As filed with the Securities and Exchange Commission on November 4, 2005
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MEDIABAY, INC.
(Exact name of registrant as specified in its charter)
Florida 5961 65-0429858
(State or other (Primary Standard Industrial (IRS employer
jurisdiction of Classification Code Number) identification
incorporation or number)
organization)
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2 Ridgedale Avenue - Suite 300
Cedar Knolls, New Jersey 07927
(973) 539-9528
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Jeffrey Dittus
Chief Executive Officer
MediaBay, Inc.
2 Ridgedale Avenue - Suite 300
Cedar Knolls, New Jersey 07927
(973) 539-9528
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copy to:
Robert J. Mittman, Esq.
Brad L. Shiffman, Esq.
Blank Rome LLP
405 Lexington Avenue
New York, New York 10174
Telephone: (212) 885-5000
Facsimile: (212) 885-5001
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| ____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| _____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Proposed
Maximum
Title of each Amount Offering Proposed Amount of
Class of Securities To be Price Per Maximum Aggregate Registration
to be Registered Registered(1) Security(2) Offering Price(2) Fee
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Common stock, no par value per share 2,130,682(3) $1.56 $3,323,864.00 $391.00
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(1) Includes 2,130,682 shares of common stock issuable upon conversion of
preferred stock and payment of dividends on outstanding preferred stock
and exercise of outstanding warrants. All of the shares of common stock
being registered hereby are being offered for the accounts of selling
shareholders who acquired such preferred stock or warrants to acquire
shares in private transactions.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, based upon the
average of the high and low sales prices of the common stock as reported
on the Nasdaq National Market on November 1, 2005.
(3) Pursuant to Rule 416 of the Securities Act of 1933, there are also being
registered hereunder additional shares of common stock as may be issued to
the selling shareholders because of any future stock dividends, stock
distributions, stock splits, similar capital readjustments or other
anti-dilution adjustments.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
DATED NOVEMBER 4, 2005
MEDIABAY, INC.
2,130,682 Shares of Common Stock
This prospectus relates to up to 2,130,682 shares of the common stock of
MediaBay, Inc., which have been registered for resale by some of our
securityholders pursuant to this prospectus.
The common stock may be offered from time to time by the selling
securityholder through ordinary brokerage transactions in the over-the-counter
markets, in negotiated transactions or otherwise, at market prices prevailing at
the time of sale or at negotiated prices and in other ways as described in the
"Plan of Distribution." The shares of common stock are issuable upon conversion
of preferred stock, payment of dividends on preferred stock and exercise of
warrants. MediaBay will not receive any of the proceeds from any sale of common
stock by the selling securityholders. MediaBay will receive proceeds from any
exercise for cash of warrants made before any sale of any of the shares of
common stock being offered under this prospectus that are underlying warrants.
The common stock was quoted on the Nasdaq National Market under the symbol
"MBAY" from November 15, 1999 until October 24, 2005. Beginning October 25,
2005, the common stock began to temporarily trade under the symbol "MBAYD" as a
result of a one for six reverse stock split. Beginning on or about November 25,
2005, the common stock will resume trading under the symbol "MBAY". On November
1, 2005, the closing sale price of the common stock as reported by the Nasdaq
National Market was $1.52.
An investment in the common stock is speculative and involves a high
degree of risk. See "Risk Factors" beginning on Page 2.
All references thereto to the number of shares outstanding, per share
amounts, and stock option, warrant and convertible security data relating to the
Company's common shares have been restated to reflect the effect of the stock
split effected on October 25, 2005 for all periods presented.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ,2005.
PROSPECTUS SUMMARY
All references thereto to the number of shares outstanding, per share
amounts, and stock option, warrant and convertible security data relating to the
Company's common shares have been restated to reflect the effect of the stock
split effected on October 25, 2005 for all periods presented.
OUR COMPANY
MediaBay is a digital media and publishing company specializing in spoken
audio entertainment. We have over 75,000 hours of audio content, which we
distribute via mail order, our websites, some of the nation's largest retailers,
and a la carte, digital downloads and subscription services.
Today we have two principal content libraries; (1) audiobooks which we
sell via digital download and on CD and cassette, through Soundsgood.com, the
Audio Book Club and third-party websites; and (2) an archive of the history of
American radio which we produce and sell on CD and cassettes through our
catalog, a mail order based continuity program, retail outlets, and our on-line
download subscription service and third-party websites. We broadcast our radio
programs through a syndicated radio show on 200 commercial stations across the
United States, as well as its 24-hour Radio Classics channels on Sirius and XM
Satellite Radio.
We are transitioning our business from selling hard goods primarily via
mail order to digital distribution via wireless and Internet downloads. Our
distribution strategy is two pronged: (1) to wholesale our audio content to the
leading music services, broadband portals, cell phone and satellite radio
companies, both domestically and internationally; and (2) to operate our own
downloadable content stores and subscription services which are co-branded via
partnerships with celebrities and corporate affiliates, each chosen specifically
to reach the targeted demographics known to be interested in its content. In
addition to our growing list of marketing partners, we intend to use various
means to market our downloadable content stores, including marketing to our
existing customer list of approximately 2.5 million audiobook buyers that
participated in the AudioBookClub or have purchased from Radio Spirits, as well
as working with manufacturers of digital music players, smart phones, and PDAs
to include samples of our audio content for consumers to preview when they
purchase these new devices, with the hope that these samples will attract
consumers to our content stores.
In October 2005, we launched our new digital storefront and technology
platform, www.Soundsgood.com. Soundsgood.com is a fully enabled digital download
service that offers thousands of digital audiobooks, classic radio shows and
other spoken word audio content on an ala carte basis or as part of a monthly
subscription. The service offers users audio content that can be downloaded
directly to the users personal computer, burned to CD or transferred to any
Window's Media compatible device that plays secured WMA (Windows Media Audio)
files. There over 70 digital devices on the market today that are
"PlaysforSure"(TM) compliant and we are working closely with Microsoft
Corporation to ensure that our content works seamlessly on these devices and the
many new smart celluar phones that will run the new Windows Mobile 5.0 operating
system.
We recently have executed several agreements to expand the digital
distribution of our audio content: an exclusive distribution agreement with
Microsoft's MSN Music to provide our spoken word content to the MSN audience,
which has 350 million unique monthly visitors. A content distribution agreement
with Real Networks, which operates Rhapsody, the largest music subscription
service in the United States, and Loudeye to act as our digital sales agent in
distributing our catalog of products to potentially 70 music services for which
they host and source content. In addition, we have executed a promotional
agreement with WFAN and the Imus in the Morning Show to promote Soundsgood.com
nationally on close to 100 radio stations across the country and simulcast on
MSNBC television five days a week. Imus program listeners will be directed to
SoundsGood.com following interviews with authors who appear on the show.
SoundsGood.com will be branded as the show's exclusive bookseller, and listeners
will be informed how they can access audiobooks and programs, via digital
downloads or on traditional media such as CDs and cassette tapes. We have also
executed distribution agreements for our growing library of classic radio ring
tones which will soon be, or are available on Nextel, Verizon, Alltell, T-Mobile
Alltel, nTelos, Midwest Wireless, Verizon Wireless and Verizon Wireless Puerto
Rico services.
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We have acquired the rights to distribute digital audiobooks from
substantially all of the major publishing houses in the United States and have a
growing number of titles with various international rights of distribution. Our
content library consists of all genres of audiobooks, classic American radio
shows, educational courses, university lectures, theatre plays, self improvement
courses, television soundtracks, stand-up comedy, children's storytelling,
parenting advice and study guides.
We were incorporated in Florida in August 1993 under the name Audio Book
Club, Inc. In October 1999, we changed our name to MediaBay, Inc. Our principal
executive offices are located at 2 Ridgedale Avenue - Suite 300, Cedar Knolls,
New Jersey 07927. Our telephone number is (973) 539-9528. Our principal internet
addresses are MediaBay.com, Soundsgood.com, RadioSpirits.com and
Audiobookclub.com. Information contained on these web sites and our other web
sites is not deemed part of this prospectus.
RECENT DEVELOPMENTS
FINANCING
All of our securities being offered hereby are being offered for resale by
the selling securityholder listed in the "Selling SecurityHolder" section of
this prospectus. This prospectus also relates to the initial sale by us of the
shares of common stock issuable upon conversion of preferred stock, payment of
dividends on preferred stock and exercise of warrants. We will not receive any
of the proceeds from the sale of the offered shares by the selling
securityholders, but we will receive proceeds from any cash exercises of the
warrants. See "Use of Proceeds."
STOCK SPLIT
On October 25, 2005, we effected a one for six reverse stock split of our
common stock.
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RISK FACTORS
Prospective investors should consider carefully the following risk factors
before purchasing any shares of the common stock offered hereby by the selling
securityholders.
WE HAVE A HISTORY OF LOSSES, ARE NOT CURRENTLY PROFITABLE, AND EXPECT TO
INCUR LOSSES IN THE FUTURE.
Since our inception, we have incurred significant losses. As of June 30,
2005, we had incurred an accumulated deficit of approximately $154.9 million.
Losses are continuing and are expected to continue. We may not be able to
achieve and sustain profitable operations.
OUR REVENUES HAVE DECLINED SIGNIFICANTLY AND WILL CONTINUE TO DECLINE. WE
DO NOT INTEND TO DEVOTE SUFFICIENT FUNDS TO MARKET TO ATTRACT NEW AUDIO BOOK
CLUB MEMBERS AND OUR REVENUE BASES WILL CONTINUE TO ERODE.
Because we significantly reduced our marketing expenditures for new
members, our club membership and revenues declined significantly. Sales for the
year ended December 31, 2004 and six months ended June 30, 2005 decreased 49%
and 46% as compared to the year ended December 31, 2003 and six months ended
June 30, 2004, respectively. Audio Book Club sales for the year ended December
31, 2004 and six months ended June 30, 2005 decreased 53% and 50% compared to
the year ended December 31, 2003 and six months ended June 30, 2004,
respectively, as a result of a reduction in our advertising expenditures for new
members. We do not anticipate conducting any significant new member acquisition
marketing of Audio Book Club as we have moved to a new strategy to grow our
business, as a result, our revenues will continue to decline until such time, if
ever, as we successfully implement our new strategies.
OUR PRODUCTS ARE SOLD IN A NICHE MARKET THAT MAY HAVE LIMITED FUTURE
GROWTH POTENTIAL.
Consumer interest in audiobooks and old-time radio may decline in the
future, and growth trends in these markets may stagnate or decline. A decline in
the popularity of audiobooks and old-time radio would limit our future growth
potential and negatively impact our future operating results.
WE MAY BE UNABLE TO ANTICIPATE CHANGES IN CONSUMER PREFERENCE FOR OUR
PRODUCTS AND MAY LOSE SALES OPPORTUNITIES.
Our success depends largely on our ability to anticipate and respond to a
variety of changes in the audiobook and old-time radio industries. These changes
include economic factors affecting discretionary consumer spending,
modifications in consumer demographics and the availability of other forms of
entertainment. The audiobook and old-time radio markets are characterized by
changing consumer preferences, which could affect our ability to:
o plan for product offerings;
o introduce new titles;
o anticipate order lead time;
o accurately assess inventory requirements; and
o develop new product delivery methods.
WE MAY NOT BE ABLE TO LICENSE OR PRODUCE DESIRABLE SPOKEN WORD CONTENT,
WHICH COULD REDUCE OUR REVENUES.
We could lose sales opportunities if we are unable to continue to obtain
the rights to additional premium spoken word content. We rely on third-party
content providers to offer downloads of premium spoken word content. These third
party providers include publishers. In some cases, we may be required to pay
substantial fees to obtain this third party content. In order to provide a
compelling service, we must license a wide variety of spoken word content to our
customers with attractive usage rules such as CD recording, output to digital
audio devices, portable subscription rights and other rights. In addition, if we
do not have sufficient breadth and depth of the titles necessary to satisfy
increased demand arising from growth in our customer base, our customer
satisfaction may be affected adversely. We cannot guarantee that we will be able
to secure licenses to spoken word content or that such licenses will be
available on commercially reasonable terms. Some of our license agreements
expire over the several months unless they are renewed.
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IF OUR THIRD-PARTY PROVIDERS FAIL TO PERFORM THEIR SERVICES PROPERLY, OUR
BUSINESS AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
Third-party providers conduct all of our Audio Book Club and a majority of
our Radio Spirits customer service operations, process orders and collect
payments for us. If these providers fail to perform their services properly,
Audio Book Club members and Radio Spirits' customers could develop negative
perceptions of our business, collections of receivables could be delayed, our
operations might not function efficiently, our expenses may increase and our
revenue may decline.
IF OUR MARKETING STRATEGIES TO ACQUIRE NEW CUSTOMERS ARE NOT SUCCESSFUL
OUR SALES WILL DECLINE AND OUR COSTS COULD INCREASE.
If our direct mail, internet and other marketing strategies are not
successful, our per customer acquisition costs may increase and we may acquire
fewer new customers than anticipated or the customers we do acquire may not
purchase as many products as we anticipate, return products at a higher rate
than we expect or fail to pay for their purchases. As a result, our operating
results would be negatively impacted and our sales growth would be inhibited.
THE PUBLIC MAY BECOME LESS RECEPTIVE TO UNSOLICITED DIRECT MAIL AND
INTERNET CAMPAIGNS.
The success of our direct mail and internet market campaigns is dependent
on many factors including the public's acceptance of direct mail solicitations.
Negative public reception of direct mail solicitations will result in lower
customer acquisitions rates and higher customer acquisition costs and will
negatively impact operating results and sales growth.
NEW LAWS ADDRESSING THE SENDING OF E-MAILS MAY LIMIT OUR ABILITY TO MARKET
OR SUBJECT US TO PENALTIES.
New laws recently enacted to limit "spam" e-mails may impact our ability
to conduct e-mail campaigns. While we attempt to only use "opt-in" e-mail
addresses and to work with third parties whose lists consist of "opt-in"
e-mails, the law may limit the number of third parties whose lists we can use or
significantly reduce the number of e-mails within these lists. Limitations on
our ability to continue the use of e-mail marketing campaigns could adversely
affect our ability to attract new customers and increase our cost to acquire new
customers.
THE CLOSING OF RETAIL STORES, WHICH CARRY OUR PRODUCTS COULD NEGATIVELY
IMPACT OUR WHOLESALE SALES OF THESE PRODUCTS.
Bankruptcy filings by major retailers may limit the number of outlets for
our old-time radio products. With fewer chains and stores available as
distribution outlets, competition for shelf space will increase and our ability
to sell our products could be impacted negatively. Moreover, our wholesale sales
could be negatively impacted if any of our significant retail customers were to
close a significant number of their locations or otherwise discontinue selling
our products.
IF THIRD PARTIES OBTAIN UNAUTHORIZED ACCESS TO OUR CUSTOMER DATABASES AND
OTHER PROPRIETARY INFORMATION, WE WOULD LOSE THE COMPETITIVE ADVANTAGE THEY
PROVIDE.
We believe that our customer lists are valuable proprietary resources, and
we have expended significant amounts of capital in acquiring these names. Our
customer lists, trade secrets, trademarks and other proprietary information have
limited protection. Third parties may copy or obtain unauthorized access to our
customer databases and other proprietary know-how, trade secrets, ideas and
concepts.
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Competitors could also independently develop or otherwise obtain access to
our proprietary information. In addition, we rent our lists for one-time use
only to third parties that do not compete with us. This practice subjects us to
the risk that these third parties may use our lists for unauthorized purposes,
including selling them to our competitors. Our confidentiality agreements with
our executive officers, employees, list managers and appropriate consultants and
service suppliers may not adequately protect our trade secrets. If our lists or
other proprietary information were to become generally available, we would lose
a significant competitive advantage.
IF WE ARE UNABLE TO COLLECT OUR RECEIVABLES IN A TIMELY MANNER, IT MAY
NEGATIVELY IMPACT OUR CASH FLOW AND OUR OPERATING RESULTS.
We experienced bad debt rates of approximately 4.4% and 10.8% during the
year ended December 31, 2004 and 2003, respectively. We are subject to the risks
associated with selling products on credit, including delays in collection or
uncollectibility of accounts receivable. If we experience significant delays in
collection or uncollectibility of accounts receivable, our liquidity and working
capital position could suffer and we could be required to increase our allowance
for doubtful accounts, which would increase our expenses and reduce our assets.
INCREASES IN COSTS OF POSTAGE COULD NEGATIVELY IMPACT OUR OPERATING
RESULTS.
We market through direct mailings to both our customers and prospective
customers, and postage is a significant expense in the operation of our
business. We do not pass on the costs of member mailings and member solicitation
packages. Even small increases in the cost of postage, multiplied by the
millions of mailings we conduct, would result in increased expenses and would
negatively impact our operating results.
WE FACE SIGNIFICANT COMPETITION FROM A WIDE VARIETY OF SOURCES FOR THE
SALE OF OUR PRODUCTS.
We may not be able to compete effectively because of the significant
competition in our markets from many competitors, many of whom are better
financed and have greater resources and from other competing products, which
provide similar entertainment value. We compete with other web sites, retail
outlets and catalogs, which offer similar entertainment products or content,
including digital download of spoken word content. New competitors, including
large companies, may elect to enter the markets for audiobooks and spoken word
content. We also compete for discretionary consumer spending with mail order
clubs and catalogs, other direct marketers and retailers that offer products
with similar entertainment value as audiobooks and old-time radio and classic
video programs, such as music on cassettes and compact discs, printed books,
videos, and DVDs. Many of these competitors are well-established companies,
which have greater financial resources that enable them to better withstand
substantial price competition or downturns in the market for spoken word
content.
A DECLINE IN CURRENT LEVELS OF CONSUMER SPENDING COULD REDUCE OUR SALES.
The level of consumer spending directly affects our business. One of the
primary factors that affect consumer spending is the general state of the local
economies in which we operate. Lower levels of consumer spending in regions in
which we have significant operations could have a negative impact on our
business, financial condition or results of operations.
WE HAVE NOT FULLY COMPLIED WITH THE TERMS OF ALL OF OUR LICENSE AGREEMENTS
AND FAILURE TO DO SO MAY IMPAIR OUR ABILITY TO LICENSE PRODUCTS FROM SOME
RIGHTSHOLDERS.
As of the June 30, 2005, certain royalty payments have not been made and
there have been no requests for royalty statements or payments in connection
therewith. The publishers and other rightsholders have not requested royalty
statements or payments. These amounts are accrued for and reflected in our
financial statements.
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THE EFFECTIVENESS OF OUR DISCLOSURE AND INTERNAL CONTROLS MAY BE LIMITED.
Our disclosure controls and procedures and internal controls over
financial reporting may not prevent all errors and intentional
misrepresentations. Any system of internal control can only provide reasonable
assurance that all control objectives are met. Some of the potential risks
involved could include but are not limited to management judgments, simple
errors or mistakes, willful misconduct regarding controls or misinterpretation.
There is no guarantee that existing controls will prevent or detect all material
issues or be effective in future conditions, which could materially and
adversely impact our financial results in the future.
ADDITIONAL RISKS RELATING TO OUR CHANGE IN STRATEGY AND OUR DOWNLOADABLE
SPOKEN WORD CONTENT OFFERINGS AND ONLINE INITIATIVES.
We are pursuing a new strategy of pursuing the opportunities to sell
downloadable spoken word content and selling hard good format content online. We
have limited experience in the emerging and competitive downloadable content
distribution business and cannot assure you that we will be successful in
transitioning, operating and growing our business. In the event that we are
unable to successfully implement our new strategy, we will be required to pursue
alternative business strategies and if we are unable to do so, discontinue
operations.
OUR NEW STRATEGY TO FOCUS ON DOWNLOADABLE SPOKEN WORD CONTENT AND OUR
ONLINE INITIATIVES IS SUBJECT TO MANY UNCERTAINTIES AND COULD RESULT IN
CONTINUING LOSSES AND DECLINING REVENUES UNTIL SUCH TIME, IF EVER, IT IS
SUCCESSFULLY IMPLEMENTED.
Historically, we have sold audiobooks through a membership club format and
other spoken word content, substantially all in hard goods format (audio
cassettes and CDs). Over the past two years, we significantly reduced our new
member and customer marketing activities.
Because we are pursuing a new strategy, which focuses on downloadable
spoken word content, we have transitioned the Audio Book Club to a positive
option drop ship business and will not devote the funds necessary to acquire new
Audio Book Club members to offset member attrition. As a result, our revenue
will continue to decline, which will continue to negatively impact our
performance. We expect this trend to continue until such time, if ever, as we
generate significant revenue from the sale of downloadable spoken word content
and attract and establish a meaningful customer base for our online websites or
other websites we may develop. There can be no assurance that we will meet these
launch dates, or be able to successfully implement our new strategies or that
implementation will result in increased revenues or profitable operations.
THE DOWNLOAD SPOKEN WORD DISTRIBUTION BUSINESS IS NEW AND RAPIDLY EVOLVING
AND MAY NOT PROVE TO BE A PROFITABLE OR EVEN VIABLE BUSINESS MODEL.
Download spoken word distribution services are a relatively new business
model for delivering digital media over the Internet. It is too early to predict
whether consumers will accept, in significant numbers, online spoken word
content services and accordingly whether the services will be financially
viable. If download spoken word distribution services do not prove to be popular
with consumers, or if these services cannot sustain any such popularity, our
business and prospects would be harmed.
THE MARKET FOR OUR SERVICE IS UNCERTAIN AND CONSUMERS MAY NOT BE WILLING
TO USE THE INTERNET TO PURCHASE SPOKEN AUDIO CONTENT, WHICH COULD HARM OUR
BUSINESS.
Downloading audio content from the Internet is a relatively new method of
distribution and its growth and market acceptance is highly uncertain. Our
success will depend in large part on more widespread consumer willingness to
purchase and download spoken audio content over the Internet. Purchasing this
content over the Internet involves changing purchasing habits, and if consumers
are not willing to purchase and download this content over the Internet, our
revenue will be limited, and our business will be materially and adversely
affected. We believe that acceptance of this method of distribution may be
subject to network capacity constraints, hardware limitations, company computer
security policies, the ability to change user habits, and the quality of the
audio content delivered.
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MANUFACTURERS OF ELECTRONIC DEVICES MAY NOT MANUFACTURE, MAKE AVAILABLE,
OR SELL A SUFFICIENT NUMBER OF PRODUCTS SUITABLE FOR OUR SERVICE, WHICH WOULD
LIMIT OUR REVENUE GROWTH.
If manufacturers of electronic devices do not manufacture, make available,
or sell a sufficient number of electronic devices enabled with the Windows Media
Platform for downloadable spoken word content or if these players do not achieve
sufficient market acceptance our sales could be adversely affected and our
business will be materially and adversely affected. Microsoft competes with
others for relationships with manufacturers of electronic devices with audio
playback capabilities. Manufacturers of electronic devices have experienced
delays in their delivery schedule of their digital players due to parts
shortages and other factors. Although the content we intend to provide can be
played on personal computers and burned to CDs for later listening, we believe
that a key to our future success is the ability to playback this content on
hand-held electronic devices that have digital audio capabilities.
WE MUST PROVIDE DIGITAL RIGHTS MANAGEMENT SOLUTIONS THAT ARE ACCEPTABLE TO
BOTH CONTENT PROVIDERS AND CONSUMERS.
We must provide digital rights management solutions and other security
mechanisms in our download spoken word distribution services in order to address
concerns of content providers and authors, and we cannot be certain that content
licensors or consumers will accept them. Content providers may be unwilling to
continue to support portable subscription services. Consumers may be unwilling
to accept the use of digital rights management technologies that limit their use
of content, especially with large amounts of free content readily available.
Third-party providers of digital rights management software, such as
Microsoft, may be unwilling to continue to provide such software to us upon
reasonable or any terms. If we are unable to acquire these solutions on
reasonable or any terms, or if customers are unwilling to accept these
solutions, our business and prospects could be harmed.
CAPACITY CONSTRAINTS AND FAILURES, DELAYS, OR OVERLOADS COULD INTERRUPT
OUR SERVICE AND REDUCE THE ATTRACTIVENESS OF DOWNLOADING SPOKEN WORD TO
POTENTIAL CUSTOMERS.
Any capacity constraints or sustained failure or delay in downloading
spoken word could reduce the attractiveness of downloading spoken word products
which could materially and adversely affect our ability to implement our new
strategy. The success of our new strategy depends on our ability to
electronically, efficiently, and with few interruptions or delays distribute
spoken audio content to potential customers. Accordingly, the performance,
reliability, and availability of our Website, our transaction processing systems
and our network infrastructure are critical to our operating results. We believe
the potential instability of the Internet could mean that periodic interruptions
to our new service could occur. These interruptions might make it difficult to
download audio content from our Website in a timely manner and jeopardize
prospective customer relationships.
WE DO NOT HAVE A COMPREHENSIVE DISASTER RECOVERY PLAN AND WE HAVE LIMITED
BACK-UP SYSTEMS, AND A DISASTER COULD SEVERELY DAMAGE OUR OPERATIONS AND COULD
RESULT IN LOSS OF CUSTOMERS.
If our computer systems are damaged or interrupted by a disaster for an
extended period of time, our business, results of operations, and financial
condition would be materially and adversely affected. We do not have a
comprehensive disaster recovery plan in effect. Our operations depend upon our
ability to maintain and protect our computer systems - all of which are located
in our headquarters and at a third party offsite hosting facility. Although we
maintain insurance against general business interruptions, we cannot assure you
that the amount of coverage will be adequate to compensate us for our losses.
PROBLEMS ASSOCIATED WITH THE INTERNET COULD DISCOURAGE USE OF
INTERNET-BASED SERVICES AND ADVERSELY AFFECT OUR BUSINESS.
If the Internet fails to develop or develops more slowly than we expect as
a commercial medium, our business may also grow more slowly than we anticipate
or fail to grow. Our success will depend in large part on increasing use of the
Internet. There are critical issues concerning the commercial use of the
Internet which we expect to affect the development of the market for
downloadable spoken word, including:
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o Secure transmission of customer credit card numbers and other
confidential information;
o Reliability and availability of Internet service providers;
o Cost of access to the Internet;
o Availability of sufficient network capacity; and
o Ability to download audio content consistent with computer security
measures employed by businesses.
MORE CONSUMERS ARE UTILIZING NON-PC DEVICES TO ACCESS DIGITAL CONTENT, AND
WE MAY NOT BE SUCCESSFUL IN GAINING WIDESPREAD ADOPTION BY USERS OF SUCH
DEVICES.
In the coming years, the number of individuals who access digital content
through devices other than a personal computer, such as personal digital
assistants, cellular telephones, television set-top devices, game consoles and
Internet appliances, is expected to increase dramatically. Manufacturers of
these types of products are increasingly investing in media-related
applications, but development of these devices is still in an experimental stage
and business models are new and unproven. If we are unable to offer downloads of
spoken word content on these alternative non-PC devices, we may fail to capture
a sufficient share of an increasingly important portion of the market for
digital media services or our costs may increase significantly.
WE COULD BE SUED FOR CONTENT THAT WE DISTRIBUTE OVER THE INTERNET, WHICH
COULD SUBJECT US TO SUBSTANTIAL DAMAGES.
A lawsuit based on the spoken word content we intend to distribute could
be expensive and damaging to our business. As a distributor and publisher of
content over the Internet, we may be liable for copyright, trademark
infringement, unlawful duplication, negligence, defamation, indecency, and other
claims based on the nature and content of the materials that we publish or
distribute to customers. Our liability insurance may not cover claims of these
types or may not be adequate to protect us from the full amount of the
liability. If we are found liable in excess of the amount of our insurance
coverage, we could be liable for substantial damages. Our reputation and
business may suffer even if we are not liable for significant financial damages.
FUTURE GOVERNMENT REGULATIONS MAY INCREASE OUR COST OF DOING BUSINESS ON
THE INTERNET, WHICH COULD ADVERSELY AFFECT OUR COST STRUCTURE.
Laws and regulations applicable to the Internet, covering issues such as
user privacy, pricing, and copyrights are becoming more prevalent. The adoption
or modification of laws or regulations relating to the Internet could force us
to modify our services in ways that could adversely affect our business.
WE MAY BECOME SUBJECT TO SALES AND OTHER TAXES FOR DIRECT SALES OVER THE
INTERNET, WHICH COULD AFFECT OUR REVENUE GROWTH.
Increased tax burden could make our service too expensive to be
competitive. We do not currently collect sales or other similar taxes for
download of content. Nevertheless, one or more local, state, or foreign
jurisdictions may require that companies located in other states collect sales
taxes when engaging in online commerce in those states. If one or more states
successfully assert that we should collect sales or other taxes on the download
of spoken word content, the increased cost to our customers could discourage
them from purchasing our services, which would materially and adversely affect
our business.
WE MAY NOT BE ABLE TO PROTECT OUR LICENSES OR OUR INTELLECTUAL PROPERTY,
WHICH COULD JEOPARDIZE OUR COMPETITIVE POSITION.
If we fail to protect our licenses or our intellectual property, we may be
exposed to expensive litigation or risk jeopardizing our competitive position.
The steps we have taken may be inadequate to protect our licenses or other
intellectual property. We rely on a combination of licenses, confidentiality
agreements, and other contracts to establish and protect our intellectual
property rights. We may have to litigate to enforce our licenses or other
intellectual property rights or to determine the validity and scope of the
proprietary rights of others. This litigation could result in substantial costs
and the diversion of our management and other resources, which would harm our
business.
-8-
OTHER COMPANIES MAY CLAIM THAT WE INFRINGE THEIR COPYRIGHTS OR PATENTS,
WHICH COULD SUBJECT US TO SUBSTANTIAL DAMAGES.
Any claims of infringement could cause us to incur substantial costs
defending against the claim, even if the claim is invalid, and could distract
our management from our business. A party making a claim could secure a judgment
that requires us to pay substantial damages. A judgment could also include an
injunction or other court order that could prevent us from offering downloads of
spoken word content. Any of these events could have a material adverse effect on
our business, operating results, and financial condition.
THE ONLINE CONTENT DISTRIBUTION INDUSTRY IS HIGHLY COMPETITIVE AND WE
CANNOT ASSURE YOU THAT WE WILL BE ABLE TO COMPETE EFFECTIVELY, WHICH WOULD HARM
OUR BUSINESS.
We will face competition in all aspects of our online business and we
cannot assure you that we will be able to compete effectively. We will compete
for consumers of spoken word content with other Internet-based audio
distributors, as well as with our existing, competitors, such as distributors of
audio on cassette tape or compact disc. The business of providing content over
the Internet is experiencing rapid growth and is characterized by rapid
technological changes, changes in consumer habits and preferences, and the
emergence of new and established companies. We will also continue to compete
with (i) book store chains deep-discount retailers, retail stores, mass
merchandisers, mail order catalogs, clubs, and libraries that sell, rent, or
loan audiobooks on cassette tape or compact disc, such as Borders, Barnes &
Noble, (ii) online retailers such as Amazon.com, (iii) websites that offer
streaming access to spoken audio content using tools such as the RealPlayer or
Windows Media Player, (iv) other companies offering services similar to ours,
such as Audible AudioFeast, iTunes, and (v) online and Internet portal companies
such as America Online, Inc., and Yahoo! Inc., and, which have the potential to
offer audio content. Moreover Audible, Inc., has begun to establish itself as a
leader in downloadable spoken word content distribution. Many of these companies
have financial, technological, promotional, and other resources that are much
greater than those available to us and could use or adapt their current
technology, or could purchase technology, to provide a service directly
competitive with our services and products.
RISKS RELATING TO OUR CAPITAL STRUCTURE
OUR ABILITY TO USE OUR NET OPERATING LOSSES WILL BE LIMITED IN FUTURE
PERIODS, WHICH COULD INCREASE OUR TAX LIABILITY.
Under Section 382 of the Internal Revenue Code of 1986, utilization of
prior net operating losses is limited after an ownership change, as defined in
Section 382, to an annual amount equal to the value of the corporation's
outstanding stock immediately before the date of the ownership change multiplied
by the long-term tax exempt rate. In the event we achieve profitable operations,
any significant limitation on the utilization of net operating losses would have
the effect of increasing our tax liability and reducing after tax net income and
available cash reserves. We are unable to determine the availability of net
operating losses since this availability is dependent upon profitable
operations, which we have not achieved in prior periods.
THE NUMBER OF SHARES OF COMMON STOCK WHICH ARE AVAILABLE FOR SALE UPON
EXERCISE OF CONVERTIBLE PREFERRED STOCK AND EXERCISE OF WARRANTS AND OPTIONS IS
SUBSTANTIAL IN RELATION TO OUR CURRENTLY OUTSTANDING COMMON STOCK AND THE PUBLIC
FLOAT OF OUR COMMON STOCK, AND COULD CAUSE DOWNWARD PRESSURE ON THE MARKET PRICE
FOR OUR COMMON STOCK.
The number of shares of common stock registered for resale upon exercise
of convertible preferred stock and exercise of warrants and options is
significantly greater than the number of shares currently outstanding and in the
public float. If those securityholders determine to sell a significant number of
shares into the market at any given time, there likely will not be sufficient
demand in the market to purchase the shares without a decline in the market
price for our common stock. Moreover, continuous sales into the market of a
number of shares in excess of the typical trading market for our common stock,
or even the availability of such a large number of shares, could continue to
depress the trading market for our common stock over an extended period of time
-9-
OUR STOCK PRICE HAS BEEN AND COULD CONTINUE TO BE EXTREMELY VOLATILE.
The market price of our common stock has been subject to significant
fluctuations since our initial public offering in October 1997. The securities
markets have experienced, and are likely to experience in the future,
significant price and volume fluctuations, which could adversely affect the
market price of our common stock without regard to our operating performance. In
addition, the trading price of our common stock could be subject to significant
fluctuations in response to:
o Timely and successful implementation of our new strategies;
o actual or anticipated variations in our quarterly operating results;
o announcements by us or other industry participants;
o factors affecting the market for spoken word content;
o changes in national or regional economic conditions;
o changes in securities analysts' estimates for us, our competitors'
or our industry or our failure to meet such analysts' expectations;
and
o general market conditions.
A LARGE NUMBER OF SHARES OF OUR COMMON STOCK COULD BE SOLD IN THE MARKET
IN THE NEAR FUTURE, WHICH COULD DEPRESS OUR STOCK PRICE.
As of October 26, 2005, we had outstanding approximately 10,439,284
million shares of common stock. In addition, a substantial portion of our shares
are currently freely trading without restriction under the Securities Act of
1933, having been registered for resale or held by their holders for over two
years and are eligible for sale under Rule 144(k). There are currently
outstanding options and warrants to purchase and convertible preferred stock
convertible into an aggregate of approximately 18.3 million shares of our common
stock and substantially all of the underlying shares are available for sale
under an effective registration statements. To the extent any of our warrants or
options are exercised or convertible preferred stock is converted, your
percentage ownership will be diluted and our stock price could be further
adversely affected. Moreover, as the underlying shares are sold, the market
price could drop significantly if the holders of these restricted shares sell
them or if the market perceives that the holders intend to sell these shares.
BECAUSE OUR BOARD OF DIRECTORS CONSISTS OF THREE CLASSES, IT MAY BE MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY.
Our By-laws divide our board of directors into three classes, serving
staggered three-year terms. The staggered board of directors may make it more
difficult for a third party to acquire, or may discourage acquisition bids for
our company.
OUR OUTSTANDING PREFERRED STOCK AND OUR ABILITY TO DESIGNATE ADDITIONAL
PREFERRED STOCK COULD ADVERSELY EFFECT THE RIGHTS OF OUR COMMON STOCKHOLDERS.
Our Articles of Incorporation authorize our board of directors to issue up
to 5,000,000 shares of "blank check" preferred stock without shareholder
approval, in one or more series and to fix the dividend rights, terms,
conversion rights, voting rights, redemption rights and terms, liquidation
preferences, and any other rights, preferences, privileges, and restrictions
applicable to each new series of preferred stock. We currently have three series
of preferred stock outstanding all of which have liquidation preferences senior
to our common stock. One of these series have approval rights with respect to
amendments to our articles of incorporation which adversely affect the preferred
stock, incurrence of indebtedness, payment of dividends and distributions,
redemption of capital stock, the creation of other series of capital stock
convertible into our common stock. Moreover, two of the series of preferred
stock have voting rights, including an approval right with respect to certain
corporate events, such as, mergers and other business contribution and certain
sales and transfer of assets. The existence of our outstanding preferred stock
and designation of additional series of preferred stock in the future could,
among other results, adversely affect the voting power of the holders of common
stock and, under certain circumstances, could make it difficult for third
parties to gain control of our company, prevent or substantially delay a change
in control, discourage bids for our common stock at a premium, or otherwise
adversely affect the market price of our common stock.
-10-
SPECIAL INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus and in the documents incorporated by
reference herein constitute "forward-looking" statements within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical facts included in this prospectus, including, without
limitation, statements regarding our future financial position, business
strategy, budgets, projected costs and plans and objectives of our management
for future operations are forward-looking statements. In addition,
forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe," or "continue" or the negative thereof or
variations thereon or similar terminology. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we
cannot assure you that such expectations will prove to be correct. These forward
looking statements involve certain known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from any results, performances or achievements expressed
or implied by such forward-looking statements. Important factors that could
cause actual results to differ materially from our expectations, include,
without limitation our ability to implement our new strategy and transition our
business and the risks related thereto: our history of losses and declining
revenues; our ability to license and sell new spoken word content, obtain
additional financing, anticipate and respond to changing customer preferences,
license and produce desirable content, protect our databases and other
intellectual property from unauthorized access, and collect receivables;
dependence on third-party providers, suppliers and distribution channels;
competition; the costs and success of our marketing strategies, product returns,
member attrition; and risks relating to our capital structure. Undue reference
should not be placed on these forward-looking statements, which speak only as of
the date hereof. We undertake no obligation to update any forward-looking
statements.
USE OF PROCEEDS
We will not receive any proceeds from any sales of shares of common stock
made from time to time hereunder by the selling securityholders. Any proceeds we
receive from the exercise of warrants or options for cash will be added to our
working capital. We have agreed to bear the expenses in connection with the
registration of the common stock being offered hereby by the selling
securityholders.
-11-
PRICE RANGE OF COMMON STOCK
MediaBay's common stock was quoted on the Nasdaq National Market under the
symbol "MBAY" from November 15, 1999 until October 24, 2005. Beginning October
25, 2005, our common stock began to temporarily trade under the symbol "MBAYD"
as a result of the one for six reverse stock split. Beginning on or about
November 25, 2005, our common stock will resume trading under the symbol "MBAY".
The following table shows the high and low sales prices of our common stock as
reported by the Nasdaq National Market. The per share data in the table below
gives effect to the reverse stock split effected on October 25, 2005.
HIGH LOW
--------- ---------
FISCAL YEAR ENDED DECEMBER 31, 2003
First Quarter $ 7.62 $ 4.62
Second Quarter 6.66 3.84
Third Quarter 6.60 3.60
Fourth Quarter 9.90 4.80
FISCAL YEAR ENDED DECEMBER 31, 2004
First Quarter 9.54 3.12
Second Quarter 4.32 2.16
Third Quarter 2.94 1.50
Fourth Quarter 11.46 1.98
FISCAL YEAR ENDING DECEMBER 31, 2005
First Quarter 9.54 3.06
Second Quarter 4.14 2.34
Third Quarter 4.20 1.44
Fourth Quarter (through October 26, 2005) 2.04 1.32
On October 26, 2005 the last reported sale price of our common stock on
the Nasdaq National Market was $1.49 per share. As of October 26, 2005, there
were approximately 149 record owners of our common stock. We believe that there
are more than 400 beneficial owners of our common stock.
DIVIDEND POLICY
We have never declared or paid and do not anticipate declaring or paying
any dividends on our common stock in the near future. Any future determination
as to the declaration and payment of dividends will be at the discretion of our
Board of Directors and will depend on then existing conditions, including our
financial condition, results of operations, capital requirements, business
factors and other factors as our Board of Directors deems relevant.
SELECTED FINANCIAL DATA
We have derived the selected statement of operations data for the years
ended December 31, 2002, 2003 and 2004 from our audited consolidated financial
statements that are included in this prospectus. We have derived the selected
statement of operations data for the year ended December 31, 2000 and 2001 and
the selected consolidated balance sheet data as of December 31, 2000, 2001 and
2002 from our audited consolidated financial statements that are not included in
this prospectus. We have derived the selected consolidated statement of
operations data for the six months ended June 30, 2004 and 2005 and the selected
consolidated balance sheet data as of June 30, 2005 from our unaudited
consolidated financial statements that are included in this prospectus. Our
unaudited consolidated financial statements include, in the opinion of our
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of those statements. Our results for any
interim period are not necessarily indicative of results to be expected for a
full fiscal year.
You should read the following selected consolidated financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and
accompanying notes appearing at the end of this prospectus.
-12-
As a result of the following factors, including capitalization and
write-off of direct response advertising costs, recording of goodwill
write-offs, the strategic charges and the income tax benefit and subsequent
expense, as well as fluctuations in operating results depending on the timing,
magnitude and success of Audio Book Club new member advertising campaigns, and
the changes in our strategy made in 2004, as discussed above, comparisons of our
historical operating results from year to year may not be meaningful. For more
information, see our financial statements for the years ended December 31, 2002,
2003 and 2004 and the notes thereto included herein.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
2000 2001 2002 2003 2004
-------- -------- -------- -------- --------
(THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales $ 44,426 $ 41,805 $ 45,744 $ 36,617 $ 18,831
Cost of sales 23,044 19,783 20,651 17,479 8,802
Cost of sales - write-downs -- 2,261 -- -- 3,745
Advertising and promotion 11,023 11,922 10,156 9,988 4,700
Advertising and promotion - write-downs -- 3,971 -- -- 846
Bad debt expense 2,583 2,536 2,821 3,940 829
General and administrative 11,823 8,947 8,347 6,816 6,043
Asset write-downs and strategic charges -- 7,044 -- 749 --
Severance and other termination costs -- -- -- 544 --
Depreciation and amortization 7,984 5,156 1,314 328 144
Non-cash write-down of intangibles -- -- 1,224 -- --
Non-cash write-down of goodwill 38,226 -- -- -- --
-------- -------- -------- -------- --------
Operating (loss) income (50,257) (19,815) 1,231 (3,227) (6,278)
Interest income (expense), net (2,940) (2,790) (2,974) (1,925) (9,082)
-------- -------- -------- -------- --------
Loss before income tax benefit (expense)
and extraordinary item (53,197) (22,605) (1,743) (5,152) (15,360)
Income tax benefit (expense) -- 17,200 (550) (1,471) (14,753)
-------- -------- -------- -------- --------
Loss before extraordinary item (53,197) (5,405) (2,293) (6,623) (30,113)
Extraordinary gain (loss) on
early extinguishment of debt (2,152) -- -- -- --
-------- -------- -------- -------- --------
Net loss (55,349) (5,405) (2,293) (6,623)
(30,113)
Dividends on preferred stock -- -- 217 246 574
-------- -------- -------- -------- --------
Net loss applicable to common shares $(55,349) $ (5,405) $ (2,510) $ (6,869) $(30,687)
======== ======== ======== ======== ========
Basic and diluted loss per share:
Basic and diluted loss before extraordinary item $ (25.08) $ (2.34) $ (1.08) $ (2.94) $ (10.26)
======== ======== ======== ======== ========
Basic and diluted loss applicable to common shares $ (26.10) $ (2.34) $ (1.08) $ (2.94) $ (10.26)
======== ======== ======== ======== ========
Basic and diluted weighted average number of
shares outstanding 2,120 2,310 2,348 2,350 2,996
======== ======== ======== ======== ========
-13-
SELECTED FINANCIAL DATA CONTINUED
SIX MONTHS ENDED
JUNE 30,
(UNAUDITED)
2005 2004
-------- --------
STATEMENT OF OPERATIONS DATA: (THOUSANDS, EXCEPT PER
SHARE DATA)
Sales, net of returns, discounts and allowances of $615 and
$1,430 and $1,387 and $5,043 for the three and six months
ended June 30, 2005 and 2004, respectively $ 5,625 $ 10,485
Cost of sales 3,098 4,798
Cost of sales - strategic charges 305 --
-------- --------
Gross profit 2,222 5,687
Advertising and promotion 787 2,627
General and administrative 3,588 3,473
Termination charges 697 --
Depreciation and amortization 43 88
-------- --------
Operating loss (2,893) (501)
Interest income (expense), net -- --
-------- --------
Net income (loss) (4,023) (8,100)
-------- --------
Loss on early extinguishment of debt 579 --
-------- --------
Loss before income taxes (4,023) (8,100)
Income tax benefit (expense), net (4,023) (8,100)
-------- --------
Dividends on preferred stock 738 179
Deemed dividend on beneficial conversion of
Series D Preferred Stock 17,423 --
======== ========
Net loss applicable to common shares $(22,184) $ (8,279)
======== ========
Basic and diluted loss applicable to common shares
per common share: $ (4.36) $ (3.23)
======== ========
AS OF JUNE
2004 30, 2005
2000 2001 2002 2003 ACTUAL (UNAUDITED)
-------- -------- -------- -------- -------- -----------
(THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Working capital (deficit) $ 313 $ (4,167) $ (4,336) $(20,165) $ 720 $ 10,719
Total assets 49,932 44,452 48,619 36,893 16,576 27,786
Current liabilities 17,103 15,491 18,984 29,194 5,905 5,998
Long-term debt (less current portion) 15,340 15,849 14,680 -- 16,852 621
Common stock subject to contingent put rights 758 758 758 125 -- 18,164
Total Common Stockholders' equity (deficit) $ 12,939 $ 8,562 $ 10,405 $ 6,949 $ (6,181) 20,586
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
We are a seller of spoken audio and nostalgia products, including
audiobooks and old-time radio shows, through direct response, retail and
Internet channels. Our content and products are sold in multiple formats,
including physical (cassette and compact disc) and secure digital download
formats.
On March 23, 2005, we received an infusion of $35 million in private
equity financing from several institutional investors. We retired all of our
borrowings and our cash reserves increased to approximately $16.5 million.
Because of this financing, we believe that we have sufficient cash to operate
our business for at least twelve months.
We report financial results on the basis of four business segments;
Corporate, Audio Book Club, Radio Spirits and MediaBay.com. A fifth division,
RadioClassics, is aggregated with Radio Spirits for financial reporting
purposes. Except for corporate, each segment serves a unique market segment
within the spoken word audio industry. In 2004, our Audio Book Club segment had
net sales of approximately $12.3 million, our Radio Spirits segment had net
sales of approximately $6.4 million, our MediaBay.com segment had sales of
approximately $0.2 million and we had eliminating inter-segment sales of $0.1
million.
We derive our principal revenue through sales of audiobooks, classic radio
shows and other spoken word audio products directly to consumers principally
through direct mail. We also sell classic radio shows to retailers either
directly or through distributors. We derive additional revenue through rental of
our proprietary database of names and addresses to non-competing third parties
through list rental brokers. We also derive a small amount of revenue from
advertisers who advertise on our nationally syndicated classic radio shows.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. On an on-going basis we evaluate our estimates including those
related to product returns, bad debts, the carrying value and net realizable
value of inventories, the recoverability of advances to publishers and other
rightsholders, the future revenue associated with deferred advertising and
promotion costs, investments, fixed assets, the valuation allowance provided to
reduce our deferred tax assets and valuation of goodwill and other intangibles.
The Securities and Exchange Commission ("SEC") defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
Our significant accounting policies are described in Note 3 to the Notes
to Consolidated Financial Statements. Not all of these significant accounting
policies require management to make difficult, subjective or complex judgments
or estimates. However the following policies are considered to be critical
within the SEC definition:
REVENUE RECOGNITION
We derive our principal revenue through sales of audiobooks, classic radio
shows and other spoken word audio products directly to consumers principally
through direct mail. We also sell classic radio shows to retailers either
directly or through distributors. We derive additional revenue through rental of
our proprietary database of names and addresses to non-competing third parties
through list rental brokers. We also derive a small amount of revenue from
advertisers included in our nationally syndicated classic radio shows. We
recognize sales to consumers, retailers and distributors upon shipment of
merchandise. List rental revenue is recognized on notification by the list
brokers of rental by a third party when the lists are rented. We recognize
advertising revenue upon notification of the airing of the advertisement by the
media buying company representing us. Allowances for future returns are based
upon historical experience and evaluation of current trends. The historical
return rates for ABC members have been consistent for the past year and our
estimate is based on a detailed historical examination of trends. Based on the
current performance and historical trends, we do not expect significant changes
in the estimate of returns for ABC members. The estimate of returns for
wholesale sales of our old-time radio products is based on a detailed review of
each significant customer, depending on the amount of products sold to a
particular customer in a specific periods, the overall return rate for wholesale
sales could vary.
-15-
We record reductions to our revenue for future returns and record an
estimate of future bad debts arising from current sales in general and
administrative expenses. These allowances are based upon historical experience
and evaluation of current trends. If members and customers return products to us
in the future at higher rates than in the past or than we currently anticipate,
our net sales would be reduced and our operating results would be adversely
affected. In November 2001, the Emerging Issues Task Force ("EITF") issued EITF
No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)", which addresses the income
statement classification of certain credits, allowances, adjustments, and
payments given to customers for the services or benefits provided. We adopted
EITF No. 01-9 effective January 1, 2002, and, as such, have classified the cost
of these sales incentives as a reduction of sales. The effect on sales of
applying EITF No. 01-9 in 2002, 2003 and 2004 was $118,000, $60,000 and $48,000
respectively.
Downloadable content revenue from the sale of individual content titles is
recognized in the period when the content is downloaded and the customer's
credit card is processed. Content revenue from the sale of content subscriptions
is recognized pro rata over the term of the subscription period. Rebates and
refunds are recorded as a reduction of revenue in the period in which the rebate
or refund is paid in accordance with Emerging Issues Task Force Issue No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products).
ACCOUNTS RECEIVABLE VALUATION
We record an estimate of our anticipated bad debt expense and return rates
based on our historical experience. If the financial condition of our customers,
including either individual consumers or retail chains, were to deteriorate, or
if the payment or buying behavior were to change, resulting in either their
inability or refusal to make payment to us, additional allowances would be
required. For example, a one percent increase in returns as a percentage of
gross sales for the year ended 2004, assuming a constant gross profit percentage
and all other expenses unchanged, would have resulted in a decrease in net sales
of $242,000 and a increase in net loss available to common shares of $129,000. A
one percent increase in bad debt expenses as a percentage of net sales, assuming
all other expenses were unchanged, would have resulted in an increase in bad
debt expenses and a corresponding increase in net loss available to common
shares of $188,000.
INCOME TAXES
The ultimate realization of deferred tax assets is dependent on the
generation of future taxable income during the periods in which temporary timing
differences become deductible. We determine the utilization of deferred tax
assets in the future based on current year projections by management.
Based on a change in our strategy, which we believe will result in lower
sales and losses in the near term, but ultimately will be more profitable, we
have determined that it is not more likely than not that we will, in the
foreseeable future, be able to realize all or part of our net deferred tax
asset. We have accordingly made an adjustment to the deferred tax asset
recording an increase to the valuation allowance, resulting in a deferred tax
expense charged against income in the fourth quarter of 2004, the period when
such determination was made.
-16-
DEFERRED MEMBER ACQUISITION COSTS
Promotional costs directed at current members are expensed on the date the
promotional materials are mailed. The cost of any premiums, gifts or the
discounted audiobooks in the promotional offer to new members is expensed as
incurred. We account for direct response advertising for the acquisition of new
members in accordance with AICPA Statement of Position 93-7, "Reporting on
Advertising Costs" ("SOP 93-7"). SOP 93-7 states that the cost of direct
response advertising (a) whose primary purpose is to elicit sales to customers
who could be shown to have responded specifically to the advertising and (b)
that results in probable future benefits should be reported as assets net of
accumulated amortization Accordingly, we have capitalized direct response
advertising costs and amortized these costs over the period of future benefit
(the average member life), which has been determined to be generally 30 months.
The costs are being amortized on accelerated basis consistent with the
recognition of related revenue. In the fourth quarter of 2003, we adjusted the
amortization period for advertising to attract customers to its World's Greatest
Old-Time Radio continuity program and revised the estimate period for
amortization of these advertising costs down to 18 months.
SOP 93-7 requires that the realizability of the mounts of direct-response
advertising reported as assets should be evaluated at each balance sheet date by
comparing the carrying amounts of the assets to their probable remaining future
net revenues. Based on the change in our strategy we have determined that the
future net revenue from our Audio Book Club does not support the carrying amount
of the direct-response advertising reported as assets relating to the Audio Book
Club. Accordingly, we have made an adjustment to write-off the carrying amount
of the asset in the fourth quarter for 2004 resulting in an increase in
advertising expense of $846.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired in business combinations accounted for using the purchase
method of accounting. In July 2001, the Financial Accounting Standards Board
issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142
requires that an intangible asset that is acquired shall be initially recognized
and measured based on its fair value. The statement also provides that goodwill
should not be amortized, but shall be tested for impairment annually, or more
frequently if circumstances indicate potential impairment, through a comparison
of fair value to its carrying amount. At December 31, 2004, we had $9.7 million
of goodwill, all of which relates to our Radio Spirits operations. We completed
our annual impairment test as of January 2005, utililizing the services of an
independent third-party appraiser, which did not result in an impairment loss.
However, if conditions or circumstances were to change resulting in a
deterioration of our Radio Spirits business, a future impairment of goodwill
could be necessary.
-17-
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, historical
operating data as a percentage of net sales.
YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2003 2004
----------- ----------- -----------
Net sales ................................ 100% 100% 100%
=========== =========== ===========
Cost of sales ............................ 45 48 47
Cost of sales - write-downs .............. -- -- 20
Advertising and promotion ................ 22 27 25
Advertising and promotion - write-downs .. -- -- 5
Bad debt expense ......................... 6 11 4
General and administrative expense ....... 18 19 32
Severance and other termination costs .... -- 1 --
Asset write-downs and strategic charges .. -- 2 --
Depreciation and amortization expense .... 3 1 1
Non-cash write-down of intangibles ....... 3 -- --
Interest expense, net .................... 7 5 48
Income tax expense (benefit) ............. 1 4 78
Net (loss) ............................... (5) (18) (160)
Dividends on preferred stock ............. -- 1 3
Net (loss) applicable to common shares ... (5) (19) (163)
SIX MONTHS
ENDED JUNE 30,
-------------------------
2005 2004
----------- -----------
Sales .............................................................. 100% 100%
Cost of sales ...................................................... 55.1 45.8
Cost of sales - strategic charges .................................. 5.4 --
Gross profit ....................................................... 39.5 54.2
Advertising and promotion .......................................... 14.0 25.1
General and administrative expense ................................. 63.8 33.1
Termination charges ................................................ 12.4 --
Depreciation and amortization expense .............................. 0.8 0.8
Interest (income) .................................................. (1.3) --
Interest expense ................................................... 11.1 72.5
Loss on early extinguishment of debt ............................... 10.3 --
Income tax expense (benefit) ....................................... -- --
Net (loss) ......................................................... (71.5) (77.3)
Dividends on preferred stock ....................................... 13.1 (1.7)
Deemed dividends on beneficial conversion of preferred stock ....... 309.7 --
Net (loss) applicable to common shares ............................. (394.4)% (79.0)%
-18-
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
NET SALES
$(000'S) CHANGE FROM 2003 TO 2004
------------------------
2003 2004 % CHANGE
---- ---- --------
AUDIO BOOK CLUB $26,380 12,303 (14,076) (53.4)%
----------------------------------------------------------
RADIO SPIRITS
Catalog 4,210 3,248 (962) (22.8)
Wholesale 3,048 1,671 (1,377) (45.2)
Continuity 2,841 1,403 (1,438) (50.6)
----------------------------------------------------------
10,099 6,322 (3,777) (37.4)
----------------------------------------------------------
MEDIABAY.COM 138 205 67 48.7
----------------------------------------------------------
$36,617 18,831 (17,786) (48.6)%
==========================================================
Audio Book Club sales decreased principally due to a decrease in club
membership as a result of a reduction in our advertising expenditures for new
members. For the year ended December 31, 2004, the Audio Book Club spent
$414,000 to attract new members, a reduction of $1.7 million, or 80.2%, from the
amount spent to attract new members of $2.1 million during the year ended
December 31, 2003. Audio Book Club attracted approximately 19,000 new members in
the year ended December 31, 2004 as compared to approximately 134,000 new
members in the year ended December 31, 2003.
The decrease in Radio Spirits catalog sales is principally attributable to
lower sales from catalogs mailed due to less new product introductions into the
catalogs and fewer new customers. Wholesale sales of old-time radio products
decreased principally due to lower orders from mass merchants and other
retailers. Sales of our The World's Greatest Old-Time Radio continuity program
decreased for the year ended December 31, 2004, as compared to the year ended
December 31, 2003, principally due to the reduction in our advertising
expenditures for new members. For the year ended December 31, 2004, we spent
$6,000 to attract new continuity customers, compared to $775,000 spent to
attract new customers during the year ended December 31, 2003.
COST OF SALES
$ (000's) 2003 2004 FROM 2003 TO 2004
------------------------------- ------------------------------- ---------------------------
AS A % AS A %
$ OF NET SALES $ OF NET SALES OF NET SALES % CHANGE
--------------- ------------- --------------- ------------- --------------- ---------
AUDIO BOOK CLUB $ 12,107 45.9% $ 5,484 44.6% (6,623) (54.7)%
----------------------------------------------------------------------------------------------------
RADIO SPIRITS
Catalog 2,015 47.9% 1,476 45.5 (539) (26.7)
Wholesale 2,057 67.5% 1,346 80.6 (711) (34.6)
Continuity 1,295 45.6% 495 29.7 (800) (61.8)
------------------------------- ------------------------------- ---------------------------
5,367 53.1% 3,317 52.5 (2050) (38.2)
------------------------------- ------------------------------- ---------------------------
MEDIABAY.COM 5 1 0.3 (4) (80.0)
------------------------------- ------------------------------- ---------------------------
$ 17,479 47.7% 8,802 46.7% (8,677) (49.6)%
=============================== =============================== ===========================
The principal reason for the decline in cost of sales at Audio Book Club
was a reduction in net sales of 53.4% as described above. Cost of sales as a
percentage of net sales at Audio Book Club for the year ended December 31, 2004
was 60.2%, compared to 45.9% for 2003. Cost of sales increased as a percentage
of sales because our smaller active membership required us to purchase finished
goods from publishers rather than licensing and manufacturing product due to
lower sales and made us unable to meet manufacturing minimums and recoup
advances to publishers, and because higher sales of unabridged and CD titles
with higher costs, higher manufacturing costs due to lower volumes and the
offering of more discounted titles in our catalogs in an effort to increase
sales.
-19-
As a percentage of net sales, cost of sales at Radio Spirits increased to
54.1% for the year ended December 31, 2004 from 53.1% for the year ended
December 31, 2003. Cost of catalog sales decreased as a percentage of net sales
to 46.3% for the year ended December 31, 2004 as compared to 47.9% for the year
ended December 31, 2003 principally due to less discounting in the catalogs. The
cost of wholesale sales as percentage of net revenue increased to 79.3% as
compared to 67.5% for the year ended December 31, 2003 principally due to
principally due to sales to discounters of discontinued items. The cost of
World's Greatest Old-Time Radio continuity sales as a percentage of net income
decreased to 37.0% from 45.6% principally due to the smaller number of new
customers in 2004 whose initial purchase has a very high cost of goods sold.
COST OF SALES - WRITE-DOWNS
$(000'S) 2003 2004
-------------- --------------
COST OF SALES - WRITE-DOWNS $ -- $ 3,745
============== ==============
We have conducted a review of our operations including product offerings,
marketing methods and fulfillment. We are committed to digitizing and encoding
our library of spoken word content and making our content available to the
digital customer as described in the introduction to this Item 1. Business.
As a result of decisions made in the third quarter of 2004 we have
recorded $2.1 million of strategic charges for the three months ended September
30, 2004. These charges include: $1.0 of inventory written down to net
realizable value due to a reduction in Audio Book Club members and our new focus
on delivering spoken word products via downloads and $1.1 million of write-downs
to royalty advances paid to audiobook publishers and other license holders,
which we do not believe will be recoverable due to our new focus on delivering
spoken word products via downloads.
In the fourth quarter of 2004, we decided to transition our Audio Book
Club customers to either principally a downloadable business or an Internet
based business, which will not offer a negative club option. Based on this
decision, we further reduced the value of our Audio Book Club inventory by
$870,000 and reduced the amount of publishers' advances recorded as assets by
$215,000.
Also in the fourth quarter of 2004, we reviewed our product mix of
offerings to both our mail order and wholesale Radio Spirits customers. We have
experienced a significant shift in the mix between CDs and cassettes and will
substantially reduce the number of cassette offerings in the future.
Accordingly, we have written off a substantial portion of our existing cassette
inventory as well as a portion of our CD inventory relating to older products,
which we will not aggressively promote in future periods. The additional
increase in the reserve for obsolescence of the Radio Spirits inventory made in
the fourth quarter of 2004 was $560,000.
-20-
ADVERTISING AND PROMOTION
($000'S) FROM 2003 TO 2004
-----------------
2003 2004 CHANGE % CHANGE
-------- ---------- --------- --------
AUDIO BOOK CLUB
New Member $ 2,092 $ 414 $(1,678) (80.2)%
Current Member 1,993 994 (999) (50.1)
------------------------------------------------
4,085 1,408 (2,677) (65.5)
------------------------------------------------
RADIO SPIRITS
Catalog 964 787 (177) (18.4)
Wholesale 74 57 (17) (22.3)
Continuity 775 6 (769) (99.2)
------------------------------------------------
1,813 850 (963) (53.1)
------------------------------------------------
NEW PROJECTS 339 164 (175) (51.6)
------------------------------------------------
TOTAL SPENDING 6,237 2,422 (3,815) (61.2)
AMOUNT CAPITALIZED (2,410) (354) (2,056) (85.3)
AMOUNT AMORTIZED 6,161 2,632 (3,529) (57.3)
------------------------------------------------
ADVERTISING AND PROMOTION EXPENSE $ 9,988 $ 4,700 $(5,288) (52.9)%
================================================
Advertising and promotion decreased $5.3 million to $4.7 million or 52.9%
for the year ended December 31, 2004 from the amount spent during the year ended
December 31, 2003 of $10.0 million. Actual advertising expenditures for the year
ended December 31, 2004 decreased $3.8 million to $2.4 million from $6.2 million
during the year ended December 31, 2003. The decrease was due to a minimal
amount of new member marketing for Audio Book Club new members due to cash
constraints and our change in strategy as described above and decreased
advertising to existing members due to the reduction in Audio Book Club
membership because of normal member attrition with no marketing to replace
leaving members. Radio Spirits continuity advertising was reduced due to cash
constraints. We spent $164,000 on the new Larry King promotion in 2004.
ADVERTISING AND PROMOTION - WRITE-DOWNS
($000'S) 2003 2004
------------ ----------
ADVERTISING AND PROMOTION - WRITE-DOWNS $ -- $ 846
============ ==========
Based on the change in our strategy , described above, we have determined
that the future net revenue from our Audio Book Club does not support the
carrying amount of the direct-response advertising reported as assets relating
to the Audio Book Club. Accordingly, we have made an adjustment to write-off the
carrying amount of the asset in the fourth quarter for 2004 resulting in an
increase in advertising expense of $846,000.
BAD DEBT EXPENSE
($000'S) 2003 2004
--------------------------------------------------- FROM 2002 TO 2003
AS A % AS A % -----------------
OF NET SALES OF NET SALES CHANGE % CHANGE
---------------------------------------------------
AUDIO BOOK CLUB $ 3,404 12.9% $ 744 6.0% $ (2,660) (78.1)%
---------------------------------------------------------------------------------
RADIO SPIRITS
CATALOG -- -- -- -- -- --
WHOLESALE 15 0.5% 15 0.8% -- --
CONTINUITY 521 18.3% 70 5.2% 451 86.5%
--------------------------------------------------- -------------------------
536 5.3% 85 1.3% 451 84.1%
--------------------------------------------------- -------------------------
MEDIABAY.COM -- -- -- -- -- --
--------------------------------------------------- -------------------------
$ 3,940 10.8% $ 829 4.4% $ 3,111 79.0%
=================================================== =========================
-21-
The principal reason for the decline in bad debt expense at Audio Book
Club was a reduction in net sales of 53.4% as described above. Bad debt expense
as a percentage of net sales at Audio Book Club for the year ended December 31,
2004 was 6.0 %, compared to 12.9% for the year ended December 31, 2003. The
decrease in bad debt expense as a percentage of net sales is principally due to
a reduced number of new members, who typically have higher bad debt expense,
since a lower number of new members were added in the year ended December 31,
2004 as compared to the year ended December 31, 2003.
The bad debt expense of World's Greatest Old-Time Radio continuity for the
year ended December 31, 2004 decreased by $451,000 to $70,000 from $521,000 for
the year ended December 31, 2003. As a percentage of net sales, bad debt expense
for the World's Greatest Old-Time Radio continuity for the year ended December
31, 2004 was 5.2% as compared to 18.3% for the year ended December 31, 2003. The
decrease in bad debt expense as a percentage of net sales is principally due to
a reduced number of new customers, who typically have higher bad debt expense,
since a lower number of new customers were added in the year ended December 31,
2004 as compared to the year ended December 31, 2003.
Because of the reasons stated above, our bad debt expense decreased $3.1
million, or 79.0% to $829,000 for the year ended December 31, 2004 as compared
to $3.9 million for the year ended December 31, 2003. As a percentage of net
sales, bad debt expense was 4.4 % for the year ended December 31, 2004 as
compared to 10.8% for the year ended December 31, 2003.
GENERAL AND ADMINISTRATIVE
$ (000'S) 2003 2004
------------------------------------------------------- FROM 2003 TO 2004
AS A % AS A % -----------------
$ OF NET SALES $ OF NET SALES CHANGE % CHANGE
----------------------------------------------------------------------------------
AUDIO BOOK CLUB $ 2,626 10.0% $ 2,379 19.3% $ (247) (9.4)%
RADIO SPIRITS 1,163 11.5% 959 15.2% (204) (17.5)
MEDIABAY.COM 614 621 7 1.1
CORPORATE 2,412 2,084 (328) (13.6)
----------------------------------------------------------------------------------
$ 6,815 18.6% $ 6,043 32.1% $ (772) (11.3)%
==================================================================================
General and administrative expenses at Audio Book Club declined
principally due to reductions in payroll and related costs due to reduced staff.
General and administrative expenses at Radio Spirits for the year ended December
31, 2004 declined principally due to reductions in payroll due to reduced staff
and commissions to outside sales personnel due to lower wholesale sales. Our
corporate general and administrative expenses for the year ended December 31,
2004 declined principally due to lower payroll costs due to less employees and
settlement of lease and consulting obligations.
ASSET WRITE-DOWNS AND STRATEGIC CHARGES
$(000'S) 2003 2004
-------------- -----------
ASSET WRITE-DOWNS AND STRATEGIC CHARGES $ 749 $ --
============== ===========
In the fourth quarter of 2003, we evaluated the performance of Audio
Passages, an Audio Book Club marketing program tailored to listeners with an
interest in Christian product and determined based on past performance and
expected future performance that we should terminate the Audio Passages
marketing program. In connection with the termination of the Audio Passages
marketing program, we took a strategic charge for the establishment of a reserve
for obsolescence of Audio Passages inventory of $0.3 million and an assets
write-down for previously capitalized advertising, which are not recoverable in
the amount of $0.5 million.
-22-
TERMINATION COSTS (000'S)
$(000'S) 2003 2004
-------------- -----------
TERMINATION COSTS $ 544 $ --
============== ===========
In 2003, the employment of two senior executives who had employment
agreements was terminated and the decision was made to terminate the employment
agreement of another senior executive. A consulting agreement was also
terminated. We agreed to make aggregate settlement payments under the employment
agreements and consulting agreement for total consideration of $.5 million
payable through May 2005.
DEPRECIATION AND AMORTIZATION
$ (000'S) 2003 2004
----------------------- ------------------------- FROM 2003 TO 2004
AS A % AS A % -----------------
$ OF NET SALES $ OF NET SALES CHANGE % CHANGE
----------------------- ------------------------- -------------------------
DEPRECIATION:
AUDIO BOOK CLUB $ 104 0.4% 83 0.7% $ (21) (19.9)%
RADIO SPIRITS 42 0.4% 37 0.6 (5) (11.9)%
AMORTIZATION:
CORPORATE 182 -- 24 -- (158) (87.0)%
----------------------- ------------------------- -------------------------
$ 328 0.9% 144 0.8% $ (184) (75.0)%
======================= ========================= =========================
The decrease in amortization expenses is principally attributable to the
reduction of the carrying amounts of our intangible assets made in the fourth
quarter of 2003. Specifically, we made a strategic decision to no longer compete
in the DVD market and accordingly wrote off the value of certain video and DVD
rights we had acquired in the amount of $90,000. We also made the strategic
decision in the fourth quarter of 2003 to discontinue future mailings to the
Columbia House lists of members of other clubs. Accordingly, in the fourth
quarter of 2003, we wrote off the unamortized value of the Columbia House
mailing agreement of $986,000.
INTEREST EXPENSE
$ (000'S) FROM 2003 TO 2004
-----------------
2003 2004 CHANGE % CHANGE
-------- -------- -------- --------
INTEREST PAID $ 384 $ 1,045 $ 661 159.1%
INTEREST ACCRUED 74 25 (49) (66.2)
INTEREST INCLUDED IN DEBT 907 521 (386) (42.6)
AMORTIZATION OF DEFERRED FINANCING COSTS AND
ORIGINAL ISSUE DISCOUNT 560 1,341 (781) (139.5)
LOSS ON EARLY EXTINGUISHMENT OF DEBT -- 1,532 1,532 --
BENEFICIAL CONVERSION EXPENSE -- 3,991 3,991 --
INDUCEMENT TO CONVERT -- 391 391 --
INTEREST CONVERTED TO PREFERRED STOCK -- 254 254 --
LESS: INTEREST INCOME -- (18) (18) --
-------- -------- -------- --------
TOTAL INTEREST EXPENSE $ 1,925 $ 9,082 $ 7,157 371.8%
The increase in interest expenses is principally due to increased debt and
higher interest costs and amortization of debt discount relating to the 2004
financing transactions as described in the Liquidity and Capital Resources
section of this Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Net loss before income taxes for the year ended December 31, 2004 was
$15.4 million as compared to a net loss before income taxes for the year ended
December 31, 2003 of $5.2 million.
-23-
INCOME TAX EXPENSE
$ (000'S) FROM 2003 TO 2004
-----------------
2003 2004 CHANGE % CHANGE
---- ---- ------ --------
INCOME TAX EXPENSE $ 1,471 $ 14,753 $ (13,282) 902.9%
======= ========= ========= =====
The ultimate realization of deferred tax assets is dependent on the
generation of future taxable income during the periods in which temporary timing
differences become deductible. We determine the utilization of deferred tax
assets in the future based on current year projections by management.
Based on the change in Company strategy, described above, we have
determined that it is not more likely than not that we will, in the foreseeable
future, be able to realize all or part of our net deferred tax asset.
Accordingly, we have made an adjustment to the deferred tax asset recording an
increase to the valuation allowance, resulting in a deferred tax expense charged
against income of $14.8 million in the fourth quarter of 2004, the period when
such determination was made.
During the years ended December 31, 2003; we utilized $1,471,000, of the
$17.2 million deferred tax asset recorded in 2001. Accordingly, we recorded
income tax expense of $1,471,000 for the year ended December 31, 2003.
PREFERRED STOCK DIVIDENDS
$ (000'S) FROM 2003 TO 2004
-----------------
2003 2004 CHANGE % CHANGE
-------- -------- -------- --------
SERIES A PREFERRED STOCK DIVIDENDS 228 228 -- --
SERIES B PREFERRED STOCK DIVIDENDS 18 28 10 55.6%
SERIES C PREFERRED STOCK DIVIDENDS -- 318 318 --
-------- -------- -------- --------
TOTAL DIVIDENDS ACCRUED ON PREFERRED STOCK $ 246 $ 574 $ 328 133.3%
======== ======== ======== ========
The increase in preferred stock dividends for the year ended December 31,
2004 as compared to the year ended December 31, 2003, is due to an increase in
dividends for Series B Preferred Stock which was issued May 2003 and outstanding
for only part of 2003 and dividends on the Series C Preferred Stock issued in
May 2004. Our Principal Shareholder agreed to exchange the principal of certain
notes, plus accrued and unpaid interest owed to the Principal Shareholder
aggregating $3.8 million and accrued and unpaid dividends owed to the Principal
Shareholder aggregating $519,000 into an aggregate of 43,527 shares of Series C
Preferred Stock convertible into (i) an aggregate of 930,064 shares of Common
Stock at an effective conversion price of $4.68, and (ii) warrants to purchase
an aggregate of 1,860,128 shares of Common Stock. The Series C Preferred Stock
accrues dividends at the rate of 9% per annum.
LOSS APPLICABLE TO COMMON STOCKHOLDERS
$ (000'S) FROM 2003 TO 2004
-----------------
2003 2004 CHANGE
-------- -------- --------
LOSS APPLICABLE TO COMMON STOCKHOLDERS $ 6,869 $ 30,687 $ 23,818
======== ======== ========
Principally due to reduced sales and higher interest costs, partially
offset by lower advertising, bad debt expense, certain write-offs and strategic
charges described above general and administrative expenses, increased interest
expenses, including beneficial conversion charges and recognition of deferred
tax expenses, our net loss applicable to common shares for the year ended
December 31, 2004 increased $23.8 million to $30.7 million, or $10.26 per
diluted share as compared to a net loss applicable to common shares for the year
ended December 31, 2003 of 6.9 million, or $2.94 per diluted share of common
stock.
-24-
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2003
NET SALES
CHANGE FROM 2002
($000'S) 2002 2003 TO 2003 % CHANGE
---- ---- ---------- --------
AUDIO BOOK CLUB $34,343 $ 26,380 $ (7,963) (23.2)%
-----------------------------------------------------------
RADIO SPIRITS
Catalog 4,507 4,210 (297) (6.6)%
Wholesale 5,594 3,048 (2,546) (45.5)%
Continuity 1,085 2,841 1,756 161.8%
-----------------------------------------------------------
11,186 10,099 (1,087) (9.7)%
-----------------------------------------------------------
MEDIABAY.COM 215 138 (77) (35.8)%
-----------------------------------------------------------
$45,744 $ 36,617 $ (9,127) (20.0)%
===========================================================
Audio Book Club sales decreased principally due to a decrease in club
membership as a result of a reduction in our advertising expenditures for new
members. For the year ended December 31, 2003, the Audio Book Club spent $2.1
million to attract new members, a reduction of $6.2 million, or 74.7%, from the
amount spent to attract new members of $8.3 million during the year ended
December 31, 2002. Audio Book Club attracted approximately 134,000 new members
in the year ended December 31, 2003 as compared to approximately 290,000 new
members in the year ended December 31, 2002.
The decrease in Radio Spirits catalog sales is principally attributable to
reduced catalog mailings. We spent $81,000, or 7.8% less in advertising during
the year ended December 31, 2003 as compared to the spending during the year
ended December 31, 2002. Wholesale sales of old-time radio products decreased
principally due to reduced sales to three major customers in 2003 and higher
returns from our major customers. Sales of our The World's Greatest Old-Time
Radio continuity program increased for the year ended December 31, 2003, as
compared to the year ended December 31, 2002, principally due to the inclusion
of a full year of sales in 2003. The World's Greatest Old-Time Radio continuity
program was introduced in the third quarter of 2002.
COST OF SALES
$ (000'S) 2002 2003
------------------------ ----------------------
FROM 2002 TO 2003
AS A % AS A % -----------------
$ OF NET SALES $ OF NET SALES CHANGE % CHANGE
---------- ------------ ------- ------------ ---------- ----------
AUDIO BOOK CLUB $14,821 43.2% $ 12,107 45.9% $ (2,714) (18.3)%
------------------------------------------------------------------------------------
RADIO SPIRITS
Catalog 1,874 41.6% 2,015 47.9% 141 7.5%
Wholesale 3,072 54.9% 2,057 67.5% (1,015) (33.0)%
Continuity 884 81.5% 1,295 45.6% 411 46.5%
------------------------ ----------------------- --------------------------
5,830 52.1% 5,369 53.1% (463) (7.9)%
------------------------ ----------------------- --------------------------
MEDIABAY.COM -- 5 5
------------------------ ----------------------- --------------------------
$20,651 45.1% $ 17,479 47.7% $ (3,172) (15.4)%
------------------------ ----------------------- --------------------------
The principal reason for the decline in cost of sales at Audio Book Club
was a reduction in net sales of 23.2% as described above. Cost of sales as a
percentage of net sales at Audio Book Club for the year ended December 31, 2003
was 45.9%, compared to 43.2% for 2002. The increase in cost of sales as a
percentage of net sales is principally due to increased costs relating to higher
return rates in 2003, an increase in the reserve for obsolescence in 2003, in
part related to the termination of Audio Passages, our Christian audiobook club,
and higher average royalty rates since fewer books were sold in new member
offerings, which have lower royalty rates, partially offset by a reduced number
of heavily discounted books sold to new members due to a lower number of new
members added in 2003 as compared to 2002.
-25-
As a percentage of net sales, cost of sales at Radio Spirits increased to
53.1% for the year ended December 31, 2003 from 52.1% for the year ended
December 31, 2002. Cost of catalog sales increased as a percentage of net sales
to 47.9% for the year ended December 31, 2003 as compared to 41.6% for the year
ended December 31, 2002 principally due to sales of discounted items both in the
Radio Spirits catalog and through a campaign on radio stations. The cost of
wholesale sales as percentage of net revenue increased to 67.5% as compared to
54.9% for the year ended December 31, 2002 principally due to the sales of
slower moving items at heavily discounted prices in remainder sales and costs
associated with higher returns. The cost of World's Greatest Old-Time Radio
continuity sales as a percentage of net income decreased 45.6% from 81.5%. The
continuity program commenced in August 2002 and the majority of sales in 2002
were of heavily discounted introductory merchandise designed to attract new
buyers.
ADVERTISING AND PROMOTION
($000'S) FROM 2002 TO 2003
-----------------
2002 2003 CHANGE % CHANGE
---- ---- ------ --------
AUDIO BOOK CLUB
New Member $ 8,269 $ 2,092 $ (6,177) (74.7)%
Current Member 2,310 1,993 (317) (13.7)%
----------------------------------------------
10,579 4,085 (6,494) (61.4)%
----------------------------------------------
RADIO SPIRITS
Catalog 1,070 964 (106) (9.9)%
Wholesale 151 74 (77) (51.0)%
Continuity 885 775 (110) (12.4)%
----------------------------------------------
2,106 1,813 (293) (13.9)%
----------------------------------------------
NEW PROJECTS -- 339 339
------------------------------------
TOTAL SPENDING 12,685 6,237 (6,448) (50.8)%
AMOUNT CAPITALIZED (8,099) (2,410)
AMOUNT AMORTIZED 5,571 6,161
----------------------
ADVERTISING AND PROMOTION EXPENSE $ 10,157 $ 9,988
----------------------
Although advertising and promotion expenses were relatively consistent,
actual advertising expenditures in the year ended December 31, 2003 were $6.2
million, a decrease of $6.4 million or 50.8% over the amount spent during the
year ended December 31, 2002 of $12.7 million.
We attempted to grow our Audio Book Club very aggressively in 2002. We
spent $8.3 million to attract new members to our Audio Book Club in 2002.
The largest increases in 2002 as compared to 2001 were in attracting
members through the Internet to our Audio Book Club in offers which required no
immediate payment to join the club or purchase the initial books and in
attracting member to Audio Passages, an audiobook club with products intended
for a Christian audience. The cost to acquire these customers was lower than our
traditional direct mail campaigns to acquire Audio Book Club members, however
the performance of both the members attracted through the Internet and the Audio
Passages members was much worse than our traditional Audio Book Club members.
Because we spent a substantial amount of money to acquire these members and
their performances were worse than we anticipated, we did not have much funds
for advertising in 2003 and accordingly our advertising and promotion activities
were dramatically reduced in 2003. A large portion of advertising expenditures
in 2002 was capitalized and a substantial portion of that advertising was
expensed in 2003. Our new member recruitment was significantly reduced in 2003.
In 2004, we have done a small amount of marketing for new ABC members on an
Internet offer requiring credit card payment. While the initial response was
encouraging we continue to monitor the buying and payment behavior of these
customers and currently do not have sufficient funds to conduct any additional
marketing.
-26-
BAD DEBT EXPENSE
($000'S) 2002 2003
------------------------- -----------------------
FROM 2002 TO 2003
AS A % AS A % -----------------
$ OF NET SALES $ OF NET SALES CHANGE % CHANGE
---------- ------------ ------- ------------ ---------- ---------
AUDIO BOOK CLUB $2,735 8.0% $3,404 12.9% $669 24.5%
-------------------------------------------------------------------------------
RADIO SPIRITS
Catalog -- -- -- -- - --
Wholesale 15 0.3% 15 0.5% - --
Continuity 71 6.5% 521 18.3% 450 633.8%
------------------------------------------------------- -----------------------
86 1.5% 536 5.3% 450 523.3%
------------------------------------------------------- -----------------------
MEDIABAY.COM -- -- -- -- -- --
------------------------------------------------------- -----------------------
$2,821 13.7% $3,940 10.8% $1,119 39.7%
======================================================= =======================
Bad debt expense at Audio Book Club increased by $.7 million to $3.4
million, or 12.9% of sales. The principal reason for the increase in bad debt
expense at Audio Book Club was the attraction of over 96,000 members through the
Internet, most of which were Bill Me Members. The bad debt rates for the initial
discounted offer to these Bill Me Internet Members often exceeded 50% and the
bad debt rate for shipments subsequent to payment for the initial offer exceeded
the historical bad debt rate of the Audio Book Club acquired through direct
mail. We stopped offering Bill Me offers on the Internet in the second quarter
of 2003 and are testing alternatives methods to attract members either through
an offer requiring immediate payment of the initial offer with a credit card or
much more extensive initial screening methods.
The bad debt expense of World's Greatest Old-Time Radio continuity members
for the year ended December 31, 2003 increased by $.4 million to $.5 million
from $.1 million for the year ended December 31, 2002. As a percentage of net
sales, bad debt for the year ended December 31, 2003 were 18.3% as compared to
6.5% for the year ended December 31, 2002. The program commenced in 2002, and as
the program matured in 2003, and customer-paying behavior became more evident,
the allowance for bad debts and the corresponding bad debt rate increased.
-27-
GENERAL AND ADMINISTRATIVE
$(000'S)
2002 2003 FROM 2002 TO 2003
------------------------- -------------------------- --------------------------
AS A % AS A %
OF NET SALES OF NET SALES CHANGE % CHANGE
------------ ------------ ------ --------
AUDIO BOOK CLUB $ 2,842 8.3% $ 2,626 10.0% $ (216) (7.6)%
RADIO SPIRITS 1,617 14.5% 1,163 11.5% (454) (28.1)%
MEDIABAY.COM 654 614 (40) (6.1)%
CORPORATE 3,234 $ 2,412 (822) (25.4)%
--------- --------- --------- --------- --------- ---------
$ 8,347 18.2% 6,815 18.6% $ (1,532) (18.4)%
========= ========= ========= ========= ========= =========
General and administrative expenses at Audio Book Club declined
principally due to reductions in payroll due to reduced staff. General and
administrative expenses at Radio Spirits for the year ended December 31, 2003
declined principally due to reductions in payroll due to reduced staff and
commissions to outside sales personnel due to lower wholesale sales, lower
consulting costs principally due to the termination of a consulting agreement
entered in to 2001 with the previous president of Radio Spirits following his
resignation and settlement of all outstanding amounts with a former joint
venture partner responsible for syndication of our old-time radio shows on
broadcast radio. Our corporate general and administrative expenses for the year
ended December 31, 2003 declined principally due to reductions in public and
investor relations, travel and legal fees partially offset by higher insurance
costs.
ASSET WRITE-DOWNS AND STRATEGIC CHARGES
($000'S) 2002 2003
--------- --------
ASSET WRITE-DOWNS AND STRATEGIC CHARGES $ -- $749
========= ========
In the fourth quarter of 2003, we evaluated the performance of Audio
Passages, an Audio Book Club marketing program tailored to listeners with an
interest in Christian product and determined based on past performance and
expected future performance that we should terminate the Audio Passages
marketing program. In connection with the termination of the Audio Passages
marketing program, we took a strategic charge for the establishment of a reserve
for obsolescence of Audio Passages inventory of $0.3 million and an assets
write-down for previously capitalized advertising, which are not recoverable in
the amount of $0.5 million.
TERMINATION COSTS
($000'S) 2002 2003
------------- -----------
TERMINATION COSTS $ -- $544
============= ===========
In 2003, the employment of two senior executives who had employment
agreements was terminated and the decision was made to terminate the employment
agreement of another senior executive. A consulting agreement was also
terminated. We agreed to make aggregate settlement payments under the employment
agreements and consulting agreement for total consideration of $.5 million
payable through May 2005.
-28-
DEPRECIATION AND AMORTIZATION
$ (000'S) 2002 2003
------------------------- -----------------------
FROM 2002 TO 2003
AS A % AS A % -----------------
$ OF NET SALES $ OF NET SALES CHANGE % CHANGE
------------ ------------ ------ --------
DEPRECIATION:
AUDIO BOOK CLUB $124 0.4% $104 0.4% $(20) (16.1)%
RADIO SPIRITS 97 0.9% 42 0.4% (55) (56.7)%
AMORTIZATION:
CORPORATE 1,093 182 (911) (83.3)%
------------------------- ----------------------- ---------------------------
$1,314 2.9% $328 0.9% $(986) (75.0)%
========================= ======================= ===========================
The decrease in amortization expenses is principally attributable to the
reduction of the carrying amounts of our intangible assets made in the fourth
quarter of 2002. Specifically, we made a strategic decision to no longer compete
in the DVD market and accordingly wrote off the value of certain video and DVD
rights we had acquired in the amount of $90,000. We also made the strategic
decision in the fourth quarter of 2002 to discontinue future mailings to the
Columbia House lists of members of other clubs. Accordingly, in the fourth
quarter of 2002, we wrote off the unamortized value of the Columbia House
mailing agreement of $986,000.
INTEREST EXPENSE
$ (000'S) FROM 2002 TO 2003
-----------------
2002 2003 CHANGE % CHANGE
---- ---- ------ --------
INTEREST PAID $ 766 $ 384 $ (382) (49.9)%
INTEREST ACCRUED 118 74 (44) (37.3)%
INTEREST INCLUDED IN DEBT 637 907 270 42.4%
AMORTIZATION OF DEFERRED FINANCING COSTS AND
ORIGINAL ISSUE DISCOUNT 1,453 560 (893) (61.5)%
-------------------------------------------------------
TOTAL INTEREST EXPENSE $ 2,974 $ 1,925 $(1,049) (35.3)%
=======================================================
The reduction in interest expense is principally due to a reduction in the
amortization of deferred financing costs and original issue discount of $0.9
million based on the original terms of the debt to which the costs and discount
related.
Net loss before income taxes for the year ended December 31, 2003 was $5.2
million as compared to a net loss before income taxes for the year ended
December 31, 2002 of $1.7 million.
INCOME TAX EXPENSE
$ (000'S) FROM 2002 TO 2003
-----------------
2002 2003 CHANGE % CHANGE
---- ---- ------ --------
INCOME TAX EXPENSE $ 550 $ 1,471 $ 921 167.5%
====== ========= ======= =====
During the years ended December 31, 2003 and 2002, we utilized $1,471,000
and $550,000, respectively, of the $17.2 million deferred tax asset recorded in
2001. Accordingly, we recorded income tax expense of $1,471,000 and $550,000 for
the years ended December 31, 2003 and 2002, respectively.
-29-
PREFERRED STOCK DIVIDENDS
$ (000'S) FROM 2002 TO 2003
-----------------
2002 2003 CHANGE % CHANGE
-------- -------- -------- --------
DIVIDENDS ACCRUED ON SERIES A PREFERRED STOCK 217 228 11 5.1%
DIVIDENDS ACCRUED ON SERIES B PREFERRED STOCK -- 18 18 --
-------- -------- -------- --------
TOTAL DIVIDENDS ACCRUED ON PREFERRED STOCK $ 217 $ 246 $ 29 13.4%
======== ======== ======== ========
For the year ended December 31, 2003, we accrued preferred stock dividends
of $0.2 million on the outstanding 25,000 shares of Series A Preferred stock,
which were issued in January 2002 and $18,000 for dividends for Series B
Preferred Stock issued May 2003.
LOSS APPLICABLE TO COMMON STOCKHOLDERS
$ (000'S) FROM 2002 TO 2003
-----------------
2002 2003 CHANGE % CHANGE
---- ---- ------ --------
LOSS APPLICABLE TO COMMON STOCKHOLDERS $ 2,510 $ 6,869 $ 4,359 173.7%
======== ========= ========= =====
Principally because of lower sales due in large part to reduced spending
on new member advertising at Audio Book Club and lower wholesale sales at Radio
Spirits, our net loss applicable to common shares increased $4.4 million to $6.9
million, or $2.92 per diluted share as compared to a net loss applicable to
common shares for the year ended December 31, 2002 of $2.5 million, or $1.08 per
diluted share of common stock.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004:
NET SALES
$(000'S) CHANGE FROM
2004 2005 2004 TO 2005 % CHANGE
---- ---- ------------ --------
AUDIO BOOK CLUB $ 7,065 $ 3,562 $ (3,503) (49.6)%
------------------------------------------------------
RADIO SPIRITS
Catalog 1,610 1,219 (391) (24.3)%
Wholesale 982 439 (543) (55.3)%
Continuity 721 314 (407) (56.5)%
------------------------------------------------------
3,314 1,972 (1,342) (40.5)%
------------------------------------------------------
MEDIABAY.COM 106 91 (15) (14.3)%
------------------------------------------------------
$ 10,485 $ 5,625 $ (4,860) (46.4)%
======================================================
Audio Book Club sales decreased principally due to a decrease in club
membership as a result of discontinuing our advertising expenditures for new
members.
In the second quarter of 2005, we changed our negative option book club
and converted to a business selling audiobooks and other audio entertainment
without a negative option requirement. As a result of this change, we anticipate
lower returns from our customers in future periods.
The decrease in Radio Spirits catalog sales is principally attributable to
fewer customers, as we have not incurred marketing expenditures to attract new
members, and greater discounting in our catalogs. Wholesale sales of old-time
radio products decreased principally due to reduced sales to our major
customers. Sales of our World's Greatest Old-Time Radio continuity program
decreased principally due to the lack of advertising expenditures for new
customers.
-30-
COST OF SALES
$(000'S) 2004 2005 FROM 2004 TO 2005
------------------------- -------------------------- ------------------------
AS A % AS A %
$ OF NET SALES $ OF NET SALES CHANGE % CHANGE
------------ ------------ ------ --------
AUDIO BOOK CLUB $ 3,224 45.6% $ 2,030 57.0% (1,194) (37.0)%
------------------------- -------------------------- ------------------------
RADIO SPIRITS
Catalog 680 42.2% 556 45.6% (124) (18.3)%
Wholesale 606 61.6% 380 86.6% (226) (37.2)%
Continuity 287 39.9% 132 42.2% (155) (53.9)%
------------------------- -------------------------- ------------------------
Total Radio Spirits 1,573 47.5% 1,068 54.2% (505) (32.1)%
------------------------- -------------------------- ------------------------
MEDIABAY.COM 1 0.4% -- -- (1) (100.0)%
------------------------- -------------------------- ------------------------
COST OF SALES 4,798 3,098 55.1% (1,700) (35.4)%
COST OF SALES -
STRATEGIC CHARGES -- -- 305 5.4% 305
------------------------- -------------------------- ------------------------
$ 4,798 45.8% $ 3,398 60.5% (1,395) (29.1)%
========================= ========================== ========================
The principal reason for the decline in cost of sales at Audio Book Club
was a reduction in sales of 49.6% as described above. Cost of sales as a
percentage of sales at Audio Book Club for the six months ended June 30, 2005
was 57.0%, compared to 45.6% for the same period in 2004. The increase in cost
of sales as a percentage of sales is principally due to an increase in product
costs as a percentage of sales since a smaller active membership required us to
purchase finished goods from publishers rather than the licensing and
manufacturing of product due to lower sales and our inability to meet
manufacturing minimums and recoup advances to publishers, higher sales of
unabridged and CD titles with higher costs and higher manufacturing costs due to
lower volumes and to a lesser extent an increase in fulfillment costs as a
percentage of sales since the fixed portion of our third party fulfillment costs
is allocated to a smaller active membership.
Cost of catalog sales increased as a percentage of sales to 45.6% for the
six months ended June 30, 2005 as compared to 42.2% for the six months ended
June 30, 2004 principally due to sales of lower cost items with lower margins,
increased discounting in the catalogs to sell older inventory and higher royalty
costs as a percentage of the lower sales volume due to the fixed portion of
royalty advances. The cost of wholesale sales as percentage of sales increased
to 86.6% for the six months ended June 30, 2005 as compared to 61.6% for the six
months ended June 30, 2004 principally due to a greater portion of fixed costs
(allocated obsolescence and product development costs, the fixed cost of
warehousing and fulfillment and royalty advances) in relation to the lower sales
volume. The cost of World's Greatest Old-Time Radio continuity sales as a
percentage of sales increased to 42.2% from 39.9% principally due to the fixed
cost associated with warehousing and fulfillment in relation to the lower sales
volume as we have not marketed for new customers.
In the second quarter of 2005, we changed our negative option book club
and converted to a business selling audiobooks and other audio entertainment
without a negative option requirement. We have moved our warehouse and
fulfillment operations to a facility which also provides products and
accordingly we have changed from licensing and manufacturing many of its
audiobook titles to buying on a wholesale basis and accordingly we recorded a
$305 write-down of royalty advances to what we believe is net realizable value
at June 30, 2005. Under our new buying arrangement we are buying products at a
fixed percentage off of manufacturer's suggested retail price. In addition we
will be incurring certain fixed fulfillment charges. The cost of the new
arrangement will be dependent on future sales volume.
-31-
ADVERTISING AND PROMOTION
$(000'S) FROM 2004 TO 2005
-----------------
2004 2005 CHANGE % CHANGE
---- ---- ------ --------
AUDIO BOOK CLUB
New Member $ 274 $ -- $ (274) (100.0)%
Current Member 632 234 (398) (63.0)%
-------------------------------------------------
Total Audio Book Club 906 234 (672) (74.2)%
-------------------------------------------------
RADIO SPIRITS
Catalog 341 380 39 11.4%
Wholesale 11 27 16 145.5%
Continuity 6 -- (6) (100.0)%
-------------------------------------------------
Total Radio Spirits 358 407 49 13.7%
-------------------------------------------------
NEW PROJECTS 14 132 118 842.9%
-------------------------------------------------
TOTAL SPENDING 1,278 773 (505) (39.5)%
AMOUNT CAPITALIZED (245) -- 245 (100.0)%
AMOUNT AMORTIZED 1,595 14 (1,581) (99.2)%
-------------------------------------------------
ADVERTISING AND PROMOTION EXPENSE $ 2,627 787 $ (1,840) (70.1)%
=================================================
Advertising and promotion expenses decreased $1.8 million to $787,000 for
the six months ended June 30, 2005 as compared to $2.6 million in the prior
comparable period, principally due to lower amortization of deferred member
acquisition costs. In the fourth quarter of 2004, based on the change in our
strategy, described above, we determined that the future net revenue from our
Audio Book Club would not support the carrying amount of the direct-response
advertising reported as assets relating to the Audio Book Club. Accordingly, we
wrote-off the carrying amount of the asset in the fourth quarter for 2004
resulting in an increase in advertising expense in 2004 and lower expense in
2005. The decrease in spending was due to the lack of new member marketing for
Audio Book Club new members due to our change in strategy as described above and
decreased advertising to existing members due to the reduction in Audio Book
Club membership because of member attrition with no marketing to replace leaving
members. During the three months ended June 30, 2005 we incurred $132,000
related to new projects, principally marketing tests related to the download
business.
GENERAL AND ADMINISTRATIVE
2004 2005 FROM 2004 TO 2005
----------------------------- ------------------------------- ---------------------------
$(000'S) As a % As a %
$ Of Net Sales $ Of Net Sales Change % Change
----------- --------------- ------------ ---------------- ----------- -----------
AUDIO BOOK CLUB $ 1,825 25.8% $ 1,030 28.9% (795) (43.6)%
RADIO SPIRITS 483 14.6% 631 32.0% 148 30.6%
MEDIABAY.COM 322 303.8% 366 402.2% 44 13.7%
CORPORATE 842 1,561 719 85.4%
----------- --------------- ------------ ---------------- ----------- -----------
$ 3,473 33.1% $ 3,588 63.8% 115 3.3%
=========== =============== ============ ================ =========== ===========
-32-
The increase in general and administrative expenses of $115,000 for the
six months ended June 30, 2005 as compared to the six months ended June 30, 2004
is principally due to increases in payroll and related costs, public and
investor relations (including directors fees), travel and entertainment and
legal and accounting fees, partially offset by lower bad debt expense The
principal reason for the decline in bad debt expense at Audio Book Club was
lower bad debts from remaining core Audio Book Club members who historically
have been good paying customers. The increase in payroll was mainly attributable
to various bonuses paid in the second quarter of 2005 and the hiring, retention
and promotion of key employees. The increase in investor and public relations
costs was attributable to fees paid to directors in the second quarter of 2005,
as well as an increase in public relations activity related to the download
strategy. The increase in travel and entertainment relates mainly to business
development travel in the implementation of the new strategy. The increase in
legal fees is related to the implementation of the new download strategy and the
increase in accounting fees is related to complying with the new requirements of
Sarbanes-Oxley.
TERMINATION COSTS
$(000'S) 2004 2005
---------- ----------
TERMINATION COSTS $ -- $697
========== ==========
In the second quarter of 2005, the employment of one senior executive who
had an employment agreement was terminated and the employment of several
employees, one of which had an employment agreement, was also terminated. We
agreed to make aggregate settlement payments totaling $697,000 payable through
March 2006.
DEPRECIATION AND AMORTIZATION
2004 2005
------- -----
$(000'S)
DEPRECIATION
------------
AUDIO BOOK CLUB $ 50 25
RADIO SPIRITS 18 14
TOTAL DEPRECIATION 68 39
AMORTIZATION
------------
CORPORATE 19 4
------- -----
TOTAL DEPRECIATION AND AMORTIZATION $ 88 43
======= =====
The decrease in depreciation and amortization expenses for the six months
ended June 30, 2005 as compared to the six months ended June 30, 2004 is
principally attributable to reductions in the amortization of intangibles, which
had been fully amortized or written off during the year ended December 31, 2004
and certain equipment, which was fully depreciated in 2004.
-33-
INTEREST EXPENSE
2004 2005 CHANGE
------------ ------------- ----------
$(000'S)
TOTAL INTEREST PAID $ 533 2,009 1,476
ACCRUED INTEREST PAID THIS PERIOD 74 1,599 1,525
------------ ------------- ----------
CURRENT INTEREST PAID 459 410 (49)
INTEREST INCLUDED IN DEBT 436 81 (355)
AMORTIZATION OF DEFERRED FINANCING COSTS AND
ORIGINAL ISSUE DISCOUNT 790 60 (730)
LOSS ON EARLY EXTINGUISHMENT OF DEBT 1,533 579 (954)
BENEFICIAL CONVERSION EXPENSES OF JANUARY 2004 NOTES
3,991 -- (3,991)
EXPENSE OF INDUCEMENT TO CONVERT, RELATED PARTY DEBT
390 (390)
------------ ------------- ----------
TOTAL INTEREST EXPENSE $ 7,599 1,130 (6,469)
============ ============= ==========
The decrease in interest expenses is principally due to the conversion of
debt into preferred stock and common stock in 2004 and the payment of the senior
debt facility and related party debt in connection with the March Financing
described below.
PREFERRED STOCK DIVIDENDS
2004 2005
------ ------
$(000'S)
DIVIDENDS ACCRUED ON SERIES A PREFERRED STOCK $ 114 51
DIVIDENDS ACCRUED ON SERIES B PREFERRED STOCK 15 1
DIVIDENDS ACCRUED ON SERIES C PREFERRED STOCK 50 100
DIVIDENDS ACCRUED ON SERIES D PREFERRED STOCK -- 586
DEEMED DIVIDEND FOR BENEFICIAL CONVERSION FEATURE OF SERIES D PREFERRED STOCK -- 17,423
------ ------
TOTAL DIVIDENDS DEEMED OR ACCRUED ON PREFERRED STOCK $ 179 18,161
====== ======
The Series D Preferred Shares are convertible at any time at the option of
the holder into shares of our common stock at the rate of $3.30 per share and
each warrant is exercisable to purchase one share of our common stock at an
exercise price of $3.36 per share. The market price for our common stock at
March 21, 2005 was $4.14. We recorded as a non-cash deemed dividend an amount of
$17,423 to reflect the value of the beneficial conversion feature of the Series
D Preferred Stock and increased contributed capital by $17,423. The recording of
the dividend had no effect on our cash or net equity.
The increase in the accrual of preferred stock dividends for the six
months ended June 30, 2005 as compared to the six months ended June 30, 2004 is
due to the accrual of dividends for the Series D Preferred Stock issued in March
2005, as described in the Liquidity and Capital Resources section below.
During the second quarter of 2005, 1,180 shares of Series D Preferred
Stock were converted into common stock and between July 1, 2005 and August 11,
2005 an additional 13,657 shares of Series D Preferred Stock were converted into
common stock. These conversions and future conversions, if any, will reduce the
preferred stock dividend in future periods.
-34-
LOSS APPLICABLE TO COMMON STOCKHOLDERS
FROM 2004 TO 2005
2004 2005 CHANGE % CHANGE
---- ---- ------ --------
$(000'S)
LOSS APPLICABLE TO COMMON STOCKHOLDERS $ 8,279 $ 22,184 $ 13,905 168.0%
======== ======== ======== =====
Principally due to the deemed dividend for beneficial conversion of Series
D Preferred Stock of $17,423, lower sales and a loss on early extinguishment of
debt of $579 the strategic charge, termination costs and higher preferred
dividends, partially offset by lower advertising expenses as described above,
our net loss applicable to common shares for the six months ended June 30, 2005
increased $14.0 million to $22.2 million, or $4.36 per diluted share, as
compared to a net loss applicable to common shares for the six months ended June
30, 2005 of $8.3 million, or $3.23 per diluted share of common stock, for the
six months ended June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our cash requirements through sales of equity
and debt securities and borrowings from financial institutions and our principal
shareholders. For the year ended December 31, 2004, we spent $414,000 to attract
new Audio Book Club members, a reduction of $1.7 million, or 80.2%, from the
amount spent to attract new members of $2.1 million during the year ended
December 31, 2003, due to a change in our business strategy and to the lack of
necessary funds. As a result, our member and customer bases eroded and our
revenues declined significantly.
As of June 30, 2005, we had cash on hand of $14.3 million, which is
substantially greater than the $3.1 million cash on hand at June 30, 2004. We
believe that we have sufficient cash to operate our business for a minimum of
twelve months.
OPERATING ACTIVITIES
Net cash used in operating activities during the year ended December 31,
2004 of $4.2 million, which principally consisted of the net loss of $30.7
million, increases in prepaid expenses and royalty advances of $48,000 and $1.0
million, respectively, and a decrease in accounts payable and accrued expenses
of $5.4 million, partially offset by deferred tax expenses of $14.8 million,
non-cash beneficial conversion charges of $4.4 million, $4.6 million of
write-downs of inventory and advances to publishers, as described above, loss on
extinguishment of debt of $1.5 million, depreciation and amortization expenses
of $144,000, amortization of deferred financing costs and original issue
discount of $1.3 million, non-current accrued interest and dividends payable of
$1.5 million, non-cash stock compensation of $328,000 decreases in accounts
receivable of $2.0 million and inventory of $103,000 and a net reduction in
deferred member acquisition costs of $2.3 million.
The decrease in accounts receivable during the year ended December 31,
2004 was primarily attributable to a reduction in sales as described above. The
net decrease in deferred member acquisition cost is due to reduced spending on
new member and customer acquisition activities as described above. The increase
in royalty advances is principally due to a decline in sales and a reduction in
new member acquisition activities at Audio Book Club, which results in lower
royalty expense and less utilization of the advances, as well as the timing and
payment of advances. During the year ended December 31, 2004, we reduced
accounts payable and accrued expenses by $5.3 million, the majority of which
were over 90 days past due.
For the six months ended June 30, 2005, cash increased by $11.2 million,
as we had net cash used in operating activities of $2.2 million, used net cash
of $580,000 in investing activities and had cash provided by financing
activities of $14.0 million. Net cash used in operating activities principally
consisted of the net loss of $22.2 million and increases in prepaid expenses of
$194,000 partially offset by the non-cash charges consisting of the deemed
dividend for beneficial conversion feature of Series D preferred Stock of $17.4
million, the loss on early extinguishment of debt of $579,000, depreciation and
amortization expenses of $43,000, amortization of deferred financing costs and
original issue discount of $210,000, non-current accrued interest and dividends
payable of $306,000; as well as decreases in accounts receivable, inventory and
royalty advances of $631,000, 132,000 and 99,000, and increases in accounts
payable and accrued expenses of $687,000.
-35-
For the six months ended June 30, 2005, the decreases in accounts
receivable and inventory are primarily attributable the reduction in sales as
described above. The increase in prepaid expenses is principally due to the
timing of payments of marketing costs and other costs related to the download
business and certain Radio Spirit's catalog costs. The increase in accounts
payable and accrued expenses is principally due to the accrual for preferred
dividends on the Series D Preferred Stock and termination costs. The decrease in
royalty advances relates to the change in strategy for our Audio Book Club, as
we are no longer licensing and manufacturing products as described above.
INVESTING ACTIVITIES
During the year ended December 31, 2004, net cash used in investing
activities consisted of the acquisition of fixed assets of $136,000, principally
computer equipment and acquisition of certain old-time radio rights from a
rightsholder of $20,000.
During the six months ended June 30, 2005, net cash used in investing
activities consists of acquisition of fixed assets of $580,000, principally
computer equipment and the cost of the development of the new websites offering
downloadable audio.
FINANCING ACTIVITIES
The following is a summary of our financing activities since January 1,
2004:
During the six months ended June 30, 2005, we received net cash proceeds
of the sale of Series D Preferred Stock of $31.5 million, as described above,
repaid debt in the amount of $9.4 million, repaid accrued interest, dividends
and fees relating to the debt of $2.4 million and redeemed Series A and Series C
Preferred Stock in the amount of $5.8 million.
JANUARY 2004 CONVERTIBLE DEBT
On January 29, 2004, we issued $4.0 million aggregate principal amount of
promissory notes (the "Notes") and warrants to purchase 392,158 shares of common
stock (the "Investor Warrants") to institutional and accredited investors (the
"Offering"). The notes were due on the earlier of (i) April 30, 2005, (ii) such
date on or after July 1, 2004 at such time as all of our indebtedness under our
existing credit facility is either repaid or refinanced or (iii) our
consummation of a merger, combination or sale of all or substantially all of our
assets or the purchase by a single entity, person or group of affiliated
entities or persons of 50% of the our voting stock. The notes bore interest at
the rate of 6%, increasing to 9% on April 28, 2004 and 18% on July 27, 2004. On
receipt of shareholder approval, which was received on April 12, 2004, in
accordance with the terms of the Notes, the principal amount of the notes
automatically converted into common stock at the rate of one share of common
stock at $4.50, or approximately 888,888 shares. In addition, accrued interest
in the amount $49,000 also converted into common stock at $4.50 per share, or
10,813 shares.
In connection with the Offering, we issued to the placement agent and a
broker warrants to purchase an aggregate of 40,833 shares of common stock and
also issued to the placement agent warrants to purchase an additional 83,481
shares of common stock on April 12, 2004 as partial consideration for the
placement agent's services. All warrants issued are exercisable until January
28, 2009 at an exercise price of $7.68 per share.
We used a portion of the proceeds of the offering to repay $1,250,000 of
principal due on our prior credit Agreement with ING (U.S.) Capital, L.L.C. and
Patriarch Partners, L.L.C. (the "ING Credit Agreement") and to reduce our
accounts payable.
-36-
2004 CREDIT AGREEMENT AND RELATED FINANCING TRANSACTIONS
On April 28, 2004, we entered into a credit agreement ("2004 Credit
Agreement") by and among MediaBay and certain of its subsidiaries, the
guarantors signatory thereto, Zohar CDO 2003-1, Limited ("Zohar") as lender, and
Zohar, as agent, pursuant to which we and certain of our subsidiaries initially
borrowed $9.5 million. The initial term of the 2004 Credit Agreement was one
year and it was extendable, at our sole option, for two additional one-year
terms upon issuance of additional notes of $600,000 for the first additional
year and $300,000 for the second additional year, provided there is no event of
default. The loan bears interest at the rate of LIBOR plus 10%. In the first
year of the loan, a fee of $900,000 has been added to the principal balance,
which will be reflected as debt discount and will be accreted to interest
expense over the next twelve months. We used a portion of the $8.6 million of
funds received under the 2004 Credit Agreement to satisfy all of its outstanding
obligations under (i) promissory notes that it issued in October 2003 in the
aggregate principal amount of $1.0 million plus accrued interest of $200,000,
(ii) our outstanding credit agreement, which had an outstanding principal
balance of approximately $1.4 million and a partial payment of $1.6 million of
the convertible note issued to ABC Investment, L.L.C. as described below. In
connection with the March 2005 financing described below we repaid all amounts
due under the senior notes.
Norton Herrick ("Herrick"), a principal shareholder of ours at that time,
Huntingdon Corporation ("Huntingdon"), a company wholly-owned by Herrick, and N.
Herrick Irrevocable ABC Trust (the "Trust"), of which Herrick is the
beneficiary, and Howard Herrick, a principal shareholder of ours at the time,
was the trustee, consented to the 2004 Credit Agreement and the other
transactions described above and entered into a subordination agreement with
Zohar. The 2004 Credit Agreement required the aggregate amount of principal and
interest owed by MediaBay to Herrick, Huntingdon and the Trust be reduced to
$6,800,000 ("Permissible Debt") by June 1, 2004.
Pursuant to an agreement dated April 28, 2004, on May 25, 2004, Herrick
exchanged accrued and unpaid interest and dividends (including accrued and
unpaid interest distributed by the Trust to Herrick) owed to Herrick aggregating
$1,181,419 into (i) 11,814 shares of Series C Preferred Stock with a liquidation
preference of $100 per share convertible into an aggregate of 252,436 shares of
common stock at an effective conversion price of $4.68, and (ii) warrants to
purchase 504,872 shares of common stock. The warrants are exercisable until
April 28, 2014 at an exercise price of $3.18.
Pursuant to an agreement dated April 28, 2004, on May 25, 2004 Huntingdon
exchanged the principal of the $500,000 principal amount note, $1,000,000
principal amount note, $150,000 principal amount note and $350,000 principal
amount note held by Huntingdon, plus accrued and unpaid interest owed to
Huntingdon aggregating $1,171,278 into (i) 31,713 shares of Series C Preferred
Stock convertible into an aggregate of 677,628 shares of common stock at an
effective conversion price of $4.68, and (ii) warrants to purchase an aggregate
of 1,355,256 shares of common stock. The warrants are exercisable until April
28, 2014 at an exercise price of $3.18. If the amount of the Permissible Debt is
required to be reduced due to MediaBay's failure to raise the requisite
additional equity, such reduction will automatically occur by the exchange of
Permissible Debt held by Huntingdon for additional shares of Series C Preferred
Stock in an aggregate liquidation preference equal to the amount of debt
exchanged and warrants to purchase a number of shares of common stock equal to
two times the number of shares of preferred stock issuable upon conversion of
the Series C Preferred Stock.
Herrick and Huntingdon agreed not to demand repayment of their debt until
the earlier of (i) the repayment of the 2004 Credit Agreement or (ii) June 28,
2007. In connection with the Financing described below, Herrick and Huntingdon
converted all their notes into common stock at their stated terms.
The remaining promissory notes held by Herrick, Huntingdon and the Trust
are guaranteed by certain of our subsidiaries and secured by a lien on our
assets and certain of our subsidiaries.
NEW ABC NOTE
On April 28, 2004, we repaid $1.6 million principal amount of the $3.2
million principal amount convertible note issued to ABC Investment, L.L.C. We
issued a new $1.6 million note (the "New ABC Note") for the remaining principal
amount. The New ABC Note extends the maturity date from December 31, 2004 to
July 29, 2007. In exchange for extending the maturity date, the conversion price
of the New ABC Note was reduced to $3.00. The closing sale price of our common
stock on the closing date was $2.88. In the fourth quarter of 2004, the note was
converted into our common stock.
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SETTLEMENT OF PUT OBLIGATIONS
We entered into a settlement agreement with Premier Electronic
Laboratories, Inc. ("Premier") dated April 1, 2004. Pursuant to the settlement,
among other things, we agreed to pay Premier $950,000 in exchange for Premier
waiving its right to put its shares of common stock to us pursuant to a Put
Agreement dated December 11, 1990. Our obligation under the Put Agreement was
reduced by $150,000 in exchange for relinquishing certain leases for real
property. We paid $14,000 on closing and is paying the remaining balance over
six years in monthly payments starting at $7,000 in July 2004 and increasing to
$19,000 from May 2007 through April 2010.
OCTOBER SALE OF EQUITY
On October 11, 2004, we entered into a Securities Purchase Agreement
pursuant to which we issued to the Forest Hill Capital LLC ("Forest Hill"), for
the account of certain of its affiliates ("the "Forest Hill Entities")
thereunder an aggregate of 300,000 shares of our common stock and warrants to
purchase 66,667 shares of Common Stock (the "October Warrants"). The Forest Hill
Entities paid an aggregate purchase price of $900,000 for the shares and October
Warrants. Each October Warrant is exercisable to purchase one share of our
common stock at an exercise price of $4.98 per share during the five-year period
commencing on October 11, 2004. In connection with the Financing described
below, the Forest Hill Entities exchanged these shares of common stock and
warrants for Series D Preferred Stock and the October Warrants issued in the
Financing described below.
MARCH 2005 FINANCING
On March 23, 2005, we issued an aggregate of (a) 35,900 shares (the
"Offering Shares") of our Series D Convertible Preferred Stock (the "Series D
Preferred") convertible into 10,878,712 of our common stock, (b) 5,439,394
five-year common stock purchase warrants (the "Offering Warrants") and (c)
preferred warrants (the "Over-Allotment Warrants" and, together with the
Offering Shares and the Offering Warrants, the "Offering Securities")
exercisable for a limited time, for additional proceeds to us of $8.975 million,
to purchase (1) up to 8,975 additional shares of Series D Preferred (the
"Additional Shares" and, together with the Offering Shares, the "Preferred
Shares") and (2) up to 1,359,849 additional warrants identical to the Offering
Warrants (the "Additional Warrants" and, together with the Offering Warrants,
the "Warrants"), to accredited investors (the "Investors") for an aggregate
purchase price of $35.9 million (the "Financing").
Immediately prior to the Financing, holders of a majority of our voting
securities approved by written consent (the "Shareholder Consent") (a) an
amendment to our Articles of Incorporation, increasing the number of our
authorized shares of the common stock ("Common Stock") from 150,000,000 to
300,000,000, (b) a change of control which may occur as a result of the
Financing, and (c) our issuance, in connection with the transactions
contemplated by the Financing documents, of common stock in excess of 19.99% of
the number of shares of Common Stock outstanding immediately prior to the
Financing.
While such actions were approved by a majority of our shareholders prior
to the financing, we ere not permitted to effect them until we satisfied certain
information requirements to our shareholders not party to the Shareholder
Consent. As a result, the Shareholder Consent did not become effective until May
3, 2005.
The Preferred Shares have a face value of $1,000 per share ("Stated
Value") and are convertible at any time at the option of the holder into shares
("Conversion Shares") of common stock at the rate of $3.30 per Conversion Share,
subject to certain anti-dilution adjustments, including for issuances of common
stock for consideration below the conversion price. The Preferred Shares are
also mandatorily convertible at our option, subject to satisfaction of certain
conditions and subject to certain limitations. Under certain limited
circumstances within our control, the holders will also have the right to
require us to redeem their Preferred Shares at their Stated Value. Cumulative
dividends will accrue on the Preferred Shares on an annualized basis in an
amount equal to 6% of their Stated Value until they are converted or redeemed
and will be payable quarterly in arrears, on each of January 1, April 1, July 1
and October 1, in cash or, at our option, subject to satisfaction of certain
conditions, in shares of Common Stock ("Dividend Shares") valued at 93% of the
average of the daily volume weighted average per-share price of the common stock
for the five trading days prior to the applicable payment date. The Preferred
Shares are non-voting. Subject to certain exceptions for accounts receivable and
equipment and capital lease financings, we may not incur additional indebtedness
for borrowed money or issue additional securities that are senior to or pari
passu to the Preferred Shares without the prior written consent of holders of at
least two-thirds of the Preferred Shares then outstanding.
-38-
Each Warrant is exercisable to purchase one share of common stock
(collectively, the "Warrant Shares"), at an exercise price of $3.36 per share
for a period of five years commencing September 23, 2005, subject to certain
anti-dilution adjustments, including for issuances of common stock for
consideration below the exercise price. In addition, once exercisable, the
Warrants permit cashless exercises during any period when the Warrant Shares are
not covered by an effective resale registration statement.
The Over-Allotment Warrants are exercisable until November 9, 2005 for the
purchase of Additional Shares and Additional Warrants, at an exercise price
equal to the Stated Value of the Additional Shares purchased, with the purchase
of each Additional Share including an Additional Warrant exercisable for a
number of Warrant Shares equal to 50% of the Conversion Shares underlying such
Additional Share.
As part of the Financing, the Forest Hill Entities exchanged the 300,000
million shares of common stock and 66,667 October Warrants previously purchased
by them in October 2004 for $900,000 of the Offering Securities.
In connection with the Financing, we also entered into an agreement (the
"Herrick Agreement") with Herrick and Huntingdon (collectively, the "Herrick
Entities"), pursuant to which, concurrently with the Financing:
o all $5.784 million principal amount of our convertible notes owned
by the Herrick Entities (the "Herrick Notes") and 10,684 of their
shares of our Series A Preferred Stock were converted into an
aggregate of approximately 2,033,333 million shares of common stock
(the "Herrick Shares"), at their stated conversion rate of $3.36 per
share;
o we also agreed to redeem the remaining 14,316 shares of Series A
Preferred Stock held by the Herrick Entities and all 43,527 of their
shares of our Series C Convertible Preferred Stock (collectively,
the "Redemption Securities") for $5.8 million, the aggregate stated
capital of such shares, on the earlier of the effective date of the
Shareholder Consent and June 1, 2005, and both the Redemption
Securities and the redemption price were placed into escrow pending
such date;
o the Herrick Entities waived certain of their registration rights and
we agreed to include the Herrick Shares for resale in the Financing
Registration Statement, so long as such Herrick Shares are owned by
the Herrick Entities and not otherwise transferred, including, but
not limited to, in the Herrick Financing (as defined below);
o the Herrick Entities consented to the terms of the Financing and the
agreements entered into in connection with the Financing, as we were
required to obtain such consents pursuant to the terms of the
Herrick Notes, the Series A Preferred Stock and the Series C
Preferred Stock; and
o Herrick and Huntingdon also entered into a voting agreement and
proxy with us pursuant to which they agreed not to take any action
to contradict or negate the Shareholder Consent.
We received $35 million of gross proceeds (not including the securities
exchanged by the Forest Entities for $900,000 of the purchase price) in the
Financing. Merriman Curhan Ford & Co. ("Merriman") acted as a financial advisor
with respect to certain of the investors in the Financing for which it received
compensation from us of $2,625,000 plus a five-year warrant (the "Merriman
Warrant") to purchase 1,193,182 shares of common stock at an exercise price of
$0.56 per share commencing upon the effectiveness of the Shareholder Consent.
Merriman also received a structuring fee from us with respect to the Financing
in the amount of $175,000. In addition, we issued to Satellite Strategic Finance
Associates, LLC, an investor in the Financing, a warrant (the "Satellite
Warrant") to purchase 41,667 shares of common stock (identical to the Warrants),
and reimbursed it $55,000 for expenses, for consulting services rendered by it
in connection with the Financing.
-39-
Concurrently with the Financing, we repaid from net Financing proceeds all
of the principal and accrued and unpaid interest due on our outstanding senior
notes issued on April 28, 2004, in the aggregate amount of approximately $9.4
million. We will report an additional charge in the first quarter of 2005 to
reflect the write-off of unamortized financing charges related to the repayment
of this debt.
We used approximately $2,271,000 of the proceeds from the Financing to pay
all accrued and unpaid interest to the Herrick Entities on convertible notes and
the Series A Preferred Stock and Series C Preferred Stock.
As of October 26, 2005, 14,837 shares of Series D Preferred Stock have
been converted into 4,496,061 shares of common stock and 21,063 shares of Series
D Preferred Stock were outstanding.
COMMITMENTS
$(000'S) Payments Due by Period
-----------------------------------------------------------------
Contractual Obligations Less than 1-3 3-5 More Than
Total 1 Year Years Years 5 Years
--------- --------- --------- -------- -------
Debt Obligations $ 17,770 $ 17,770 $ -- $ -- $ --
Capital Lease Obligations 71 53 18 -- --
Operating Lease Obligations 964 163 385 406 10
Purchase Obligations 1,487 459 575 453 --
Other Long Term Liabilities
Reflected on the Registrant's
Balance Sheet Under GAAP 1,331 551 780 -- --
--------- --------- --------- -------- -------
Total $ 21,623 $ 18,996 $ 1,758 $ 859 $ 10
========= ========= ========= ======== =======
OPERATING LEASE
We lease approximately 12,000 square feet of office space in Cedar Knolls,
New Jersey pursuant to a sixty-six month lease agreement dated April 18, 2003.
Minimum annual lease commitments including capital improvement payments
under all non-cancelable operating leases are as follows:
Year ending December 31,
2005............................................... $ 186
2006............................................... 189
2007............................................... 198
2008............................................... 198
Thereafter......................................... --
--------
Total lease commitments............................ $ 771
========
CAPITALIZED LEASES
During the year ended December 31, 2004, we had three capital leases.
Lease payments under these agreement were $59, $53 and $53 in 2004, 2003 and
2002, respectively. The amount of equipment capitalized under the leases and
included in fixed assets is $196, and net of depreciation the fixed asset
balance is $24 and $94 at December 31, 2004 and 2003, respectively. The
obligations under the leases included in accounts payable and accrued expenses
on the consolidated balance sheets at December 31, 2004 and 2003 were $9 and
$71, respectively.
-40-
Minimum annual lease commitments under capital leases are as follows:
2005.................................................. $ 18
2006.................................................. 6
2007.................................................. 1
------
Total capital lease commitments....................... $ 25
======
EMPLOYMENT AGREEMENTS
We have commitments pursuant to employment agreements with certain of our
officers. Our minimum aggregate commitments under such employment agreements are
approximately $674,000 and $223,000 during 2005 and 2006, respectively.
LICENSING AGREEMENTS
We have numerous licensing agreements for both audiobooks and old-time
radio shows with terms generally ranging from one to five years, which require
us to pay, in some instances, non-refundable advances upon signing agreements,
against future royalties. We are required to pay royalties based on net sales.
Royalty expenses were $1,473,000 $2,524,000 and $3,243,000 for 2004, 2003 and
2002, respectively. Minimum advances required to be paid under existing
agreements for the next five years are as follows:
2005 $ 303,000
2006 455,000
2007 238,000
2008
138,000
----------
Total $1,134,000
==========
RECENT ACCOUNTING PRONOUNCEMENTS
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In March 2005, the FASB issued Staff Position (FSP) No. FIN 46(R)-5,
Implicit Variable Interests under FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities. This FSP clarifies that when
applying the variable interest consolidation model, a reporting enterprise
should consider whether it holds an implicit variable interest in a variable
interest entity (VIE) or potential VIE when specific conditions exist. FSP No.
FIN 46(R)-5 is effective as of April 1, 2005. We do not anticipate an impact
from the adoption of this statement.
SHARE-BASED PAYMENT
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation".
SFAS 123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The compensation cost will
be measured based on the fair value of the equity or liability instruments
issued. The Statement is effective as of the beginning of the first interim or
annual period beginning after June 15, 2005. We do not yet know the impact that
any future share-based payment transactions will have on our financial position
or results of operations.
INVENTORY COSTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS
151 amends ARB No. 43, "Inventory Pricing", to clarify the accounting for
certain costs as period expense. The Statement is effective for fiscal years
beginning after June 15, 2005; however, early adoption of this Statement is
permitted. We do not anticipate an impact from the adoption of this statement.
-41-
ACCOUNTING CHANGES AND ERROR CORRECTIONS
In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error
Corrections--A Replacement of APB Opinion No. 20 and FASB Statement No. 3". This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. This Statement does not change the guidance for reporting the correction
of an error in previously issued financial statements or a change in accounting
estimate. The provisions of this Statement shall be effective for accounting
changes and correction of errors made in fiscal years beginning after December
15, 2005. We are not able to assess at this time the future impact of this
Statement on its consolidated financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
We have no exposure to market risk for changes in interest rates. We have
total debt outstanding as of August 11, 2005 of $652,000, all of which is at
fixed rates. Changes in the prime rate or LIBOR would not have an impact on our
fair values, cash flows, or earnings for the six months ended June 30, 2005.
-42-
BUSINESS
INTRODUCTION
MediaBay is a digital media and publishing company specializing in spoken
audio entertainment. We have over 75,000 hours of audio content, which we
distribute via mail order, our websites, some of the nation's largest retailers,
and a la carte, digital downloads and subscription services.
Today we have two principal content libraries; (1) audiobooks which we
sell via digital download and on CD and cassette, through Soundsgood.com, the
Audio Book Club and third-party websites; and (2) an archive of the history of
American radio which we produce and sell on CD and cassettes through our
catalog, a mail order based continuity program, retail outlets, and our on-line
download subscription service and third-party websites. We broadcast our radio
programs through a syndicated radio show on 200 commercial stations across the
United States, as well as its 24-hour Radio Classics channels on Sirius and XM
Satellite Radio.
We are transitioning our business from selling hard goods primarily via
mail order to digital distribution via wireless and Internet downloads. Our
distribution strategy is two pronged: (1) to wholesale our audio content to the
leading music services, broadband portals, cell phone and satellite radio
companies, both domestically and internationally; and (2) to operate our own
downloadable content stores and subscription services which are co-branded via
partnerships with celebrities and corporate affiliates, each chosen specifically
to reach the targeted demographics known to be interested in its content. In
addition to our growing list of marketing partners, we intend to use various
means to market our downloadable content stores, including marketing to our
existing customer list of approximately 2.5 million audiobook buyers that
participated in the AudioBookClub or have purchased from Radio Spirits, as well
as working with manufacturers of digital music players, smart phones, and PDAs
to include samples of our audio content for consumers to preview when they
purchase these new devices, with the hope that these samples will attract
consumers to our content stores.
In October 2005, we launched our new digital storefront and technology
platform, www.Soundsgood.com. Soundsgood.com is a fully enabled digital download
service that offers thousands of digital audiobooks, classic radio shows and
other spoken word audio content on an ala carte basis or as part of a monthly
subscription. The service offers users audio content that can be downloaded
directly to the users personal computer, burned to CD or transferred to any
Window's Media compatible device that plays secured WMA (Windows Media Audio)
files. There over 70 digital devices on the market today that are
"PlaysforSure"(TM) compliant and we are working closely with Microsoft
Corporation to ensure that our content works seamlessly on these devices and the
many new smart celluar phones that will run the new Windows Mobile 5.0 operating
system.
We recently have executed several agreements to expand the digital
distribution of our audio content: an exclusive distribution agreement with
Microsoft's MSN Music to provide our spoken word content to the MSN audience,
which has 350 million unique monthly visitors. A content distribution agreement
with Real Networks, which operates Rhapsody, the largest music subscription
service in the United States, and Loudeye to act as our digital sales agent in
distributing our catalog of products to potentially 70 music services for which
they host and source content. In addition, we have executed a promotional
agreement with WFAN and the Imus in the Morning Show to promote Soundsgood.com
nationally on close to 100 radio stations across the country and simulcast on
MSNBC television five days a week. Imus program listeners will be directed to
SoundsGood.com following interviews with authors who appear on the show.
SoundsGood.com will be branded as the show's exclusive bookseller, and listeners
will be informed how they can access audiobooks and programs, via digital
downloads or on traditional media such as CDs and cassette tapes. We have also
executed distribution agreements for our growing library of classic radio ring
tones which will soon be, or are available on Nextel, Verizon, Alltell, T-Mobile
Alltel, nTelos, Midwest Wireless, Verizon Wireless and Verizon Wireless Puerto
Rico services.
We have acquired the rights to distribute digital audiobooks from
substantially all of the major publishing houses in the United States and have a
growing number of titles with various international rights of distribution. Our
content library consists of all genres of audiobooks, classic American radio
shows, educational courses, university lectures, theatre plays, self improvement
courses, television soundtracks, stand-up comedy, children's storytelling,
parenting advice and study guides.
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Today, some of our largest digital content partners include BBC,
Blackstone, Brilliance Audio, CBS Radio, Harper Collins, Hay House, Oasis,
Penguin Group USA Audio, Random House, Simon & Schuster, Sound Room Publishers,
Time Warner Audio and Zondervan. In addition to Audio Book Club, we distribute
our content through proprietary web sites soundsgood.com and radiospirits.com,
as well as through partner channels including Loudeye, MSN Music, Sirius
Satellite Radio and XM Satellite Radio.
STRATEGY
In response to the music industry's recent success in creating a market
for legal digital downloads using digital rights management solutions that are
intended to prevent piracy of copyrighted content, we intend to become a leading
distributor for downloadable, spoken word audio entertainment. We intend to
build this new distribution channel by utilizing our nearly twelve years of
experience operating the Audio Book Club and our old-time radio business. During
those twelve years, we have serviced approximately 2.9 million customer accounts
and plan to leverage this list of audio buyers to attract new digital shoppers.
We intend to use the Windows Media Digital Rights Management (DRM) system,
and other easy to use, rights management technologies that may evolve over time.
Beginning this past Christmas season, 70 new digital devices that support the
Microsoft "PlaysforSure(TM)" digital rights management and device platform
became available for sale by many of the leading device manufacturers. Examples
of companies offering a "PlaysforSure(TM)" device include Hewlett Packard, Dell,
Creative, Rio, i-River and Samsung. Many of these devices have large file
storage capacities and make, what we believe, could be a perfect match for our
content, which is typically one half hour in length for our classic radio shows,
to an average of 6 to 10 hours for an audiobook.
In addition, the rapid evolution of cell and smart phones with hard drives
and media players presents a large potential user base of digital devices for
our content, as more than 500 million new handsets are sold each year in the
market place. These portable devices, coupled with the ubiquitous installed base
of personal computers with CD burners and USB port memory discs are making
digital audio content portable and more accessible to users.
We believe the proliferation of broadband Internet service, the Microsoft
digital rights management solution, and an expanding user base of portable
devices have created an inflection point where downloads are a better way to
distribute audio than traditional CDs and tapes via a retail store or by mail
order. Broadband Internet and ubiquitous wireless networks means companies like
MediaBay can deliver audio files quickly and affordably. Downloads provide
consumers a more convenient way to purchase audio in real time and provides
incredible opportunity for broad choice since there are no inventory
requirements. This distribution is better for the environment and most
importantly, provides real savings for the consumer.
We have determined that future investment in our mail order, hard goods
based, Audio Book Club would not provide the returns adequate to justify future
expenditures. Accordingly, in 2004, we discontinued marketing to attract new
Audio Book Club members and are developing plans to transition current members
to new programs including encouraging existing members to begin downloading
spoken word.
SOUNDSGOOD.COM
SoundsGood.com which was launched in October 2005, is a premier audio
download and traditional media service providing consumers with an easy way to
access thousands of best selling audio books, classic radio shows, theatre
performances, and a growing collection of audio newspapers, magazines, lectures,
self help and wellness courses, modern day radio shows and other spoken word
entertainment.
SoundsGood.com is a unique one-stop shop that provides customers with both
digital downloads for immediate listening as well as the ability to purchase CDs
and audiocassettes for those more comfortable with traditional media. SoundsGood
supports digital downloads that are compatible with MP3 players, CD players, PCs
and some high-end smart phones that support the Windows Media audio format.
-44-
SoundsGood offers a wide range of audiobook titles ranging from New York
Times best sellers to the obscure. There is a monthly subscription for two
downloads, and individual purchases of CDs, cassettes and digital downloads are
available at an additional cost.
ONLINE AGREEMENT WITH MICROSOFT
The first step in executing our new strategy is our agreements with
Microsoft. These agreements provide for us to distribute spoken word audio
content, including audiobooks from the largest publishers and our old-time radio
programs, through an exclusive distribution relationship with the new MSN Music
Service. Today, MSN has an audience of 350 million unique monthly visitors.
Microsoft has announced that the new music service will have the largest
selection of songs and audio content of any service and will be compatible with
the most number of digital devices, leveraging its industry leading windows
media player and windows digital rights management platform.
ONLINE AGREEMENT WITH LOUDEYE
We have also announced a multi-year agreement with Loudeye Corp., a
worldwide leader in business-to-business digital media solutions. Loudeye is
working with us to provide a solution for powering digital distribution of a
wide range of audiobooks. Under the agreement, we intend to make available our
audiobook content catalog to Loudeye for both domestic and international
distribution, subject to obtaining appropriate international rights, to new and
existing Loudeye partners. Loudeye and its OD2 services have relationships with
more than 70 web storefronts and music services throughout the United States,
Europe and Australia.
OPEN STANDARD PLATFORM TECHNOLOGY
We have chosen to leverage the proliferation of the Windows Media DRM
platform as the de facto rights management standard for content owners to
protect their intellectual property on the Internet. According to a report from
the International Federation of the Phonographic Industry (IFPI) trade group,
the number of online music stores quadrupled to more than 230 in 2004. In the
United States, the overwhelming majority of these stores have adopted the
Windows Media DRM as their solution to protect content owners intellectual
property and to transfer files to digital hand held devices. This trend is
certain to improve consumer choice as it allows consumers to shop in a broad
range of stores, but maintain the flexibility to switch devices over time as
functionality improves without having to worry about media format conversion
issues that closed proprietary systems, such as Apple i-Tunes, create. On-line
music stores in the United States that use the Window's DRM system include such
companies as RealNetworks, MSN Music, Wal-Mart, Napster, Music Maker, Yahoo's
Music Match, Buy.com, Music Now, and VirginDigital. The competing storefronts,
which use proprietary DRM technologies or closed systems, are Apple and Audible.
INDUSTRY BACKGROUND
A major trend over the thirty years in the United States is to work longer
hours, spend more time in the automobile commuting to and from work, and thus
have less time for leisure activities. According to Harris Interactive, since
1973, the median number of hours that people say they work has jumped from 41
hours a week to 49. Over the same period, Harris reports that people's leisure
time has dropped from 26 to 19 hours per week. Listening is a way for
individuals to consume content at times when they are unable to read, such as
when they are driving. The 2003 edition of the Veronis Suhler Stevenson
Communications Industry Forecast estimates that on average Americans spent more
than 20 hours a week listening to the radio in 2003, compared to 17.7 hours in
1998. In comparison, Veronis Suhler Stevenson estimates that book reading
declined among Americans from an average of 2.3 hours in 1998 to 2.1 hours per
week in 2003. According to the 2000 United States Census, 97 million people
drive to and from work alone, an increase of 15% from 1989. The average travel
time to work increased to 25.5 minutes each way, an increase of 7% from 1990. In
addition, more than 42 million individual drivers have a commute of at least 30
minutes or more each way.
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As individuals look to use their commuting time more efficiently and
manage an increasing amount of available content, audiobooks have emerged as a
personalized "pay-to-listen" alternative to radio, because radio does not allow
listeners to control when they listen to a particular program.
According to the Audio Publishers Association 2003 Sales Survey, the U.S.
market for audiobooks on cassette and CD sold in retail stores grew to $800
million in 2001. The APA also estimated that 25 million American households
listened to audiobooks in 2002, and that in 2002 audiobooks were the "fastest
growing segment of the publishing industry".
This increasing usage of audiobooks exists despite limited types of
content, high prices and the limitations of cassette tapes and CDs. For
instance, the audiobook market based on retail sales does not include the many
audiobooks and other spoken word products sold to consumers directly or in
vertical markets such as personal improvement, training, and educational
markets, nor does it address the emerging market in personalized "time-shifted"
radio programming or timely print content such as newspapers, newsletters,
magazines, and journals.
The Internet has emerged as a powerful global communications and
entertainment medium, giving millions of people the ability to access large
amounts of valuable, pay-for-access media. Jupiter Research reported that as of
the end of 2003, 21.5 million households, or about one-fifth of U.S. households,
were connected to the Internet via broadband. Based on historic growth rates and
current trends around broadband availability, interest, and pricing, Jupiter
Research forecasts that by 2008, 46 million households, representing half of
online households and 40% of all U.S. households will connect via high-speed,
always-on technologies. Through the Internet, people can buy various forms of
information and entertainment, from books to music and video for usage both at
and away from the computer.
According to International Data Corporation (IDC), mobile access to the
Internet, instant messaging, music, and more are spurring a nearly fivefold
run-up in worldwide sales of smart handheld devices by 2004, creating a market
for those products valued at approximately $26 billion.
In December 2003, Jupiter Research published a report that predicted the
demand for MP3 players in the U.S. would grow at a rate of 50% a year through
2006. According to Jupiter, shipments of MP3 players in the U.S. were about 3.5
million in 2003, which are almost double 2002 figures. Jupiter also predicted
that there would be more than 26 million MP3 players in use by 2006 and that
starting in 2004, the demand for players with hard drives will surpass that of
players with flash memory. The DVD player market, which we believe is a valid
comparative model, has grown from 11.4 million U.S. households in 2000 to 39.3
million in 2003 according to the Consumer Electronics Association, with an
average price of $490 in 1997 to an estimated $138 in 2003.
The market for personal digital assistants that have digital audio
capabilities had been led by Pocket PCs -- devices running on Microsoft
operating systems which are manufactured by Hewlett-Packard, Toshiba, and Dell
among others. Gartner Group has reported that sales of smartphones were
significant enough in the U.S. to slow the sales of PDAs. Research firm IDC
published a report in February 2004 estimated that smartphones showed
significant growth and future promise. In 2003, the worldwide smartphone market
grew 181% year-over-year to 9.6 million units.
The key characteristic of smartphones that enable the download of spoken
word content is the inclusion of enough internal memory to store our audio
content. Since most smartphones "dock" to computers, allowing for data exchange
of contact and schedule information, spoken word can also be transferred to
smartphones via a personal computer.
We are seeking to develop relationships with cell phone companies and
other high technology providers. Wireless handheld technology is the ideal match
for the download spoken word business. The combination of wireless freedom and
digital transmission will in the future allow a consumer to download from a
library of audio recordings and bypass the anchored desktop PC. This freedom to
download wirelessly will allow unprecedented convenience for consumers.
-46-
BUSINESSES
SOUNDSGOOD.COM
SoundsGood.com which was launched in October 2005, is a premier audio
download and traditional media service providing consumers with an easy way to
access thousands of best selling audio books, classic radio shows, theatre
performances, and a growing collection of audio newspapers, magazines, lectures,
self help and wellness courses, modern day radio shows and other spoken word
entertainment.
SoundsGood.com is a unique one-stop shop that provides customers with both
digital downloads for immediate listening as well as the ability to purchase CDs
and audiocassettes for those more comfortable with traditional media. SoundsGood
supports digital downloads that are compatible with MP3 players, CD players, PCs
and some high-end smart phones that support the Windows Media audio format.
SoundsGood offers a wide range of audiobook titles ranging from New York
Times best sellers to the obscure. There is a monthly subscription for two
downloads, and individual purchases of CDs, cassettes and digital downloads are
available at an additional cost.
AUDIO BOOK CLUB
Audio Book Club was originally modeled after the traditional
"Book-of-the-Month Club" format. We recently transitioned this business to a
positive option drop ship format which sells audiobooks via download, CD and
cassette format.
RADIO SPIRITS
We believe Radio Spirits is the world's largest seller of old-time radio
shows, which it sells on audiocassettes and compact discs through retail, direct
mail and online channels. Radio Spirits has a database of names of more than
400,000 catalog customers and prospects and sells its products in such
well-known national chains as Barnes & Noble, Borders, Wal-Mart, Cracker Barrel
Old Country Stores and online retailers such as Amazon.com. Radio Spirits'
products can also be purchased online at www.radiospirits.com. The Radio Spirits
content library consists of more than 65,000 hours of classic radio shows
licensed on a primarily exclusive basis. Radio Spirits' library of classic radio
shows includes episodes from the following notable series: The Shadow, The Jack
Benny Program, The Bob Hope Show, Superman, Suspense and many others including
famous stars such as Clark Gable, Cary Grant, Humphrey Bogart, Jimmy Stewart,
Lucille Ball, Frank Sinatra, Judy Garland, Orson Welles and Bing Crosby. Radio
Spirits also offers its old-time radio programs in a continuity format, a
marketing program that automatically sends selections to a customer once an
initial order is placed. Radio Spirits accounted for approximately 35.3% of
MediaBay's revenue in 2004.
MEDIABAY.COM
MediaBay.com provides the infrastructure and support for all of our web
sites including www.audiobookclub.com, www.radiospirits.com, and
www.RadioClassics.com. It is expected that MediaBay.com will power our new
digital audio download services.
RADIOCLASSICS DIVISION
RadioClassics was created to distribute our proprietary old-time radio
content across multiple distribution platforms including traditional radio,
cable television, satellite television (DBS), satellite radio and the Internet.
RadioClassics currently distributes a national "classic" radio program, "When
Radio Was" and can also be heard on dedicated channels on both the Sirius
Satellite Radio and XM Satellite Radio services.
-47-
COMPETITION
We compete for discretionary consumer spending with other mail order clubs
and catalogs and other direct marketers and traditional and on-line retailers
that offer products with similar entertainment value as audiobooks and old-time
radio programs, such as music on cassettes and compact discs, printed books,
videos, and laser and digital video discs. Many of these competitors are
well-established companies, which have greater financial resources.
We will compete for consumers of spoken word content with other
Internet-based audio distributors, as well as with our existing, competitors,
such as distributors of audio on cassette tape or compact disc. The business of
providing content over the Internet is experiencing rapid growth and is
characterized by rapid technological changes, changes in consumer habits and
preferences, and the emergence of new and established companies. We will also
continue to compete with (i) book store chains deep-discount retailers, retail
stores, mass merchandisers, mail order catalogs, clubs, and libraries that sell,
rent, or loan audiobooks on cassette tape or compact disc, such as Borders,
Barnes & Noble, (ii) online retailers such as Amazon.com, (iii) websites that
offer streaming access to spoken audio content using tools such as the
RealPlayer or Windows Media Player, (iv) other companies offering services
similar to ours, such as Audible AudioFeast, and (v) online and Internet portal
companies such as America Online, Inc., Yahoo! Inc., and iTunes, which are
either offering or have the potential to offer audio content. Moreover Audible,
Inc., has begun to establish itself as a leader in downloadable spoken word
content distribution.
INTELLECTUAL PROPERTY
We have several United States registered trademarks and service marks for
slogans and designs used in our advertisements, member mailings and member
solicitation packages, including the Audio Book Club logo, "MediaBay," "Radio
Spirits", "MediaBay.com," "audiobookclub.com" and the MediaBay logos. We believe
that our trademarks and service marks have significant value and are important
to our marketing. We also own or license the rights to substantially all of our
radio programs in our content library.
We rely on trade secrets and proprietary know-how and employ various
methods to protect our ideas, concepts and membership database. In addition, we
typically obtain confidentiality agreements with our executive officers,
employees, list managers and appropriate consultants and service suppliers.
EMPLOYEES
As of October 26, 2005 we had 32 full-time employees. Of these employees,
3 served in corporate management; 13 served in operational positions at our
Audio Book Club operations; 8 served in operational positions at our
MediaBay.com and information systems operations and 7 served in operational
positions at our old-time radio operations. We believe our employee relations to
be good. None of our employees are covered by a collective bargaining agreement.
-48-
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
Name Age Position
---- --- --------
Joseph R. Rosetti 71 Chairman and Director
Jeffrey Dittus 39 Chief Executive Officer and Director
Patricia Campbell 51 Chief Operating Officer
Robert Toro 41 Senior Vice President of Finance
Daniel J. Altobello 64 Director
Richard J. Berman 63 Director
Robert B. Montgomery 44 Director
Marshall C. Phelps 61 Director
Carl U.J. Rossetti 57 Director
Joseph Rosetti was appointed Chairman of our Board of Directors in August
2004. Mr. Rosetti has been a member of our board of directors since December
2002. Mr. Rosetti is President of SafirRosetti, an investigative and security
firm owned by Omnicom Group, Inc. Prior to forming SafirRosetti, Joseph R.
Rosetti was the Vice Chairman of Kroll Associates. As Vice Chairman, he had
responsibility for Corporate Security/Crisis Management, which provides industry
and professional organizations with preventive measures to combat corporate and
financial crimes. From 1971 to 1987 he had worldwide responsibility at IBM for
security programs in physical security, investigations, personnel security,
trade secret protection, information asset security, real and movable and
financial asset security and Department of Defense Security. Mr. Rosetti was a
member of the U.S. National Chamber of Commerce Crime Reduction Panel and was
Staff Director for the Conference of the National Commission on Criminal Justice
Standards and Goals, a member of the private Security Task Force to the National
Advisory Committee on Criminal Justice Standards and Goals and Chairman of the
American Management Association's Council on Crimes against Business. Prior to
joining IBM, Mr. Rosetti was the Northeast Director for the Law Enforcement
Assistance Administration of the U.S. Department of Justice and a Special Agent,
Group Supervisor, and Special Assistant to the Assistant Commissioner for
Compliance in the Intelligence Division, U.S. Treasury Department. Prior to
joining the Treasury Department, Mr. Rosetti held the position of Chief
Accountant at Marriott Corporation. Mr. Rosetti is a director of GVI Security
Solutions, Inc., a publicly traded company.
Jeffrey Dittus has been our Chief Executive Officer and has been a member
of our board of directors since January 2004. From 1995 through 1998, Mr. Dittus
was a senior executive with one of the world's largest direct response
marketers, National Media Corporation. While at National Media, Mr. Dittus had
direct responsibility for over 300 staff in two different countries, and built a
process that streamlined the marketing process in concert with building direct
marketing systems that quickly evaluated the profitability of new product
launches. After leaving National Media, Mr. Dittus founded IT Capital Limited, a
public company based in New Zealand, serving as its Chief Executive Officer
until November 2001. Mr. Dittus returned to the United States and, in November
2001 founded a merchant banking firm Kauri Capital, serving as its managing
director until January 2004. Mr. Dittus was recently elected to the board of
directors of the Audio Publishers Association, the audiobook publishers industry
trade association and is a member of the Board of Directors of the Leukemia and
Lymphoma Society. He is also the founder of Divine 9 Open, a gold tournament
that raises money for Leukemia and Lymphoma research. Mr. Dittus earned a B.S.
degree from Pennsylvania State University in Finance and began his career with
Philadelphia Bank.
Patricia Campbell has been our Chief Operating Officer since April 2005.
For the four years prior to joining us, Ms. Campbell had been Managing Partner
of Terra Nova Marketing Solutions. Ms. Campbell founded Terra Nova to provide
hands-on solutions to companies with immediate marketing, direct marketing and
Internet opportunities. From February 2000 to April 2001, Ms. Campbell was
President of Direct Equity Partners, LP, a $250 million private equity firm
specializing in direct marketing and Internet companies. From 1999-2000, Ms.
Campbell was Executive Vice President at barnesandnoble.com. Ms. Campbell was
responsible for creating and managing a world-class direct marketing group to
drive customer acquisition, relationship management and product development on
the Internet. From 1996 to 1999, Ms. Campbell served as a senior executive at
Advanta, a $1.5 billion financial services company. In addition, Ms. Campbell
has had 15 years of magazine publishing experience at Time Inc., and Times
Mirror Magazines where she held the position of President of Popular Science and
Today's Homeowner. Ms. Campbell was Chairman of the Direct Marketing Association
and is actively involved in the association's policy development for the
industry. Ms. Campbell is a member of the Board of Directors of Synova
Healthcare, Inc. Ms. Campbell holds a B.A. from Dartmouth College graduating Phi
Beta Kappa, an M.A. and an M.B.A. from Columbia University.
-49-
Robert Toro has been our Chief Financial Officer since May 2005 and our
Senior Vice President of Finance since July 1999, Chief Financial Officer of our
Audio Book Club division since November 2001 and an employee since April 1999.
Prior to joining us, Mr. Toro was Senior Vice President of AM Cosmetics Co. and
had previously served in senior financial positions in both public and private
entertainment and publishing companies. From 1992 through early 1997, Mr. Toro
served in various senior financial positions with Marvel Entertainment Group,
Inc., a publicly traded youth entertainment company. Mr. Toro is a Certified
Public Accountant with six years of progressive experience with Arthur Andersen
where he was employed immediately prior to joining Marvel Entertainment Group.
Daniel J. Altobello has been a member of our board of directors since
April 2005. Mr. Altobello is the retired Director and Chairman of Onex
foodservices, the parent corporation of Caterair International, Inc., and
LSG/SKY Chefs. From 1989 to 1995, Mr. Altobello served as Chairman, President
and Chief Executive Officer of Caterair International Corporation. From 1979 to
1989, he held various managerial positions with the food service management and
in-flight catering divisions of Marriott Corporation, including Executive Vice
President of Marriott Corporation and President of Marriott Airport Operations
Group. Mr. Altobello began his management career at Georgetown University as
Vice President of Administration Services. He is a member of the board of
directors of Mesa Air Group, Inc., World Air Holdings, Inc. and Friedman,
Billings and Ramsey Group, Inc. (public reporting companies). Mr. Altobello is
also a director of several private companies: Diamond Rock Hospitality Trust,
Inc., JER Real Estate Investment Trust, and Mercury Air Centers; and is also a
trustee of Loyola Foundation, Inc. Mr. Altobello obtained a bachelor of arts in
English from Georgetown University and a master of business administration from
Loyola College.
Richard J. Berman became a director in June 2003. Mr. Berman has over 30
years of experience in venture capital and mergers and acquisitions. He is
currently a Director of International Microcomputer Software, Inc. a publicly
traded software company, the Internet Commerce Corporation, a publicly traded
Internet supply chain company, NexMed, a publicly traded life sciences company,
GVI Security Solutions, Inc., a publicly traded company, and is currently
Chairman of the KnowledgeCube Group, a venture capital firm, and Candidate
Resources Inc., a leading manager of human resource websites. Mr. Berman started
and managed the mergers and acquisitions and private equity groups of Bankers
Trust as Senior Vice President. Mr. Berman has also invested in and managed over
20 companies including as Chairman of Prestolite Battery, Inc., Boston Proper
and Internet Commerce Corporation. Mr. Berman received his B.S. and M.B.A. in
Finance from New York University, a J.D. from Boston College Law School and a
degree in International Law from Hague Academy of International Law.
Robert B. Montgomery has been a member of our board of directors since
June 6, 2005. Since August 2001, Mr. Montgomery has been a Partner at Achilles
Partners, LLC, an advisory firm specializing in the media, communications and
technology industries. Mr. Montgomery is also currently CEO of Achilles Media
Ltd., a Toronto-based event management firm for television and new media
industry events. In addition, since August 2000, Mr. Montgomery has served as a
director of First Maximilian Associates Ltd. He holds a bachelor of arts degree
from the University of Manitoba in Canada.
Marshall C. Phelps has been a member of our board of directors since June
6, 2005. In June 2003, Mr. Phelps joined Microsoft Corporation serving as Deputy
General Counsel and Corporate Vice President for intellectual property and
licensing, where his responsibilities include supervising Microsoft's
intellectual property groups, including those responsible for trademarks, trade
secrets, patents, licensing, business development, standards and copyrights.
From September 2000 to December 2002, Mr. Phelps worked for Spencer Trask
Intellectual Capital Company LLC, where for two years he served as chairman and
chief executive officer. Mr. Phelps holds a bachelor of arts degree from
Muskingum College, a master of science degree from Stanford Graduate School of
Business and a doctorate from Cornell Law School.
Carl U.J. Rossetti has been a member of our board of directors since June
6, 2005. Since January 2000, Mr. Rossetti has been employed at Time Warner
Cable, most recently as Executive Vice President of Corporate Development and
President of Time Warner Cable Voice Services. In this position, Mr. Rossetti
oversees the digital phone business and is responsible for developing and
launching new products, new businesses and new services for Time Warner Cable.
He earned his BA in Accounting (1970) and his MBA (1975), both at Chamindale
University in Honolulu, Hawaii.
-50-
Our Board of Directors is classified into three classes, each with a term
of three years, with only one class of directors standing for election by the
shareholders in any year. Richard Berman and Carl U.J. Rossetti are Class III
directors and stand for re-election at the 2006 annual meeting of shareholders.
Joseph Rosetti, Daniel J. Altobello and Marshall C. Phelps are Class I directors
and will stand for re-election at the 2007 annual meeting of shareholders.
Jeffrey Dittus and Robert Montgomery are Class II directors and stand for
re-election at the 2006 annual meeting of shareholders. Our executive officers
serve at the direction of the Board and until their successors are duly elected
and qualified.
DIRECTOR INDEPENDENCE
The Board has determined that Messrs. Altobello, Berman, Montgomery,
Phelps and Carl Rossetti, meet the director independence requirements of the
Marketplace Rules of the National Association of Securities Dealers, Inc.
("NASD") applicable to Nasdaq listed companies.
AUDIT COMMITTEE
We have established an Audit Committee of the Board of Directors, which
currently consists of Messrs. Altobello (Chairman), Montgomery and Carl
Rossetti, each of whom is an "independent" director as defined under the rules
of the National Association of Securities Dealers, Inc. The Board has determined
that Mr. Altobello qualifies as a "financial expert" under federal securities
laws.
COMPENSATION COMMITTEE
We have established a Compensation Committee of the Board of Directors,
which currently consists of Messrs. Phelps (Chairman) and Berman, each of whom
is an "independent" director as defined under the rules of the National
Association of Securities Dealers, Inc.
NOMINATING COMMITTEE
We have established a Nominating Committee of the Board of Directors,
which currently consists of Messrs. Berman (Chairman) and Montgomery, each of
whom is an "independent" director as defined under the rules of the National
Association of Securities Dealers, Inc. Mr. Berman serves as Chairman.
CODE OF ETHICS AND BUSINESS CONDUCT
We adopted a Code of Ethics and Business Conduct that applies to its
employees, including its senior management, including its Chief Executive
Officer, Chief Financial Officer, Controller and persons performing similar
functions. Copies of the Code of Ethics and Business Conduct can be obtained,
without charge, upon written request, addressed to: Corporate Secretary,
MediaBay, Inc., 2 Ridgedale Avenue, Cedar Knolls, New Jersey 07927.
COMMUNICATIONS WITH THE BOARD
The Board of Directors, through its Nominating Committee, has established
a process for stockholders to send communications to the Board of Directors.
Stockholders may communicate with the Board of Directors individually or as a
group by writing to: The Board of Directors of MediaBay, Inc., c/o Corporate
Secretary, 2 Ridgedale Avenue, Cedar Knolls, New Jersey 07927. Shareholders
should identify their communication as being from one of our shareholders. The
Corporate Secretary may require reasonable evidence that the communication or
other submission is made by one of our shareholders before transmitting the
communication to the Board of Directors.
-51-
EXECUTIVE COMPENSATION
The following table discloses for the fiscal years ended December 31,
2002, 2003 and 2004, compensation paid to Ron Celmer, Carl Wolf and Jeffrey
Dittus, our Chief Executive Officers during 2004, and our current executive
officers (the "Named Executives").
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
ANNUAL COMPENSATION UNDERLYING
------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SAR'S (#) COMPENSATION
---------------------------------- ------ --------- -------- ---------------- --------------
Carl Wolf 2004 $ 61,923 $ -- 83,333 $ --
Former Chairman and 2003 135,000 -- 97,500 --
Former Chief Executive Officer (1) 2002 15,688 -- 107,500 --
Joseph Rosetti 2004 33,750 -- 95,833 --
Chairman (2)
Ronald Celmer 2003 85,608 -- 250,000 --
Former Chief Executive Officer (3)
Jeffrey Dittus 2004 222,172 -- 375,000 --
Chief Executive Officer (4)
John F. Levy 2004 190,048 -- 150,000
Vice Chairman and 2003 190,000 35,705 10,040 --
Chief Financial Officer 2002 181,414 17,500 8,333 --
Robert Toro 2004 185,048 -- --
Senior Vice President Finance 2003 185,000 5,223 36,024 --
2002 176,752 18,500 -- --
1. Carl Wolf became Co-Chairman on November 15, 2002, was named Chairman on
May 1, 2003, became Interim Chief Executive Officer on January 3, 2004 and
resigned on May 27, 2004.
2. Joseph Rosetti was appointed Chairman on August 12, 2004.
3. Ronald Celmer was employed as Chief Executive Officer from August 15, 2003
through January 5, 2004. In connection with the termination of his
employment, we paid severance of $56,250 in six semi-monthly payments
commencing January 15, 2004.
4. Jeffrey Dittus became Chief Executive Officer on January 29, 2004.
-52-
The following table discloses options granted during the fiscal year ended
December 31, 2004 to the Named Executives:
OPTION/SAR GRANTS IN FISCAL YEAR ENDING DECEMBER 31, 2004:
POTENTIAL
REALIZABLE VALUE
% OF TOTAL AT ASSUMED ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SHARES GRANTED TO APPRECIATION
UNDERLYING EMPLOYEES FOR OPTION TERM
OPTIONS IN FISCAL EXERCISE PRICE EXPIRATION -----------------------------
NAME GRANTED YEAR ($/SHARE) DATE 5% ($) 10% ($)
----------------------- -------------- ------------ ----------------- -------------- ------------- -------------
Carl Wolf 83,333 8.28% $ 3.18 05/28/2009 $ 73,215 $ 161,785
Joseph Rosetti 12,500 1.24% 3.24 05/28/2009 11,188 24,721
66,667 6.63% 1.98 08/12/2009 36,464 80,573
16,667 1.66% 10.74 12/15/2009 49,447 109,262
Jeffrey Dittus 41,667 4.14% 5.94 04/30/2009 75,559 165,193
41,667 4.14% 5.94 07/30/2009 79,547 175,259
41,667 4.14% 9.30 01/30/2010 -- 55,448
41,667 4.14% 9.30 07/30/2010 -- 77,535
41,667 4.14% 11.16 01/30/2011 -- 22,179
41,667 4.14% 11.16 04/30/2011 -- 34,359
66,667 6.63% 3.24 05/28/2009 59,668 131848
58,333 5.80% 3.60 10/05/2009 58,010 128,185
John F. Levy 125,000 12.42% 3.24 05/28/2009 111,877 247,214
25,000 2.48% 6.00 11/14/2009 48,971 110,482
The following table sets forth information concerning the number of
options owned by the Named Executives and the value of any in-the-money
unexercised options as of December 31, 2003. No options were exercised by any of
these executives during fiscal 2003.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY
DECEMBER 31, 2003 OPTIONS AT DECEMBER 31, 2003
----------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Carl Wolf 129,992 -- $215,011 $ --
Joseph Rosetti 71.250 39,583 311,875 281,875
Jeffrey Dittus 116,667 258,333 482,000 534,500
John F. Levy 70,040 100,000 332,369 560,000
Robert Toro 36,024 20,000 84,602 63,600
The year-end values for unexercised in-the-money options represent the
positive difference between the exercise price of such options and the fiscal
year-end market value of the common stock. An option is "in-the-money" if the
fiscal year-end fair market value of the common stock exceeds the option
exercise price. The closing sale price of our common stock on December 31, 2004
was $1.55
-53-
DIRECTOR COMPENSATION
We reimburse directors for reasonable travel expenses incurred in
connection with their activities on our behalf. On April 4, 2005, the Board of
Directors approved payment of $35,000 of director compensation to Mr. Berman,
for previous services as a member of our board of directors. Our independent
directors are compensated for their services as follows:
On April 4, 2005, the Board approved a compensation plan for those persons
who serve as a member of our board of directors and qualify as an "independent
director" under the Nasdaq Marketplace Rules (or the rules of the principal
exchange on which the Common Stock is listed, if the Common Stock is not listed
on Nasdaq). The compensation payable to our independent directors is as follows:
(i) $2,000 per month for serving as a member of the Board of Directors, payable
on the first calendar day of each month, which payments commenced May 1, 2005,
(ii) an additional $1,000 per month for serving as Audit Committee Chairman,
payable on the first calendar of each month, which payments commenced May 1,
2005, and (iii) an additional $2,500 per month for serving as Lead Independent
Director (as designated by the Board of Directors), payable on the first
calendar day of each month, which payments commenced May 1, 2005. Mr. Berman has
been designated by the Board of Directors as Lead Independent Director.
EMPLOYMENT AGREEMENTS
On January 29, 2004, we entered into a 27-month employment agreement with
Jeffrey Dittus. The agreement provides for a base annual salary of $250,000 per
year. Pursuant to the agreement, we granted to Mr. Dittus options to purchase
1,500,000 shares of Common Stock, which have exercise prices and vest as
follows:
Options to Purchase Exercise Price Vesting Date
41,667 shares $5.94 04/30/2004
41,667 shares $5.94 07/30/2004
41,667 shares $9.30 01/30/2005
41,667 shares $9.30 07/30/2005
41,667 shares $11.16 01/30/2006
41,667 shares $11.16 04/30/2006
On June 6, 2005, we entered into an employment agreement with Jeffrey A.
Dittus, which agreement became effective on June 6, 2005, for Mr. Dittus to be
employed as its Chief Executive Officer. The employment agreement has a term
ending June 6, 2008 and provides for an annual base salary of $280,000. Upon
termination of Mr. Dittus' employment without Cause (as defined in the
employment agreement) or upon Mr. Dittus' termination of employment for Good
Reason (as defined in the employment agreement), in addition to paying Mr.
Dittus through the date of termination and, otherwise complying with the
employment agreement, we shall pay to Mr. Dittus severance compensation equal to
twelve (12) months of Mr. Dittus' base salary as of the date of termination, a
pro rata portion of any bonus earned through the date of termination, and any
options to purchase our common stock then held by Mr. Dittus shall, as of the
date of such termination, be deemed to be fully vested for all purposes.
On June 6, 2005, we entered into an employment agreement with Joseph R.
Rosetti, which agreement became effective on June 6, 2005, for Mr. Rosetti to be
employed as its Chairman, and ends on June 6, 2006 with automatic successive one
year extensions. The employment agreement provides for an annual base
compensation of $120,000. Upon termination of Mr. Rosetti's employment without
Cause, we shall pay to Mr. Rosetti, in accordance with the terms of the
employment agreement, a severance payment equal to twelve (12) months of Mr.
Rosetti's base salary as of the date of termination, payable in bi-monthly
installments. If the term or any successive extension is not extended as a
result of Mr. Rosetti providing notice of such non-renewal in accordance with
the agreement, Mr. Rosetti shall receive a severance payment equal to 50% of his
base compensation for the twelve (12) months prior to the date of the
non-renewal, payable in bi-monthly installments.
On April 1, 2005, we entered into an employment agreement with Patricia
Campbell, which agreement became effective on April 4, 2005, the commencement
date of Ms. Campbell's employment (the "Campbell Effective Date"), for Ms.
Campbell to serve as our Chief Operating Officer. The employment agreement has a
term ending March 31, 2008 and provides for an annual base salary of $215,000, a
starting bonus of $50,000, payable upon the first day of employment under the
employment agreement and grant of a stock option to purchase 141,667 shares of
common stock (the "Campbell Option"). The Campbell Option is exercisable at a
price of $3.54 per share, shall be exercisable commencing on the Campbell
Effective Date at the closing sale price of the Common Stock on the Campbell
Effective Date, and shall be exercisable as to 40% of the shares of Common Stock
covered thereby commencing on the Campbell Effective Date and an additional 20%
of the shares covered thereby on each of the first, second and third year
anniversaries of the Campbell Effective Date, and shall expire on the tenth
anniversary of the Campbell Effective Date. Upon termination of Ms. Campbell's
employment without Cause (as defined in the employment agreement) or termination
of Ms. Campbell's employment for Good Reason (as defined in the employment
agreement and which includes a change of control, as defined in the employment
agreement), (i) Ms. Campbell is entitled to severance equal to six months base
salary as of the date of termination (12 months base salary if such termination
occurs on or after the first anniversary of the employment agreement), payable
in accordance with our regular payroll practices (but no less than frequently
than semi-monthly); and (ii) all options to purchase Common Stock then held by
Ms. Campbell shall be deemed to be fully vested as of the date of termination.
-54-
On June 6, 2005, we entered into an employment agreement with Robert Toro,
which agreement became effective on June 6, 2005, for Mr. Toro to be employed as
its Senior Vice President and Chief Financial Officer, and ends on June 6, 2006
with automatic successive one-year extensions, unless Mr. Toro is given 90 days
written notice of non-renewal. The employment agreement provides for an annual
base compensation of $205,000. In addition, Mr. Toro will receive stock options
to acquire an additional 16,667 shares of our Common Stock pursuant to our 2004
Stock Incentive Plan. The options granted to Mr. Toro shall (i) vest
immediately, (ii) be exercisable at a price of $3.54 per share (the closing
price of the Common Stock on the date of the grant), (iii) be immediately
exercisable as to 40% of the shares covered thereby and shall become exercisable
as to an additional 20% of the shares covered thereby on each of the first,
second and third year anniversaries of the date of grant, and (iv) expire ten
(10) years from the grant date. Upon Mr. Toro's termination of his employment
for Good Reason (as defined in the employment agreement) or in the event that we
have terminated Mr. Toro's employment under the agreement (i) "without cause"
(as defined in the employment agreement), (ii) in the event there is a "Change
of Control" (as defined in the employment agreement) and Mr. Toro voluntarily
terminates his employment within three (3) months of such Change of Control, or
(iii) Mr. Toro's employment is terminated by us following the expiration of the
term of the employment agreement (including MediaBay not offering Mr. Toro at
least a one-year employment term at the annual salary then in effect), then Mr.
Toro shall be entitled to receive severance pay equal to 100% of his base salary
for the greater of (i) the balance of the term or (ii) 6 months; such payment,
if any, shall be made to Mr. Toro in equal payments in accordance with our
regular payroll over the remaining unexpired period of Mr. Toro's employment
term or six (6) month period, as the case may be. In addition, upon a Change of
Control, all stock options issued to Mr. Toro as of such date (except for those
which have expired prior thereto), shall immediately be exercisable (in full)
and any unvested options shall immediately vest.
STOCK PLANS
Our 1997 Stock Option Plan provides for the grant of stock options to
purchase up to 333,333 shares. As of March 28, 2005, options to purchase an
aggregate of 329,500 shares of our common stock have been granted under the 1997
plan.
Our 1999 Stock Option Plan provides for the grant of stock options to
purchase 416,667 shares. As of October 26, 2005, options to purchase an
aggregate of 381,119 shares of our common stock have been granted under the 1999
plan.
Our 2000 Stock Incentive Plan provides for the grant of any or all of the
following types of awards: (1) stock options, which may be either incentive
stock options or non-qualified stock options, (2) restricted stock, (3) deferred
stock and (4) other stock-based awards. A total of 583,333 shares of common
stock have been reserved for distribution pursuant to the 2000 plan. As of
October 26, 2005, options to purchase an aggregate of 565,583 shares of our
common stock have been granted under the 2000 plan.
Our 2001 Stock Incentive Plan provides for the grant of any or all of the
following types of awards: (1) stock options, which may be either incentive
stock options or non-qualified stock options, (2) restricted stock, (3) deferred
stock and (4) other stock-based awards. A total of 583,333 shares of common
stock have been reserved for distribution pursuant to the 2001 plan. As of
October 26, 2005, options to purchase an aggregate of 566,166 shares of our
common stock have been granted under the 2001 plan.
-55-
Our 2004 Stock Incentive Plan provides for the grant of any or all of the
following types of awards: (1) stock options, which may be either incentive
stock options or non-qualified stock options, (2) restricted stock, (3) deferred
stock and (4) other stock-based awards. A total of 1,250,000 shares of common
stock have been reserved for distribution pursuant to the 2004 plan. As of
October 26, 2005, options to purchase an aggregate of 785,702 shares of our
common stock have been granted under the 2004 plan.
As of October 26, 2005, of the options outstanding under our plans,
options to purchase 1,125,192 shares of our common stock which are outstanding
to our officers and directors as follows: Joseph R. Rosetti - 160,833 shares;
Jeffrey Dittus - 541,667 shares; Patricia Campbell - 151,667 shares; Robert Toro
- 108,524 shares; Daniel J. Altobello - 25,000 shares; Richard J. Berman -
70,833 shares; Robert B. Montgomery - 16,667 shares; Marshall C. Phelps --
16,667 shares; and Carl U.J. Rossetti - 16,667 shares.
LEGAL PROCEEDINGS
We are not a party to any lawsuit or proceeding which we believe is likely
to have a material adverse effect on us.
PRINCIPAL STOCKHOLDERS
The following table details information regarding our existing equity
compensation plans as of December 31, 2004:
Number of securities
remaining available for
(a) (B) future issuance under
Number of securities Weighted-average equity compensation
to be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column (a))
-------------------------------------- -------------------------- -------------------- ------------------------
Equity compensation plans
approved by security holders........ 1,759,177 $11.70 1,226,318
Equity compensation plans not
approved by security holders(1)....... 2,644,933 $4.56 --
--------- ---------
Total................................. 4,404,110 $7.44 1,226,318
========= ===== =========
(1) Represents warrants granted from time to time by the Company.
Note 1: See Note 10 and Note 11 to the Consolidated Financial Statements
beginning on page F-8 for a further description of these plans.
-56-
The following table sets forth certain information as of October 26, 2005
relating to the beneficial ownership of shares of Common Stock by (i) each
person or entity who is known by us to own beneficially 5% or more of the
outstanding Common Stock according to Schedules 13G and 13D filed with the SEC,
(ii) each of our directors and nominees for director, (iii) each of the Named
Executives, and (iv) all of our directors and executive officers as a group.
Number of Shares Percentage of Shares
Name and Address of Beneficial Owner (1)(2) Beneficially Owned Beneficially Owned
------------------------------------------- ------------------ ------------------
Jeffrey Dittus 329,167(3) 3.6%
Joseph Rosetti 141,667(4) 1.7
Robert Toro 53,524(5) *
Patricia Campbell 66,667(6) *
Richard J. Berman 62,500(7) *
Daniel J. Altobello 12,500(8) *
Robert B. Montgomery 8,333(7) *
Marshall C. Phelps 8,333(7) *
Carl V. T. Rossetti 8,333(7)
Michael Roth 560,727(9) 7.4
3600 South Lane Drive
St. Francis, W.I. 53235
Brian Stark 560,727(9) 7.4
3600 South Lane Drive
St. Francis, W.I. 53235
John H. Wittier 560,402(10) 6.9
Wood River Associates, L.L.C.
Wood River, L.P.
All directors and executive officers as a group (9 664,690 7.5
persons)
--------------
* Less than 1%
1. Unless otherwise indicated the address of each beneficial owner is c/o
MediaBay, Inc., 2 Ridgedale Avenue, Cedar Knolls, New Jersey 07927. Unless
otherwise indicated, we believe that all persons named in the following
table have sole voting and investment power with respect to all shares of
common stock that they beneficially own.
2. For purposes of this table, a person is deemed to be the beneficial owner
of the securities if that person has the right to acquire such securities
within 60 days of the Record date upon the exercise of options, warrants
or other convertible securities. In determining the percentage ownership
of the persons in the table below, we assumed in each case that the person
exercised and converted all options, warrants or convertible securities
which are currently held by that person and which are currently
exercisable, but that options, warrants or other convertible securities
held by all other persons were not exercised or converted.
3. Represents (i) 2,833 shares of common stock, and (ii) 329,167 shares
issuable upon exercise of options. Does not include 212,500 shares
issuable upon issue of options.
4. Represents (i) 10,833 shares of common stock, and (ii) 130,833 shares
issuable upon exercise of options. Does not include 30,000 shares issuable
upon issue of options.
5. Represents shares issuable upon exercise of options. Does not include
55,000 shares issuable upon exercise of options.
-57-
6. Represents shares issuable upon exercise of options. Does not include
85,000 shares issuable upon exercise of options.
7. Represents shares issuable upon exercise of options. Does not include
8,334 shares issuable upon exercise of options.
8. Represents shares issuable upon exercise of options. Does not include
12,500 shares issuable upon exercise of options.
9. The following information is based upon a Schedule 13G filed on March 31,
2005. Represents the combined indirect holdings of Michael Roth and Brian
Stark. All of the foregoing represents an aggregate of 606,061 shares of
common stock held directly by SF Capital Partners Ltd. ("SF Capital"). Mr.
Roth and Mr. Stark are the Managing Members of Stark Offshore Management,
LLC ("Stark Offshore"), which acts as investment manager and has sole
power to direct the management of SF Capital. Through Stark Offshore, Mr.
Roth and Mr. Stark possess voting and dispositive power over all of the
foregoing shares. Does not include 303,030 shares of common stock issuable
upon the exercise of common stock purchase warrants held by SF Capital.
Such warrants are subject to exercise caps that preclude the holder
thereof from utilizing its exercise rights to the extent that it would
beneficially own in excess of 4.9% and 9.5% of the common stock, giving
effect to such exercise. Therefore, for the purposes of Rule 13d-3 under
the Securities Exchange Act of 1934, as amended, Mr. Roth and Mr. Stark
may be deemed to be the beneficial owners of, but have disclaimed such
beneficial ownership of, the foregoing shares.
10. According to a Schedule 13G filed on July 25, 2005, Mr. Witlier, Wood
River Associates, L.L.C. and Wood River, L.P. have shared voting power and
shared dispositive power over these shares.
CERTAIN TRANSACTIONS
As of December 31, 2004, we owed to Norton Herrick ("Herrick"), a
principal shareholder at the time, and his affiliates approximately $315,000 for
reimbursement of certain expenses and services incurred in prior years. On April
28, 2004, in connection with the agreements described below, we agreed to repay
Herrick based on an agreed upon schedule. From April 28, 2004 through December
31, 2004, we paid Herrick a total of $324,000. During 2005, we paid Herrick (i)
$40,500 per month on the first of each month through and including July 2005 and
(ii) the remaining $31,410 on August 1, 2005.
On May 1, 2003, we entered into a two-year consulting agreement with XNH
Consulting Services, Inc. ("XNH"), a company wholly-owned by Herrick. Effective
December 31, 2003, we agreed with Herrick to terminate the two-year consulting
agreement with XNH, and to pay XNH a fee of $7,500 per month for 16 months
commencing on January 1, 2004 and to provide Herrick with health insurance and
other benefits applicable to our officers to the extent such benefits may be
provided under our benefit plans. The termination agreement provides that the
indemnification agreement with Herrick entered into on November 15, 2002 shall
remain in full force and effect and that we will reimburse Herrick for expenses
incurred in connection with any indemnification obligation. In April 2004, we
amended the termination agreement such that it is no longer required to either
pay Herrick the $7,500 each month or to provide Herrick with health insurance
and other benefits applicable to our officers. In connection with the
termination agreement, the non-competition and nondisclosure covenants of the
XNH consulting agreement were extended until December 31, 2006. In accordance
with the agreement, we paid or reimbursed certain health insurance premiums for
Herrick.
On May 7, 2003, we sold 3,350 shares of a newly created Series B Stock
with a liquidation preference of $100 per share for $335,000. Of the total sold,
200 shares ($20,000) were purchased by John Levy, our former Vice Chairman and
Chief Financial Officer. Under a subscription agreement, certain "piggy-back"
registration rights were granted.
On January 29, 2004, we issued $4,000,000 aggregate principal amount of
promissory notes (the "2004 Notes") and warrants to purchase 392,158 shares of
common stock to 13 institutional and accredited investors. In connection with
this offering, Herrick and Huntingdon (Huntingdon together with Herrick, the
"Herrick Entities") entered into a letter agreement with the purchasers of the
2004 Notes pursuant to which they granted to the holders of the 2004 Notes in
the event of an event of default (as defined in the 2004 Notes) the rights to
receive payment under certain secured indebtedness owed by us to the Herrick
Entities and to exercise their rights under security agreements securing such
secured indebtedness. Pursuant to the letter agreement, the Herrick Entities
also executed Powers-of-Attorney in favor of a representative of the 2004 Note
holders pursuant to which such representative may, following an Event of
Default, take actions necessary to enforce the 2004 Note holders rights under
the letter agreement, including enforcing the Herrick Entities' rights under the
security agreements. On April 12, 2004, the notes were converted into common
stock. In consideration for Huntingdon's consent to the Financing and execution
of the letter agreement upon receipt of shareholders' approval, we agreed to
reduce the conversion price of $1,150,000 principal amount of convertible
promissory notes held by Huntingdon from $2.00 to $1.27 and $500,000 principal
amount of convertible promissory notes held by Huntingdon from $1.82 to $1.27.
-58-
On April 28, 2004, we entered into a new credit agreement. Herrick,
Huntingdon and N. Herrick Irrevocable ABC Trust (the "Trust"), of which Herrick
was the beneficiary, consented to the new credit agreement and the other
transactions described above and entered into a subordination agreement with
Zohar CDO 2003-1, Limited. The new credit agreement required the aggregate
amount of principal and interest owed by us to Herrick, Huntingdon and the Trust
be reduced to $6,800,000 ("Permissible Debt") by June 1, 2004, and that the
Permissible Debt be further reduced by up to an additional $1,800,000 if we do
not raise at least $2,000,000 in additional equity in each of the two calendar
years following the execution of the new credit agreement. We received a
fairness opinion in connection with this transaction.
Pursuant to an agreement dated April 28, 2004, on May 25, 2004, Herrick
exchanged accrued and unpaid interest and dividends (including accrued and
unpaid interest distributed by the Trust to Herrick) owed to Herrick aggregating
$1,181,419 into (i) 11,814 shares of Series C Convertible Preferred Stock with a
liquidation preference of $100 per share convertible into an aggregate of
252,436 shares of Common Stock at an effective conversion price of $4.68, and
(ii) warrants to purchase 504,872 shares of common stock. The warrants are
exercisable until April 28, 2014 at an exercise price of $3.18.
Pursuant to an agreement dated April 28, 2004, on May 25, 2004, Huntingdon
exchanged the principal of the $500,000 principal amount note, $1,000,000
principal amount note, $150,000 principal amount note and $350,000 principal
amount note held by Huntingdon, plus accrued and unpaid interest owed to
Huntingdon aggregating $1,171,278 into (i) 31,713 shares of Series C Preferred
Shares convertible into an aggregate of 677,628 shares of common stock at an
effective conversion price of $4.68, and (ii) warrants to purchase an aggregate
of 1,355,256 shares of common stock. The warrants are exercisable until April
28, 2014 at an exercise price of $3.18. If the amount of the Permissible Debt is
required to be reduced due to our failure to raise the requisite additional
equity, such reduction will automatically occur by the exchange of Permissible
Debt held by Huntingdon for additional shares of Series C Preferred Shares in an
aggregate liquidation preference equal to the amount of debt exchanged and
warrants to purchase a number of shares of common stock equal to two times the
number of shares of common stock issuable upon conversion of the Series C
Preferred Shares.
The Herrick Entities agreed not to demand repayment of their debt until
the earlier of (i) the repayment of the New Credit Agreement or (ii) June 28,
2007. The remaining promissory notes held by Herrick, Huntingdon and the Trust
are guaranteed by certain of our subsidiaries and secured by a lien on our
assets and certain of our subsidiaries.
On April 28, 2004, we repaid $1.6 million principal amount of the $3.2
million principal amount convertible note issued to ABC Investments, L.L.C., a
former principal shareholder of ours. We issued a new $1.6 million note (the
"New ABC Note") for the remaining principal amount. The New ABC Note extends the
maturity date from December 31, 2004 to July 29, 2007. In exchange for extending
the maturity date, the conversion price of the New ABC Note was reduced to
$3.00. The closing sale price of our common stock on the closing date was $2.88.
During October 2004, ABC Investments, L.L.C. converted $1,000,000 principal
amount of the New ABC into shares of common stock pursuant to the terms of the
note.
In December 2004, we entered into a letter agreement with certain
affiliates of Forest Hill Capital, LLC, at that time a principal shareholder
(collectively, the "Forest Entities"), extending the date by which we were
required to file a registration statement covering the securities issued to the
Forest Entities (the "Registration Statement") to January 31, 2005. As
consideration for this extension, we issued to the Forest Entities warrants to
purchase an aggregate of 8,333 shares of common stock, exercisable until
December 14, 2008 at a price of $8.52 per share. On February 8, 2005, we entered
into another letter agreement with the Forest Entities extending the date by
which we were required to file the Registration Statement to May 1, 2005. As
consideration for the extension, we issued an aggregate of 19,841 shares of
common stock (the "January Shares"), based on the last sale price of the common
stock on February 8, 2005 of $5.04. We also agreed that if the last sale price
of the common stock on the date the Registration Statement is declared effective
by the Securities and Exchange Commission (the "effective date") is below $0.75,
we would pay an aggregate of $250,000 less the value of the January Shares on
such effective date in cash or in shares of common stock, at the Forest
Entities' option. We also granted the Forest Entities the right to require us to
purchase an aggregate of 33,333 shares of common stock from the Forest Entities
at a price of $18.00 per share if, at any time prior to the effective date, the
last sale price of the common stock was above $24.00 per share.
-59-
On March 21, 2005, we issued an aggregate of (a) 35,900 shares of the
Series D Preferred Shares convertible into 10,878,712 of common stock, (b)
5,439,394 five-year common stock purchase warrants and (c) preferred warrants
exercisable for a limited time, for additional proceeds to us of $8.975 million,
to purchase (1) up to 8,975 additional shares of Series D Preferred Shares and
(2) up to 1,359,949 additional warrants identical to the Offering Warrants, to
accredited investors for an aggregate purchase price of $35.9 million (the
"Financing").
As part of the Financing, the Forest Entities exchanged 300,000 million
shares of common stock and 66,667 common stock warrants previously purchased by
them from us in October 2004 for $900,000 of the Offering Securities. The Forest
Entities also purchased an additional $1.0 million of the Offering Securities.
We also agreed to include an additional 19,841 shares of common stock, as well
as 8,333 shares of common stock underlying certain additional warrants, already
beneficially owned and retained by Forest Hill Capital, LLC for resale in the
Financing Registration Statement.
In connection with the Financing, we also entered into an agreement with
the Herrick Entities, pursuant to which, concurrently with the Financing:
o all $5.784 million principal amount of our convertible notes owned
by the Herrick Entities (the "Herrick Notes") and 10,684 of their
shares of Series A Preferred Shares were converted into an aggregate
of approximately 2,033,333 million shares of common stock (the
"Herrick Shares"), at their stated conversion rate of $3.36 per
share;
o We also agreed to redeem the remaining 14,316 shares of Series A
Preferred Shares held by the Herrick Entities and all 43,527 of
their shares of Series C Preferred Shares (collectively, the
"Redemption Securities") for $5.8 million, the aggregate stated
capital of such shares, on the earlier of the effective date of the
Shareholder Consent and June 1, 2005, and both the Redemption
Securities and the redemption price were placed into escrow pending
such date;
o The Herrick Entities waived certain of their registration rights and
we agreed to include the Herrick Shares for resale in the Financing
Registration Statement, so long as such Herrick Shares are owned by
the Herrick Entities and not otherwise transferred, including, but
not limited to, in the Herrick Financing (as defined below);
o The Herrick Entities consented to the terms of the Financing and the
agreements entered into in connection with the Financing, as we were
required to obtain such consents pursuant to the terms of the
Herrick Notes, the Series A Preferred Shares and the Series C
Preferred Shares; and
o The Herrick Entities also entered into a voting agreement and proxy
with us pursuant to which they agreed not to take any action to
contradict or negate the Shareholder Consent and gave us a proxy to
vote their shares, at the direction of our Board of Directors, until
the Effective Date.
On March 23, 2005 in connection with the Financing, our company, the
Herrick Entities entered into a voting agreement whereby the Herrick Entities
authorized our chairman and/or president to vote their voting securities
pursuant to the terms of the Financing and in accordance with our Board of
Directors.
-60-
Also on March 23, 2005 in connection with the Financing, we entered into a
registration rights agreement dated the date hereof with the Herrick Entities in
which the Herrick Entities were granted the same automatic registration rights
as the Investors under the Registration Rights Agreement with respect to the
shares of common stock issuable to the Herrick Entities upon conversion of the
Herrick Notes and Series A Preferred Stock. We also entered into another
registration rights agreement dated March 23, 2005, with the Herrick Entities in
which we agreed to register the shares of common stock issuable to the Herrick
Entities upon exercise of the warrants held by the Herrick Entities in a
registration statement to be filed with the SEC within 30 days following the
effective date of the Financing Registration Statement.
We also paid to the Herrick Entities all accrued and unpaid interest
dividends due to them in the amount $2,271,000 on March 23, 2005. We redeemed
the Redemption Securities on May 3, 2005 (the effective date of the Shareholder
Consent) for $5.8 million.
-61-
SELLING SECURITYHOLDER
The following table sets forth information as of October 27, 2005, with
respect to the securityholders for which shares are being registered for sale.
The table below assumes for calculating each selling securityholder's
beneficial percentage ownership that options, warrants and/or convertible
securities that are held by such selling securityholder (but not held by any
other selling securityholder or person) and are exercisable or convertible
within 60 days from the date of this prospectus have been exercised or
converted. The table also assumes the sale of all of the shares registered for
sale by the selling securityholder pursuant to this prospectus.
Beneficial Shares Beneficially % of Shares
Ownership of Owned Assuming the Beneficially Owned
Securityholders for Which Shares Shares of Common Shares Registered Sale of the Shares Assuming the Sale of
are Being Registered for Sale Stock for Sale Registered the Shares Registered
-------------------------------- ------------------ ------------------- ---------------------- -----------------------
Goldman, Sachs & Co. 548,279 2,130,682 8 *
-------------
* Less than 1%
1. Represents up to (i) 1,136,364 shares issuable on conversion of Series D
Preferred, (ii) 568,182 shares issuable upon exercise of Warrants and
(iii) 426,136 shares which may be issued as Additional Shares. Additional
Shares include shares which may be issued as part of dividends on the
Series D Preferred and additional shares issued upon conversion of the
Series D Preferred or exercise of Warrants as a result of anti-dilution
adjustments.
-62-
DESCRIPTION OF CAPITAL STOCK
GENERAL
MediaBay is authorized to issue 300,000,000 shares of common stock, no par
value, and 5,000,000 shares of preferred stock, no par value, of which 75,000
shares are designated as Series A Preferred Stock, 10,000 shares are designated
as Series B Preferred Stock, 100,000 shares are designated as Series C Preferred
Stock and 44,875 shares designated as Series D Preferred Stock. As of October
26, 2005, there were 10,439,284 shares of common stock outstanding, 25,000
shares of Series A Convertible Preferred Stock outstanding and 3,350 shares of
Series B Convertible Preferred Stock outstanding.
COMMON STOCK
The holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders, including the election of
directors, and, subject to preferences that may be applicable to any preferred
stock outstanding at the time, are entitled to receive ratably dividends, if
any, as may be declared from time to time by the board of directors out of funds
legally available therefor. In the event of liquidation or dissolution of
MediaBay, the holders of common stock are entitled to receive all assets
available for distribution to the shareholders after satisfaction of obligations
to creditors, subject to any preferential rights of any preferred stock then
outstanding. The holders of our common stock have no preemptive or other
subscription rights, and there are no conversion rights or redemption or sinking
fund provisions with respect to the common stock. All of the outstanding shares
of common stock are, and the shares of common stock offered hereby upon issuance
and sale will be, fully paid and non-assessable. The rights, preferences and
privileges of the holders of our common stock are subject to, and may be
adversely affected by, the right of the holders of any shares of preferred stock
which our board of directors may designate in the future.
PREFERRED STOCK
Authorized but undesignated shares of preferred stock may be issued from
time to time in one or more series upon authorization by our board of directors.
Our board of directors, without further approval of the shareholders, is
authorized to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights and terms, liquidation preferences, and other rights,
preferences, privileges and restrictions applicable to each series of preferred
stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes could
adversely affect the voting power of the holders of common stock and make it
more difficult for a third party to gain control of MediaBay prevent or
substantially delay a change of control, discourage bids for our common stock at
a premium or otherwise adversely affect the market price of our common stock.
Series B Convertible Preferred Stock
The stated value of the Series B Preferred Stock is $100.00 per share.
Dividends. Dividends are payable on the Series B Preferred Stock
quarterly, in arrears, on each March 31, June 30, September 30 and December 30
at an annual rate of $9.00 per share. Dividends are payable at the holder's
option in (i) additional shares of Series B Preferred Stock (ii) shares of
common stock or (iii) cash.
Conversion. The Series B Preferred Stock is convertible, at the option of
the holder, into a number of shares of common stock equal to a fraction, (i) the
numerator of which is equal to the liquidation preference plus accrued and
unpaid dividends through the conversion date and (ii) the denominator is the
stock price which is currently $4.62, subject to adjustment.
Liquidation. In the event of a liquidation, dissolution or winding up of
MediaBay, the holders of Series B Preferred Stock shall be entitled to receive
out of the assets of MediaBay, a sum in cash equal to $100.00 per share before
any amounts are paid to the holders of MediaBay common stock.
-63-
Voting Rights. The holders of Series B Preferred Stock shall have no
voting rights, except as required by law and except that the consent of the
Series B Preferred Stock, voting separately as a class, is required for any
amendment, alteration or repeal of the terms of the Series B Preferred Stock
which materially and adversely affects the rights, preferences and privileges of
the Series B Preferred Stock.
Classified Board of Directors
Our By-Laws divide our board of directors into three classes, serving
staggered three-year terms. The staggered terms of the classes of directors may
make it more difficult for a third party to gain control of our board or acquire
MediaBay and may discourage bids for our common stock at a premium. In addition,
our Articles of Incorporation provide that shareholders may not call special
meetings of shareholders unless they represent at least 25% of our outstanding
voting shares of stock.
Series D Preferred Stock
The face value of the Series D Preferred Stock is $1,000.00 per share.
Dividends
Dividends are payable on the Series D Preferred Stock quarterly, in
arrears, on each of January 1, April, July l and October 1, in cash or, at our
option, subject to satisfaction of certain conditions and subject to certain
limitations, in shares of common stock valued at 93% of the daily value weighted
average per-share price of our common stock for the five trading days prior to
the applicable payment date.
Conversion
The Series D Preferred Stock is convertible at the option of the holder,
at any time, at the option of the holders into shares of common stock at the
rate of $3.30 per share of common stock, subject to certain anti-dilution
adjustments, including for issuances of common stock for consideration below the
conversion price. The Series D Preferred Stock is also mandatorily convertible
at an option, subject to the satisfaction of certain conditions and subject to
certain limitations.
Liquidation
In the event of a liquidation, dissolution or winding up of MediaBay, the
holders of Series D Preferred Stock shall be entitled to receive out of the
assets of MediaBay, a sum in cash equal to $1,000.00 per share before any
amounts are paid to the holders of MediaBay common stock.
Voting Rights
The holders of Series D Preferred Stock shall have no voting rights,
except as required by law and except that the consent of the Series D Preferred
Stock, voting separately as a class, is required for any amendment, alteration
or repeal of the terms of the Series D Preferred Stock which materially and
adversely affects the rights, preferences and privileges of the Series D
Preferred Stock.
-64-
PLAN OF DISTRIBUTION
The selling securityholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of our common stock on any stock exchange, market or trading facility on which
the shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling securityholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker/dealer solicits purchasers;
o block trades in which the broker/dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker/dealer as principal and resale by the
broker/dealer for its account;
o an exchange distribution in accordance with the Rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales;
o broker/dealers may agree with the selling shareholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling securityholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker/dealers engaged by the selling securityholders may arrange for
other brokers/dealers to participate in sales. Broker/dealers may receive
commissions from the selling securityholders (or, if any broker/dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling securityholders do not expect these commissions to
exceed what is customary in the types of transactions involved.
The selling securityholders may from time to time pledge or grant a
security interest in some or all of the shares of common stock owned by them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock from
time to time under this prospectus, or under an amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933
amending the list of selling securityholders to include the pledgee, transferee
or other successors in interest as selling securityholders under this
prospectus.
The selling shareholders and any broker/dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker/dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions under the Securities Act. The selling securityholders have informed
MediaBay that they do not have any agreement or understanding, directly or
indirectly, with any person to distribute MediaBay common stock.
MediaBay is required to pay all fees and expenses incident to the
registration of the shares. MediaBay has agreed to indemnify the selling
securityholders who purchased securities in the Financing against certain
losses, claims, damages and liabilities, including liabilities under the
Securities Act.
-65-
INDEMNIFICATION
Our Articles of Incorporation and By-Laws provide that we shall indemnify
our directors and officers to the fullest extent permitted by the Florida
Business Corporation Act. The Florida Business Corporation Act provides that
none of our directors or officers shall be personally liable to us or our
shareholders for damages for breach of any duty owed to MediaBay or our
shareholders, except for liability for (i) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (ii) any
unlawful payment of a dividend or unlawful stock repurchase or redemption in
violation of the Florida Business Corporation Act, (iii) any transaction from
which the director received an improper personal benefit or (iv) a violation of
a criminal law.
We have entered into indemnification agreements with some of our
employees, officers and consultants. Under the terms of the indemnity
agreements, we have agreed to indemnify, to the fullest extent permitted under
applicable law, against any amounts which the employee, officer or consultant
may become legally obligated to pay in connection with any claim arising from or
out of the employee, officer or consultant acting, in connection with any
services performed by or on behalf of us and related expenses. Provided however,
that the employee, officer or consultant shall reimburse us for the amounts if
the individual is found, as finally judicially determined by a court of
competent jurisdiction, not to have been entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted for our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the SEC this indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against these liabilities, other than the
payment by us of expenses incurred or paid by a director, officer or controlling
person of us in the successful defense of any action, suit or proceeding is
asserted by the director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of the issue.
LEGAL MATTERS
The legality of the shares of common stock offered hereby was passed upon
for MediaBay, Inc. by Blank Rome LLP, New York, New York.
EXPERTS
The financial statements included in this prospectus and the related
financial statement schedule from MediaBay, Inc.'s Annual Report on Form 10-K
for the years ended December 31, 2004 and 2003 have been audited by Amper
Politziner & Mattia, P.C.,an independent registered public accounting firm, as
stated in their report appearing herein, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements for the year ended December 31, 2002 (prior to
the effects of the 2005 reverse stock split), not presented herein, and the
related financial statement schedule included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report appearing herein and elsewhere
in the registration statement, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and we file reports and other information with the SEC.
You may read and copy any of the reports, statements, or other information
we file with the SEC at the SEC's Public Reference Section at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. Information on the operation
of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. The SEC maintains a Web site at http://www.sec.gov that contains
reports, proxy statements and other information regarding issuers that file
electronically with the SEC. The Nasdaq Stock Market maintains a Web site at
http://www.nasdaq.com that contains reports, proxy statements and other
information filed by us.
-66-
MEDIA BAY, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accounting Firm.................................F-2
Report of Independent Public Accounting Firm.................................F-3
Consolidated Balance Sheets as of December 31, 2004 and 2003.................F-4
Consolidated Statements of Operations for the years
ended December 31, 2004, 2003, and 2002....................................F-5
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2004, 2003 and 2002.......................F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 2004, 2003, and 2002....................................F-7
Notes to Consolidated Financial Statements...................................F-8
Condensed Consolidated Balance Sheets as of June 30, 2005
(unaudited) and December 31, 2004.........................................F-32
Condensed Consolidated Statement of Operations for the three
months and six months ended June 30, 2005 and 2004 (unaudited)............F-33
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2005 and 2004 (unaudited)...........................F-34
Notes to Consolidated Financial Statements (unaudited)......................F-35
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Media Bay, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Media Bay
Inc. and Subsidiaries (the "Company") as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the two years in the period ended December 31, 2004. Our audit also
included the financial statement schedule listed in the Index at page S-1 as of
December 31, 2004 and 2003 and for the years then ended. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit. The consolidated financial statements of the
Company for the year ended December 31, 2002, before they were restated for the
matter described in Note 13 to the consolidated financial statements, were
audited by other auditors whose report, dated April 15, 2003, expressed an
unqualified opinion on those statements and included an explanatory paragraph
that described that effective January 1, 2002, the Company changed its method of
accounting for goodwill and intangible assets upon adoption of Statement of
Financial Accounting No. 142, "Goodwill and Other Intangible Assets".
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Media Bay Inc.
and Subsidiaries at December 31, 2004 and 2003, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule as of December 31, 2004 and 2003 and for years then
ended, when considered in relation to the consolidated basic financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
We also audited the adjustments described in Note 13 that were applied to
restate the 2002 consolidated financial statements. In our opinion, such
adjustments are appropriate and have been properly applied.
As described in Note 13 to the consolidated financial statements, the
financial statements for the years ended December 31, 2004, 2003 and 2002 were
restated.
/s/ Amper, Politziner & Mattia, P.C.
Edison, New Jersey
March 28, 2005, except Note 13 for
Which date is November 3, 2005.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of MediaBay, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of MediaBay, Inc. and subsidiaries (the
"Company") for the year ended December 31, 2002 (prior to the effects of the
2005 reverse stock split) not presented herein. Our audit also included the
financial statement schedule as of and for the year ended December 31, 2002,
listed in the index at Item 16. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of MediaBay,
Inc. and subsidiaries for the year ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill and
intangible assets upon adoption of Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets".
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
April 15, 2003
F-3
MEDIABAY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
2004 2003
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents ........................................ $ 3,122 $ 683
Accounts receivable, net of allowances for
sales returns and doubtful accounts of
$2,708 and $4,446 at December 31, 2004 and
2003, respectively ............................................. 1,285 3,264
Inventory ........................................................ 1,530 4,063
Prepaid expenses and other current assets ........................ 199 215
Royalty advances ................................................. 489 804
--------- ---------
Total current assets ......................................... 6,625 9,029
Fixed assets, net .................................................... 243 227
Deferred member acquisition costs .................................... -- 3,172
Deferred income taxes ................................................ -- 14,753
Other intangibles .................................................... 50 54
Goodwill ............................................................. 9,658 9,658
--------- ---------
$ 16,576 $ 36,893
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................ $ 5,361 $ 10,268
Accounts payable, related party .................................. 315 826
Common stock subject to contingent put rights, current portion ... -- 350
Current portion of long-term debt ................................ 200 --
Short-term debt, net of original issue discount
of $54 and $274 at December 31, 2004 and
2003, respectively ............................................. 29 7,107
Related party short-term debt, net of original issue
discount of $142 at December 31, 2004 and
2003, respectively ............................................. -- 10,643
--------- ---------
Total current liabilities .................................... 5,905 29,194
Long-term debt, net of original issue discount of
$908 at December 31, 2004 ...................................... 9,102 --
Related party long-term debt including accrued interest .............. 7,750 --
Common stock subject to contingent put rights ........................ -- 750
--------- ---------
Commitments and Contingencies ........................................ -- --
--------- ---------
Total liabilities ............................................ 22,757 29,944
--------- ---------
Preferred stock, no par value, authorized
5,000,000 shares; 25,000 shares of Series A
outstanding at December 31, 2004 and
December 31, 2003; 200 and 3,350 shares of
Series B issued and outstanding at December 31,
2004 and December 31, 2003, respectively and 43,527
and no shares of Series C issued and outstanding at
December 31, 2004 and December 31, 2003, respectively ............ 6,873 2,828
Common stock; no par value, authorized 150,000,000
shares; issued and outstanding
4,140,663 and 2,176,236 at December 31,
2004 and 2003, respectively ...................................... 101,966 94,567
Contributed capital .................................................. 17,682 11,569
Accumulated deficit .................................................. (132,702) (102,015)
--------- ---------
Total common stockholders' equity (deficit) .......................... (6,181) 6,949
--------- ---------
$ 16,576 $ 36,893
========= =========
F-4
MEDIABAY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
2004 2003 2002
-------- -------- --------
Sales, net of returns, discounts and allowances of $5,363, $16,960
and $16,195 for the years ended December 31, 2004, 2003 and
2002, respectively ........................................... $ 18,831 $ 36,617 $ 45,744
Cost of sales ..................................................... 8,802 17,479 20,651
Cost of sales - write-downs ....................................... 3,745 -- --
Advertising and promotion ......................................... 4,700 9,988 10,156
Advertising and promotion write-downs ............................. 846 -- --
Bad debt .......................................................... 829 3,940 2,821
General and administrative ........................................ 6,043 6,816 8,347
Severance and other termination costs ............................. -- 544 --
Asset write-downs and strategic charges ........................... -- 749 --
Depreciation and amortization ..................................... 144 328 1,314
Non-cash write-down of intangibles ................................ -- -- 1,224
-------- -------- --------
Operating (loss) income ..................................... (6,278) (3,227) 1,231
Interest expense .................................................. 9,082 1,925 2,974
-------- -------- --------
Loss before income tax expense .............................. (15,360) (5,152) (1,743)
Income tax expense ................................................ 14,753 1,471 550
-------- -------- --------
Net loss .................................................... (30,113) (6,623) (2,293)
Dividends on preferred stock ...................................... 574 246 217
-------- -------- --------
Net loss applicable to common shares ........................ $(30,687) $ (6,869) $ (2,510)
======== ======== ========
Basic and diluted loss per share:
Basic and diluted loss per share ............................ $ (10.24) $ (2.92) $ (1.07)
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
MEDIABAY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(AMOUNTS IN THOUSANDS)
SERIES A SERIES B SERIES C
PREFERRED SERIES A PREFERRED SERIES B PREFERRED
STOCK - PREFERRED STOCK - PREFERRED STOCK -
NUMBER STOCK NO NUMBER OF STOCK NO NUMBER OF
OF SHARES PAR VALUE SHARES PAR VALUE SHARES
------------ ------------ ------------ ------------ ------------
Balance at January 1, 2002 .............................. -- $ -- -- $ -- --
Conversion of convertible debt to preferred stock .... 25,000 2,500 -- -- --
Conversion of convertible notes ...................... -- -- -- -- --
Options and warrants granted for consulting .......... -- -- -- -- --
Exercise of options and warrants ..................... -- -- -- -- --
Cancellation of warrants issued ...................... -- -- -- -- --
Stock issued to consultants .......................... -- -- -- -- --
Stock tendered as payment for exercise of options .... -- -- -- -- --
Stock and warrants issued in acquisition of patent ... -- -- -- -- --
Loss applicable to common shares ..................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 ............................ 25,000 2,500 -- -- --
Issuance of Series B Preferred Stock ................. -- -- 3,350 328 --
Warrants granted in consideration for
non-compete agreements .............................. -- -- -- -- --
Exercise of options .................................. -- -- -- -- --
Stock issued to consultants .......................... -- -- -- -- --
Options issued to consultants ........................ -- -- -- -- --
Columbia House settlement ............................ -- -- -- -- --
Stock tendered as payment of settlement .............. -- -- -- -- --
Warrants issued in connection with financing ......... -- -- -- -- --
Options issued to Directors .......................... -- -- -- -- --
Loss applicable to common shares ..................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003 ............................ 25,000 $ 2,500 3,350 $ 328 --
============ ============ ============ ============ ============
Conversion of Series B Preferred Stock, net of fees .. -- -- (3,150) (308) --
Issuance of Series C Preferred Stock ................. -- -- -- -- 43,527
Conversion of subordinated debt ...................... -- -- -- -- --
Sales of common stock ................................ -- -- -- -- --
Exercise of options and warrants ..................... -- -- -- -- --
Stock issued to consultants .......................... -- -- -- -- --
Beneficial conversion feature of debt issued ......... -- -- -- -- --
Warrants issued in connection with financing ......... -- -- -- -- --
Inducement to convert ................................ -- -- -- -- --
Settlement of put obligation ......................... -- -- -- -- --
Options issued to Directors .......................... -- -- -- -- --
Options issued to consultants ........................ -- -- -- -- --
Loss applicable to common shares ..................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 ......................... 25,000 $ 2,500 200 $ 20 43,527
============ ============ ============ ============ ============
SERIES C COMMON COMMON
PREFERRED STOCK - STOCK -
STOCK NO NUMBER OF NO PAR CONTRIBUTED ACCUMULATED
PAR VALUE SHARES VALUE CAPITAL DEFICIT
------------ ------------ ------------ ------------ ------------
Balance at January 1, 2002 ..............................$ -- 2,310 $ 93,468 $ 7,730 $ (92,636)
Conversion of convertible debt to preferred stock .... -- -- -- -- --
Conversion of convertible notes ...................... -- 33 1,000 (49) --
Options and warrants granted for consulting .......... -- -- -- 659 --
Exercise of options and warrants ..................... -- 37 207 -- --
Cancellation of warrants issued ...................... -- -- (125) --
Stock issued to consultants .......................... -- 3 50 -- --
Stock tendered as payment for exercise of options .... -- (10) -- -- --
Stock and warrants issued in acquisition of patent ... -- 17 75 36 --
Loss applicable to common shares ..................... -- -- -- -- (2,510)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 ............................ -- 2,390 94,800 8,251 (95,146)
Issuance of Series B Preferred Stock ................. -- -- -- -- --
Warrants granted in consideration for
non-compete agreements .............................. -- -- -- 23 --
Exercise of options .................................. -- 18 -- -- --
Stock issued to consultants .......................... -- 5 14 -- --
Options issued to consultants ........................ -- -- -- 26 --
Columbia House settlement ............................ -- (54) (247) 3,020 --
Stock tendered as payment of settlement .............. -- (183) -- -- --
Warrants issued in connection with financing ......... -- -- -- 176 --
Options issued to Directors .......................... -- -- -- 73 --
Loss applicable to common shares ..................... -- -- -- -- (6,869)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003 ............................ -- 2,176 $ 94,567 11,569 (102,015)
============ ============ ============ ============ ============
Conversion of Series B Preferred Stock, net of fees .. -- 78 365 -- --
Issuance of Series C Preferred Stock ................. 4,353 -- --
Conversion of subordinated debt ...................... -- 1,433 5,554 -- --
Sales of common stock ................................ -- 300 900 -- --
Exercise of options and warrants ..................... -- 150 562 -- --
Stock issued to consultants .......................... -- 4 17 -- --
Beneficial conversion feature of debt issued ......... -- -- -- 3,991 --
Warrants issued in connection with financing ......... -- -- -- 1,164 --
Inducement to convert ................................ -- -- -- 391 --
Settlement of put obligation ......................... -- -- -- 259 --
Options issued to Directors .......................... -- -- -- 219 --
Options issued to consultants ........................ -- -- -- 89 --
Loss applicable to common shares ..................... -- -- -- -- (30,687)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 .........................$ 4,353 4,141 $ 101,965 17,682 $ (132,702)
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
MEDIABAY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
2004 2003 2002
-------- -------- --------
Cash flows from operating activities:
Net loss applicable to common shares ................................... $(30,687) $ (6,869) $ (2,510)
Adjustments to reconcile net loss to net cash used in operating
activities:
Asset write-downs and strategic charges ............................ 4,591 749 --
Income tax expense ................................................. 14,753 1,471 550
Non-cash beneficial conversion ..................................... 4,382 -- --
Amortization of deferred member acquisition costs .................. 2,663 6,161 5,571
Loss on extinguishment of debt ..................................... 1,532 -- --
Non-current accrued interest and dividends payable ................. 1,472 1,155 456
Amortization of deferred financing costs and original issue
discount ........................................................... 1,329 561 1,453
Depreciation and amortization ...................................... 144 328 1,314
Non-cash compensation expense ...................................... 328 118 --
Changes in asset and liability accounts, net of acquisitions and
asset write-downs and strategic charges:
Decrease (increase) in accounts receivable, net .................. 1,979 4,195 (2,643)
Decrease (increase) in inventory ................................. 103 896 (1,123)
(Increase) decrease in prepaid expenses
and other current assets ....................................... (48) 300 1,106
(Increase) decrease in royalty advances .......................... (1,000) 240 (261)
Increase in deferred member acquisition costs .................... (356) (2,410) (8,099)
(Decrease) increase in accounts payable and accrued expenses ..... (5,406) (5,346) 3,981
-------- -------- --------
Net cash provided by (used in) operating activities ............. (4,221) 1,549 1,019
-------- -------- --------
Cash flows from investing activities:
Purchase of fixed assets ............................................. (136) (16) (111)
Additions to intangible assets ....................................... (20) (102) --
Cash paid in acquisitions ............................................ -- (148) (1,000)
-------- -------- --------
Net cash used in investing activities ........................... (156) (266) (1,111)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of debt ....................................... 13,500 1,065 --
Proceeds from sale of common stock ................................... 900 -- --
Proceeds from exercise of stock options .............................. 563 -- 214
Proceeds from sale of preferred stock, net of costs .................. -- 328 --
Proceeds from issuance of notes payable - related parties ............ -- -- 2,000
Repayment of long-term debt .......................................... (6,008) (1,615) (1,640)
Increase in deferred financing costs ................................. (2,139) (99) (149)
Payments made in connection with litigation
settlement recorded in contributed
capital, net of cash received ...................................... -- (676) --
-------- -------- --------
Net cash provided by (used in) financing activities ............. 6,816 (997) 425
-------- -------- --------
Net increase in cash and cash equivalents .............................. 2,439 286 333
Cash and cash equivalents at beginning of year ......................... 683 397 64
-------- -------- --------
Cash and cash equivalents at end of year ............................... $ 3,122 $ 683 $ 397
======== ======== ========
F-7
MEDIABAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) ORGANIZATION
The Company is a Florida corporation formed on August 16, 1993. The
Company is a media, marketing and publishing company specializing in spoken
audio entertainment. Today, the Company is a leading reseller of audiobooks on
CD and cassettes from the nation's largest publishing houses via the Audio Book
Club, a mail order based, negative option book club. MBAY is also a licensee and
marketer of programs from the golden age of radio. These titles are sold in
physical formats through a catalog focused on collectors, a mail order based
continuity program, retail outlets, and an on-line download subscription
service. The Company's strategy consist of pursuing the download opportunity
through both the exclusive distribution agreement with Microsoft and the
opportunity to offer their content to other websites; leveraging their agreement
with Larry King to create opportunities which provide lower customer acquisition
costs and higher profit potential; and exploiting their existing content and
businesses.
(2) Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts have
been eliminated.
Cash and Cash Equivalents
Securities with maturities of three months or less when purchased are
considered to be cash equivalents.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and
accrued expenses approximates fair value due to the short maturity of those
instruments.
The fair value of long-term debt is estimated based on the interest rates
currently available for borrowings with similar terms and maturities. The
carrying value of the Company's long-term debt approximates fair value.
Inventory
Inventory, consisting primarily of audiocassettes and compact discs held
for resale, is valued at the lower of cost (weighted average cost method) or
market.
Prepaid Expenses
Prepaid expenses consist principally of deposits and other amounts being
expensed over the period of benefit. All current prepaid expenses will be
expensed over a period no greater than the next twelve months.
Fixed Assets, Net
Fixed assets, consisting primarily of furniture, leasehold improvements,
computer equipment, and third-party web site development costs, are recorded at
cost. Depreciation and amortization, which includes the amortization of
equipment under capital leases, is provided by the straight-line method over the
estimated useful life of three years (the lease term) for computer equipment and
five years (the lease term) for sound equipment under capital leases, five years
for equipment, seven years for furniture and fixtures, five years for leasehold
improvements, and two years for Internet web site development costs. Ongoing
maintenance and other recurring charges are expensed as incurred.
F-8
Other Intangibles, Net
Intangible assets, principally consisting of purchased intellectual
property, which is reviewed for impairment on each reporting date, and
non-compete agreements, which are being amortized over their contractual term.
Goodwill
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired in business combinations accounted for using the purchase
method of accounting. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", the Company
ceased amortization of goodwill as of January 1, 2002. The Company completed the
transitional impairment test as of January 1, 2002, which did not result in an
impairment loss and performed an annual impairment tests in January 2005,
October 2003 and 2002, which did not result in an impairment loss. Prior to
January 1, 2002, goodwill was amortized over the estimated period of benefit not
to exceed 20 years.
Revenue Recognition
During the years ended December 31, 2004, 2003 and 2002, the Company
derived its principal revenue through sales of audiobooks, classic radio shows
and other spoken word audio products directly to consumers principally through
direct mail. The Company also sold classic radio shows to retailers either
directly or through distributors. The Company derived additional revenue through
rental of its proprietary database of names and addresses to non-competing third
parties through list rental brokers. The Company also derived a small amount of
revenue from advertisers included in its nationally syndicated classic radio
shows. The Company recognizes sales to consumers, retailers and distributors
upon shipment of merchandise. List rental revenue is recognized on notification
by the list brokers of rental by a third party when the lists are rented. The
Company recognizes advertising revenue upon notification of the airing of the
advertisement by the media buying company representing the Company. Allowances
for future returns are based upon historical experience and evaluation of
current trends.
Downloadable content revenue from the sale of individual content titles is
recognized in the period when the content is downloaded and the customer's
credit card is processed. Downloadable content revenue from the sale of
downloadable content subscriptions is recognized pro rata over the term of the
subscription period. Rebates and refunds are recorded as a reduction of revenue
in the period in which the rebate or refund is paid in accordance with Emerging
Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor
to a Customer (Including a Reseller of the Vendor's Products).
Shipping and Handling Revenue and Costs
Amounts paid to the Company for shipping and handling by customers is
included in sales. Amounts the Company incurs for shipping and handling costs
are included in cost of sales. The Company recognizes shipping and handling
revenue upon shipment of merchandise. Shipping and handling expenses are
recognized on a monthly basis from invoices from the third party fulfillment
houses, which provide the services.
Cost of Sales
Cost of sales includes the following: o Product costs (including free
audiobooks in the initial enrollment offer to prospective members)
o Royalties to publishers and rightsholders
o Fulfillment costs, including shipping and handling
o Customer service
o Direct response billing, collection and accounts receivable
management
F-9
Cooperative Advertising and Related Selling Expenses
In accordance with EITF No. 01-9, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)", the
Company classifies the cost of sales incentives as a reduction of net sales.
Bad Debt Expense
The Company records an estimate of its anticipated bad debt expense based
on historical experience.
General and Administrative Costs
General and administrative costs include the following:
o Bad Debt Expense
o Payroll and related items
o Commissions
o Insurance
o Office expenses
o Telephone and postage
o Public and investor relations
o Dues and subscriptions
o Rent and utilities
o Travel and entertainment
o Bank charges
o Professional fees, principally legal and auditing fees
o Consulting
Stock-Based Compensation
The Company accounts for its stock-based compensation plans using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". Accordingly, no stock-based
employee compensation cost has been recognized in the financial statements as
all options granted under the Company's stock option plan, had an exercise price
at least equal to the market value of the underlying common stock on the date of
grant. The pro forma information below is based on provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure", issued in
December 2002.
F-10
YEAR ENDED DECEMBER 31,
2004 2003 2002
-------------------------------------
Net loss applicable to common shares, as reported $(30,687) $ (6,869) $ (2,510)
Add: Stock-based employee compensation expense included in
reported net income applicable to common shares, net
of related tax effects -- -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (2,092) (1,486) (1,245)
-------------------------------------
Pro forma net loss applicable to common shares $(32,779) $ (8,355) $ (3,755)
=====================================
Net loss per share:
Basic and diluted-as reported $ (10.24) $ (2.92) $ (1.07)
=====================================
Basic and diluted-pro forma $ (10.94) $ (3.56) $ (1.60)
=====================================
Income Taxes
The ultimate realization of deferred tax assets is dependent on the
generation of future taxable income during the periods in which temporary timing
differences become deductible. The Company determines the utilization of
deferred tax assets in the future based on current year projections by
management.
Based on a change in Company strategy, which the Company believes will
result in lower sales and losses in the near term, but ultimately will be more
profitable, the Company has determined that it is not more likely than not that
it will, in the foreseeable future, be able to realize all or part of its net
deferred tax asset. The Company has accordingly made an adjustment to the
deferred tax asset recording an increase to the valuation allowance, resulting
in a deferred tax expense charged against income in the fourth quarter of 2004,
the period when such determination was made.
Deferred Member Acquisition Costs
Promotional costs directed at current members are expensed on the date the
promotional materials are mailed. The cost of any premiums, gifts or the
discounted audiobooks in the promotional offer to new members is expensed as
incurred. The Company accounts for direct response advertising for the
acquisition of new members in accordance with AICPA Statement of Position 93-7,
"Reporting on Advertising Costs" ("SOP 93-7"). SOP 93-7 states that the cost of
direct response advertising (a) whose primary purpose is to elicit sales to
customers who could be shown to have responded specifically to the advertising
and (b) that results in probable future benefits should be reported as assets
net of accumulated amortization Accordingly, the Company has capitalized direct
response advertising costs and amortizes these costs over the period of future
benefit (the average member life), which has been determined to be generally 30
months. The costs are being amortized on accelerated basis consistent with the
recognition of related revenue. In the fourth quarter of 2003, the Company
adjusted the amortization period for advertising to attract customers to its
World's Greatest Old-Time Radio continuity program and revised the estimate
period for amortization of these advertising costs down to 18 months, which
resulted in an increase in advertising expenses for the year ended December 31,
2003 of $409.
SOP 93-7 requires that the realizability of the mounts of direct-response
advertising reported as assets should be evaluated at each balance sheet date by
comparing the carrying amounts of the assets to their probable remaining future
net revenues. Based on a change in Company strategy, which the Company believes
will result in lower sales and losses in the near term, but ultimately will be
more profitable, the Company has determined that the future net revenue from the
Company's Audio Book Club does not support the carrying amount of the
direct-response advertising reported as assets relating to the Audio Book Club.
Accordingly the Company has made an adjustment to write-off the entire carrying
amount of the asset in the fourth quarter for 2004 resulting in an increase in
advertising expense of $846.
F-11
Royalties
The Company is liable for royalties to licensors based upon revenue earned
from the respective licensed product. The Company pays certain of its publishers
and other rightsholders advances for rights to products. Royalties earned on the
sale of the products are payable only in excess of the amount of the advance.
Advances, which have not been recovered through earned royalties, are recorded
as an asset. Advances not expected to be recovered through royalties on sales
are charged to royalty expense.
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates. On an ongoing basis, management reviews its estimates based on
current available information. Changes in facts and circumstances may result in
revised estimate.
(3) ASSET WRITE-DOWNS AND STRATEGIC CHARGES
In September 2004, the Company conducted a review of its operations
including product offerings, marketing methods and fulfillment. The Company is
committed to digitizing and encoding its library of spoken word content that
includes audiobooks and famous Old Time Radio shows, including The Shadow, Amos
and Andy, Jack Benny, Dragnet, Gunsmoke and more. By making its content
available to the digital customer, it believes it can expand the market for its
audio content and may be able to significantly reduce the cost of delivery. The
Company believes this distribution strategy could lead to increased revenues and
potentially put the Company on a track to profitability.
In October 2004 the Company and Microsoft announced that they are working
together to offer a wide range of audiobook titles via download to the millions
of MSN(R) users in the United States. Among the audiobook titles we will
exclusively offer on the MSN Music service are those from the nation's largest
audiobook publishers. MSN attracts more than 350 million unique users worldwide
per month. With localized versions available globally in 39 markets and 20
languages, MSN is a world leader in delivering Web services to consumers and
online advertising opportunities to businesses worldwide.
In October 2004 the Company also announced that it had signed a multi-year
agreement with Celebrity Newsletter LLC to develop television personality and
syndicated talk show host, Larry King's, On-line Audiobook and Entertainment
Club. The Company intends to design The Larry King Audiobook Club to meet, what
it believes, are its customers' needs for an easy to use online retail
experience. The Company is working to give its members more choice, better
customer service, and great prices for repeat buyers.
The Company believes that many of its key operating metrics may be
improved by its transition from a predominantly mail order business to an
Internet based business. The Company hopes to reduce its return rates, lower its
bad debt rates and reduce printing and fulfillment costs.
As a result of these third quarter decisions, the Company has recorded
$2,100 of strategic charges for the three months ended September 30, 2004. These
charges include: $1,000 of inventory written down to net realizable value due to
a reduction in Audio Book Club members and the Company's new focus on delivering
spoken word products via downloads and $1,100 of write-downs to royalty advances
paid to audiobook publishers and other license holders, which the Company does
not believe will be recoverable due to its new focus on delivering spoken word
products via downloads.
In the fourth quarter of 2004, the Company determined to transition its
Audio Book Club customers to either a downloadable business or an Internet based
business, which will not offer a negative club option. Based on this decision,
the Company reduced the value of its Audio Book Club inventory by $870, reduced
the amount of publishers' advances recorded as assets by $215 and wrote-off the
carrying amount direct-response advertising relating to Audio Book Club
resulting in an increase in advertising expense of $846. The Company also
determined based on this fourth quarter review that it is not more likely than
not that it will, in the foreseeable future, be able to realize all or part of
its net deferred tax asset. The Company has accordingly made an adjustment to
the deferred tax asset recording an increase to the valuation allowance,
resulting in a deferred tax expense charged against income in the fourth quarter
of 2004 of $14,753, the period when such determination was made.
F-12
Also in the fourth quarter of 2004, the Company reviewed its product mix
of offerings to both its mail order and wholesale Radio Spirits customers. The
Company has experienced a significant shift in the mix between CDs and cassettes
and will substantially reduce the number of cassette offerings in the future.
Accordingly, the Company has written off a substantial portion of its existing
cassette inventory as well as a portion of its CD inventory relating to older
products, which it will not aggressively promote in future periods. Workpapers
supporting these write-offs have been provided to our auditors. The additional
increase in the reserve for obsolescence of the Radio Spirits inventory made in
the fourth quarter of 2004 was $560.
In the fourth quarter of 2003, the Company evaluated the performance of
Audio Passages, an Audio Book Club marketing program tailored to listeners with
an interest in Christian product and determined based on past performance and
expected future performance that it should terminate the Audio Passages
marketing program. In connection with the termination of the Audio Passages
marketing program, the Company took a strategic charge for the establishment of
a reserve for obsolescence of Audio Passages inventory of $285 and an assets
write-down for previously capitalized advertising, which will no longer recover
of $464.
(4) FIXED ASSETS
Fixed Assets consist of the following as of December 31,
2004 2003
------- -------
Capital leases, equipment and related software ..... $ 959 $ 825
Furniture and fixtures ............................. 84 82
Leasehold improvements ............................. 74 74
Web site development costs ......................... 57 57
------- -------
Total .............................................. 1,174 1,038
Accumulated depreciation ........................... (931) (811)
------- -------
$ 243 $ 227
======= =======
Depreciation expense for the years ended December 31, 2004, 2003 and 2002
was $120, $146 and $221, respectively.
(5) GOODWILL AND OTHER INTANGIBLES
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142")
requires the Company to perform an evaluation of goodwill impairment annually.
The Company conducted its annual impairment test for 2004 in January 2005,
utilizing the services of an independent appraiser, and its annual impairment
tests for 2003 and 2002 in October 2003 and 2002, respectively, none of which
resulted in an impairment loss. Any future impairment losses incurred will be
reported in operating results.
The following is a reconciliation of changes in the carrying amounts of
goodwill for the Radio Spirits reportable segment for each of 2004 and 2003:
2004 2003
Balance at January 1, $ 9,658 $ 9,871
Goodwill acquired during the year -- --
Finalization of GAA asset purchase allocation -- (213)
------- -------
Ending Balance $ 9,658 $ 9,658
======= =======
F-13
During the fourth quarter of 2002, the Company reviewed the carrying
amounts of its intangible assets and determined, based on decisions made in the
fourth quarter of 2002, that the value of certain intangible assets could no
longer be supported by anticipated future operations. Specifically, the Company
made a strategic decision to no longer compete in the DVD market and accordingly
wrote off the value of certain video and DVD rights it had acquired in the
amount of $90. The Company also made the strategic decision in the fourth
quarter of 2002 to discontinue future mailings to the Columbia House lists of
members of other clubs, which could not support the remaining carrying value of
the Columbia House mailing agreement. Accordingly, in the fourth quarter of
2002, the Company wrote off the remaining value of the Columbia House mailing
agreement of $986.
Amortization of intangible assets was $24, $181 and $1,093 for the years
ended December 31, 2004, 2003 and 2002, respectively. The Company estimates
intangible amortization expenses of $45 in 2005.
The following table presents details of other intangibles at December 31,
2004 and December 31, 2003:
DECEMBER 31, 2004 DECEMBER 31, 2003
---------------------------------------------- ----------------------------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION NET COST AMORTIZATION NET
------------ ------------ ------------ ------------ ------------ ------------
Mailing Agreements $ 592 $ 592 $ -- $ 592 $ 592 $ --
Customer Lists 4,380 4,380 -- 4,380 4,380 --
Non-Compete Agreements 313 288 25 313 264 49
Other 25 -- 25 5 -- 5
------------ ------------ ------------ ------------ ------------ ------------
Total Other Intangibles $ 5,310 $ 5,260 $ 50 $ 5,290 $ 5,236 $ 54
============ ============ ============ ============ ============ ============
(6) DEBT
AS OF
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
Credit agreement, senior secured bank debt, $ -- $ 2,925
Credit agreement, senior secured debt,
net of original issue discount 8,661 --
Subordinated debt -- 3,200
Premier debt, net of original issue discount 670 --
October 2003 Notes and related accrued interest,
net of original issue discount -- 982
Related party notes and related accrued interest,
net of original issue discount 7,750 10,643
------------ ------------
Total Debt 17,081 17,750
Less: Current Portion (229) (17,750)
------------ ------------
Long-Term Debt $ 16,852 $ --
============ ============
Convertible Debt
On January 29, 2004, the Company issued $4,000 aggregate principal amount
of promissory notes (the "January 2004 Notes") and warrants to purchase 392,158
shares of common stock (the "Investor Warrants") to institutional and accredited
investors (the "Offering"). The notes were due on the earlier of (i) April 30,
2005, (ii) such date on or after July 1, 2004 at such time as all of the
Company's indebtedness under its existing credit facility is either repaid or
refinanced or (iii) the consummation by the Company of a merger, combination or
sale of all or substantially all of the Company's assets or the purchase by a
single entity, person or group of affiliated entities or persons of 50% of the
Company's voting stock. The January 2004 Notes bore interest at the rate of 6%,
increasing to 9% on April 28, 2004 and 18% on July 27, 2004. On receipt of
shareholder approval, which was received on April 12, 2004, in accordance with
the terms of the January 2004 Notes, the principal amount of the notes
automatically converted into MediaBay common stock at the rate of one share of
common stock at $4.50, or approximately 888,888 shares. In addition accrued
interest in the amount $49 also converted into common stock at $4.50 per share,
or 10,813 shares.
F-14
In connection with the Offering, the Company issued to the placement agent
and a broker warrants to purchase an aggregate of 40,833 shares of common stock
and also issued to the placement agent warrants to purchase an additional 83,481
shares of Common Stock on April 12, 2004 as partial consideration for its
services as placement agent. All warrants issued are exercisable until January
28, 2009 at an exercise price of $7.68 per share.
The Company accounted for the issuance of the January 2004 debt and its
subsequent conversion in accordance with Emerging Issues task Force No. 00-27,
"Application of Issue No. 98-5 to Certain Convertible Instruments". Accordingly,
the Company recorded an expense of $3,991 as beneficial conversion expenses at
the date of the conversion. The Company also recorded in interest expense a loss
on early extinguishment of debt for the unamortized debt discount relating to
the expenses incurred in the transaction and the relative fair value of the
warrants issued in the transaction totaling $1,343.
In connection with the Offering, the Principal Shareholder and an
affiliate of the Principal Shareholder entered into a letter agreement (the
"Letter Agreement") with the purchasers of January 2004 Notes in the Offering
pursuant to which the Principal Shareholder granted to the holders of the Notes
in the event of an Event of Default (as defined in the Notes) the rights to
receive payment under certain secured indebtedness owed by the Company to the
Principal Shareholder and to exercise their rights under security agreements
securing such secured indebtedness. Pursuant to the Letter Agreement, the
Principal Shareholder also executed Powers of Attorney in favor of a
representative of the January 2004 Note holders pursuant to which such
representative may, following an Event of Default, take actions necessary to
enforce the Note holders rights under the Letter Agreement, including enforcing
the Principal Shareholder's rights under the security agreements.
New Credit Agreement and Related Transactions
On April 28, 2004, MediaBay entered into a new credit agreement ("New
Credit Agreement") by and among MediaBay and certain of its subsidiaries, the
guarantors signatory thereto, Zohar CDO 2003-1, Limited ("Zohar") as lender, and
Zohar, as agent, pursuant to which MediaBay and certain of its subsidiaries
initially borrowed $9,500. The initial term of the New Credit Agreement is one
year and it is extendable, at MediaBay's sole option, for two additional
one-year terms upon issuance of additional notes of $600 for the first
additional year and $300 for the second additional year, provided there is no
event of default. The loan bears interest at the rate of LIBOR plus 10%. In the
first year of the loan, a fee of $900 has been added to the principal balance,
which will be reflected as debt discount and will be accreted to interest
expense over the next twelve months. The New Credit Agreement contains certain
positive and negative covenants, including, beginning with the quarter ending
September 30, 2004, the maintenance of certain minimum levels of EBITDA, as
defined in the New Credit Agreement. Had the New Credit Agreement been in effect
at the date of the filing of this Annual Report on Form 10-K, the Company would
not be in compliance with EBITDA covenant.
MediaBay used a portion of the $8,600 of funds received under the New
Credit Agreement to satisfy all of its outstanding obligations under (i)
promissory notes that it issued in October 2003 in the aggregate principal
amount of $1,065, and (ii) its prior Credit Agreement, which had an outstanding
principal balance of approximately $1,386. The Company has included in interest
expense a loss on early extinguishment of debt of $73 related to unamortized
original issue discount relating to promissory notes that it issued in October
2003 and a loss on early extinguishment of debt of $116 related to unamortized
debt discount relating to the prior Credit Agreement.
The Principal Shareholder and an affiliate of the principal shareholder,
which held a $500 principal amount note and 25,000 shares of Series A
Convertible Preferred Stock, consented to the New Credit Agreement and the other
transactions described above and entered into a subordination agreement with
Zohar. The New Credit Agreement required the aggregate amount of principal and
interest owed by MediaBay to the Principal Shareholder and the affiliate of the
Principal Shareholder be reduced to $6,800 ("Permissible Debt") by June 1, 2004,
and that the Permissible Debt be further reduced by up to an additional $1,800
if MediaBay does not raise at least $2,000 in additional equity in the two years
after the execution of the New Credit Agreement.
F-15
On April 28, 2004, to reduce its debt to $6,800, the Principal Shareholder
and his affiliate agreed, subject to, and automatically upon, the receipt of a
fairness opinion from an independent investment banking firm, to exchange the
principal of their $500 Note, $1,000 Note, $150 Note and $350 Note, plus accrued
and unpaid interest owed to the Principal Shareholder aggregating $1,833 and
accrued and unpaid dividends owed to the Principal Shareholder aggregating $519
into an aggregate of 43,527 shares of Series C Preferred Stock convertible into
(i) an aggregate of 930,046 shares of Common Stock at an effective conversion
price of $4.68, and (ii) warrants to purchase an aggregate of 1,860,128 shares
of Common Stock. The Warrants are exercisable until April 28, 2014 at an
exercise price of $3.18. The Series C Preferred Stock has a liquidation
preference of $100 per share. On May 25, 2004, a fairness opinion was received
from an independent investment banking firm, and, pursuant to the agreements
described above, the exchange of debt for units occurred. The transactions
described above resulted in a charge to earnings for debt inducement pursuant to
SFAS 84 of $391.
The remaining promissory notes held by the Principal Shareholders and its
affiliate were guaranteed by certain subsidiaries of the Company and secured by
a lien on the assets of the Company and certain subsidiaries of the Company. If
the amount of the Permissible Debt was required to be reduced due to MediaBay's
failure to raise the requisite additional equity, such reduction will
automatically occur by the exchange of Permissible Debt for additional shares of
Series C Preferred Stock in an aggregate liquidation preference equal to the
amount of debt exchanged and warrants to purchase a number of shares of common
stock equal to two times the number of shares of preferred stock issuable upon
conversion of the Series C Preferred Stock.
New ABC Note
Also on April 28, 2004, MediaBay repaid $1,600 principal amount of the
$3,200 principal amount convertible note issued to ABC Investment, L.L.C.
MediaBay issued a new $1,600 note (the "New ABC Note") for the remaining
principal amount. The New ABC Note extends the maturity date from December 31,
2004 to July 29, 2007. In exchange for extending the maturity date, the
conversion price of the New ABC Note was reduced to $3.00. The closing sale
price of MediaBay's Common Stock on the closing date was $2.88. The entire
principal amount of the note was converted into common stock during the fourth
quarter of 2004.
Premier Debt
MediaBay has also entered into a settlement agreement, dated as of April
1, 2004, with Premier Electronic Laboratories, Inc. ("Premier"). Pursuant to the
settlement, among other things, MediaBay is paying Premier $950 in exchange for
Premier waiving its right to put its shares of Common Stock to MediaBay pursuant
to a Put Agreement dated December 11, 1998. MediaBay's obligation under the Put
Agreement was reduced by $150 in exchange for relinquishing certain leases for
real property. MediaBay paid $14 on closing and is paying the remaining balance
over six years in monthly payments starting at $7 in July 2004 and increasing to
$19 from May 2007 through April 2010.
The future minimum loan payments are as follows:
Year Ending December 31,
2005 ................................................... $ 284
2006 ................................................... 284
2007 ................................................... 16,911
2008 ................................................... 233
2009 ................................................... 233
Beyond ................................................. 77
-------
Total maturities, including debt discount of $223 ...... $18,022
=======
(7) COMMITMENTS AND CONTINGENCIES
Rent expense for the years ended December 31, 2004, 2003 and 2002 amounted
to $179, $180 and $291, respectively.
F-16
Operating Leases
The Company leases approximately 12,000 square feet of office space in
Cedar Knolls, New Jersey pursuant to a sixty-six month lease agreement dated
April 18, 2003.
Minimum annual lease commitments including capital improvement payments
under all non-cancelable operating leases are as follows:
Year ending December 31,
2005 ............................................. $ 186
2006 ............................................. 189
2007 ............................................. 198
2008 ............................................. 198
Thereafter ....................................... --
--------
Total lease commitments .......................... $ 771
========
Capitalized Leases
During the year ended December 31, 2004, the Company had three capital
leases. Lease payments under these agreement were $59, $53 and $53 in 2004, 2003
and 2002, respectively. The amount of equipment capitalized under the leases and
included in fixed assets is $196, and net of depreciation the fixed asset
balance is $24 and $94 at December 31, 2004 and 2003, respectively. The
obligations under the leases included in accounts payable and accrued expenses
on the consolidated balance sheets at December 31, 2004 and 2003 were $9 and
$71, respectively.
Minimum annual lease commitments under capital leases are as follows:
2005 ............................................ $ 18
2006 ............................................ 6
2007 ............................................ 1
--------
Total capital lease commitments ................. $ 25
--------
Employment Agreements
The Company has commitments pursuant to employment agreements with certain
of its officers. The Company's minimum aggregate commitments under such
employment agreements are approximately $674 and $223 during 2005 and 2006,
respectively.
Licensing Agreements
The Company has numerous licensing agreements for both audiobooks and
old-time radio shows with terms generally ranging from one to five years, which
require the Company to pay, in some instances, non-refundable advances upon
signing agreements, against future royalties. The Company is required to pay
royalties based on net sales. Royalty expenses were $1,473, $2,524 and $3,243
for 2004, 2003 and 2002, respectively. Minimum advances required to be paid
under existing agreements for the next five years are as follows:
2005 $ 303,000
2006 455,000
2007 238,000
2008 138,000
Total $1,134,000
==========
The Company has an agreement with a publisher under which it made periodic
payments for a series of audiobook titles. The agreement provides for the
Company to make additional payments of approximately $700, some of which is past
due. The Company does not believe that it can profitably license the additional
titles and is negotiating with the publisher to revise, amend or cancel the
agreement. The Company does not believe that canceling the agreement would have
a material adverse effect on its business, however it does want to maintain a
good relationship with the publisher.
F-17
Litigation
The Company is not a defendant in any litigation. In the normal course of
business, the Company is subject to threats of litigation. The Company does not
believe that the potential impact of any threatened litigation, if ultimately
litigated, will have a material adverse effect on the Company.
(8) STOCK OPTION AND STOCK INCENTIVE PLANS
In June 1997, the Company adopted the 1997 Stock Option Plan, pursuant to
which the Company's Board of Directors may grant stock options to key employees
of the Company. In June 1998, the Company amended the 1997 Stock Option Plan to
authorize the grant of up to 333,333 shares of authorized but unissued common
stock.
In March 1999, the Company's stockholders approved an amendment to the
Company's Articles of Incorporation adopting 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 416,667 shares of common stock have been reserved for issuance pursuant to
the plan.
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 583,333 shares of
common stock have been reserved for issuance pursuant to the plan.
In October 2001, the Company's shareholders adopted the Company's 2001
Stock Incentive Plan, which provides for grants of awards of stock options,
restricted stock, deferred stock or other stock based awards. A total of 583,333
shares of common stock have been reserved for issuance pursuant to the plan.
In December 2004, the Company's shareholders adopted the Company's 2004
Stock Incentive Plan, which provides for grants of awards of stock options,
restricted stock, deferred stock or other stock based awards. A total of
1,250,000 shares of common stock have been reserved for issuance pursuant to the
plan.
Options under the Company's option plans expire at various times between
2005 and 2014. In accordance with the plans, options generally have terms of 5
to 10 years and vest from grant date to three years.
Stock option activity under the plans is as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- ----------
Outstanding at January 1, 2002 998,225 $ 30.36
Granted 200,833 13.62
Exercised (25,166) 3.06
Canceled and expired (124,792) 41.70
---------- ----------
Outstanding at December 31, 2002 1,049,100 26.34
Granted 598,964 6.30
Exercised (50,000) 3.00
Canceled and expired (296,250) 28.38
---------- ----------
Outstanding at December 31. 2003 1,301,814 17.52
Granted 1,006,250 5.16
Exercised (131,338) 3.72
Canceled and expired (418,548) 16.74
---------- ----------
Outstanding at December 31. 2004 1,758,177 $ 11.70
========== ==========
F-18
The per share weighted-average fair value of stock options granted during
the years ended December 31, 2004, 2003 and 2002 is as follows using an accepted
option-pricing model with the following assumptions and no dividend yield. The
shares were granted as follows:
NO. OF EXERCISE ASSUMED RISK-FREE FAIR VALUE
DATE SHARES PRICE VOLATILITY INTEREST RATE PER SHARE
------------------------ ---------- ---------- -------------- ----------------- -----------
2002 GRANTS:
First Quarter 41,667 $ 16.20 159% 4.42% $ 7.50
Second Quarter -- -- -- -- --
Third Quarter 6,667 26.64 159% 3.46% 19.86
Fourth Quarter 152,500 12.36 159% 3.08% 5.22
---------
TOTAL 200,834
=========
2003 GRANTS:
First Quarter 6,667 9.00 165% 4.85% 5.40
Second Quarter -- -- -- -- --
Third Quarter 362,309 5.82 165% 4.85% 1.74
Fourth Quarter 229,988 7.02 97% 4.00% 4.02
---------
TOTAL 598,964
=========
2004 GRANTS:
First Quarter 275,833 8.52 100% 3.50% 3.66
Second Quarter 350,000 3.18 75% 3.45% 1.74
Third Quarter 151,250 2.58 75% 3.44% 1.08
Fourth Quarter 229,167 $ 5.76 200% 3.46% $ 4.98
---------
TOTAL 1,006,250
=========
The following table summarizes information for options outstanding and
exercisable at December 31, 2004:
OPTIONS EXERCISABLE
-----------------------------
OPTIONS OUTSTANDING WEIGHTED
RANGE OF WEIGHTED AVERAGE AVERAGE WEIGHTED AVERAGE
PRICES NUMBER REMAINING LIFE IN YEARS EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- ------------ ------------------------ ------------ ------------ ------------
$1.98-3.00 238,750 5.20 $ 2.28 106,958 $ 2.34
3.24-4.50 314,992 4.37 3.42 121,242 3.54
5.10-6.00 242,396 4.16 5.26 222,396 5.76
6.12-12.00 516,023 4.88 8.76 271,174 8.52
13.50-$29.28 496,017 4.48 29.10 443,017 29.10
------------ ------------------------ ------------ ------------ ------------
1,758,177 4.63 $ 5.70 1,164,287 $ 2.76
============ ======================== ============ ============ ============
At December 31, 2004, there were 3,833 additional shares available for
grant under the 1997 Plan, 20,026 additional shares available for grant under
the 1999 Plan, 13,625 additional shares available for grant under the 2000 Plan,
13,833 additional shares available for grant under the 2001 Plan and 1,175,000
additional shares available for grant under the 2004 Plan.
(9) WARRANTS AND NON-PLAN OPTIONS
In connection with the financings described above, in 2004, the Company
granted warrants to purchase a total of 2,487,641 shares of the Company's common
stock, all of which vested in 2004, to investors and advisors. During the year
ended December 31, 2004, warrants to purchase 23,323 of the Company's common
stock expired; non-plan options to purchase 33,333 shares of the Company's
common stock expired or were cancelled and non-plan options to purchase 1,333
shares were exercised.
F-19
The following table summarizes information for warrants and non-plan
options outstanding and exercisable at December 31, 2002:
OPTIONS EXERCISABLE
-----------------------------
OPTIONS OUTSTANDING WEIGHTED
RANGE OF WEIGHTED AVERAGE AVERAGE WEIGHTED AVERAGE
PRICES NUMBER REMAINING LIFE IN YEARS EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- ------------ ------------------------ ------------ ------------ ------------
$3.18-4.80 1,932,211 9.12 $ 3.24 1,932,211 $ 3.24
4.98-7.50 115,000 4.78 5.64 115,000 5.64
7.68-12.00 579,388 4.38 8.04 579,388 8.04
18.00-$72.00 18,333 5.22 28.38 18,333 28.38
-------------- ------------ ------------------------ ------------ ------------ ------------
2,644,932 7.87 $4.56 2,644,933 $ 4.56
============ ======================= ============ ============ ============
(10) LITIGATION SETTLEMENT
In December 1998, the Company acquired certain assets from a third party.
The parties also entered into certain other agreements including a mailing
agreement and a non-compete agreement. As consideration for the assets acquired
and the related transactions, including the mailing agreement and the
non-compete agreement, the third party received cash consideration of $30,750
and an aggregate of 54,167 shares of the Company's common stock"(the "shares")
and warrants to purchase an additional 16,667 shares of the Company's common
stock. The parties also entered into a Registration and Shareholder Rights
Agreement pursuant to which, the Company granted the third party the right under
certain circumstances, commencing December 31, 2004, to require the Company to
purchase from the third party the Shares at a price of $90.00 per Share.
In 2001, the Company commenced litigation alleging, among other things,
that the Company was fraudulently induced to purchase certain of the assets. On
June 16, 2003, Audio Book Club, Inc. ("ABC"), a wholly owned subsidiary of
MediaBay entered into a settlement agreement with respect to the lawsuit.
Pursuant to the settlement agreement, ABC received $350 in cash, the return for
cancellation of 54,167 shares of MediaBay common stock issued in connection with
the acquisition and the termination of put rights granted to the seller in the
acquisition with respect to 38,333 of the shares (put rights with respect to the
remaining 15,833 shares had previously terminated). The termination of the put
rights terminated a $3,450 future contingent obligation of MediaBay and results
in a corresponding increase in stockholders' equity.
The calculation of the settlement of litigation recorded in Contributed
Capital is as follows:
TERMINATION OF CONTINGENT PUT RIGHTS $ 3,450
RETURN FOR CANCELLATION OF 325,000 SHARES OF COMMON STOCK 247
CASH RECEIVED 350
--------
TOTAL RECEIVED IN SETTLEMENT OF LITIGATION 4,047
LEGAL AND OTHER COSTS INCURRED IN CONNECTION WITH THE LITIGATION 1,027
--------
SETTLEMENT OF LITIGATION RECORDED IN CONTRIBUTED CAPITAL $ 3,020
========
(11) EQUITY
On October 11, 2004, MediaBay, Inc. (the "Company") entered into a
Securities Purchase Agreement pursuant to which it issued to the purchasers
thereunder an aggregate of 300,000 shares (the "Shares") of the Company's common
stock, no par value per share (the "Common Stock"), and warrants to purchase
75,000 shares of Common Stock (the "Warrants"). The purchasers paid an aggregate
purchase price of $900,000 for the Shares and Warrants. Each Warrant is
exercisable to purchase one share of the Company's Common Stock at an exercise
price of $4.98 per share during the five (5)-year period commencing on October
11, 2004. The Shares and Warrants were issued to the purchasers without
registration under the Securities Act of 1933, as amended (the "Act"), in
reliance upon the exemptions from registration provided under 4(2) of the Act.
The issuances did not involve any public offering; the Company made no
solicitation in connection with the transactions other than communications with
the purchasers; the Company obtained representations from the purchasers
regarding their investment intent, experience and sophistication; the purchasers
either received or had access to adequate information about the Company in order
to make informed investment decisions; the Company reasonably believed that the
purchasers were sophisticated within the meaning of Section 4(2) of the Act; and
the Shares and Warrants were issued with restricted securities legends. No
underwriting discounts or commissions were paid in conjunction with the
issuances.
F-20
Series B Convertible Preferred Stock
On May 7, 2003, the Company sold 3,350 shares of a newly created Series B
Convertible Preferred Stock (the "Series B Stock") with a liquidation preference
of $100 per share for $335. Of the total sold, 1,400 shares ($140) were
purchased by Carl Wolf, Chairman and a director of the Company, and 200 shares
($20) were purchased by John Levy, Vice Chairman and Chief Financial Officer of
the Company. The holders of shares of Series B Convertible Preferred Stock will
receive dividends at the rate of $9.00 per share, payable quarterly, in arrears,
in cash on each March 31, June 30, September 30 and December 31; provided that
payment will accrue until the Company is permitted to make such payment in cash
under its Agreement with its senior lender. During the fourth quarter of 2004,
3,150 shares of Series B Preferred Stock were converted into the Company's
common stock.
The Series B Stock is convertible into shares of Common Stock into
MediaBay Common Stock at a conversion rate equal to a fraction, (i) the
numerator of which is equal to the number of Series B Stock times $100 plus
accrued and unpaid dividends though the date of conversion and (ii) the
denominator is $4.62, the average price of the Company's stock on May 6, 2003.
In the event of a liquidation, dissolution or winding up of the Company,
the holders of Series B Stock shall be entitled to receive out of the assets of
the Company, a sum in cash equal to $100.00 per share before any amounts are
paid to the holders of the Company common stock and on a pari passu with the
holders of the Series A Convertible Preferred Stock. The holders of Series B
Stock shall have no voting rights, except as required by law and except that the
vote or consent of the holders of a majority of the outstanding shares of Series
B Stock, voting separately as a class, will be required for any amendment,
alteration or repeal of the terms of the Series B Stock that adversely effects
the rights, preferences or privileges of the Series B Stock.
Options Issued to Directors
During the year ended December 31, 2004, the Company issued options to
purchase 116,666 shares of its common stock to its non-employee directors. Of
the options issued, 77,083 vested during 2004. The Company valued the vested
options at $219 using an acceptable valuation method and recorded an expense for
that amount in general and administrative expenses.
Dividends
The terms of the Company's debt agreements prohibit the Company from
declaring or paying any dividends or distributions on the Company's common
stock.
(12) INCOME TAXES
The Company's income tax provision for the years ended December 31, 2004,
2003 and 2002 includes a Federal deferred tax expense of $14,753, a Federal
deferred tax expense of $1,471 and a Federal deferred tax benefit of $550,
respectively.
F-21
Income tax expense for the years ended December 31, 2004, 2003 and 2003
differed from the amount computed by applying the U.S. Federal income tax rate
of 34% and the state income tax rate of 7% to the pre-tax loss as a result of
the following:
2004 2003 2002
-------- -------- --------
Computed tax benefit $ (6,360) $ (446) $ (97)
Increase (decrease) in valuation allowance for
Federal and State deferred tax assets 21,113 1,917 1,347
-------- -------- --------
Income tax expense $ 14,753 $ 1,471 $ 550
======== ======== ========
The ultimate realization of deferred tax assets is dependent on the
generation of future taxable income during the periods in which those temporary
timing differences become deductible. Management determined in the fourth
quarter of 2004 that, based on the inherent uncertainties in the Company's
strategy to fully reserve for the deferred tax asset. Accordingly, in 2004, the
deferred tax asset was reduced by approximately $14,753 for amounts, which the
Company was unable to determine would be recoverable in future periods.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
Deferred tax assets:
2004 2003
Federal and state net operating loss carry-forwards $ 31,103 $ 22,362
Loss in I-Jam, LLC 85 85
Accounts receivable, principally due to allowance for doubtful
accounts and reserve for returns 606 1,408
Inventory, principally due to reserve for obsolescence 1,522 584
Intangibles 11,186 13,984
Beneficial conversion feature 438 156
-------- --------
Total net deferred tax assets 44,940 38,579
Less valuation allowance (44,940) (23,826)
-------- --------
Net deferred tax assets $ -- $ 14,753
======== ========
At December 31, 2004, the Company had approximately $76,887 of net
operating loss carry-forwards, which could possibly have been used to offset
possible future earnings, if any, in computing future income tax liabilities.
However, the March 2005 transactions described in Note 21 to these financial
statements have resulted in limitations to the utilization of net operating loss
carryforwards.
(13) NET LOSS PER SHARE OF COMMON STOCK
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the applicable reporting
periods. The computation of diluted net loss per share is similar to the
computation of basic loss per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the dilutive potential common shares had been issued.
Basic and diluted loss per share were computed using the weighted average
number of shares outstanding for the years ended December 31, 2004, 2003 and
2002 of 2,996, 2,350 and 2,348, respectively.
Common equivalent shares of 3,759 including 3,400 relating to convertible
subordinated debt and convertible preferred stock were not included in the
calculation of fully diluted shares because they were anti-dilutive. Interest
expense and dividends on the convertible subordinated debt and convertible
preferred stock that were not added back to net loss were $1,322 for the year
ended December 31, 2004.
F-22
Common equivalent shares of 2,828 including 2,652 relating to convertible
subordinated debt and convertible preferred stock were not included in the
calculation of fully diluted shares because they were anti-dilutive. Interest
expense and dividends on the convertible subordinated debt and convertible
preferred stock that were not added back to net loss were $1,150 for the year
ended December 31, 2003.
Common equivalent shares of 2,986 including 2,652 relating to convertible
subordinated debt and convertible preferred stock were not included in the
calculation of fully diluted shares because they were anti-dilutive. Interest
expense and dividends on the convertible subordinated debt and convertible
preferred stock that were not added back to net loss were $1,134 for the year
ended December 31, 2002.
The Company's Board of Directors and shareholders approved a one for six
reverse stock split effective October 25, 2005. All references in the financial
statements and notes thereto to the number of shares outstanding, per share
amounts, and stock option, warrant and convertible security data relating to the
Company's common shares have been restated to reflect the effect of the stock
split for all periods presented.
(14) SUPPLEMENTAL CASH FLOW INFORMATION
No cash has been expended for income taxes for the years ended December
31, 2004, 2003 and 2002. Cash expended for interest was $1,045, $384 and $766
for the years ended December 31, 2004, 2003 and 2002, respectively.
The Company had the following non-cash activities for the years ended
December 31, 2004, 2003, and 2002:
2004 2003 2002
------ ------ ------
E-Data patent rights acquisition ............................... $ -- $ -- $ 75
Conversions of subordinated notes into common shares ........... 5,649 -- 1,000
Conversion of notes into preferred shares ...................... 4,353 -- 2,500
Stock tendered as payment for exercise of options .............. -- 150 75
Settlement of litigation ....................................... -- 3,697 --
(15) RELATED PARTY TRANSACTIONS
As of December 31, 2004, we owed to Mr. Herrick and his affiliates
approximately $315,000 for reimbursement of certain expenses and services
incurred in prior years. On April 28, 2004, in connection with the agreements
described below, the Company agreed to repay Mr. Herrick based on an agreed upon
schedule. From April 28, 2004 through December 31, 2004 the Company paid Mr.
Herrick a total of $324,000. As of December 31, 2004, the Company will pay Mr.
Herrick (i) $40,500 per month on the first of each month through and including
July 2005 and (ii) $31,410 on August 1, 2005.
On May 1, 2003, we entered into a two-year consulting agreement with XNH
Consulting Services, Inc. ("XNH"), a company wholly-owned by Norton Herrick.
Effective December 31, 2003, we agreed with Norton Herrick to terminate the
two-year consulting agreement with XNH, and to pay XNH a fee of $7,500 per month
for 16 months commencing on January 1, 2004 and to provide Mr. Herrick with
health insurance and other benefits applicable to our officers to the extent
such benefits may be provided under our benefit plans. In April 2004, we amended
the termination agreement such that we are no longer required to either pay Mr.
Herrick the $7,500 each month or to provide Mr. Herrick with health insurance
and other benefits applicable to our officers. In connection with the
termination agreement, the non-competition and nondisclosure covenants of the
XNH consulting agreement were extended until December 31, 2006. In accordance
with the agreement, the Company paid or reimbursed certain health insurance
premiums for Mr. Herrick.
In December 2004, the Company entered into a letter agreement with certain
affiliates of Forest Hill Capital, LLC, at that time a principal shareholder
(collectively, the "Forest Hill Entities"), extending the date by which the
Company is required to file a registration statement covering the securities
issued to Forest Hill entities (the "Registration Statement") to January 31,
2005. As consideration for this extension, the Company issued to the Forest Hill
Entities warrants to purchase an aggregate of 8,333 shares of its common stock,
exercisable until December 14, 2008 at a price of $8.52 per share.
F-23
On January 29, 2004, the Company issued $4,000,000 aggregate principal
amount of promissory notes (the "2004 Notes") and warrants to purchase 392,158
shares of Common Stock to 13 institutional and accredited investors. In
connection with this offering, Norton Herrick and Huntingdon entered into a
letter agreement with the purchasers of the 2004 Notes pursuant to which they
granted to the holders of the 2004 Notes in the event of an Event of Default (as
defined in the 2004 Notes) the rights to receive payment under certain secured
indebtedness owed by the Company to Norton Herrick and Huntingdon and to
exercise their rights under security agreements securing such secured
indebtedness. Pursuant to the letter agreement, Norton Herrick and Huntingdon
also executed Powers-of-Attorney in favor of a representative of the 2004 Note
holders pursuant to which such representative may, following an Event of
Default, take actions necessary to enforce the 2004 Note holders rights under
the letter agreement, including enforcing Norton Herrick's and Huntingdon's
rights under the security agreements. On April 12, 2004, the notes were
converted into Common Stock. In consideration for Huntingdon's consent to the
Financing and execution of the letter agreement upon receipt of shareholders'
approval, the Company agreed to reduce the conversion price of $1,150,000
principal amount of convertible promissory notes held by Huntingdon from $2.00
to $1.27 and $500,000 principal amount of convertible promissory notes held by
Huntingdon from $1.82 to $1.27.
On April 28, 2004, the Company entered into a new credit agreement.
Herrick, Huntingdon and N. Herrick Irrevocable ABC Trust (the "Trust"), of which
Herrick was the beneficiary, consented to the new credit agreement and the other
transactions described above and entered into a subordination agreement with
Zohar. The new credit agreement required the aggregate amount of principal and
interest owed by the Company to Herrick, Huntingdon and the Trust be reduced to
$6,800,000 ("Permissible Debt") by June 1, 2004, and that the Permissible Debt
be further reduced by up to an additional $1,800,000 if the Company does not
raise at least $2,000,000 in additional equity in each of the two calendar years
following the execution of the new credit agreement. MediaBay received a
fairness opinion in connection with this transaction.
Pursuant to an agreement dated April 28, 2004, on May 25, 2004, Herrick
exchanged accrued and unpaid interest and dividends (including accrued and
unpaid interest distributed by the Trust to Herrick) owed to Herrick aggregating
$1,181,419 into (i) 11,814 shares of Series C Convertible Preferred Stock with a
liquidation preference of $100 per share convertible into an aggregate of
252,435 shares of Common Stock at an effective conversion price of $4.68, and
(ii) warrants to purchase 504,872 shares of Common Stock. The warrants are
exercisable until April 28, 2014 at an exercise price of $3.18.
Pursuant to an agreement dated April 28, 2004, on May 25, 2004, Huntingdon
exchanged the principal of the $500,000 principal amount note, $1,000,000
principal amount note, $150,000 principal amount note and $350,000 principal
amount note held by Huntingdon, plus accrued and unpaid interest owed to
Huntingdon aggregating $1,171,278 into (i) 31,713 shares of Series C Convertible
Preferred Stock convertible into an aggregate of 677,628 shares of Common Stock
at an effective conversion price of $4.68, and (ii) warrants to purchase an
aggregate of 1,355,256 shares of Common Stock. The warrants are exercisable
until April 28, 2014 at an exercise price of $3.18. If the amount of the
Permissible Debt is required to be reduced due to the Company's failure to raise
the requisite additional equity, such reduction will automatically occur by the
exchange of Permissible Debt held by Huntingdon for additional shares of Series
C Convertible Preferred Stock in an aggregate liquidation preference equal to
the amount of debt exchanged and warrants to purchase a number of shares of
Common Stock equal to two times the number of shares of Common Stock issuable
upon conversion of the Series C Convertible Preferred Stock.
Herrick and Huntingdon agreed not to demand repayment of their debt until
the earlier of (i) the repayment of the New Credit Agreement or (ii) June 28,
2007. The remaining promissory notes held by Herrick, Huntingdon and the Trust
are guaranteed by certain subsidiaries of the Company and secured by a lien on
the assets of the Company and certain subsidiaries of the Company.
On April 28, 2004, the Company repaid $1.6 million principal amount of the
$3.2 million principal amount convertible note issued to ABC Investments,
L.L.C., a principal shareholder of the Company. We issued a new $1.6 million
note (the "New ABC Note") for the remaining principal amount. The New ABC Note
extends the maturity date from December 31, 2004 to July 29, 2007. In exchange
for extending the maturity date, the conversion price of the New ABC Note was
reduced to $0.50. The closing sale price of our common stock on the closing date
was $0.48. During October 2004, ABC Investments, L.L.C. converted $1,000,000
principal amount of the New ABC into shares of Common Stock pursuant to the
terms of the note.
F-24
On May 7, 2003, the Company sold 3,350 shares of a newly created Series B
Stock with a liquidation preference of $100 per share for $335,000. Of the total
sold, 200 shares ($20,000) were purchased by John Levy, Vice Chairman and Chief
Financial Officer of the Company. Under a subscription agreement, certain
"piggy-back" registration rights were granted.
(16) RECENT ACCOUNTING PRONOUNCEMENTS
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation".
SFAS 123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The compensation cost will
be measured based on the fair value of the equity or liability instruments
issued. The Statement is effective as of the beginning of the first interim or
annual period beginning after June 15, 2005. We do not yet know the impact that
any future share-based payment transactions will have on our financial position
or results of operations.
Inventory costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS
151 amends ARB No. 43, "Inventory Pricing", to clarify the accounting for
certain costs as period expense. The Statement is effective for fiscal years
beginning after June 15, 2005; however, early adoption of this Statement is
permitted. The Company does not anticipate an impact from the adoption of this
statement.
(17) SEGMENT REPORTING
For 2004, 2003 and 2002, the Company has divided its operations into four
reportable segments: Corporate, Audio Book Club ("ABC") a membership-based club
selling audiobooks in direct mail and on the Internet; Radio Spirits ("RSI")
which produces, sells, licenses and syndicates old-time radio programs and
MediaBay.com a media portal offering spoken word audio content in secure digital
download formats. Segment operating income is total segment revenue reduced by
operating expenses identifiable with that business segment. Corporate includes
general corporate administrative costs, professional fees and interest expenses.
The Company evaluates performance and allocates resources among its three
operating segments based on operating income and opportunities for growth. The
Company evaluates performance and allocates resources among its three operating
segments based on operating income and opportunities for growth. RadioClassics,
which was created to distribute the Company's proprietary old-time radio content
across multiple distribution platforms including traditional radio, cable
television, satellite television (DBS), satellite radio and the Internet, is
aggregated with RSI for segment reporting purposes. Inter-segment sales are
recorded at prevailing sales prices.
The accounting policies of the reportable segments are the same as those
described in Note 3. Inter-segment sales are recorded at prevailing sales
prices.
F-25
YEAR ENDED DECEMBER 31, 2004
CORPORATE ABC RSI MBAY.COM INTER-SEG. TOTAL
--------- --------- --------- --------- --------- ---------
Sales $ -- $ 12,303 $ 6,382 $ 205 $ (60) $ 18,831
(Loss) profit before asset write-downs and
strategic charges, severance and other termination
costs, non-cash write-down of intangibles,
depreciation, amortization interest expense, income
tax expense and dividends on preferred stock (2,084) 2 938 (416) 17 (1,543)
Depreciation and amortization 24 83 37 -- -- 144
Asset write-downs and strategic charges -- 3,831 760 -- -- 4,591
Severance and other termination costs -- -- -- -- -- --
Interest expense 9,078 -- 4 -- -- 9,082
Income tax expense 14,753 -- -- -- -- 14,753
Dividends on preferred stock 574 -- -- -- -- 574
Net (loss) income applicable to common shares (26,513) (3,912) 137 (416) 17 (30,687)
Total assets -- 3,508 13,122 1 (55) 16,576
Purchase of fixed assets -- 127 9 -- -- 136
YEAR ENDED DECEMBER 31, 2003
CORPORATE ABC RSI MBAY.COM INTER-SEG. TOTAL
--------- --------- --------- --------- --------- ---------
Sales $ -- $ 26,379 $ 10,247 $ 138 $ (147) $ 36,617
(Loss) profit before asset write-downs and
strategic charges, severance and other termination
costs, non-cash write-down of intangibles,
depreciation, amortization interest expense, income
tax expense and dividends on preferred stock (2,407) 455 846 (481) (19) (1,606)
Depreciation and amortization 180 106 42 -- -- 328
Asset write-downs and strategic charges 749 -- -- -- -- 749
Severance and other termination costs 544 -- -- -- -- 544
Interest expense 1,913 -- 12 -- -- 1,925
Income tax expense 1,200 271 -- -- 1,471
Dividends on preferred stock 246 -- -- -- -- 246
Net (loss) income applicable to common shares (6,039) (851) 521 (481) (19) (6,869)
Total assets 24,312 14,613 38,925
Purchase of fixed assets -- 14 2 -- -- 16
YEAR ENDED DECEMBER 31, 2002
CORPORATE ABC RSI MBAY.COM INTER-SEG. TOTAL
--------- --------- --------- --------- --------- ---------
Sales $ -- $ 34,342 $ 11,348 $ 215 $ (161) $ 45,744
(Loss) profit before asset write-downs and
strategic charges, depreciation, amortization,
interest expense and income tax benefit (3,233) 5,281 2,141 (436) 16 3,769
Asset write-downs and strategic charges -- 1,217 97 -- -- 1,314
Depreciation and amortization 2,903 -- 71 -- -- 2,974
Interest expense 1,134 90 1,224
Income tax benefit (449) (101) (550)
Net (loss) income applicable to common shares 217 -- -- -- -- 217
Total assets (6,353) 2,481 1,782 (436) 16 (2,510)
(18) QUARTERLY OPERATING DATA (UNAUDITED)
The following table presents selected unaudited operating data of the
Company for each quarter in the three year period ended December 31, 2003.
F-26
YEAR ENDED
DECEMBER 31, 2004 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Sales $ 5,684 $ 4,801 $ 3,849 $ 4,496
Cost of sales 2,570 2,228 1,875 2,129
Cost of sales - write-downs -- -- 2,100 1,645
Net (loss) income applicable to common shares (1,168) (7,111) (3,784) (18,624)
Basic and diluted loss per share: $ (0.54) $ (2.40) $ (1.26) $ (4.98)
YEAR ENDED
DECEMBER 31, 2003 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Sales $ 10,697 $ 9,407 $ 9,572 $ 6,941
Cost of sales 5,234 4,124 4,252 3,869
Net (loss) income applicable to common shares (1,537) (228) 285 (5,389)
Basic and diluted income (loss) per share:
Basic earnings (loss) per common share $ (.66) $ (.12) $ .12 $ (2.28)
Diluted earnings (loss) per common share $ (.66) $ (.12) $ .12 $ (2.28)
(19) SUBSEQUENT EVENTS
Extension to File Registration Statement
On February 8, 2005, the Company entered into a letter agreement extending
the date by which the Company shall file the Registration Statement with respect
to the October 11, 2004 sale of common stock and warrants to May 1, 2005 (the
"Extension"). As consideration for the Extension, the Company issued to the
Forest Hill Entities an aggregate of 19,841 shares of its Common Stock (the
"January Shares"), based on the last sale price of the Common Stock on February
8, 2005 of $5.04. If the last sale price of the Common Stock on the date the
Registration Statement is declared effective by the Securities and Exchange
Commission (the "Effective Date") is below $4.50, the Company is required to pay
to the Forest Hill Entities an aggregate of $250 less the value of the January
Shares on the Effective Date in cash or in shares of Common Stock, at the Forest
Hill Entities' option. The Company also granted the Forest Hill Entities the
right (the "Put Right") to require the Company to purchase an aggregate of
33,333 shares of the Common Stock issued to the Forest Hill Entities at a price
of $18.00 per share if, at any time prior to the Effective Date, the last sale
price of the Common Stock is above $24.00 per share, subject to the Company
obtaining the Consents. The Company's maximum potential obligation under the Put
Right is $600.
The January Shares were issued to the purchasers without registration
under the Securities Act of 1933, as amended (the "Act"), in reliance upon the
exemptions from registration provided under 4(2) of the Act. The issuances did
not involve any public offering; the Company made no solicitation in connection
with the transactions other than communications with the purchasers; the
Purchasers either received or had access to adequate information about the
Company in order to make informed investment decisions; the Company reasonably
believed that the purchasers were sophisticated within the meaning of Section
4(2) of the Act; and the January Shares were issued with restricted securities
legends. No underwriting discounts or commissions were paid in conjunction with
the issuances.
March Transactions
On March 23, 2005, MediaBay, Inc. (the "Company") issued an aggregate of
(a) 35,900 shares (the "Offering Shares") of its Series D Convertible Preferred
Stock (the "Series D Preferred") convertible into 10,878,712 shares of the
Company's common stock, (b) 5,439,394 five-year common stock purchase warrants
(the "Offering Warrants") and (c) preferred warrants (the "Over-Allotment
Warrants" and, together with the Offering Shares and the Offering Warrants, the
"Offering Securities") exercisable for a limited time, for additional proceeds
to the Company of $8,975, to purchase (1) up to 8,975 additional shares of
Series D Preferred (the "Additional Shares" and, together with the Offering
Shares, the "Preferred Shares") and (2) up to 1,359,849 additional warrants
identical to the Offering Warrants (the "Additional Warrants" and, together with
the Offering Warrants, the "Warrants"), to accredited investors (the
"Investors") for an aggregate purchase price of $35,900 (the "Financing").
F-27
Immediately prior to the Financing, holders of a majority of the Company's
voting securities approved by written consent (the "Shareholder Consent") (a) an
amendment to the Articles of Incorporation of the Company, increasing the number
of authorized shares of the common stock of the Company ("Common Stock") from
150,000,000 to 300,000,000, (b) a change of control which may occur as a result
of the Financing, and (c) the Company's issuance, in connection with the
transactions contemplated by the Financing documents, of Common Stock in excess
of 19.99% of the number of shares of Common Stock outstanding immediately prior
to the Financing.
While such actions have been approved by a majority of the shareholders,
the Company may not effect them until it satisfies certain information
requirements to the shareholders of the Company not party to the Shareholder
Consent. As a result, the Shareholder Consent will not be effective, and
therefore no conversion of the Preferred Shares nor exercise of the Warrants or
the Satellite Warrant above the Cap Amount can be effected until at least 20
calendar days after an information statement is sent or given to such
shareholders. Until such time, the Investors have agreed not to convert or
exercise their securities above their pro rata portion of the Cap Amount and
Merriman has agreed not to exercise the Merriman Warrants.
The Preferred Shares have a face value of $1,000 per share ("Stated
Value") and are convertible at any time at the option of the holder into shares
("Conversion Shares") of common stock at the rate of $3.30 per Conversion Share,
subject to certain anti-dilution adjustments, including for issuances of Common
Stock for consideration below the conversion price. The Preferred Shares are
also mandatorily convertible at the option of the Company, subject to its
satisfaction of certain conditions, commencing 30 days following the later date
to occur (the "Effective Date") of (a) the effective date of the Financing
Registration Statement (defined below) and (b) the effective date of the
Shareholder Consent. Under certain circumstances under the control of the
Company, the holders will also have the right to require the Company to redeem
their Preferred Shares at their Stated Value. Cumulative dividends will accrue
on the Preferred Shares on an annualized basis in an amount equal to 6% of their
Stated Value until they are converted or redeemed and will be payable quarterly
in arrears, beginning April 1, 2005, in cash or, at the Company's option,
subject to its satisfaction of certain conditions, in shares of Common Stock
("Dividend Shares") valued at 93% of the average of the daily volume weighted
average per-share price of the Common Stock for the five trading days prior to
the applicable payment date. The Preferred Shares are non-voting. Subject to
certain exceptions for accounts receivable and equipment and capital lease
financings, the Company may not incur additional indebtedness for borrowed money
or issue additional securities that are senior to or pari passu to the Preferred
Shares without the prior written consent of holders of at least 2/3rds of the
Preferred Shares then outstanding.
Each Warrant is exercisable to purchase one share of Common Stock
(collectively, the "Warrant Shares"), at an exercise price of $3.36 per share
for a period of five years commencing September 23, 2010, subject to certain
anti-dilution adjustments, including for issuances of Common Stock for
consideration below the exercise price. In addition, once exercisable, the
Warrants permit cashless exercises during any period when the Warrant Shares are
not covered by an effective resale registration statement.
The Over-Allotment Warrants are exercisable until 90 days following the
Effective Date for the purchase of Additional Shares and Additional Warrants, at
an exercise price equal to the Stated Value of the Additional Shares purchased,
with the purchase of each Additional Share including an Additional Warrant
exercisable for a number of Warrant Shares equal to 50% of the Conversion Shares
underlying such Additional Share.
As part of the Financing, the Forest Hill Entities exchanged 1.8 million
shares of Common Stock and 400,000 common stock warrants previously purchased by
them from the Company in October 2004 for $900 of the Offering Securities. The
Forest Hill Entities also purchased $1,000 of the Offering Securities. The
Company has agreed to include an additional 19,841 shares of Common Stock, as
well as 8,333 shares of Common Stock underlying certain additional warrants,
already beneficially owned and retained by Forest Hill Capital, for resale in
the Financing Registration Statement. The Forest Entities also purchased 1,000
shares of the Offering Securities.
In connection with the Financing, the Company also entered into an
agreement (the "Herrick Agreement") with Norton Herrick, a principal shareholder
of the Company, and Huntington Corporation, one of his affiliates and also a
principal shareholder of the Company (collectively, the "Herrick Entities"),
pursuant to which, concurrently with the Financing:
F-28
o all $5,784 principal amount of the convertible notes of the Company
owned by the Herrick Entities (the "Herrick Notes") and 10,684 of
their shares of the Series A Convertible Preferred Stock of the
Company ("Series A Preferred") were converted into an aggregate of
approximately 2.03 million shares of Common Stock (the "Herrick
Shares"), at their stated conversion rate of $3.36 per share;
o the Company agreed to redeem the remaining 14,316 shares of Series A
Preferred held by the Herrick Entities and all 43,527 of their
shares of the Series C Convertible Preferred Stock of the Company
(collectively, the "Redemption Securities") for $5,784, the
aggregate stated capital of such shares, on the earlier of the
effective date of the Shareholder Consent and June 1, 2005, and both
the Redemption Securities and the redemption price were placed into
escrow pending such date;
o the Herrick Entities waived certain of their registration rights and
the Company agreed to include the Herrick Shares for resale in the
Financing Registration Statement, so long as such Herrick Shares are
owned by the Herrick Entities and not otherwise transferred,
including, but not limited to, in the Herrick Financing (as defined
below); and
o the Herrick Entities consented to the terms of the Financing and the
agreements entered into in connection with the Financing, as the
Company was required to obtain such consents pursuant to the terms
of the Herrick Notes, the Series A Preferred and the Series C
Preferred.
o Herrick and Huntingdon also entered into a voting agreement and
proxy with the Company pursuant to which they agreed not to take any
action to contradict or negate the Shareholder Consent and gave the
Company a proxy to vote their shares, at the direction of the
Company's Board of Directors, until the Effective Date.
o the Company entered into a registration rights agreement dated the
date hereof with Herrick and Huntingdon in which the parties are
granted "piggy-back" registration rights and, with respect to the
shares of Common Stock issuable to Herrick and Huntingdon upon
conversion of the Herrick Notes and Series A Preferred Stock,
Herrick and Huntingdon are granted the same automatic registration
rights as the Investors under the Registration Rights Agreement.
o the Company also entered into another registration rights agreement
dated March 23, 2005, with Herrick and Huntingdon in which the
parties are granted "piggy-back" registration rights and, with
respect to the shares of our common stock issuable to Herrick and
Huntingdon upon exercise of the warrants held by Herrick and
Huntingdon.
The Company received $35,000 of gross proceeds (not including the
securities exchanged by the Forest Entities for $900 of the purchase price) in
the Financing. Merriman Curhan Ford & Co. ("Merriman") acted as a financial
advisor with respect to certain of the investors in the Financing for which it
received compensation from the Company of $2,625 plus a five-year warrant (the
"Merriman Warrant") to purchase 1,193,182 shares of Common Stock at an exercise
price of $3.36 per share commencing upon the effectiveness of the Shareholder
Consent. Merriman also received a structuring fee from the Company with respect
to the Financing in the amount of $175. In addition, the Company issued to
Satellite Strategic Finance Associates, LLC, an investor in the Financing, a
warrant (the "Satellite Warrant") to purchase 41,667 shares of Common Stock
(identical to the Warrants), and reimbursed it $55 for expenses, for consulting
services rendered by it in connection with the Financing.
Concurrently with the Financing, the Company repaid from its net Financing
proceeds, all of the principal and accrued and unpaid interest due on the
Company's outstanding senior notes issued on April 28, 2004, in the aggregate
amount of approximately $9,400. The Company will report an additional charge in
the first quarter of 2005 to reflect the write-off of unamortized financing
charges related to the repayment of this debt.
F-29
The Company also paid to Norton Herrick and Huntingdon all accrued and
unpaid interest dividends due to them in the amount $2, 271 and placed into
escrow $5,784, such amounts to be used to redeem the portion of Series A
Preferred Stock not converted and all of the Series C Preferred Stock on a date
at least 20 days after an information statement is sent to all shareholders who
did not initially vote on the transaction.
F-30
Pro Forma Balance Sheet
THE FOLLOWING PRO FORMA BALANCE SHEET REFLECTS THE EFFECTS OF THE MARCH
TRANSACTIONS:
MEDIABAY, INC.
CONSOLIDATED
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
PRE-TRANSACTION
DECEMBER 31, PRO FORMA FOR
2004 Dr. Dr. Cr. TRANSACTION
ASSETS ----------------- --------------
Current Assets:
Cash and cash equivalents $ 3,122 $ 35,000 (1) (20,215) (10) $ 17,907
Accounts receivable, net 1,285 1,285
Inventory 1,530 1,530
Prepaid expenses and other current assets 199 199
Royalty advances 489 489
------------------------ ------ -------- ---------
Total current assets 6,625 35,000 -- (20,215) 21,410
Fixed assets, net 243 243
Other intangibles 50 50
Goodwill 9,658 9,658
------------------------ ------ -------- ---------
$ 16,576 $ 35,000 -- ($20,215) $ 31,361
======================== ====== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,676 $ 5,676
Current portion of long-term debt 200 (200) (2) -
Short-term debt, net 29 29
------------------------ ------ -------- ---------
Total current liabilities 5,905 (200) -- -- 5,705
Long-term debt, net 9,102 (9,200) (2) 738 (7) 640
Related party long-term debt
including accrued interest 7,750 (5,784) (3) --
(1,966) (4)
------------------------ ------ -------- ---------
Total liabilities 22,757 (17,150) -- 738 6,345
------------------------ ------ -------- ---------
Preferred stock 6,873 (5,784) (5) (3,065) (8) 35,000 (1) 30,135
(1,069) (3) (2,720) (9) 900 (6)
Common stock 101,966 (900) (6) 5,784 (3) 107,919
1,069 (3)
Contributed capital 17,682 2,720 (9) 20,402
Accumulated deficit (132,702) (738) (7) (133,440)
------------------------ ------ -------- ---------
Total common stockholders' equity (6,181) (8,491) (5,785) 45,473 25,016
------------------------ ------ -------- ---------
16,576 (25,641) (5,785) 46,211 31,361
======================== ====== ======== =========
Notes:
(1) Gives effect to the sale of $35 million in Series D preferred stock.
(2) Gives effect to the repayment of senior debt facility.
(3) Gives effect to the conversion of related party debt to common stock.
(4) Gives effect to the payment of accrued interest and dividends.
(5) Assumes redemption of preferred stock, which will occur on or before June 1,
2005.
(6) To record issuance of Series D Preferred Stock and warrants in exchange for
common stock and warrants issued in October 2004.
(7) To record loss on early retirement of debt.
(8) Represents estimate of cash fees and expenses on the transaction.
(9) Represents value of warrants issued to investment bankers.
(10)Total amounts to be paid out in the transaction as follows:
Repayment of senior debt facility $ 9,400
Payment of accrued interest and dividends 1,966
Payment of convertible preferred stock 5,784
Payment of fees and expenses 3,065(estimated)
------------
$ 20,215
============
F-31
MEDIABAY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2005 2004
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents ..................................................................... $ 14,290 $ 3,122
Accounts receivable, net of allowances for sales returns and doubtful accounts of
$1,980 and $2,708 at June 30, 2005 and December 31, 2004, respectively...................... 876 1,285
Inventory ..................................................................................... 1,399 1,530
Prepaid expenses and other current assets ..................................................... 343 199
Royalty advances .............................................................................. 390 489
---------- ----------
Total current assets ...................................................................... 17,298 6,625
Fixed assets, net ................................................................................. 784 243
Other intangibles ................................................................................. 46 50
Goodwill .......................................................................................... 9,658 9,658
---------- ----------
$ 27,786 $ 16,576
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ......................................................... $ 5,998 $ 5,361
Accounts payable, related party ............................................................... 31 315
Short-term debt, net of original issue discount of $53 at June 30, 2005 and December 31, 2004 . 31 29
Preferred dividends payable ................................................................... 519 --
Current portion of long-term debt ............................................................. -- 200
---------- ----------
Total current liabilities ................................................................. 6,579 5,905
---------- ----------
Long-term debt, net of original issue discount of $140 and $908 at June 30, 2005 and
December 31, 2004 ............................................................................... 621 9,102
Related party long-term debt including accrued interest ........................................... -- 7,750
---------- ----------
Total liabilities ......................................................................... 7,200 22,757
========== ==========
Commitments and Contingencies ..................................................................... -- --
Preferred stock, no par value, authorized 5,000,000 shares; no shares of Series
A outstanding at June 30, 2005 and 25,000 shares of Series A outstanding at
December 31, 2004; 200 shares of Series B issued and outstanding at June 30,
2005 and December 31, 2004; no shares of Series C issued and outstanding at
June 30, 2005 and 43,527 shares of Series C issued and outstanding at
December 31, 2004; and 34,720 shares of Series D issued and outstanding at
June 30, 2005 and no shares of Series D issued and outstanding at December 31, 2004 ........... 18,965 6,873
Common stock, no par value, authorized 300,000,000; issued and outstanding
6,262,726 as of June 30, 2005 and 150,000,000 shares; issued and outstanding
4,140,663 at December 31, 2004 ................................................................ 108,985 101,966
Contributed capital ............................................................................... 47,522 17,682
Accumulated deficit ............................................................................... (154,886) (132,702)
---------- ----------
Total stockholders' equity (deficit) .............................................................. 20,586 (6,181)
---------- ----------
$ 27,786 $ 16,576
========== ==========
F-32
MEDIABAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2005 2004 2005 2004
-------- -------- -------- --------
Sales, net of returns, discounts and allowances of $615 and
$1,430 and $1,387 and $5,043 for the three and six months
ended June 30, 2005 and 2004, respectively $ 2,272 $ 4,801 $ 5,625 $ 10,485
Cost of sales 1,302 2,228 3,098 4,798
Cost of sales - strategic charges 305 -- 305 --
-------- -------- -------- --------
Gross profit 665 2,573 2,222 5,687
Expenses:
Advertising and promotion 401 1,268 787 2,627
General and administrative 2,013 1,515 3,588 3,473
Termination charges 697 -- 697 --
Depreciation and amortization 17 41 43 88
-------- -------- -------- --------
Operating loss (2,463) (251) (2,893) (501)
Interest (income) (62) -- (75)
Interest expense 16 6,745 626 7,599
Loss on early extinguishment of debt -- -- 579 --
-------- -------- -------- --------
Loss before income taxes (2,417) (6,996) (4,023) (8,100)
Income tax expense -- -- -- --
-------- -------- -------- --------
Net loss (2,417) (6,996) (4,023) (8,100)
Dividends on preferred stock 533 115 738 179
Deemed dividend on beneficial conversion of
Series D Preferred Stock -- -- 17,423 --
======== ======== ======== ========
Net loss applicable to common shares $ (2,950) $ (7,111) $(22,184) $ (8,279)
======== ======== ======== ========
Basic and diluted loss applicable to common shares
per common share: $ (.49) $ (2.41) $ (4.36) $ (3.23)
======== ======== ======== ========
F-33
MEDIABAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2005 2004
-------- --------
Cash flows used in operating activities:
Net loss applicable to common shares $(22,184) $ (8,279)
Adjustments to reconcile net loss to net cash provided by operating activities:
Deemed dividend on beneficial conversion of
Series D Preferred Stock 17,423 --
Loss on extinguishment of debt 579 1,532
Non-current accrued interest and dividends payable 306 728
Amortization of deferred financing costs and original issue discount 210 789
Depreciation and amortization 43 88
Payment of accrued dividends through issuance of common stock 14 --
Amortization of deferred member acquisition costs 13 1,595
Non-cash beneficial conversion charge included in interest expense -- 3,991
Expense of inducement to convert -- 391
Non-cash stock compensation -- 82
Changes in asset and liability accounts, net of asset acquisition:
Decrease in accounts receivable, net 631 1,541
Decrease (increase) in inventory 132 (89)
Increase in prepaid expenses (194) (93)
Decrease (increase) in royalty advances 99 (756)
Increase in deferred member acquisition costs -- (243)
Increase (decrease) in accounts payable, accrued expenses and preferred dividends
payable 687 (4,985)
-------- --------
Net cash used in operating activities (2,241) (3,707)
-------- --------
Cash flows used in investing activities:
Acquisition of fixed assets, including website development costs (580) (67)
-------- --------
Net cash used in investing activities (580) (67)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of preferred stock 31,528 --
Proceeds from issuance of long-term debt -- 13,500
Proceeds from exercise of stock options -- 1
Payment of long-term debt (11,721) (5,923)
Redemption of Series A and Series C Preferred Stock (5,789)
Increase in deferred financing costs (29) (2,033)
-------- --------
Net cash provided by financing activities 13,989 5,544
-------- --------
Net increase in cash and cash equivalents 11,168 1,770
Cash and cash equivalents at beginning of period 3,122 682
-------- --------
Cash and cash equivalents at end of period $ 14,290 $ 2,452
======== ========
See accompanying notes to condensed consolidated financial statements.
F-34
MEDIABAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(1) ORGANIZATION
MediaBay, Inc. ("MediaBay" or "the Company") is a Florida corporation
formed on August 16, 1993. The Company is a media, marketing and publishing
company specializing in spoken audio entertainment. Today, the Company is a
leading reseller of audiobooks on CD and cassettes from the nation's largest
publishing houses via the Audio Book Club, a mail order and Internet based
business. MediaBay is also a licensee and marketer of programs from the golden
age of radio. These titles are sold in physical formats through a catalog
focused on collectors, a mail order based continuity program, retail outlets and
an on-line download subscription service. The Company's strategy consist of
pursuing download opportunities through both an exclusive distribution agreement
with Microsoft and the opportunity to offer its content to other websites;
creating affinity opportunities which provide lower customer acquisition costs
and higher profit potential; and exploiting its existing content and businesses.
(2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The interim unaudited condensed consolidated financial statements should
be read in conjunction with the Company's audited consolidated financial
statements contained in its Annual Report on Form 10-K. The preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from these estimates. On an
ongoing basis management reviews its estimates based on current available
information. Changes in facts and circumstances may result in revised estimates.
In the opinion of management, the interim unaudited financial statements include
all material adjustments, all of which are of a normal recurring nature,
necessary to present fairly the Company's financial position, results of
operations and cash flows for the periods presented. The results for any interim
period are not necessarily indicative of results for the entire year or any
other interim period.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts have
been eliminated.
Cash and Cash Equivalents
Securities with maturities of three months or less when purchased are
considered to be cash equivalents.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and
accrued expenses approximates fair value due to the short maturity of those
instruments.
The fair value of long-term debt is estimated based on the interest rates
currently available for borrowings with similar terms and maturities. The
carrying value of the Company's long-term debt approximates fair value.
Inventory
Inventory, consisting primarily of audiocassettes and compact discs held
for resale, is valued at the lower of cost (weighted average cost method) or
market.
F-35
Prepaid Expenses
Prepaid expenses consist principally of deposits and other amounts being
expensed over the period of benefit. All current prepaid expenses will be
expensed over a period no greater than twelve months from the date of the
Balance Sheet.
Deferred Member Acquisition Costs
Promotional costs directed at current members are expensed on the date the
promotional materials are mailed. The cost of any premiums, gifts or the
discounted audiobooks in the promotional offer to new members is expensed as
incurred. The Company accounts for direct response advertising for the
acquisition of new members in accordance with AICPA Statement of Position 93-7,
"Reporting on Advertising Costs" ("SOP 93-7"). SOP 93-7 states that the cost of
direct response advertising (a) whose primary purpose is to elicit sales to
customers who could be shown to have responded specifically to the advertising
and (b) that results in probable future benefits should be reported as assets
net of accumulated amortization.
SOP 93-7 requires that the realizability of the amounts of direct-response
advertising reported as assets should be evaluated at each balance sheet date by
comparing the carrying amounts of the assets to their probable remaining future
net revenues. At June 30, 2005, we had no direct-response advertising reported
as assets, since we have determined that probable future benefits from any
direct advertising we have incurred would not exceed the amounts expended.
Fixed Assets, Net
Fixed assets, consisting primarily of furniture, leasehold improvements,
computer equipment, and third-party web site development costs, are recorded at
cost. Depreciation and amortization, which includes the amortization of
equipment under capital leases, is provided by the straight-line method over the
estimated useful life of three years (the lease term) for computer equipment and
five years (the lease term) for sound equipment under capital leases, five years
for equipment, seven years for furniture and fixtures, five years for leasehold
improvements, and three years from the date the assets are put into service for
Internet web site development costs. Ongoing maintenance and other recurring
charges are expensed as incurred.
Other Intangibles, Net
Intangible assets, principally consisting of purchased intellectual
property, which is reviewed for impairment on each reporting date, and
non-compete agreements, which are being amortized over their contractual term.
Goodwill
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired in business combinations accounted for using the purchase
method of accounting. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", the Company
ceased amortization of goodwill as of January 1, 2002. Goodwill is tested for
impairment annually or when certain triggering events require such tests and are
written down, with a resulting charge to operations, only in the period in which
the recorded value of goodwill is more than its fair value.
Revenue Recognition
During the six months ended June 30, 2005 and June 30, 2004, the Company
derived its principal revenue through sales of audiobooks, classic radio shows
and other spoken word audio products directly to consumers principally through
direct mail and the Internet. The Company also sold classic radio shows to
retailers either directly or through distributors. The Company derived
additional revenue through rental of its proprietary database of names and
addresses to non-competing third parties through list rental brokers. The
Company also derived a small amount of revenue from advertisers included in its
nationally syndicated classic radio shows. The Company recognizes sales to
consumers, retailers and distributors upon shipment of merchandise. List rental
revenue is recognized on notification by the list brokers of rental by a third
party when the lists are rented. The Company recognizes advertising revenue upon
notification of the airing of the advertisement by the media buying company
representing the Company or directly from the broadcaster. Allowances for future
returns are based upon historical experience and evaluation of current trends.
F-36
Downloadable content revenue from the sale of individual content titles is
recognized in the period when the content is downloaded and the customer's
credit card is processed. Downloadable content revenue from the sale of
downloadable content subscriptions is recognized pro rata over the term of the
subscription period.
Shipping and Handling Revenue and Costs
Amounts paid to the Company for shipping and handling by customers is
included in sales. Amounts the Company incurs for shipping and handling costs
are included in cost of sales. The Company recognizes shipping and handling
revenue upon shipment of merchandise. Shipping and handling expenses are
recognized on a monthly basis from invoices from the third party fulfillment
houses, which provide the services.
Cost of Sales
Cost of sales includes the following:
o Product costs (including free audiobooks in the initial enrollment
offer to prospective members)
o Royalties to publishers and rightsholders
o Fulfillment costs, including shipping and handling
o Customer service
o Direct response billing, collection and accounts receivable
management
Cooperative Advertising and Related Selling Expenses
In accordance with EITF No. 01-9, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)", the
Company classifies the cost of sales incentives as a reduction of net sales.
Bad Debt Expense
The Company records an estimate of its anticipated bad debt expense based
on historical experience.
General and Administrative Costs
General and administrative costs include the following:
o Bad debt expense
o Payroll and related items
o Commissions
o Insurance
o Office expenses
o Telephone and postage
o Public and investor relations
o Dues and subscriptions
o Rent and utilities
o Travel and entertainment
F-37
o Bank charges
o Professional fees, principally legal and auditing fees
o Consulting
Stock-Based Compensation
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") was issued. SFAS 123, which prescribes the
recognition of compensation expense based on the fair value of options on the
grant date, allows companies to continue applying APB 25 if certain pro forma
disclosures are made assuming a hypothetical fair value method application. In
December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which is
a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS
123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The compensation cost will
be measured based on the fair value of the equity or liability instruments
issued. The Statement is effective as of the beginning of the first annual
period beginning after June 15, 2005. Had compensation expense for the Company's
stock options been recognized on the fair value on the grant date under SFAS
123, the Company's net loss and net loss per share for the three months ended
March 31, 2005 and 2004 would have been as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net loss applicable to common shares, as reported $ 2,950 $ 7,111 $ 22,184 $ 8,279
Add: Stock-based employee compensation expense included in
reported net loss applicable to common shares, net of
related tax effects -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
(720) (660) (755) (1,943)
---------- ---------- ---------- ----------
Pro forma net loss applicable to common shares $ 3,670 $ 7,771 $ 22,939 $ 10,222
========== ========== ========== ==========
Net loss per share
Basic and diluted - as reported $ (.49) $ (2.41) $ (4.36) $ (3.23)
========== ========== ========== ==========
Basic and diluted - pro forma $ (.61) $ (2.64) $ (4.51) $ (3.99)
========== ========== ========== ==========
No dividend yield and the following assumptions were used in the pro forma
calculation of compensation expense:
ASSUMED RISK-FREE FAIR VALUE
DATE NO. OF SHARES EXERCISE PRICE VOLATILITY INTEREST RATE PER SHARE
---- -------------- --------------- ------------ -------------- ------------
FIRST SIX MONTHS 2004 550,000 $ 5.88 97% 4.00% $ 3.54
FIRST SIX MONTHS 2005 801,667 $ 3.54 41% 3.35% $ .96
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. A valuation allowance is
provided when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the period that includes the enactment date.
F-38
Royalties
The Company is liable for royalties to licensors based upon revenue earned
from the respective licensed product. The Company pays certain publishers and
other rightsholders advances for rights to products. Royalties earned on the
sale of the products are payable only in excess of the amount of the advance.
Advances, which have not been recovered through earned royalties, are recorded
as an asset. Advances not expected to be recovered through royalties on sales
are charged to royalty expense.
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates. On an ongoing basis, management reviews its estimates based on
current available information. Changes in facts and circumstances may result in
revised estimate.
Reclassifications
Certain amounts relating to 2004 have been reclassified to conform to the
current presentation.
(3) GOODWILL AND OTHER INTANGIBLES
Goodwill and indefinite-lived intangible assets are tested for impairment
annually or when certain triggering events require such tests and are written
down, with a resulting charge to operations, only in the period in which the
recorded value of goodwill and indefinite-lived intangible assets is more than
their fair value.
The Company amortizes other intangible assets over their estimated useful
lives. Amortization expense for other intangible assets was $4 and $20 for the
six months ended June 30, 2005 and 2004, respectively. The Company estimates
intangible amortization expenses of $8 in 2005:
The following table presents details of Other Intangibles at June 30, 2005
and December 31, 2004:
JUNE 30, 2005 DECEMBER 31, 2004
------------------------------ ------------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION NET COST AMORTIZATION NET
------ ------------ ------ ------ ------------ ------
Mailing Agreements $ 592 $ 592 $ -- $ 592 $ 592 $ --
Customer Lists 4,380 4,380 -- 4,380 4,380 --
Non-Compete Agreements 313 292 21 313 288 25
Other 25 -- 25 25 -- 25
------ ------------ ------ ------ ------------ ------
Total Other Intangibles $5,310 $ 5,264 $ 46 $5,310 $ 5,260 $ 50
====== ============ ====== ====== ============ ======
Goodwill of $9,658 as of June 30, 2005 and December 31, 2004 is
attributable to the Company's Radio Spirits business. The Company conducted its
annual impairment test for 2004 in January 2005, utilizing the services of an
independent appraiser, and its annual impairment tests for 2003 in October 2003,
neither of which resulted in an impairment loss. Any future impairment losses
incurred will be reported in operating results.
F-39
(4) DEBT
AS OF
JUNE 30, DECEMBER 31,
2005 2004
----------- --------------
Credit agreement, senior secured debt,
net of original issue discount $ -- $ 8,661
Premier debt, net of original issue discount 652 670
Related party notes and related accrued interest,
net of original issue discount -- 7,750
----------- --------------
Total debt 652 17,081
Less: current portion (31) (229)
----------- --------------
Long-term debt $ 621 $ 16,852
=========== ==============
March Payment and Conversion of Debt
On March 23, 2005, the Company completed the March Financing described
below.
Concurrently with the March Financing, the Company repaid from the net
proceeds all of the principal and accrued and unpaid interest due on the
Company's outstanding senior notes issued on April 28, 2004, in the aggregate
amount of approximately $9,400. The Company reported a charge in the first
quarter of 2005 of $579 to reflect the write-off of unamortized financing
charges related to the repayment of this debt.
Also in connection with the March Financing, the Company entered into an
agreement (the "Herrick Agreement") with the Herrick Entities, described below
(the "Herrick Agreement"). Pursuant to the Herrick Agreement, concurrently with
the Financing, among other actions, all $5,784 principal amount of the
convertible notes of the Company owned by the Herrick Entities were converted
into an aggregate of approximately 1.71 million shares of Common Stock, at their
stated conversion rate of $3.36 per share.
The Company also paid to Norton Herrick and Huntingdon all accrued and
unpaid interest dividends due to them in the amount $2,271.
(5) STOCKHOLDERS' EQUITY AND STOCK OPTIONS AND WARRANTS
The following table presents information regarding the Company's
outstanding preferred stock at June 30, 2005 and December 31, 2004:
AS OF
JUNE 30, DECEMBER 31,
2005 2004
---------- --------------
Series A Convertible Preferred Stock $ -- $ 2,500
Series B Convertible Preferred Stock 20 20
Series C Convertible Preferred Stock -- 4,353
Series D Convertible Preferred Stock,
total outstanding at June 30, 2005
$34,720, net of cash fees and
expenses of $3,359; value ascribed
to investors' and advisors'
warrants of $12,416 18,945 --
---------- --------------
Total Preferred Stock $ 18,965 $ 6,873
========== ==============
March 2005 Sale of Series D Convertible Preferred Stock and Warrants
On March 21, 2005, the Company agreed to issue an aggregate of (a) 35,900
shares (the "Offering Shares") of its Series D Convertible Preferred Stock (the
"Series D Preferred") convertible into 10,878,712 shares of the Company's common
stock, (b) 5,439,394 five-year common stock purchase warrants (the "Offering
Warrants"), valued at $10,852 using an accepted valuation method and (c)
preferred warrants (the "Over-Allotment Warrants" and, together with the
Offering Shares and the Offering Warrants, the "Offering Securities")
exercisable for a limited time, for additional proceeds to the Company of
$8,975, to purchase (1) up to 8,975 additional shares of Series D Preferred (the
"Additional Shares" and, together with the Offering Shares, the "Preferred
Shares") and (2) up to 1,359,849 additional warrants identical to the Offering
Warrants (the "Additional Warrants" and, together with the Offering Warrants,
the "Warrants"), to accredited investors (the "Investors") for an aggregate
purchase price of $35,900 (the "Financing").
F-40
Immediately prior to the Financing, holders of a majority of the Company's
voting securities approved by written consent (the "Shareholder Consent") (a) an
amendment to the Articles of Incorporation of the Company, increasing the number
of authorized shares of the common stock of the Company ("Common Stock") from
150,000,000 to 300,000,000, (b) a change of control which may occur as a result
of the Financing, and (c) the Company's issuance, in connection with the
transactions contemplated by the Financing documents, of Common Stock in excess
of 19.99% of the number of shares of Common Stock outstanding immediately prior
to the Financing.
While such actions were approved by a majority of the shareholders prior
to the Financing, the Company was not permitted to effect them until it
satisfied certain information requirements to the shareholders of the Company
not party to the Shareholder Consent. As a result, the Shareholder Consent did
not become effective until May 3, 2005.
The Preferred Shares have a face value of $1,000 per share ("Stated
Value") and are convertible at any time at the option of the holder into shares
("Conversion Shares") of common stock at the rate of $0.55 per Conversion Share,
subject to certain anti-dilution adjustments, including for issuances of Common
Stock for consideration below the conversion price. The Preferred Shares are
also mandatorily convertible at the option of the Company, subject to its
satisfaction of certain conditions, commencing June 10, 2005, which is 30 days
after May 11, 2005, the effective date of the registration statement registering
the shares underlying the Series D Preferred Stock. Under certain circumstances
under the control of the Company, the holders will also have the right to
require the Company to redeem their Preferred Shares at their Stated Value.
Cumulative dividends will accrue on the Preferred Shares on an annualized basis
in an amount equal to 6% of their Stated Value until they are converted or
redeemed and will be payable quarterly in arrears, beginning April 1, 2005, in
cash or, at the Company's option, subject to its satisfaction of certain
conditions, in shares of Common Stock ("Dividend Shares") valued at 93% of the
average of the daily volume weighted average per-share price of the Common Stock
for the five trading days prior to the applicable payment date. The Preferred
Shares are non-voting. Subject to certain exceptions for accounts receivable and
equipment and capital lease financings, the Company may not incur additional
indebtedness for borrowed money or issue additional securities that are senior
to or pari passu to the Preferred Shares without the prior written consent of
holders of at least 2/3rds of the Preferred Shares then outstanding.
Each Warrant is exercisable to purchase one share of Common Stock
(collectively, the "Warrant Shares"), at an exercise price of $3.36 per share
for a period of five years commencing September 23, 2005, subject to certain
anti-dilution adjustments, including for issuances of Common Stock for
consideration below the exercise price. In addition, once exercisable, the
Warrants permit cashless exercises during any period when the Warrant Shares are
not covered by an effective resale registration statement.
The Over-Allotment Warrants are exercisable until August 9, 2005 for the
purchase of Additional Shares and Additional Warrants, at an exercise price
equal to the Stated Value of the Additional Shares purchased, with the purchase
of each Additional Share including an Additional Warrant exercisable for a
number of Warrant Shares equal to 50% of the Conversion Shares underlying such
Additional Share.
As part of the Financing, the Forest Hill Select Fund L.P. and related
entities (the "Forest Hill Entities") exchanged 300,000 shares of Common Stock
and 66,667 common stock warrants previously purchased by them from the Company
in October 2004 for $900 of the Offering Securities. The Forest Hill Entities
also purchased $1,000 of the Offering Securities. The Company included an
additional 119,048 shares of Common Stock, as well as 50,000 shares of Common
Stock underlying certain additional warrants, already beneficially owned and
retained by Forest Hill Capital, for resale in the registration statement
declared effective May 11, 2005.
In connection with the Financing, the Company also entered into an
agreement with Norton Herrick and certain of his affiliates (the "Herrick
Entities") pursuant to which, concurrently with the Financing:
F-41
o all $5,784 principal amount of the convertible notes of the Company
owned by the Herrick Entities (the "Herrick Notes") and 10,684 of
their shares of the Series A Convertible Preferred Stock of the
Company ("Series A Preferred") were converted into an aggregate of
approximately 2.03 million shares of Common Stock (the "Herrick
Shares"), at their stated conversion rate of $3.36 per share;
o the Company agreed to redeem the remaining 14,316 shares of Series A
Preferred held by the Herrick Entities and all 43,527 of their
shares of the Series C Convertible Preferred Stock of the Company
(collectively, the "Redemption Securities") for $5,784, the
aggregate stated capital of such shares, on the earlier of the
effective date of the Shareholder Consent (May 3, 2005);
o the Herrick Entities waived certain of their registration rights and
the Company agreed to include the Herrick Shares for resale in the
registration statement declared effective May 11, 2005 so long as
such Herrick Shares are owned by the Herrick Entities and not
otherwise transferred, including, but not limited to, in the Herrick
Financing (as defined below); and
o the Herrick Entities consented to the terms of the Financing and the
agreements entered into in connection with the Financing, as the
Company was required to obtain such consents pursuant to the terms
of the Herrick Notes, the Series A Preferred and the Series C
Preferred.
o Herrick and Huntingdon also entered into a voting agreement and
proxy with the Company pursuant to which they agreed not to take any
action to contradict or negate the Shareholder Consent.
o the Company entered into a registration rights agreement dated the
date hereof with Herrick and Huntingdon in which the parties are
granted "piggy-back" registration rights and, with respect to the
shares of Common Stock issuable to Herrick and Huntingdon upon
conversion of the Herrick Notes and Series A Preferred Stock,
Herrick and Huntingdon are granted the same automatic registration
rights as the Investors under the Registration Rights Agreement.
o the Company also entered into another registration rights agreement
dated March 23, 2005, with Herrick and Huntingdon in which the
parties are granted "piggy-back" registration rights and, with
respect to the shares of our common stock issuable to Herrick and
Huntingdon upon exercise of the warrants held by Herrick and
Huntingdon.
The Company received $35,000 of gross proceeds (not including the
securities exchanged by the Forest Hill Entities for $900 of the purchase price)
in the Financing. Merriman Curhan Ford & Co. ("Merriman") acted as a financial
advisor with respect to certain of the investors in the Financing for which it
received compensation from the Company of $2,625 plus a five-year warrant (the
"Merriman Warrant") to purchase 1,193,181 shares of Common Stock at an exercise
price of $4.14 per share commencing upon May 3, 2005, the effective date of the
Shareholder Consent. Merriman also received a structuring fee from the Company
with respect to the Financing in the amount of $175. In addition, the Company
issued to Satellite Strategic Finance Associates, LLC and Satellite Strategic
Finance Partners, Ltd., investors in the Financing, warrants to purchase an
aggregate of 41,667 shares of Common Stock (identical to the Warrants), and
reimbursed them $55 for expenses, for consulting services rendered by it in
connection with the Financing. The Company incurred cash fees and expenses
including fees paid to advisors of $3,472. Warrants issued to advisors were
valued at $1,986 using an accepted valuation method.
The Preferred Shares are convertible at any time at the option of the
holder into shares ("Conversion Shares") of common stock at the rate of $3.30
per Conversion Share and each Warrant is exercisable to purchase one share of
Common Stock (collectively, the "Warrant Shares"), at an exercise price of $3.36
per share. The market price for the Company's common stock at March 21, 2005 was
$4.14. The Company recorded as dividends an amount of $17,423 to reflect the
value of the deemed dividend for beneficial conversion feature of Series D
Preferred Stock.
As of June 30, 2005, 1,180 shares of Series D Preferred Stock plus accrued
dividends and warrants thereon were converted into 361,700 shares of common
stock.
Stock Options and Warrants
From January 1, 2005 to June 30, 2005, the Company issued options to
purchase 80,1667 shares of its common stock to employees, officers, directors
and consultants under its stock incentive plans. From January 1, 2005 to June
30, 2005, options to purchase 62,280 shares of its common stock were either
cancelled or expired. The Company issued non-plan warrants to purchase 6,674,243
shares of its common stock in connection with the Financing described above.
During the six months ended June 30, 2005, the Company cancelled non-plan
warrants to purchase 76,667 shares of its common stock.
F-42
(6) COST OF GOODS SOLD - STRATEGIC CHARGES
In the second quarter of 2005, the Company changed its negative option
book club and converted to a business selling audiobooks and other audio
entertainment without a negative option requirement. The Company has moved its
warehouse and fulfillment operations to a facility which also provides products
and accordingly the Company has changed from licensing and manufacturing many of
its audiobook titles to buying on a wholesale basis and accordingly has recorded
a $305 write-down of royalty advances to what the Company believes is net
realizable value at June 30, 2005.
(7) SUPPLEMENTAL CASH FLOW INFORMATION
No cash has been expended for income taxes for the six months ended June
30, 2005 and 2004. Cash paid for interest expense was $2,015 and $536 for the
six months ended June 30, 2005 and 2004, respectively.
The Company had the following non-cash activities for the six months ended
June 30, 2005:
2005
------
Conversions of subordinated notes into common stock ............. 5,784
Conversion of preferred shares into common stock ................ 1,707
Conversion of common shares and warrants into preferred stock and
warrants sold in the Financing ............................. 900
Issuance of warrants in connection with the Financing ........... 12,838
(8) NET LOSS PER SHARE OF COMMON STOCK
Basic (loss) earnings per share was computed using the weighted average
number of common shares outstanding for the three and six months ended June 30,
2005 of 5,983,773 and 5,083,994, respectively and for the three and six months
ended June 30, 2004 of 2,948,742 and 2,562,701.
For the three months ended June 30, 2005 common equivalent shares which
were not included in the computation of diluted loss per share because they
would have been anti-dilutive were 146,653 common equivalent shares, as
calculated under the treasury stock method and 11,344,760 common equivalent
shares relating to convertible subordinated debt and convertible preferred stock
calculated under the "if-converted method". Dividends on the convertible
preferred stock added back to net income applicable to common stockholders would
have been $533 for the three months ended June 30, 2005.
For the six months ended June 30, 2005 common equivalent shares which were
not included in the computation of diluted loss per share because they would
have been anti-dilutive were 1,299,400 common equivalent shares, as calculated
under the treasury stock method and 7,587,804 common equivalent shares relating
to convertible subordinated debt and convertible preferred stock calculated
under the "if-converted method". Interest expense and dividends on the
convertible subordinated debt and convertible preferred stock added back to net
income applicable to common stockholders would have been $893 for the six months
ended June 30, 2005.
For the three months ended June 30, 2004 common equivalent shares which
were not included in the computation of diluted loss per share because they
would have been anti-dilutive were 370 common equivalent shares, as calculated
under the treasury stock method and 3,557,152 common equivalent shares relating
to convertible subordinated debt and convertible preferred stock calculated
under the "if-converted method". Interest expense and dividends on the
convertible subordinated debt and convertible preferred stock added back to net
income applicable to common stockholders would have been $378 for the three
months ended June 30, 2004.
F-43
For the six months ended June 30, 2004 common equivalent shares which were
not included in the computation of diluted loss per share because they would
have been anti-dilutive were 109,096 common equivalent shares, as calculated
under the treasury stock method and 3,540,070 common equivalent shares relating
to convertible subordinated debt and convertible preferred stock calculated
under the "if-converted method". Interest expense and dividends on the
convertible subordinated debt and convertible preferred stock added back to net
income applicable to common stockholders would have been $786 for the six months
ended June 30, 2004.
The Company's Board of Directors and shareholders approved a one for six
reverse stock split effective October 25, 2005. All references in the financial
statements and notes thereto to the number of shares outstanding, per share
amounts, and stock option, warrant and convertible security data relating to the
Company's common shares have been restated to reflect the effect of the stock
split for all periods presented.
(9) SEGMENT REPORTING
For 2005 and 2004, the Company has divided its operations into four
reportable segments: Corporate; Audio Book Club ("ABC") a business selling
audiobooks via direct mail and on the Internet; Radio Spirits ("RSI") which
produces, sells, licenses and syndicates old-time radio programs and
MediaBay.com a media portal offering spoken word audio content in secure digital
download formats. Segment operating income is total segment revenue reduced by
operating expenses identifiable with that business segment. Corporate includes
general corporate administrative costs, professional fees, interest expenses and
amortization of acquisition related costs. The Company evaluates performance and
allocates resources among its three operating segments based on operating income
and opportunities for growth. Inter-segment sales are recorded at prevailing
sales prices.
SEGMENT REPORTING
THREE MONTHS ENDED JUNE 30, 2005
Corporate ABC RSI Mbay.com Inter-segment Total
--------- -------- -------- -------- ------------- --------
Sales, net of returns, discounts and $ -- $ 1,322 $ 906 $ 44 $ -- $ 2,272
allowances
Operating (loss) profit before depreciation
and amortization (1,672) (367) (261) (150) 4 (2,446)
Depreciation and amortization 2 10 5 -- -- 17
Interest (income) (62) (62)
Interest expense 16 -- -- -- -- 16
Dividends on preferred stock 533 -- -- -- -- 533
Net income (loss) applicable to common (2,161) (377) (266) (150) 4 (2,950)
shares
Total assets -- 14,690 13,133 9 (46) 27,786
Acquisition of fixed assets -- 404 -- -- -- 404
THREE MONTHS ENDED JUNE 30, 2004
Corporate ABC RSI Mbay.com Inter-segment Total
--------- -------- -------- -------- ------------- --------
Sales, net of returns, discounts and $ -- $ 3,339 $ 1,421 $ 54 $ (13) $ 4,801
allowances
Operating (loss) profit before depreciation
and amortization (334) (60) 280 (96) -- (210)
Depreciation and amortization 6 26 9 -- -- 41
Interest expense 6,744 -- 1 -- -- 6,745
Dividends on preferred stock 115 -- -- -- -- 115
Net income (loss) applicable to common (7,199) (86) 270 (96) -- (7,111)
shares
Total assets -- 22,859 13,799 3 (71) 36,590
Acquisition of fixed assets -- 20 -- -- -- 20
SIX MONTHS ENDED JUNE 30, 2005
Corporate ABC RSI Mbay.com Inter-segment Total
--------- -------- -------- -------- ------------- --------
Sales, net of returns, discounts and $ -- $ 3,562 $ 1,972 $ 91 $ -- $ 5,625
allowances
Operating (loss) profit before depreciation
and amortization (2,208) (170) (207) (274) 9 (2,850)
Depreciation and amortization 4 25 14 -- -- 43
Interest (income) (75) -- -- -- -- (75)
Interest expense 626 -- -- -- -- 626
Loss on early retirement of debt 579 -- -- -- -- 579
Dividends on preferred stock 738 -- -- -- -- 738
Deemed dividend on beneficial conversion of
Series D Preferred Stock 17,423 -- -- -- -- 17,423
Net income (loss) applicable to common shares (21,503) (195) (221) (274) 9 (22,184)
Total assets -- 14,690 13,133 9 (46) 27,786
Acquisition of fixed assets -- 580 -- -- -- 580
SIX MONTHS ENDED JUNE 30, 2004
Corporate ABC RSI Mbay.com Inter-segment Total
--------- -------- -------- -------- ------------- --------
Sales, net of returns, discounts and $ -- $ 7,065 $ 3,361 $ 106 $ (47) $ 10,485
allowances
Operating (loss) profit before depreciation
and amortization (842) (126) 771 (216) -- (413)
Depreciation and amortization 19 50 19 -- -- 88
Interest expense 7,596 -- 3 -- -- 7,599
Dividends on preferred stock 179 -- -- -- -- 179
Net income (loss) applicable to common shares (8,636) (176) 749 (216) -- (8,279)
Total assets -- 22,859 13,799 3 (71) 36,590
Acquisition of fixed assets -- 58 9 -- -- 67
F-44
(10) RECENT ACCOUNTING PRONOUNCEMENTS
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In March 2005, the FASB issued Staff Position (FSP) No. FIN 46(R)-5,
Implicit Variable Interests under FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities. This FSP clarifies that when
applying the variable interest consolidation model, a reporting enterprise
should consider whether it holds an implicit variable interest in a variable
interest entity (VIE) or potential VIE when specific conditions exist. FSP No.
FIN 46(R)-5 is effective as of April 1, 2005. The Company does not anticipate an
impact from the adoption of this statement.
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation".
SFAS 123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The compensation cost will
be measured based on the fair value of the equity or liability instruments
issued. The Statement is effective as of the beginning of the first annual
period beginning after June 15, 2005. Beginning in January 2006, the value of
all options granted by the Company will be recorded as compensation expense and
will be reported as general and administrative expense. Currently, the value of
options granted to officers and directors at or above market at the date of the
grant are not recorded as expenses by the Company. We do not yet know the impact
that any future share-based payment transactions will have on our financial
position or results of operations.
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS
151 amends ARB No. 43, "Inventory Pricing", to clarify the accounting for
certain costs as period expense. The Statement is effective for fiscal years
beginning after June 15, 2005; however, early adoption of this Statement is
permitted. The Company does not anticipate an impact from the adoption of this
statement.
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error
Corrections--A Replacement of APB Opinion No. 20 and FASB Statement No. 3". This
Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. This Statement does not change the guidance for reporting the correction
of an error in previously issued financial statements or a change in accounting
estimate. The provisions of this Statement shall be effective for accounting
changes and correction of errors made in fiscal years beginning after December
15, 2005. The Company is not able to assess at this time the future impact of
this Statement on its consolidated financial position or results of operations.
F-45
(11) RELATED PARTY TRANSACTIONS
In addition to the transactions described above with the Herrick Entities
and the Forest Hill entities, as of June 30, 2005, the Company owed to Norton
Herrick, and his affiliates $31 for reimbursement of certain expenses and
services incurred in prior years. From January 1, 2005 through June 30, 2005,
the Company paid Herrick a total of $284, and has agreed to pay Herrick the
remaining $31 on August 1, 2005.
(12) SUBSEQUENT EVENTS
Stock Options
From July 1, 2005 to August 11, 2005 options to purchase 10,000 shares of
MediaBay common stock were cancelled or expired.
From July 1, 2005 to August 11, 2005, 13,657 shares of Series D Preferred
Stock and related dividends were converted into 4,159,892 shares of MediaBay
common stock under the terms of the Series D Preferred Stock.
On August 9, 2005, the period to exercise warrants to purchase additional
shares of the Series D Preferred Stock granted to the investors in the March
sale of Series D Convertible Preferred Stock was extended to November 9, 2005.
F-46
We have not authorized any dealer, sales person or any other person to
give any information or to represent anything not contained in this prospectus.
You must not rely on any unauthorized information. This prospectus does not
offer to sell or buy any securities in any jurisdiction where it is unlawful.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY........................1
RISK FACTORS..............................2
SPECIAL INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS................11
USE OF PROCEEDS...........................11
PRICE RANGE OF COMMON STOCK...............12
DIVIDEND POLICY...........................12
SELECTED FINANCIAL DATA...................12
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................15
QUANTITATIVE AND QUALITATIVE
DISCLOSURES OF MARKET RISK................42
BUSINESS..................................43
LEGAL PROCEEDINGS.........................56
PRINCIPAL STOCKHOLDERS....................56
CERTAIN TRANSACTIONS......................58
SELLING SECURITYHOLDER....................62
DESCRIPTION OF CAPITAL STOCK..............63
PLAN OF DISTRIBUTION......................65
INDEMNIFICATION...........................66
LEGAL MATTERS.............................66
EXPERTS...................................66
WHERE YOU CAN FIND INFORMATION............66
INDEX TO FINANCIAL STATEMENTS.............F-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses of the issuance and distribution
of the securities being registered, all of which will be paid by the Registrant:
SEC registration fee................................................... $391.00
Legal fees and expenses*............................................. $30,000.00
Accounting fees and expenses*........................................ $20,000.00
Miscellaneous*........................................................ $5,000.00
Total*.............................................................. $55,391.00
---------------------------
* Estimated+
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida Business Corporation Act (the "Florida Act") contains
provisions entitling the Registrant's directors and officers to indemnification
from judgments, settlements, penalties, fines, and reasonable expenses
(including attorney's fees) as the result of an action or proceeding in which
they may be involved by reason of having been a director or officer of the
Registrant. In its Articles of Incorporation, the Registrant has included a
provision that limits, to the fullest extent now or hereafter permitted by the
Florida Act, the personal liability of its directors to the Registrant or its
shareholders for monetary damages arising from a breach of their fiduciary
duties as directors. Under the Florida Act as currently in effect, this
provision limits a director's liability except where such director breaches a
duty. The Company's Articles of Incorporation and By-Laws provide that the
Company shall indemnify, and upon request shall advance expenses to, its
directors and officers to the fullest extent permitted by the Florida Act. The
Florida Act provides that no director or officer of the Company shall be
personally liable to the Company or its shareholders for damages for breach of
any duty owed to the Company or its shareholders, except for liability for (i)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (ii) any unlawful payment of a dividend or unlawful
stock repurchase or redemption in violation of the Florida Act, (iii) any
transaction from which the director received an improper personal benefit or
(iv) a violation of a criminal law. This provision does not prevent the
Registrant or its shareholders from seeking equitable remedies, such as
injunctive relief or rescission. If equitable remedies are found not to be
available to shareholders in any particular case, shareholders may not have any
effective remedy against actions taken by directors that constitute negligence
or gross negligence.
Our company has entered into indemnification agreements with certain
employees, officers and consultants. Pursuant to the terms of the indemnity
agreements, our company has agreed to indemnify, to the fullest extent permitted
under applicable law, against any amounts which the employee, officer or
consultant may become legally obligated to pay in connection with any claim
arising from or out of the employee, officer or consultant acting, in connection
with any services performed by or on behalf of our company and certain expenses
related thereto. Provided however, that the employee, officer or consultant
shall reimburse our company for such amounts if the such individual is found, as
finally judicially determined by a court of competent jurisdiction, not to have
been entitled to such indemnification.
II-1
Insofar as indemnification for liabilities arising under the Securities
Act of 1993, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to any charter
provision, by-law, contract, arrangement, statute or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
(the "Commission") such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
FISCAL YEAR 2002
In January 2002, we issued 25,000 shares of preferred stock with a
liquidation value of $2,500,000 to a principal stockholder in exchange for a
$2,500,000 principal amount convertible note.
On February 22, 2002, a principal stockholder, purchased a $500,000
principal amount convertible senior promissory note (the "$500,000 Note"). The
note is convertible into shares of our common stock at the rate of $10.92 of
principal and/or interest per share. This note was issued in consideration of
cancellation of a $0.5 million loan made to us by the principal stockholder.
In May 2002, an unaffiliated third-party holder of our subordinated debt
converted $1.0 million principal amount of its convertible note into 33,333
shares of our common stock.
During the three months ended June 30, 2002, we granted warrants to
purchase a total of 16,667 shares of our common stock to a consultant. The fair
value of $36, computed using accepted option-pricing model, has been included in
prepaid expenses and contributed capital and is being amortized to expense over
the period of service. The warrants vest one year from grant date and have an
exercise period of three years from date of vesting. Exercise prices range from
$24.00 to $42.00 per share.
During the three months ended June 30, 2002, we issued 1,042 shares of our
common stock to consultants under consulting agreements and a total of 11,500
shares of common stock were issued as result of the exercise of options and
warrants in the second quarter of 2002, resulting in proceeds to us of $212,000.
During the three months ended September 30, 2002, we issued warrants and
options to purchase 6,667 shares of our common stock at an weighted average
exercise price of $26.64 per share to officers, employees and consultants. The
options vest at various times and have exercise periods ranging from one to five
years. Certain of the warrants also include limitations on exercise based on
stock price and trading volumes.
On October 3, 2002, $1.0 million advanced to us was by a principal
stockholder was converted into a $1.0 convertible promissory note (the "$1.0
Million Convertible Note"). The $1.0 Million Convertible Note bore interest at
the prime rate plus 2 1/2 %, was convertible into shares of our common stock at
a rate of $12.00 per share and was due September 30, 2007, provided that the
holder was permitted to make a demand for repayment after our then existing
credit facility was repaid. In connection with the transaction, we issued to the
principal stockholder a ten-year warrant to purchase 44,667 shares of common
stock at an exercise price of $12.00 per share (the "Initial Warrant").
On October 10, 2002, we issued to a principal stockholder an additional
$150,000 principal amount convertible promissory note to a principal stockholder
(the "$150,000 Note"). The $150,000 Note is convertible into shares of common
stock at a rate of $12.00 per share. The remaining terms of the $150,000 Note
are similar to those of the $1.0 Million Note. Warrants to purchase 6,250 of
shares of common stock at an exercise price of $12.00 were also issued to the
principal stockholder. The remaining terms of this warrant are similar to those
of the Initial Warrant.
On November 15, 2002, we issued to a principal stockholder an additional
$350,000 principal amount convertible promissory note (the "$350,000 Note"). The
$350,000 Note is convertible into shares of common stock at a rate of $7.50 per
share. The remaining terms of the $350,000 Note are similar to those of the $1.0
Million Note. At the time of the loan, warrants to purchase 23,333 of shares of
common stock at an exercise price of $7.50 were also issued to the principal
stockholder. The remaining terms of this warrant are similar to those of the
Initial Warrant.
II-2
The foregoing securities were issued in private transactions pursuant to
an exemption from the registration requirement offered by Section 4(2) of the
Securities Act of 1933.
FISCAL YEAR 2003
On May 7, 2003, we sold 3,350 shares of a newly created Series B
Convertible Preferred Stock (the "Series B Stock") with a liquidation preference
of $100 per share for $335,000 to accredited investors. The Series B Stock was
convertible into shares of common stock at a conversion rate equal to a
fraction, (i) the numerator of which is equal to the number of Series B Stock
times $100 plus accrued and unpaid dividends though the date of conversion and
(ii) the denominator is the $4.62, the closing sale price of our stock on May 6,
2003.
From January 1, 2003 to September 30, 2003, we issued warrants to purchase
15,000 shares of our common stock to a former employee and consultant at prices
ranging from $9.00 to $18.00 per share as part of non-competition agreements.
On July 31, 2003, a director exercised options to purchase 50,000 shares
of our common stock at an exercise price of $3.00 per share pursuant to an
Option Agreement dated November 23, 2001. The options were exercised on a
"cash-less" basis and the closing stock price on July 31, 2001 was $4.68,
accordingly, we issued to the director a certificate for 17,949 shares of our
common stock.
In August 2003 we granted a consultant a warrant to purchase 2,222 shares
of common stock for services rendered valued at $7,000.
In October 2003 we granted a consultant a warrant to purchase 2,564 shares
of common stock for services rendered valued at $7,000.
On October 1, 2003, we issued to investors, five year warrants to purchase
44,375 shares of our common stock at an exercise price of $4.80. We also agreed
to issue the investors warrants to purchase an additional 44,375 shares of
common stock on April 1, 2004.
The foregoing securities were issued in private transactions pursuant to
an exemption from the registration requirement offered by Section 4(2) of the
Securities Act of 1933.
FISCAL YEAR 2004
On January 29, 2004, we issued $4.0 million aggregate principal amount of
convertible promissory notes (the "Notes") and warrants to purchase 392,158
shares of common stock (the "Investor Warrants") to 13 institutional and
accredited investors (the "Note Offering"). The Notes were due on the earlier of
(i) April 30, 2005, (ii) such date on or after July 1, 2004 at such time as all
of our indebtedness under our then existing credit facility was either repaid
our assets or the purchase by a single entity, person or group of affiliated
entities or persons of 50% of our voting stock. The notes bore interest at the
rate of 6%, increasing to 9% on April 28, 2004 and 18% on July 27, 2004. In
connection with the financing, we issued to a placement agent, warrants to
purchase 40,833 shares of common stock. The warrants are exercisable until
January 28, 2009 at an exercise price of $7.68 per share.
In addition, 1,333 shares of our common stock at $.60 were exercised
during the three months ended March 31, 2004.
The foregoing securities were issued in private transactions pursuant to
an exemption from the registration requirement offered by Rule 506 promulgated
under the Securities Act of 1933.
On April 12, 2004, 888,889 shares of common stock were issued upon the
automatic conversion of $4.0 million aggregate principal amount of the Notes. In
addition, 10,815 shares of common stock were issued upon conversion of accrued
interest on the Notes in the amount of $49,000. These securities were issued
pursuant to an exemption from the registration requirements offered by Section
3(a)(9) of the Securities Act of 1933.
II-3
In addition, on April 12, 2004, we issued to a placement agent additional
warrants to purchase 83,481 shares of common stock as partial consideration for
its services as placement agent in a January 2004 financing. The warrants are
exercisable until January 28, 2009 at an exercise price of $7.68 per share.
These securities were issued in private transactions pursuant to an exemption
from the registration requirements offered by Section 4(2) of, and Rule 506
promulgated under, the Securities Act of 1933.
On May 25, 2004, a principal shareholder and his affiliate exchanged the
principal of the $500,000 Note, the $1.0 Million Convertible Note, the $150,000
Note and the $350,000 Note, plus accrued and unpaid interest and dividends owed
to the Principal Shareholder into an aggregate of 43,527 shares of Series C
Preferred Stock, with a liquidation preference of $100 per share, convertible
into (i) an aggregate of 930,064 shares of common stock at an effective
conversion price of $4.68, and (ii) warrants to purchase an aggregate of
1,860,128 shares of common stock. The warrants are exercisable until April 28,
2014 at an exercise price of $3.18. The foregoing securities were issued in
private transactions pursuant to an exemption from the registration requirement
offered by Section 4(2) of the Securities Act of 1933.
In February 2004, we also issued 1,333 shares of common stock, upon
exercise of options at an exercise price of $.60 per share. The securities were
issued pursuant to an exemption from the registration requirements offered by
Section 4(2) of the Securities Act of 1933.
On October 11, 2004, we entered into a Securities Purchase Agreement (the
"October Agreement") pursuant to which it issued to the purchasers thereunder an
aggregate of 300,000 shares (the "Shares") of the our common stock and warrants
to purchase 66,667 shares of common stock (the "Warrants"). The purchasers paid
an aggregate purchase price of $900,000 for the Shares and Warrants. Each
Warrant is exercisable to purchase one share of our common stock at an exercise
price of $4.98 per share during the five (5)-year period commencing on October
11, 2004. The Shares and Warrants were issued in private transactions pursuant
to an exemption from the registration requirement offered by Section 4(2) of the
Securities Act of 1933.
In November 2004 we granted a consultant a warrant to purchase 4,167
shares of common stock for services rendered valued at $17,000.
FISCAL YEAR 2005
On February 8, 2005, we entered into a letter agreement further amending
the October Agreement, pursuant to which the October Agreement was amended to
extend the date by which the Company shall file a registration statement
covering the securities issued to the purchasers pursuant to the October
Agreement (the "Registration Statement") to May 1, 2005 (the "Extension"). As
consideration for the Extension, we issued to the purchasers an aggregate of
19,841 shares of our Common Stock (the "February Shares"), based on the last
sale price of the common stock on February 8, 2005 of $5.04. If the last sale
price of the Common Stock on the date the Registration Statement is declared
effective by the Securities and Exchange Commission (the "Effective Date") is
below $4.50, we are required to pay to the purchasers an aggregate of $250,000
less the value of the February Shares on the Effective Date in cash or in shares
of common stock, at the purchasers' option, subject to us obtaining the
necessary consents, approvals, votes and waivers required (i) under our existing
credit agreement and outstanding indebtedness in effect on February 8, 2005 and
(ii) from the holders of the existing series of our preferred stock (the
"Consents"). We also granted the purchasers the right (the "Put Right") to
require us to purchase an aggregate of 33,333 shares of the common stock issued
to the purchasers at a price of $18.00 per share if, at any time prior to the
Effective Date, the last sale price of the common stock is above $24.00 per
share, subject to us obtaining the Consents. Our maximum potential obligation
under the Put Right is $600,000.
The February Shares were issued to the purchasers without registration
under the Act in reliance upon the exemptions from registration provided under
4(2) of the Act.
II-4
On March 21, 2005, we issued an aggregate of (a) 35,900 shares (the
"Offering Shares") of our Series D Convertible Preferred Stock (the "Series D
Preferred"), (b) 5,439,394 five-year common stock purchase warrants (the
"Offering Warrants") and (c) preferred warrants (the "Over-Allotment Warrants"
and, together with the Offering Shares and the Offering Warrants, the "Offering
Securities") exercisable for a limited time, for additional proceeds to us of
$8.975 million, to purchase (1) up to 8,975 additional shares of Series D
Preferred (the "Additional Shares" and, together with the Offering Shares, the
"Preferred Shares") and (2) up to 1,359,849 additional warrants identical to the
Offering Warrants (the "Additional Warrants" and, together with the Offering
Warrants, the "Warrants"), to accredited investors (the "Investors") for an
aggregate purchase price of $35.9 million (the "Financing").
Each Warrant is exercisable to purchase one share of common stock
(collectively, the "Warrant Shares"), at an exercise price of $3.36 per share
for a period of five years commencing September 21, 2005, subject to certain
anti-dilution adjustments, including for issuances of common stock for
consideration below the exercise price. In addition, once exercisable, the
Warrants permit cashless exercises during any period when the Warrant Shares are
not covered by an effective resale registration statement.
As part of the Financing, certain affiliates of one of our principal
shareholders exchanged 300,000 shares of common stock and 66,667 common stock
warrants previously purchased by them from us in October 2004 for $900,000 of
the Offering Securities. We have agreed to include an additional 19,841 shares
of common stock, as well as 50,000 shares of Common Stock underlying certain
additional warrants, already beneficially owned and retained by a principal
stockholder, for resale in the Financing Registration Statement.
Prior to the Financing, on March 19, 2005, we entered into an agreement
with a principal stockholder and one of his affiliates who was also one of our
principal stockholders, pursuant to which:
(a) all $5.784 million principal amount of our convertible notes
owned by a principal stockholder and one of his affiliates and
10,684 of their shares of our Series A Convertible Preferred
Stock ("Series A Preferred") were converted as of that date
into an aggregate of approximately 2 million shares of Common
Stock, at their stated conversion rate of $3.36 per share; and
(b) we agreed to redeem the remaining 14,316 shares of Series A
Preferred held by a principal stockholder and one of his
affiliates and all 43,527 of their shares of our Series C
Convertible Preferred Stock (collectively, the "Redemption
Securities") for $5.8 million, the aggregate stated capital of
such shares, on the earlier of the effective date of the
shareholder consent and June 1, 2005, and both the Redemption
Securities and the redemption price were placed into escrow
pending such date.
In addition, concurrently with the Financing, the a principal stockholder
and one of his affiliates sold 1,515,152 shares of common stock and 757,576
common stock purchase warrants to several purchasers in a private sale for $5
million.
In addition, a financial advisor with respect to certain of the investors
in the Financing received compensation from us of $2,625,000 plus a five-year
warrant to purchase 1,193182 shares of common stock at an exercise price of
$3.36 per share commencing upon the effectiveness of the shareholder consent. In
addition, we issued an investor in the Financing, a warrant to purchase 41,667
shares of common stock (identical to the Warrants).
The Offering Securities and the warrants described in the preceding
paragraph were issued in the Financing without registration under the Securities
Act of 1933, as amended, in reliance upon the exemptions from registration
provided under Section 4(2) of the Act and Regulation D promulgated thereunder.
II-5
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit
Number Description
------ -----------
3.1 Restated Articles of Incorporation of the Registrant. (1)
3.2 Articles of Amendment to Articles of Incorporation. (3)
3.3 Articles of Amendment to Articles of Incorporation. (4)
3.4 Articles of Amendment to Articles of Incorporation of the
Registrant filed with the Department of State of the State of
Florida on January 18, 2002. (7)
3.5 Articles of Amendment to Articles of Incorporation of the
Registrant filed with the Department of State of the State of
Florida on May 7, 2003. (9)
3.6 Amended and Restated By-Laws of the Registrant. (8)
3.7 Amendment to the Articles of Incorporation of MediaBay, Inc.
regarding the designation of the Series D Preferred Stock.
(14)
3.8 Articles of Amendment to the Articles of Incorporation of
MediaBay, Inc. filed May 3, 2005. (18)
5 Opinion of Blank Rome LLP as to the legality of the securities
being registered.
10.1 1997 Stock Option Plan. (1)
10.2 1999 Stock Incentive Plan. (2)
10.3 2000 Stock Incentive Plan. (5)
10.4 2001 Stock Incentive Plan. (6)
10.5 2004 Stock Incentive Plan. (13)
10.6 Form of 2004 Stock Incentive Plan Non-Qualified Stock Option
Agreement for Officers. (16)
10.7 Form of 2004 Stock Incentive Plan Non-Qualified Stock Option
Agreement for Directors. (16)
10.8 Letter Agreement between the Registrant and Norton Herrick
entered into in November 2002. (10)
10.9 Indemnification Agreement dated as of November 15, 2002
between the Registrant, MEH Consulting Services. Inc. and
Michael Herrick. (8)
10.10 Indemnification Agreement dated as of November 15, 2002
between the Registrant and Norton Herrick. (8)
10.11 Termination Agreement dated as of March 8, 2004 among XNH
Consulting Services, Inc., the Registrant and Norton Herrick.
(11)
10.12 Employment Agreement between the Registrant and Jeffrey Dittus
dated June 6, 2005. (14)
10.13 Employment Agreement between the Registrant and Joseph Rosetti
dated June 6, 2005. (14)
10.14 Employment Agreement between the Registrant and John Levy
dated June 6, 2005. (14)
10.15 Employment Agreement between the Registrant and Robert Toro
dated June 6, 2005. (14)
II-6
10.16 Amendment No. 1 dated July 5, 2005 to Employment Agreement
between the Registrant and Jeffery Dittus dated June 6, 2005.
(15)
10.17 Employment Agreement between the Registrant and Patricia
Campbell dated April 1, 2005 (effective April 4, 2005. (17)
10.18 Employment Agreement between the Registrant and Howard Herrick
dated October 30, 2002. (21)
10.19 Option Agreement dated as of April 4, 2005 between the Company
and Jeffrey Dittus. (19)
10.20 Option Agreement dated as of April 4, 2005 between the Company
and Joseph Rosetti. (19)
10.21 Option Agreement dated as of April 4, 2005 between the Company
and Robert Toro. (19)
10.22 Option Agreement dated as of April 4, 2005 between the Company
and Patricia Campbell. (19)
10.23 Option Agreement dated as of April 4, 2005 between the Company
and Daniel Altobello. (19)
10.24 Option Agreement dated as of April 4, 2005 between the Company
and Richard Berman. (19)
10.25 Option Agreement dated as of April 4, 2005 between the Company
and Paul Neuwirth. (19)
10.26 Option Agreement dated as of April 4, 2005 between the Company
and Stephen Yarvis. (19)
10.27 Severance and Consulting Agreement between the Company and
John Levy. (19)
10.28 Approval of Bonus Payable to Robert Toro. (19)
10.29 Letter Agreement among the Registrant and the Forest Hill
Entities dated February 8, 2005. (20)
10.30 Registration Rights Agreement dated March 21, 2005 by and
among MediaBay, Inc. and each of the investors whose names
appear on the signature pages thereof. (14)
10.31 Registration Rights Agreement dated March 21, 2005 by and
between MediaBay, Inc. and Goldman, Sachs & Co. (14)
10.32 Registration Rights Agreement (No. 1) dated March 19, 2005 by
and among MediaBay, Inc., Norton Herrick and Huntingdon
Corporation. (14)
10.33 Registration Rights Agreement (No. 2) dated March 19, 2005 by
and among MediaBay, Inc., Norton Herrick and Huntingdon
Corporation. (14)
10.34 Securities Purchase Agreement dated March 21, 2005 by and
among MediaBay, Inc., Satellite Strategic Finance Associates,
LLC and the other institutional investors whose names appear
on the signature pages thereof, including exhibits and
schedules thereto. (14)
10.35 Form of Warrant issued to each Investor pursuant to the
Securities Purchase Agreement. (14)
10.36 Form of Preferred Warrant issued to each Investor pursuant to
the Securities Purchase Agreement. (14)
10.37 Form of Warrant issued to Satellite Strategic Finance
Associates, LLC. (14)
10.38 Form of Warrant issued to Merriman Curhan Ford & Co. (14)
II-7
10.39 Form of Key Employee Agreement dated March 21, 2005 between
MediaBay, Inc. and each of Jeffrey A. Dittus and Joseph
Rosetti. (14)
10.40 Form of Voting Agreement and Proxy dated March 21, 2005 by and
among MediaBay, Inc., Norton Herrick and Huntingdon
Corporation. (14)
10.41 Agreement dated March 19, 2005 by and among MediaBay, Inc.,
Norton Herrick and Huntingdon Corporation. (14)
10.42 Letter Agreement dated March 21, 2005 by and among MediaBay,
Inc., Forest Hill Select Offshore Ltd., Forest Hill Select
Fund, L.P. and Lone Oak Partners L.P. (14)
10.43 Form of Letter Agreement between MediaBay, Inc. and each of
Stephen Yarvis, Paul Ehrlich, Paul Neuwirth and Richard
Berman. (14)
21.1 Subsidiaries of the Company. (11)
23.1 Consent of Amper Politziner & Mattia, P.C.
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Blank Rome LLP included in opinion filed as Exhibit
5
24.1 Power of Attorney, included in the signature page of this
Registration Statement
--------------------------------------------------------------------------------
(1) Incorporated by reference to the applicable exhibit contained in our
Registration Statement on Form SB-2 (file no. 333-30665) effective October
22, 1997.
(2) Incorporated by reference to the applicable exhibit contained in our
Definitive Proxy Statement dated February 23, 1999.
(3) Incorporated by reference to the applicable exhibit contained in our
Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
1999.
(4) Incorporated by reference to the applicable exhibit contained in our
Registration Statement on Form SB-2 (file no. 333-95793) effective March
14, 2000.
(5) Incorporated by reference to the applicable exhibit contained in our
Definitive Proxy Statement dated May 23, 2000.
(6) Incorporated by reference to the applicable exhibit contained in our proxy
statement dated September 21, 2001.
(7) Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K for the reportable event dated January 18,
2002.
(8) Incorporated by reference to the applicable exhibit contained in our
Annual Report on Form 10-K for the year ended December 31, 2002.
(9) Incorporated by reference to the applicable exhibit contained in our
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2003.
(10) Incorporated by reference to Exhibit 10.32 contained in our Annual Report
on Form 10-K for the year ended December 31, 2002.
(11) Incorporated by reference to the applicable exhibit contained in our
Annual Report on Form 10-K for the year ended December 31, 2003.
(12) Incorporated by reference to the applicable exhibit contained in our
Quarterly Report on Form 10-QSB for the quarterly period ended September
30, 2004.
(13) Incorporated by reference to the applicable exhibit contained in our
Definitive Proxy Statement dated November 16, 2004.
II-8
(14) Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K for the reportable event dated June 10, 2005.
(15) Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K for the reportable event dated July 7, 2005.
(16) Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 10-Q for the quarterly period ended June 30, 2005.
(17) Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K for the reportable event dated April 7, 2005.
(18) Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K for the reportable event dated May 3, 2005.
(19) Incorporated by reference to the applicable exhibit contained in our
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2005.
(20) Incorporated by reference to the applicable exhibit contained in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
(21) Incorporated by reference to the applicable exhibit contained in our
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2002.
(b) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act.
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining liability under the Securities
Act, each post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and offering therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered that remain unsold at the termination of the
offering.
II-9
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, in the Town of Cedar
Knolls, State of New Jersey, on the 4th day of November 2005.
MEDIABAY, INC.
By: /s/ Robert Toro
------------------------------------------------
Robert Toro, Chief Financial Officer and
Senior Vice President of Finance
Each person whose signature appears below hereby authorizes each of
Jeffrey Dittus and Robert Toro or either of them as his true and lawful
attorney-in-fact with full power of substitution to execute in the name and on
behalf of each person, individually and in each capacity stated below, and to
file, any and all amendments to this Registration Statement, including any and
all post-effective amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 was signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Joseph R. Rosetti Director and Chairman November 4, 2005
------------------------------------
Joseph R. Rosetti
/s/ Jeffrey Dittus Director and Chief Executive Officer (Principal November 4, 2005
------------------------------------ Executive Officer)
Jeffrey Dittus
/s/ Robert Toro Chief Financial Officer and Senior Vice President of November 4, 2005
------------------------------------ Finance
Robert Toro
/s/ Daniel Altobello Director November 4, 2005
------------------------------------
Daniel Altobello
/s/ Richard Berman Director November 4, 2005
------------------------------------
Richard Berman
/s/ Robert B. Montgomery Director November 4, 2005
------------------------------------
Robert B. Montgomery
/s/ Marshall C. Phelps Director November 4, 2005
------------------------------------
Marshall C. Phelps
/s/ Carl U.J. Rossetti Director November 4, 2005
------------------------------------
Carl U.J. Rossetti
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
BALANCE WRITE-OFFS
BEGINNING OF AMOUNTS CHARGED AMOUNTS AGAINST BALANCE END
PERIOD TO NET INCOME ACQUIRED RESERVES OF PERIOD
--------------- ----------------- ---------- ------------ --------------
Allowances for sales returns and
doubtful accounts:
Year Ended December 31, 2004 $ 4,446 6,192 -- 7,930 2,708
Year Ended December 31, 2003 $ 5,325 20,900 -- 21,779 4,446
Year Ended December 31, 2002 $ 4,539 18,793 -- 18,007 5,325
Valuation allowance for Federal
and State deferred tax assets
Year Ended December 31, 2004 $ 23,826 14,753 6,361 -- 44,940
Year Ended December 31, 2003 $ 21,911 1,471 -- 446 23,826
Year Ended December 31, 2002 $ 20,563 550 -- 798 21,911
S-1
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1 Restated Articles of Incorporation of the Registrant. (1)
3.2 Articles of Amendment to Articles of Incorporation. (3)
3.3 Articles of Amendment to Articles of Incorporation. (4)
3.4 Articles of Amendment to Articles of Incorporation of the
Registrant filed with the Department of State of the State of
Florida on January 18, 2002. (7)
3.5 Articles of Amendment to Articles of Incorporation of the
Registrant filed with the Department of State of the State of
Florida on May 7, 2003. (9)
3.6 Amended and Restated By-Laws of the Registrant. (8)
3.7 Amendment to the Articles of Incorporation of MediaBay, Inc.
regarding the designation of the Series D Preferred Stock.
(14)
3.8 Articles of Amendment to the Articles of Incorporation of
MediaBay, Inc. filed May 3, 2005. (18)
5 Opinion of Blank Rome LLP as to the legality of the securities
being registered.
10.1 1997 Stock Option Plan. (1)
10.2 1999 Stock Incentive Plan. (2)
10.3 2000 Stock Incentive Plan. (5)
10.4 2001 Stock Incentive Plan. (6)
10.5 2004 Stock Incentive Plan. (13)
10.6 Form of 2004 Stock Incentive Plan Non-Qualified Stock Option
Agreement for Officers. (16)
10.7 Form of 2004 Stock Incentive Plan Non-Qualified Stock Option
Agreement for Directors. (16)
10.8 Letter Agreement between the Registrant and Norton Herrick
entered into in November 2002. (10)
10.9 Indemnification Agreement dated as of November 15, 2002
between the Registrant, MEH Consulting Services. Inc. and
Michael Herrick. (8)
10.10 Indemnification Agreement dated as of November 15, 2002
between the Registrant and Norton Herrick. (8)
10.11 Termination Agreement dated as of March 8, 2004 among XNH
Consulting Services, Inc., the Registrant and Norton Herrick.
(11)
10.12 Employment Agreement between the Registrant and Jeffrey Dittus
dated June 6, 2005. (14)
10.13 Employment Agreement between the Registrant and Joseph Rosetti
dated June 6, 2005. (14)
10.14 Employment Agreement between the Registrant and John Levy
dated June 6, 2005. (14)
10.15 Employment Agreement between the Registrant and Robert Toro
dated June 6, 2005. (14)
10.16 Amendment No. 1 dated July 5, 2005 to Employment Agreement
between the Registrant and Jeffery Dittus dated June 6, 2005.
(15)
10.17 Employment Agreement between the Registrant and Patricia
Campbell dated April 1, 2005 (effective April 4, 2005. (17)
10.18 Employment Agreement between the Registrant and Howard Herrick
dated October 30, 2002. (21)
10.19 Option Agreement dated as of April 4, 2005 between the Company
and Jeffrey Dittus. (19)
10.20 Option Agreement dated as of April 4, 2005 between the Company
and Joseph Rosetti. (19)
10.21 Option Agreement dated as of April 4, 2005 between the Company
and Robert Toro. (19)
10.22 Option Agreement dated as of April 4, 2005 between the Company
and Patricia Campbell. (19)
10.23 Option Agreement dated as of April 4, 2005 between the Company
and Daniel Altobello. (19)
10.24 Option Agreement dated as of April 4, 2005 between the Company
and Richard Berman. (19)
10.25 Option Agreement dated as of April 4, 2005 between the Company
and Paul Neuwirth. (19)
10.26 Option Agreement dated as of April 4, 2005 between the Company
and Stephen Yarvis. (19)
10.27 Severance and Consulting Agreement between the Company and
John Levy. (19)
10.28 Approval of Bonus Payable to Robert Toro. (19)
10.29 Letter Agreement among the Registrant and the Forest Hill
Entities dated February 8, 2005. (20)
10.30 Registration Rights Agreement dated March 21, 2005 by and
among MediaBay, Inc. and each of the investors whose names
appear on the signature pages thereof. (14)
10.31 Registration Rights Agreement dated March 21, 2005 by and
between MediaBay, Inc. and Goldman, Sachs & Co. (14)
10.32 Registration Rights Agreement (No. 1) dated March 19, 2005 by
and among MediaBay, Inc., Norton Herrick and Huntingdon
Corporation. (14)
10.33 Registration Rights Agreement (No. 2) dated March 19, 2005 by
and among MediaBay, Inc., Norton Herrick and Huntingdon
Corporation. (14)
10.34 Securities Purchase Agreement dated March 21, 2005 by and
among MediaBay, Inc., Satellite Strategic Finance Associates,
LLC and the other institutional investors whose names appear
on the signature pages thereof, including exhibits and
schedules thereto. (14)
10.35 Form of Warrant issued to each Investor pursuant to the
Securities Purchase Agreement. (14)
10.36 Form of Preferred Warrant issued to each Investor pursuant to
the Securities Purchase Agreement. (14)
10.37 Form of Warrant issued to Satellite Strategic Finance
Associates, LLC. (14)
10.38 Form of Warrant issued to Merriman Curhan Ford & Co. (14)
10.39 Form of Key Employee Agreement dated March 21, 2005 between
MediaBay, Inc. and each of Jeffrey A. Dittus and Joseph
Rosetti. (14)
10.40 Form of Voting Agreement and Proxy dated March 21, 2005 by and
among MediaBay, Inc., Norton Herrick and Huntingdon
Corporation. (14)
10.41 Agreement dated March 19, 2005 by and among MediaBay, Inc.,
Norton Herrick and Huntingdon Corporation. (14)
10.42 Letter Agreement dated March 21, 2005 by and among MediaBay,
Inc., Forest Hill Select Offshore Ltd., Forest Hill Select
Fund, L.P. and Lone Oak Partners L.P. (14)
10.43 Form of Letter Agreement between MediaBay, Inc. and each of
Stephen Yarvis, Paul Ehrlich, Paul Neuwirth and Richard
Berman. (14)
21.2 Subsidiaries of the Company. (11)
23.1 Consent of Amper Politziner & Mattia, P.C.
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Blank Rome LLP included in opinion filed as Exhibit
5
24.2 Power of Attorney, included in the signature page of this
Registration Statement
--------------------------------------------------------------------------------
(1) Incorporated by reference to the applicable exhibit contained in our
Registration Statement on Form SB-2 (file no. 333-30665) effective October
22, 1997.
(2) Incorporated by reference to the applicable exhibit contained in our
Definitive Proxy Statement dated February 23, 1999.
(3) Incorporated by reference to the applicable exhibit contained in our
Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
1999.
(4) Incorporated by reference to the applicable exhibit contained in our
Registration Statement on Form SB-2 (file no. 333-95793) effective March
14, 2000.
(5) Incorporated by reference to the applicable exhibit contained in our
Definitive Proxy Statement dated May 23, 2000.
(6) Incorporated by reference to the applicable exhibit contained in our proxy
statement dated September 21, 2001.
(7) Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K for the reportable event dated January 18,
2002.
(8) Incorporated by reference to the applicable exhibit contained in our
Annual Report on Form 10-K for the year ended December 31, 2002.
(9) Incorporated by reference to the applicable exhibit contained in our
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2003.
(10) Incorporated by reference to Exhibit 10.32 contained in our Annual Report
on Form 10-K for the year ended December 31, 2002.
(11) Incorporated by reference to the applicable exhibit contained in our
Annual Report on Form 10-K for the year ended December 31, 2003.
(12) Incorporated by reference to the applicable exhibit contained in our
Quarterly Report on Form 10-QSB for the quarterly period ended September
30, 2004.
(13) Incorporated by reference to the applicable exhibit contained in our
Definitive Proxy Statement dated November 16, 2004.
(14) Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K for the reportable event dated June 10, 2005.
(15) Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K for the reportable event dated July 7, 2005.
(16) Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 10-Q for the quarterly period ended June 30, 2005.
(17) Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K for the reportable event dated April 7, 2005.
(18) Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K for the reportable event dated May 3, 2005.
(19) Incorporated by reference to the applicable exhibit contained in our
Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2005.
(20) Incorporated by reference to the applicable exhibit contained in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2004.
(21) Incorporated by reference to the applicable exhibit contained in our
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2002.