As
filed
with the Securities and Exchange Commission on January 19, 2006
Registration
No. 333-129488
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
________________
AMENDMENT
NO. 1
TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
________________
MEDIABAY,
INC.
(Exact
name of registrant as specified in its charter)
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Florida
(State
or other jurisdiction
of
incorporation
or organization)
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5961
(Primary
Standard Industrial
Classification
Code Number)
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65-0429858
(IRS
employer Identification
number)
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|
_______________
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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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________________
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Jeffrey
Dittus
Chief
Executive Officer
MediaBay,
Inc.
2
Ridgedale Avenue - Suite 300
Cedar
Knolls, New Jersey 07927
(973)
539-9528
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(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
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||
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. ¨
________________
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 January 19, 2006
PRELIMINARY
PROSPECTUS
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 by us for resale by one of our securityholders
pursuant to this prospectus. All of these registered shares are issuable, or
may
in the future become issuable, upon the selling securityholder’s conversion of
its shares of our Series D preferred stock, our payment of dividends on such
preferred stock or the selling securityholder’s exercise of warrants.
The
offered shares may only be offered for resale by the selling securityholder
pursuant to this prospectus if and when they are actually issued. We will not
receive any of the proceeds from any sale of the registered shares by the
selling securityholder. We will, however, receive proceeds from any cash
exercise of the selling securityholder’s warrants.
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.”
Our
common stock was quoted on the Nasdaq National Market under the symbol “MBAY”
from November 15, 1999 to October 25, 2005. From October 25, 2005 to November
25, 2005, our common stock temporarily traded under the symbol “MBAYD” as a
result of a one-for-six reverse stock split we effected in October 2005. On
November 25, 2005, our common stock has resumed trading under the symbol “MBAY.”
On January 18, 2006, the closing sale price of our common stock as reported
by
the Nasdaq National Market was $1.28 per share.
An
investment in our common stock is speculative and involves a high degree of
risk. See “Risk Factors” beginning on Page 3.
All
references herein to the number of shares of our common stock outstanding and
all per share data and stock option, warrant and convertible security data
relating to our common shares have been adjusted for all periods presented
to
give retroactive effect to our October 2005 1-for-6 reverse stock
split.
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 ______________, 2006.
This
summary highlights information contained elsewhere in this prospectus and does
not contain all the information that you should consider before investing in
our
common stock. You should read this entire prospectus carefully, including “Risk
Factors” and our consolidated financial statements and related notes, before
making an investment decision. All references to “we,” “us,” “our,””MediaBay” or
“our company” refer to MediaBay, Inc. and, where appropriate, our consolidated
subsidiaries.
Our
company
MediaBay
is a digital media and publishing company specializing in spoken audio
entertainment, such as audio readings of books, newspapers, magazines, original
productions and radio broadcast transcripts, each of which audio readings is
referred to as a title. We offer thousands of audio titles, comprising over
75,000 hours of aggregate audio content, which we distribute via mail order,
our
websites and some of the nation’s largest retailers. Our titles can be purchased
in digital format via Internet downloads through subscription services at a
flat
monthly fee for a specified number of titles per month, and/or on a per title,
or a la carte, basis. Our titles can also be obtained in hard copy format,
such
as compact discs (CDs) and audiocassettes.
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, and retail outlets, and in digital format through 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 a per title basis or as part of a monthly subscription. The service offers
users audio content that can be downloaded directly to the user’s personal
computer, burned to CD or transferred to any Window’s Media compatible device
that plays secured WMA (Windows Media Audio) files. There are over 70 digital
devices on the market today that are compliant with Microsoft Corporation’s
“PlaysforSure”™ digital rights management and device platform, which means they
can play WMA formatted digital files, and we are working closely with Microsoft
Corporation to ensure that our content works seamlessly on these devices and
the
many new smart cellular phones that will run the new Windows Mobile 5.0
operating system.
To
expand
the digital distribution of our audio content, we recently executed 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,
and
a content distribution agreement with Real Networks, which operates Rhapsody,
the largest music subscription service in the United States. 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.
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
On
October 25, 2005, we effected a one-for-six reverse stock split of our common
stock. Unless we tell you otherwise, the information in this prospectus,
including our consolidated financial statements, has been adjusted to give
retroactive effect to this reverse stock split.
You
should carefully consider the following risks and all other information set
forth in this prospectus before deciding to invest in shares of our common
stock. If any of the events or developments described below actually occurs,
our
business, financial condition and results of operations may suffer. In that
case, the trading price of our common stock may decline and you could lose
all
or part of your investment.
Risks
related to our business
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 September 30, 2005, we
had
incurred an accumulated deficit of approximately $157.1 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 nine months ended September 30, 2005 decreased 49% and
51%
as compared to the year ended December 31, 2003 and nine months ended September
30, 2004, respectively. Audio Book Club sales for the year ended December 31,
2004 and nine months ended September 30, 2005 decreased 53% and 58% compared
to
the year ended December 31, 2003 and nine months ended September 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.
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:
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plan
for product offerings;
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introduce
new titles;
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anticipate
order lead time;
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accurately
assess inventory requirements; and
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develop
new product delivery methods.
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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 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.
If
our third-party providers fail to perform their services properly, we may not
be
able to service our customers properly and our operations may not function
effectively.
Third-party
providers conduct all of our Audio Book Club and a majority of our Radio Spirits
customer service operations and process orders and collect payments for us.
If
these providers fail to perform their services properly, we, in turn, may not
be
able to service our customers properly, and, as a result, our Audio Book Club
and Radio Spirits’ customers could develop negative perceptions of our business,
our operations might not function efficiently, collections of receivables could
be delayed, our revenue could decline and our expenses could
increase.
If
our marketing strategies to acquire new customers are not successful our sales
growth will decline and our costs could increase.
Many
factors beyond our control, such as the public’s receptiveness to direct mail
solicitations, may affect the success of our marketing strategies. 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 sales growth would be
inhibited and our costs would increase.
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 (those
belonging to customers that have affirmatively elected to receive emails from
us) 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.
If
we are unable to collect our receivables in a timely manner, our cash flow
and
our operating results could decline.
We
experienced bad debt rates of approximately 4.4% and 10.8%, resulting in bad
debt expense of $829,000 and $3,900,000, during the years 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.
We
face significant competition from a wide variety of sources for the sale of
our
products, which could prevent us from significantly increasing our
revenues.
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 than us, and from other products providing similar entertainment
value, such as music on cassettes and CDs, printed books, videos and DVDs.
We
also 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 CD, 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 competitors
are
well-established companies, which could use or adapt their current technologies
or purchase technology to provide a service directly competitive with our
service or products and which have greater financial resources that enable
them
to better withstand substantial price competition or downturns in the market
for
spoken word content. Additionally, 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, all of which could affect our
ability to compete.
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
September 30, 2005, we had past due royalty payments under our licensing
agreements aggregating $1,300,000. The publishers and other rightsholders to
whom these payments would be payable have not requested royalty statements
or
payments. These amounts are accrued for and reflected in our financial
statements.
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, such as seeking to enter new markets or finding
strategic partners with greater financial marketing and other resources, 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 compact
discs). 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 if consumers are not willing to use
the
Internet to purchase spoken audio content, our revenues will be limited.
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. 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.
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.
If
we do not provide digital
rights management solutions in our download distribution services, content
providers may refuse to license content to us and consumers may not purchase
our
content.
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.
Because
we do not have a comprehensive disaster recovery plan and have only limited
back-up systems, 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 could grow more slowly than anticipated or fail
to
grow.
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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secure
transmission of customer credit card numbers and other confidential
information;
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reliability
and availability of Internet service providers;
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cost
of access to the Internet;
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availability
of sufficient network capacity; and
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ability
to download audio content consistent with computer security measures
employed by businesses.
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If
we are unable to offer downloads of our content on non-PC drivers, we may fail
to capture a significant share of the market for digital media services and
our
revenues may be limited.
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 and our revenues may be limited.
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 cost structure
and
limit our ability to rent our customer lists to third parties and limits our
ability to utilize third parties for collection efforts.
We
may not be able to protect our licenses or our intellectual property, which
could jeopardize our competitive position. Unauthorized duplication of the
content we sell could result in our liability for substantial damages and
discourage other content providers from entering into agreements with
us.
If
we
fail to protect our customer lists, 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
believe that we are able to license spoken word audio content in part because
our service has been designed to reduce the risk of unauthorized duplication
and
playback of audio files. If these security measures fail, our content may be
vulnerable to unauthorized duplication playback. If others duplicate the content
we provide without authorization, content providers may terminate their
agreements with us and hold us liable for substantial damages. Although we
maintain general liability insurance, including insurance for errors or
omissions, we cannot assure you that the amount of coverage will be adequate
to
compensate us for these losses. Security breaches might also discourage other
content providers from entering into agreements with us. We may be required
to
expend substantial money and other resources to protect against the threat
of
security breaches or to alleviate problems caused by these
breaches.
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.
Litigation could result in substantial costs and the diversion of our management
and other resources, which would harm our business.
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.
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.
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
January 19, 2006, we had outstanding approximately 10,439,284 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 18.8 million shares of our common stock and
substantially all of the underlying shares are available for sale under
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. As a result, a shareholder acquiring a majority of the voting
stock may not be able to appoint a majority of the members of our board of
directors upon acquiring majority ownership because at least two annual
meetings, instead of one, will be required to effect a change of control of
a
majority of the members of the board of directors. 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 affect 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.
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.
We
will
not receive any proceeds from any sales of shares of common stock made from
time
to time hereunder by the selling securityholder. Any proceeds we receive from
the selling securityholder’s exercise of warrants with cash or exercise of its
option to purchase additional shares of Series D preferred stock and additional
warrants, will be added to our working capital. If the selling securityholder
exercises for cash its currently outstanding warrants to purchase an aggregate
of 454,546 shares of our common stock, we will receive proceeds of approximately
$1,527,000. If the selling securityholder exercises its option to purchase
additional shares of our Series D Preferred Stock and additional warrants
exercisable for 113,636 shares of our common stock, we would receive proceeds
of
$750,000, and, if it exercises for cash the additional warrants issued upon
exercise of such option, we would receive approximately an additional $382,000
in proceeds. There can be no assurance that the selling securityholder will
exercise its option or any of its warrants. We have agreed to bear the expenses
in connection with the registration of the common stock offered by the selling
securityholder for resale pursuant to this prospectus.
Our
common stock has been quoted on the Nasdaq National Market since November 15,
1999. From November 15, 1999 to October 24, 2005 it was quoted under the symbol
“MBAY,” from October 25, 2005 to November 25, 2005 it temporarily traded under
the symbol “MBAYD” as a result of a 1-for-6 reverse split of our common stock
effected on October 25, 2005, and beginning November 25, 2005 it resumed 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 for the fiscal
quarters indicated, after giving retroactive effect to our October 2005 reverse
stock split.
|
High
|
Low
|
||||||
|
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 Ended December 31, 2005
|
|||||||
|
First
Quarter
|
$
|
9.54
|
$
|
3.06
|
|||
|
Second
Quarter
|
$
|
4.14
|
$
|
2.34
|
|||
|
Third
Quarter
|
$
|
4.20
|
$
|
1.44
|
|||
|
Fourth
Quarter
|
$
|
2.31
|
$
|
1.20
|
|||
On
January 18, 2006 the last reported sale price of our common stock on the Nasdaq
National Market was $1.28 per share. As of such date, there were approximately
149 record owners of our common stock; however, a number of our shares are
held
in street name and as such we believe that the actual number of beneficial
owners is higher.
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.
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 years 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 nine months ended September 30, 2004 and 2005 and the
selected consolidated balance sheet data as of September 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.
As
a
result of such factors as the capitalization and write-off of direct response
advertising costs, recording of goodwill write-offs, strategic charges and
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,
all
as discussed elsewhere herein, comparisons of our historical operating results
from year to year may not be meaningful. In addition, our historical
results are not necessarily indicative of results to be expected for future
periods, and results for the nine months ended September 30, 2005 are not
necessarily indicative of results that may be expected for the entire year
ending December 31, 2005.
You
should read the following selected consolidated financial data together with
the
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section appearing elsewhere herein and with our consolidated
financial statements and accompanying notes appearing at the end of this
prospectus:
|
Statement
of Operations Data:
|
(In
thousands, except per share data)
|
|||||||||||||||
|
|
Years
Ended December 31,
|
|||||||||||||||
|
|
2000
|
2001
|
2002
|
2003
|
2004
|
|||||||||||
|
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
on early extinguishment of debt
|
(2,152
|
)
|
—
|
—
|
—
|
—
|
||||||||||
|
Loss
before income tax benefit (expense)
|
(55,349
|
)
|
(22,605
|
)
|
(1,743
|
)
|
(5,152
|
)
|
(15,360
|
)
|
||||||
|
Income
tax benefit (expense)
|
—
|
17,200
|
(550
|
)
|
(1,471
|
)
|
(14,753
|
)
|
||||||||
|
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 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
|
|||||||||||
| Statement of Operations Data (continued): |
(In
thousands, except per share data)
|
||||||
|
Nine
months ended
September
30,
|
|||||||
|
2005
|
2004
|
||||||
|
(unaudited)
|
|||||||
|
Sales,
net of returns, discounts and allowances of $1,554 and $4,286 for
the
nine months ended September 30, 2005 and 2004,
respectively
|
$
|
7,012
|
$
|
14,334
|
|||
|
Cost
of sales
|
4,101
|
6,672
|
|||||
|
Cost
of sales - strategic charges
|
305
|
2,100
|
|||||
|
Gross
profit
|
2,606
|
5,562
|
|||||
|
Expenses:
|
|||||||
|
Advertising
and promotion
|
1,265
|
3,758
|
|||||
|
General
and administrative
|
5,295
|
5,301
|
|||||
|
Termination
charges
|
697
|
—
|
|||||
|
Depreciation
and amortization
|
58
|
116
|
|||||
|
Operating
loss
|
(4,709
|
)
|
(3,343
|
)
|
|||
|
Interest
income
|
167
|
—
|
|||||
|
Interest
expense
|
752
|
6,808
|
|||||
|
Loss
on early extinguishment of debt
|
579
|
1,532
|
|||||
|
Net
loss
|
(5,873
|
)
|
(11,691
|
)
|
|||
|
Dividends
on preferred stock
|
1,127
|
378
|
|||||
|
Deemed
dividend on beneficial conversion of Series D Preferred
Stock
|
17,423
|
—
|
|||||
|
Net
loss applicable to common shares
|
$
|
(24,423
|
)
|
$
|
(12,061
|
)
|
|
|
Basic
and diluted loss per share applicable to common shares
|
$
|
(3.82
|
)
|
$
|
(4.40
|
)
|
|
|
Balance
Sheet Data:
|
(In
thousands, except per share data)
|
||||||||||||||||||
|
As
of December 31,
|
As
of
September
30,
|
||||||||||||||||||
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
||||||||||||||
|
|
|
|
|
|
|
||||||||||||||
|
Working
capital (deficit)
|
$
|
313
|
$
|
(4,167
|
)
|
$
|
(4,336
|
)
|
$
|
(20,165
|
)
|
$
|
720
|
$
|
7,962
|
||||
|
Total
assets
|
49,932
|
44,452
|
48,619
|
36,893
|
16,576
|
23,745
|
|||||||||||||
|
Current
liabilities
|
17,103
|
15,491
|
18,984
|
29,194
|
5,905
|
4,684
|
|||||||||||||
|
Long-term
debt (less current portion)
|
15,340
|
15,849
|
14,680
|
—
|
16,852
|
615
|
|||||||||||||
|
Common
stock subject to contingent put rights
|
758
|
758
|
758
|
125
|
—
|
—
|
|||||||||||||
|
Total
common stockholders' equity (deficit)
|
$
|
12,939
|
$
|
8,562
|
$
|
10,405
|
$
|
6,949
|
$
|
(6,181
|
)
|
$
|
18,446
|
||||||
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.
New
sources of entertainment media continue to grow as the quantity and variety
of
content and its sources proliferate. The Internet has emerged as a powerful
global communications and entertainment media, giving millions of people the
ability to access large amounts of valuable pay-for-access media. Additionally,
recent advances in technologies have made it possible to deliver digital
downloads of music and spoken word content, such as audiobooks, newspapers
and
magazines. A key driving force in consumer acceptance of digital downloads
has
been the emerging market for handheld devices that play digital or compressed
audio. Over the past few years, the music industry has been successful in
creating a market for digital downloads. According
to a report published January 19, 2006 by the International Federation of the
Phonographic Industry, global sales of music via the Internet and mobile phones
proliferated in 2005, generating sales of $1.1 billion for record companies
a
threefold increase on 2004. Accordingly, our strategy is to provide
digital audio books to this rapidly growing audience of music buyers and mobile
phone users who are using different broadband and wireless technologies to
access their audio content.
As
a
provider of secure WMA audio content, we hope to take advantage of the large
worldwide installed base of windows media players on consumers desktops
worldwide, and the growing number of smart phones that are being shipped
with
the new Windows Mobile 5.0 platform which includes a mobile windows media
player
that enables playback of the content on these mobile devices. While we
cannot predict the adoption rate for our content on this technology platform,
we
have chosen to leverage the Microsoft technologies rather than build our
own
proprietary digital rights management and compression system due to the large
market opportunity presented by this installed base and the difficulty and
expense in creating a new unproven system and the complexity of intellectual
property laws.
In
October 2005, we launched our digital distribution strategy through the launch
of Soundsgood.com, our fully enabled digital storefront and technology platform.
We also continue to enter into strategic agreements to license content and
to
distribute downloads to consumers. In December 2005, we launched our co-branded
digital storefront with Microsoft at msn.soundsgood.com. We have also entered
into distribution agreements with Real Network’s Rhapsody and with
MusicNet. We have gradually begun increasing our marketing efforts to
drive customers to our storefronts, and expect to continue to do so at these
modest levels until such time as we believe it will be cost effective to
aggressively market to new customers, including our database of 2.5 million
customers that have purchased audiobooks from us in the past.
To
date,
our sales of digital downloads have been minimal. Our sales will continue to
decline until such time as we generate significant sales from the implementation
of our digital strategy.
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.
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 more likely than not that we will, in the foreseeable future, be
unable 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.
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.
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
|
)%
|
||||
|
Nine
Months Ended
September
30,
|
|||||||
|
2005
|
2004
|
||||||
|
Net
sales
|
100
|
%
|
100
|
%
|
|||
|
Cost
of sales
|
58.5
|
46.5
|
|||||
|
Cost
of sales - strategic charges
|
4.3
|
14.7
|
|||||
|
Gross
profit
|
37.2
|
38.8
|
|||||
|
Advertising
and promotion
|
18.0
|
26.2
|
|||||
|
General
and administrative expense
|
75.5
|
35.1
|
|||||
|
Termination
charges
|
10.0
|
—
|
|||||
|
Depreciation
and amortization expense
|
0.8
|
0.8
|
|||||
|
Interest
(income)
|
(2.4
|
)
|
—
|
||||
|
Interest
expense
|
10.7
|
58.2
|
|||||
|
Loss
on early extinguishment of debt
|
8.3
|
—
|
|||||
|
Income
tax expense (benefit)
|
—
|
—
|
|||||
|
Net
(loss)
|
(83.7
|
)
|
(81.6
|
)
|
|||
|
Dividends
on preferred stock
|
16.1
|
2.6
|
|||||
|
Deemed
dividends on beneficial conversion of preferred
stock
|
248.5
|
—
|
|||||
|
Net
(loss) applicable to common shares
|
(348.3
|
)%
|
(84.2
|
)%
|
|||
Nine
months ended September 30, 2005 compared to nine months ended September 30,
2004
Net
sales.
| $(000’s) |
Nine
months ended
September
30,
|
Change
from
|
|||||||||||||||||
|
2004
|
2005
|
2004
to 2005
|
|||||||||||||||||
|
$
amount
|
As
a % of
net
sales
|
$
amount
|
As
a % of
net
sales
|
$
change
|
%
change
|
||||||||||||||
|
Audio
Book Club
|
$
|
9,719
|
67.8
|
%
|
$
|
4,093
|
58.4
|
%
|
$
|
(5,626
|
)
|
(57.9
|
)%
|
||||||
|
Radio
Spirits:
|
|||||||||||||||||||
|
Catalog
|
2,125
|
14.8
|
%
|
1,730
|
24.7
|
%
|
(395
|
)
|
(18.6
|
)%
|
|||||||||
|
Wholesale
|
1,270
|
8.9
|
%
|
615
|
8.8
|
%
|
(655
|
)
|
(51.5
|
)%
|
|||||||||
|
Continuity
|
1,062
|
7.4
|
%
|
441
|
6.3
|
%
|
(622
|
)
|
(58.5
|
)%
|
|||||||||
|
Total
Radio Spirits
|
4,457
|
31.1
|
%
|
2,786
|
39.8
|
%
|
(1,672
|
)
|
(37.5
|
)%
|
|||||||||
|
MediaBay.com
|
158
|
1.1
|
%
|
133
|
1.8
|
%
|
(25
|
)
|
(16.1
|
)%
|
|||||||||
|
$
|
14,334
|
100.0
|
%
|
$
|
7,012
|
100.0
|
%
|
$
|
(7,322
|
)
|
(51.1
|
)%
|
|||||||
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 business model from that of a traditional
“book-of-the-month club” with a negative option format to a business selling
audiobooks and other audio entertainment under a positive option drop ship
format. Under the negative option format, unless the member affirmatively
declined the audiobook selection featured in our mailing on or prior to the
designated reply date, the featured item was automatically shipped to the member
and the member was billed for the product. Under our current positive option
drop ship format, products are shipped only if and when the customer
affirmatively orders them. 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.
Cost
of sales.
|
$(000’s)
|
Nine
months ended
September
30,
|
Change
from
|
|||||||||||||||||
|
2004
|
2005
|
2004
to 2005
|
|||||||||||||||||
|
$
amount
|
As
a % of
net
sales
|
$
amount
|
As
a % of
net
sales
|
$
change
|
%
change
|
||||||||||||||
|
Audio
Book Club
|
$
|
4,500
|
46.3
|
%
|
$
|
2,558
|
62.5
|
%
|
(1,942
|
)
|
(43.2
|
%)
|
|||||||
|
Radio
Spirits:
|
|||||||||||||||||||
|
Catalog
|
921
|
43.3
|
%
|
762
|
44.1
|
%
|
(159
|
)
|
(17.2
|
%)
|
|||||||||
|
Wholesale
|
834
|
65.7
|
%
|
594
|
96.5
|
%
|
(240
|
)
|
(28.8
|
%)
|
|||||||||
|
Continuity
|
416
|
39.2
|
%
|
187
|
42.5
|
%
|
(230
|
)
|
(55.1
|
%)
|
|||||||||
|
Total
Radio Spirits
|
2,171
|
48.7
|
%
|
1,543
|
55.4
|
%
|
(629
|
)
|
(29.0
|
%)
|
|||||||||
|
MediaBay.com
|
1
|
0.6
|
%
|
--
|
0.0
|
%
|
(1
|
)
|
(100.0
|
%)
|
|||||||||
|
Cost
of sales
|
6,672
|
4,101
|
58.5
|
%
|
(2,571
|
)
|
(38.5
|
%)
|
|||||||||||
|
Cost
of sales - strategic charges
|
2,100
|
14.7
|
%
|
305
|
4.3
|
%
|
(1,795
|
)
|
(85.5
|
%)
|
|||||||||
|
$
|
8,772
|
61.2
|
%
|
$
|
4,406
|
62.8
|
%
|
(4,366
|
)
|
(49.8
|
%)
|
||||||||
The
principal reason for the decline in cost of sales at Audio Book Club was a
reduction in sales of 57.9% as described above. Cost of sales as a percentage
of
sales at Audio Book Club for the nine months ended September 30, 2005 was 62.5%,
compared to 46.3% 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 and related
royalty costs as a percentage of sales (accounting for approximately 92% of
the
increase) since a smaller active membership requires 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 until in the second
quarter of 2005 we moved our warehouse and fulfillment operations to a facility
which allows us to drop ship from its inventory and accordingly we have changed
from licensing and manufacturing our audiobook titles to buying on a wholesale
basis. Under our new buying arrangement we are buying products at a fixed
percentage off of manufacturer’s suggested retail price. The cost of the new
arrangement will be dependent on future sales volume. Additionally, an increase
in fulfillment costs as a percentage of sales (accounting for approximately
8%
of the increase) due to the fixed cost of fulfillment being allocated over
lower
sales as well as one time programming and transition costs associated with
the
change in our fulfillment operations and the move from a negative option book
club to a business selling audiobooks and other audio entertainment without
a
negative option requirement contributed to the increase in cost of sales as
a
percentage of sales at Audio Book Club.
Cost
of
Radio Spirits catalog sales increased as a percentage of sales to 44.1% for
the
nine months ended September 30, 2005 as compared to 43.3% for the nine months
ended September 30, 2004 principally due to higher royalty and fulfillment
costs
as a percentage of the lower sales volume due to the fixed portion of royalty
advances and warehousing and fulfillment costs. The cost of wholesale sales
as
percentage of sales increased to 96.5% for the nine months ended September
30,
2005 as compared to 65.7% for the nine months ended September 30, 2004
principally due to a greater portion of fixed costs (allocated obsolescence
and
product development costs (accounting for approximately 43% of the increase),
the fixed cost of warehousing and fulfillment (accounting for approximately
37%
of the increase) and royalty advances (accounting for approximately 20% of
the
increase)) 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 42.5%
from
39.2% 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, due to the change in strategy for our audiobook club
we
recorded a $305,000 write-down of royalty advances to what we believe is net
realizable value at September 30, 2005. In the third quarter of 2004, we
recorded $2,100,000 in strategic charges for the write-down of inventory and
royalty advances.
Advertising
and promotion.
|
$(000’s)
|
Nine
months ended
September
30,
|
From
2004 to 2005
|
|||||||||||
|
2004
|
2005
|
$
change
|
%
change
|
||||||||||
|
Audio
Book Club:
|
|||||||||||||
|
New
member
|
$
|
382
|
$
|
—
|
$
|
(382
|
)
|
(100.0
|
)%
|
||||
|
Current
member
|
885
|
386
|
(499
|
)
|
(56.4
|
)%
|
|||||||
|
Total
Audio Book Club
|
1,267
|
386
|
(881
|
)
|
(69.6
|
)%
|
|||||||
|
Radio
Spirits:
|
|||||||||||||
|
Catalog
|
543
|
580
|
37
|
6.8
|
%
|
||||||||
|
Wholesale
|
19
|
39
|
20
|
102.6
|
%
|
||||||||
|
Continuity
|
6
|
—
|
(6
|
)
|
(100.0
|
)%
|
|||||||
|
Total
Radio Spirits
|
568
|
619
|
51
|
9.0
|
%
|
||||||||
|
New
projects
|
61
|
244
|
183
|
300.0
|
%
|
||||||||
|
Total
spending
|
1,896
|
1,249
|
(647
|
)
|
34.1
|
%
|
|||||||
|
Amount
capitalized
|
(341
|
)
|
—
|
341
|
100.0
|
%
|
|||||||
|
Amount
amortized
|
2,203
|
16
|
(2,187
|
)
|
(99.3
|
)%
|
|||||||
|
Advertising
and promotion expense
|
$
|
3,758
|
1,265
|
$
|
(2,493
|
)
|
(66.3
|
)%
|
|||||
Advertising
and promotion expenses decreased $2.5 million to $1,265,000 for the nine months
ended September 30, 2005 as compared to $3.8 million in the prior comparable
period, principally due to lower amortization of deferred customer 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 customer marketing for Audio Book Club
new customers due to our change in strategy as described above and decreased
advertising to existing customers due to the reduction in Audio Book Club
customers because of customer attrition with no marketing to replace leaving
members. During the nine months ended September 30, 2005 we incurred $244,000
related to new projects, principally marketing tests related to the download
business.
General
and administrative.
| $(000’s) |
Nine
months ended
September
30,
|
||||||||||||||||||
|
2004
|
2005
|
From
2004 to 2005
|
|||||||||||||||||
|
$
amount
|
As
a % of
net
sales
|
$
amount
|
As
a % of
net
sales
|
$
change
|
%
change
|
||||||||||||||
|
Audio
Book Club
|
$
|
2,560
|
26.3
|
%
|
$
|
1,552
|
37.9
|
%
|
$
|
(1,008
|
)
|
(39.4
|
)%
|
||||||
|
Radio
Spirits
|
804
|
18.0
|
%
|
879
|
31.6
|
%
|
75
|
9.3
|
%
|
||||||||||
|
MediaBay.com
|
473
|
299.4
|
%
|
561
|
423.2
|
%
|
88
|
18.6
|
%
|
||||||||||
|
Corporate
|
1,194
|
—
|
2,302
|
—
|
1,108
|
92.8
|
%
|
||||||||||||
|
$
|
5,031
|
35.1
|
%
|
$
|
5,294
|
75.5
|
%
|
$
|
263
|
5.2
|
%
|
||||||||
The
increase in general and administrative expenses of $263,000 for the nine months
ended September 30, 2005 as compared to the nine months ended September 30,
2004
is principally due to increases in payroll and related costs of $301,000, public
and investor relations (including directors fees) of $68,000 related to being
a
public company, travel and entertainment expenses of $65,000 and professional
fees of $487,000, partially offset by lower bad debt expense of $659,000. 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 expenses relates mainly
to
business development travel incurred to build the new digital download business.
The increase in professional fees was mainly attributable to legal and
consulting fees associated with the transition to the new download business
strategy, as well as an increase in accounting fees related to Sarbanes-Oxley
compliance.
Termination
costs.
|
Nine
months ended
September
30,
|
|||||||
|
$(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.
|
Nine
months ended
September
30,
|
|||||||
|
$(000’s)
|
2004
|
2005
|
|||||
|
Depreciation:
|
|||||||
|
Audio
Book Club
|
$
|
67
|
$
|
34
|
|||
|
Radio
Spirits
|
28
|
17
|
|||||
|
Total
depreciation
|
$
|
95
|
51
|
||||
|
Amortization:
|
|||||||
|
Corporate
|
21
|
7
|
|||||
|
Total
depreciation and amortization
|
$
|
116
|
$
|
58
|
|||
The
decrease in depreciation and amortization expenses for the nine months ended
September 30, 2005 as compared to the nine months ended September 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.
Interest
expense.
|
Nine
months ended
September
30,
|
||||||||||
|
$(000’s)
|
2004
|
2005
|
$
change
|
|||||||
|
Total
interest paid
|
$
|
852
|
$
|
2,126
|
1,274
|
|||||
|
Accrued
interest paid this period
|
85
|
1,599
|
1,514
|
|||||||
|
Current
interest paid
|
767
|
527
|
(240
|
)
|
||||||
|
Accrued
interest included in principal amount of debt
outstanding (1)
|
602
|
—
|
602
|
|||||||
|
Amortization
of deferred financing costs and original
issue discount
|
1,058
|
225
|
(833
|
)
|
||||||
|
Beneficial
conversion expenses of January 2004 Notes
|
3,991
|
—
|
(3,991
|
)
|
||||||
|
Expense
of inducement to convert, related party debt
|
390
|
—
|
(390
|
)
|
||||||
|
Total
interest expense
|
$
|
6,808
|
$
|
752
|
(6,056
|
)
|
||||
| (1) |
During
the nine months ended September 30, 2004, we had outstanding loan
agreements that provided that accrued interest on the loans be added
to
the principal amount of the debt.
|
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 our March 2005 Series D
preferred stock financing described below under “Liquidity and capital resources
- Financing activities.”
Preferred
stock dividends.
|
Nine
months ended
September
30,
|
|||||||
|
$(000’s)
|
2004
|
2005
|
|||||
|
Dividends
on Series A Preferred Stock
|
$
|
171
|
51
|
||||
|
Dividends
on Series B Preferred Stock
|
23
|
1
|
|||||
|
Dividends
on Series C Preferred Stock
|
184
|
100
|
|||||
|
Dividends
on Series D Preferred Stock
|
—
|
975
|
|||||
|
Deemed
dividend for beneficial conversion feature of Series D Preferred
Stock
|
—
|
17,423
|
|||||
|
Total
dividends deemed or accrued on preferred stock
|
$
|
378
|
18,550
|
||||
The
shares of our Series D Preferred Stock 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 issued in connection with our March 2005 Series D Preferred
Stock financing 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 a non-cash deemed dividend in the amount
of $17,423,000 to reflect the value of the beneficial conversion feature of
the
Series D Preferred Stock and increased contributed capital by $17,423,000.
The
recording of the dividend had no effect on our cash or net equity.
The
increase in preferred stock dividends for the nine months ended September 30,
2005 as compared to the nine months ended September 30, 2004 is due to the
accrual of dividends for the Series D Preferred Stock issued in March 2005,
as
described below in “Liquidity and capital resources -Recent financing
transaction.”
During
the second quarter of 2005, 1,180 shares of Series D Preferred Stock were
converted into 361,700 shares of common stock and between July 1, 2005 and
during the third quarter an additional 13,657 shares of Series D Preferred
Stock
and related dividends were converted into 4,159,822 shares of common stock.
These conversions and future conversions, if any, will reduce the preferred
stock dividend in future periods.
Loss
applicable to common stockholders.
|
Nine
moths ended
September
30,
|
From
2004 to 2005
|
||||||||||||
|
$(000’s)
|
2004
|
2005
|
$
change
|
%
change
|
|||||||||
|
Loss
applicable to common stockholders
|
$
|
(12,061
|
)
|
$
|
(24,423
|
)
|
$
|
(12,361
|
)
|
102.5
|
%
|
||
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 nine months ended September 30, 2005 increased $12.4
million to $24.4 million, or $3.82 per diluted share, as compared to a net
loss
applicable to common shares for the nine months ended September 30, 2005 of
$12.1 million, or $4.38 per diluted share of common stock, for the nine months
ended September 30, 2004.
Year
ended December 31, 2004 compared to year ended December 31,
2003
Net
sales.
|
$(000’s)
|
Year
ended
December
31,
|
Change
from
|
|||||||||||||||||
|
2003
|
2004
|
2003
to 2004
|
|||||||||||||||||
|
$
amount
|
As
a % of
net
sales
|
$
amount
|
As
a % of
net
sales
|
$
change
|
%
change
|
||||||||||||||
|
Audio
Book Club
|
$
|
26,380
|
72.0
|
%
|
$
|
12,303
|
65.3
|
%
|
$
|
(14,076
|
)
|
(53.4
|
)%
|
||||||
|
Radio
Spirits:
|
|||||||||||||||||||
|
Catalog
|
4,210
|
11.5
|
%
|
3,248
|
17.2
|
%
|
(962
|
)
|
(22.8
|
)%
|
|||||||||
|
Wholesale
|
3,048
|
8.3
|
%
|
1,671
|
8.9
|
%
|
(1,377
|
)
|
(45.2
|
)%
|
|||||||||
|
Continuity
|
2,841
|
7.8
|
%
|
1,403
|
7.5
|
%
|
(1,438
|
)
|
(50.6
|
)%
|
|||||||||
|
Total
Radio Spirits
|
10,099
|
27.6
|
%
|
6,322
|
33.6
|
%
|
(3,777
|
)
|
(37.4
|
)%
|
|||||||||
|
MediaBay.com
|
138
|
0.4
|
%
|
205
|
1.1
|
%
|
67
|
48.7
|
%
|
||||||||||
|
$
|
36,617
|
100.0
|
%
|
$
|
18,831
|
100.0
|
%
|
$
|
(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)
|
Year
ended December 31,
|
Change
from
|
|||||||||||||||||
|
2003
|
2004
|
2003
to 2004
|
|||||||||||||||||
|
$
amount
|
As
a % of
net
sales
|
$
amount
|
As
a % of
net
sales
|
$
change
|
%
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
|
35.3
|
(800
|
)
|
(61.8
|
)
|
||||||||||
|
Total
Radio Spirits
|
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 44.6%, compared to 45.9% for 2003. The slight decrease in cost of sales
as a
percentage of sales was mainly attributable to a decrease in fulfillment costs
(postage and handling) resulting from lower product returns in
2004.
As
a
percentage of net sales, cost of sales at Radio Spirits decreased to 52.5%
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 45.5%
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 80.6% 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
35.3%
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.
|
Year
ended
December
31,
|
|||||||
|
$(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 section and are transitioning our
business from a predominately mail order business to an Internet based
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
our audiobooks and other 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 compact discs 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.
Advertising
and promotion.
|
Year
ended
December
31,
|
From
2003 to 2004
|
||||||||||||
|
$(000’s)
|
2003
|
2004
|
$
change
|
%
change
|
|||||||||
|
Audio
Book Club:
|
|||||||||||||
|
New
member
|
$
|
2,092
|
$
|
414
|
$
|
(1,678
|
)
|
(80.2
|
)%
|
||||
|
Current
member
|
1,993
|
994
|
(999
|
)
|
(50.1
|
)%
|
|||||||
|
Total
Audio Book Club
|
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
|
)%
|
|||||||
|
Total
Radio Spirits
|
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 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.
|
Year
ended
December
31,
|
|||||||
|
$(000’s)
|
2003
|
2004
|
|||||
|
Advertising
and promotion - write-down
|
$
|
—
|
$
|
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) |
Year
ended
December
31,
|
Change
from
|
|||||||||||||||||
|
2003
|
2004
|
2003
to 2004
|
|||||||||||||||||
|
$
amount
|
As
a % of
net
sales
|
$
amount
|
As
a % 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
|
)%
|
|||||||||||
|
Total
Radio Spirits
|
536
|
5.3
|
85
|
1.3
|
(451
|
)
|
(84.1
|
)%
|
|||||||||||
|
MediaBay.com
|
—
|
—
|
—
|
—
|
—
|
—
|
%
|
||||||||||||
|
$
|
3,940
|
10.8
|
%
|
$
|
829
|
4.4
|
%
|
$
|
3,111
|
(79.0
|
)%
|
||||||||
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) |
Year
ended
December
31,
|
||||||||||||||||||
|
2003
|
2004
|
From
2003 to 2004
|
|||||||||||||||||
|
$
amount
|
As
a % of
net
sales
|
$
amount
|
As
a % 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 of $136,000 due to reduced
staff and reduced commissions to outside sales personnel of $127,000 due to
lower wholesale sales. Our corporate general and administrative expenses for
the
year ended December 31, 2004 declined principally due to lower payroll of
$257,000 costs due to fewer employees.
Asset
write-downs and strategic charges.
|
Year
ended
December
31,
|
|||||||
|
$(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.
Termination
costs.
|
Year
ended
December
31,
|
|||||||
|
$(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) |
Year
ended
December
31,
|
||||||||||||||||||
|
2003
|
2004
|
From
2003 to 2004
|
|||||||||||||||||
|
$
amount
|
As
a % of
net
sales
|
$
amount
|
As
a % 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
|
)%
|
|||||||||
|
Total
depreciation
|
146
|
120
|
(26
|
)
|
|||||||||||||||
|
Amortization:
|
|||||||||||||||||||
|
Corporate
|
182
|
—
|
24
|
—
|
(158
|
)
|
(87.0
|
)%
|
|||||||||||
|
Total
depreciation and amortization
|
$
|
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.
|
Year
ended
December
31,
|
From
2003 to 2004
|
||||||||||||
| $(000’s) |
2003
|
2004
|
$
Change
|
%
Change
|
|||||||||
|
Interest
paid
|
$
|
384
|
$
|
1,045
|
$
|
661
|
159.1
|
%
|
|||||
|
Interest
accrued
|
74
|
25
|
(49
|
)
|
(66.2
|
)%
|
|||||||
|
Accrued
interest included in principle amount of debt outstanding
|
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 below in “Liquidity and capital resources - Recent
financing transactions.”
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.
Income
tax expense.
|
Year
ended
December
31,
|
From
2003 to 2004
|
||||||||||||
|
$
(000's)
|
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 our distribution strategy, described above, we have determined
that it is more likely than not (a likelihood of more than 50%) that we will
be
unable 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.
|
Year
ended
December
31,
|
From
2003 to 2004
|
||||||||||||
|
$
(000's)
|
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.
|
Year
ended
December
31,
|
||||||||||
|
$(000’s)
|
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.
Year
ended December 31, 2002 compared to year ended December 31,
2003
Net
sales.
| $(000’s) |
Year
ended
December
31,
|
Change
from
|
|||||||||||||||||
|
2002
|
2003
|
2002
to 2003
|
|||||||||||||||||
|
$
amount
|
As
a % of
net
sales
|
$
amount
|
As
a % of
net
sales
|
$
change
|
%
change
|
||||||||||||||
|
Audio
Book Club
|
$
|
34,343
|
75.1
|
%
|
$
|
26,380
|
72.0
|
%
|
$
|
(7,963
|
)
|
(23.2
|
)%
|
||||||
|
Radio
Spirits:
|
|||||||||||||||||||
|
Catalog
|
4,507
|
9.9
|
%
|
4,210
|
11.5
|
%
|
(297
|
)
|
(6.6
|
)%
|
|||||||||
|
Wholesale
|
5,594
|
12.2
|
%
|
3,048
|
8.3
|
%
|
(2,546
|
)
|
(45.5
|
)%
|
|||||||||
|
Continuity
|
1,085
|
2.4
|
%
|
2,841
|
7.8
|
%
|
1,756
|
161.8
|
%
|
||||||||||
|
Total
Radio Spirits
|
11,186
|
24.5
|
%
|
10,099
|
27.6
|
%
|
(1,087
|
)
|
(9.7
|
)%
|
|||||||||
|
MediaBay.com
|
215
|
0.4
|
%
|
138
|
0.4
|
%
|
(77
|
)
|
(35.8
|
)%
|
|||||||||
|
$
|
45,744
|
100.0
|
%
|
$
|
36,617
|
100.0
|
%
|
$
|
(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) |
Year
ended
December
31,
|
Change
from
|
|||||||||||||||||
|
2002
|
2003
|
2002
to 2003
|
|||||||||||||||||
|
$
amount
|
As
a % of
net
sales
|
$
amount
|
As
a % 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
|
%
|
||||||||||
|
Total
Radio Spirits
|
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 fulfillment costs
(postage and handling) relating to higher return rates in 2003 (accounting
for
approximately 15% of the increase), and higher average royalty rates (accounting
for approximately 93% of the increase) since fewer books were sold in new member
offerings, which have lower royalty rates, partially offset by a reduction
in
production costs due to 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
(offsetting 8% of the increase).
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
|
Year
ended
December
31,
|
From
2002 to 2003
|
||||||||||||
|
$(000’s)
|
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
|
)%
|
|||||||
|
Total
Audio Book Club
|
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
|
)%
|
|||||||
|
Total
Radio Spirits
|
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 many 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.
Bad
debt expense.
| $(000’s) |
Year
ended
December
31,
|
Change
from
|
|||||||||||||||||
|
2002
|
2003
|
2002
to 2003
|
|||||||||||||||||
|
$
amount
|
As
a % of
net
sales
|
$
amount
|
As
a % 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
|
%
|
||||||||||
|
Total
Radio Spirits
|
86
|
1.5
|
%
|
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.
General
and administrative.
| $(000’s) |
Year
ended
December
31,
|
||||||||||||||||||
|
2002
|
2003
|
From
2002 to 2003
|
|||||||||||||||||
|
$
amount
|
As
a % of
net
sales
|
$
amount
|
As
a % 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 of $160,000 due to reduced staff and reduced
commissions to outside sales personnel of $128,000 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 of $110,000 and settlement of all outstanding amounts
with a former joint venture partner responsible for syndication of our old-time
radio shows on broadcast radio of $50,000. Our corporate general and
administrative expenses for the year ended December 31, 2003 declined
principally due to reductions in public and investor relations of $194,000,
travel expenses of $119,000 and legal and consulting fees of $608,000 partially
offset by higher insurance costs of $155,000.
Asset
write-downs and strategic charges.
|
Year
ended
December
31,
|
|||||||
|
$(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.
|
Year
ended
December
31,
|
|||||||
|
$(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.
Depreciation
and amortization.
| $(000’s) |
Year
ended
December
31,
|
||||||||||||||||||
|
2002
|
2003
|
From
2002 to 2003
|
|||||||||||||||||
|
$
amount
|
As
a % of
net
sales
|
$
amount
|
As
a % 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
|
)%
|
|||||||||
|
Total
depreciation
|
221
|
146
|
(75
|
)
|
|||||||||||||||
|
Amortization:
|
|||||||||||||||||||
|
Corporate
|
1,093
|
—
|
182
|
—
|
(911
|
)
|
(83.3
|
)%
|
|||||||||||
|
Total
depreciation and amortization
|
$
|
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) |
Year
ended
December
31,
|
From
2002 to 2003
|
|||||||||||
|
2002
|
2003
|
$
change
|
%
change
|
||||||||||
|
Interest
paid
|
$
|
766
|
$
|
384
|
$
|
(382
|
)
|
(49.9
|
)%
|
||||
|
Interest
accrued
|
118
|
74
|
(44
|
)
|
(37.3
|
)%
|
|||||||
|
Accrued
interest included in principle amount of debt outstanding
|
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.
|
Year
ended
December
31,
|
From
2002 to 2003
|
||||||||||||
|
$
(000's)
|
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.
Preferred
stock dividends.
|
Year
ended
December
31,
|
From
2002 to 2003
|
||||||||||||
|
$
(000's)
|
2002
|
2003
|
$
change
|
%
change
|
|||||||||
|
Series
A Preferred Stock dividends
|
$
|
217
|
$
|
228
|
$
|
11
|
5.1
|
%
|
|||||
|
Series
B Preferred Stock dividends
|
—
|
18
|
18
|
55.6
|
%
|
||||||||
|
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.
|
Year
ended
December
31,
|
From
2002 to 2003
|
||||||||||||
|
$(000’s)
|
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.
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
September 30, 2005, we had cash on hand of $10.4 million, which is substantially
greater than the $3.1 million cash on hand at December 31, 2004. We believe
that
our existing cash plus anticipated revenues will be sufficient to fund our
capital commitments as described below and operate our business for a minimum
of
twelve months. However, we intend to significantly increase our marketing
efforts and content acquisition efforts and have and will continue to expend
cash on technology maintenance and development. The level of these efforts
will
depend in part on the timing and extent of revenue generation form our digital
download business, resulting customer acquisition costs and whether we enter
into strategic relationships with third parties who fund a portion of these
costs. If our strategy is successful, we will likely require additional
financing to fund additional anticipated marketing expenditures. Additionally,
we will likely require additional financing to fund our long-term growth. We
cannot assure you that any financing will be available when
required.
Cash
flows
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
nine months ended September 30, 2005, cash increased by $7.2 million, as we
had
net cash used in operating activities of $5.6 million, used net cash of $1.2
million 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 $24.4 million, an increase in prepaid expenses of $121,000,
and
a decrease in accounts payable, accrued expense and preferred dividends payable
of $1.5 million which were 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 $58,000, cost of sales strategic
charges of $305,000, amortization of deferred financing costs and original
issue
discount of $225,000, non-current accrued interest and dividends payable of
$306,000; payment of accrued dividends through issuance of common stock of
$85,000; as well as decreases in accounts receivable, inventory and royalty
advances of $811,000, $593,000 and $108,000. The decreases in accounts
receivable and inventory are primarily attributable to the reduction in sales
as
described above and the remaindering of manufactured audio book inventory under
license due to the change in strategy discussed 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 decrease in accounts payable and accrued expenses is principally
due
to the payment of back royalties to publishers. 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. We 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.
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 nine months ended September 30, 2005, net cash used in investing activities
consists of acquisition of fixed assets and website development costs of $1.2
million, principally computer equipment and the cost of the development of
the
new websites offering downloadable audio.
Financing
Activities. During
the nine months ended September 30, 2005, we received net cash proceeds from
the
sale of Series D Preferred Stock of $31.5 million, as described below, 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.
Recent
financing transactions
The
folowing is a summary of our financing activities since January 1,
2004:
January
2004 convertible debt.
On
January 29, 2004, we issued $4.0 million aggregate principal amount of
promissory notes and warrants to purchase 392,158 shares of common stock,
referred to as the January 2004 warrants, to institutional and accredited
investors.
The
notes
were due on the earlier of (i) April 30, 2005, (ii) such date on or after July
1, 2004 when all of our indebtedness under our existing credit facility was
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 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 accordance with the terms of the notes, upon
our receipt of shareholder approval, which occurred on April 12, 2004, the
principal amount of the notes automatically converted into shares of our common
stock at the rate of $4.50 per share, or approximately 888,888 shares. In
addition, accrued interest in the amount of $49,000 also converted into common
stock at $4.50 per share, or 10,813 shares.
The
January 2004 warrants are exercisable until January 28, 2009 at an exercise
price of $7.68 per share.
In
connection with our January 2004 note financing, 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 our common stock on April 12, 2004 as partial consideration
for
the placement agent’s services. All of these warrants are identical to the
January 2004 warrants.
We
used a
portion of the proceeds of the January 2004 financing 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. and to reduce our accounts payable.
2004
Credit Agreement and related financing transactions.
On
April 28, 2004, we entered into a credit agreement, referred to as the 2004
Credit Agreement, by and among MediaBay and certain of its subsidiaries, the
guarantors signatory thereto, Zohar CDO 2003-1, Limited, referred to as 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 was 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
our
outstanding obligations under (i) promissory notes that we issued in October
2003 in the aggregate principal amount of $1.0 million plus accrued interest
of
$200,000 and (ii) our outstanding credit agreement, which had an outstanding
principal balance of approximately $1.4 million and a partial payment of $1.6
million on 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 2004 Credit Agreement.
Norton
Herrick, a principal shareholder of ours at that time, referred to as Herrick,
Huntingdon Corporation, a company wholly-owned by Herrick, referred to as
Huntingdon, and N. Herrick Irrevocable ABC Trust, of which Herrick is the
beneficiary, and Howard Herrick, a principal shareholder of ours at the time,
was the trustee, referred to as the Herrick Trust, 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 us to Herrick, Huntingdon
and
the Herrick 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 Herrick Trust to Herrick) owed by us to Herrick aggregating
$1,181,419 into (i) 11,814 shares of our 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 by us to Huntingdon
aggregating $1,171,278 into (i) 31,713 shares of our 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 our 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 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 our March 2005 financing described below, Herrick and Huntingdon
converted all their notes into common stock at their stated terms.
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 for the remaining principal amount. The new ABC note
extended 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 new ABC note was converted into
shares of our common stock.
Settlement
of put obligations.
Premier
Electronic Laboratories, Inc. (“Premier”) exercised its right to put its shares
of common stock to us pursuant to a Put Agreement dated December 11, 1990.
We
entered into a settlement agreement with Premier dated April 1, 2004, pursuant
to which, among other things, we agreed to pay Premier $950,000 as payment
of
the amount due to Premier. 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 are 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
2004 sale of equity.
On
October 11, 2004, we entered into a Securities Purchase Agreement pursuant
to
which we issued to Forest Hill Capital LLC, referred to as Forest Hill, for
the
account of certain of its affiliates, referred to as the Forest Hill entities,
an aggregate of 300,000 shares of our common stock and warrants to purchase
66,667 shares of common stock, referred to as the October 2004 warrants. The
Forest Hill entities paid an aggregate purchase price of $900,000 for these
shares and October 2004 warrants. Each October 2004 warrant is exercisable
to
purchase one share of our common stock at an exercise price of $4.98 per share
until October 11, 2009. In connection with the March 2005 financing described
below, the Forest Hill entities exchanged the shares of common stock and October
2004 warrants issued to them in October 2004 for securities issued in the March
2005 financing.
March
2005 equity financing.
On
March 23, 2005, we issued to accredited investors for an aggregate purchase
price of $35.9 million an aggregate of (a) 35,900 shares of our Series D
Convertible Preferred Stock, convertible into 10,878,788 shares of our common
stock, (b) 5,439,394 five-year common stock purchase warrants, referred to
as the March 2005 warrants, and (c) preferred warrants, referred to as
Over-Allotment Warrants, to purchase for additional proceeds to us of $8.975
million, up to 8,975 additional shares of Series D Preferred Stock and 1,359,849
additional March 2005 warrants in a private financing, referred to as the March
2005 financing.
Immediately
prior to the March 2005 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 common stock from 150,000,000 to 300,000,000, (b) a
change of control which could occur as a result of the financing, and (c) our
issuance, in connection with the transactions contemplated by the financing,
of
common stock in excess of 19.99% of the number of shares of common stock
outstanding immediately prior to the financing. However, while such actions
were
approved by a majority of our shareholders prior to the financing, we were
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
shares of Series D Preferred Stock have a face or stated value of $1,000 per
share and are convertible at any time at the option of the holder into shares
of
common stock at the rate of $3.30 per each 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 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 shares of Series D Preferred Stock at their stated
value. Cumulative dividends accrue on the Series D Preferred shares on an
annualized basis in an amount equal to 6% of their stated value until they
are
converted or redeemed and are 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 our common stock 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
Series D Preferred Stock is 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
Series D Preferred Stock without the prior written consent of holders of at
least two-thirds of the then outstanding shares of the Series D Preferred
Stock.
Each
of
the March 2005 warrants is exercisable to purchase one share of our common
stock, at an exercise price of $3.36 per share, until September 23, 2010,
subject to certain anti-dilution adjustments, including for issuances of common
stock for consideration below the exercise price of the warrants. In addition,
once exercisable, the March 2005 warrants permit cashless exercises during
any
period when the underlying shares are not covered by an effective resale
registration statement.
The
Over-Allotment warrants are exercisable until February 9, 2006 at an exercise
price per each share of Series D Preferred Stock purchased equal to its stated
value, with each such purchase including an additional March 2005 warrant
exercisable for a number of shares of common stock equal to 50% of the shares
of
common stock then issuable upon conversion of a share of Series D Preferred
Stock.
As
part
of the March 2005 financing, the Forest Hill entities exchanged the 300,000
million shares of common stock and 66,667 October 2004 Warrants previously
purchased by them in October 2004, for $900,000 of the securities issued in
the
March 2005 financing.
In
connection with the March 2005 financing, we also entered into an agreement,
referred to as the Herrick Agreement, with Herrick and Huntingdon, collectively
referred to as the “Herrick Entities, pursuant to which, concurrently with the
financing:
|
·
|
all
$5.784 million principal amount of our convertible notes owned by
the
Herrick Entities, referred to as the Herrick Notes, and 10,684 of
their
shares of our Series A Preferred Stock were converted into an aggregate
of
approximately 2.03 million shares of our common stock, referred to
as the
Herrick Shares, at their stated conversion rate of $3.36 per share;
|
|
·
|
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 for $5.8 million, the aggregate
stated capital of such shares, on the earlier of the effective date
of the
Shareholder Consent and September 1, 2005, and both the shares to
be
redeemed and the redemption price were placed into escrow pending
such
date;
|
|
·
|
the
Herrick Entities waived certain of their registration rights and
we agreed
to include the Herrick Shares for resale in a registration statement
as
long as they were owned by the Herrick Entities and not otherwise
transferred, except as contemplated in the Herrick
Agreement;
|
|
·
|
the
Herrick Entities consented to the terms of the March 2005 financing
and
the agreements entered into in connection with such 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
|
|
·
|
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 March 2005
financing. Merriman Curhan Ford & Co. 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 to purchase
1,193,182 shares of common stock at an exercise price of $4.14 per share
commencing upon the effectiveness of the Shareholder Consent. Merriman also
received a $175,000 structuring fee from us with respect to the financing.
In
addition, we issued to Satellite Strategic Finance Associates, LLC, an investor
in the financing, a warrant to purchase 41,667 shares of common stock (identical
to the March 2005 warrants), and reimbursed it $55,000 for expenses, for
consulting services rendered by it in connection with the
financing.
Concurrently
with the March 2005 financing, we repaid from the 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, and
reported
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 March 2005 financing to pay
all accrued and unpaid interest to the Herrick Entities on their convertible
notes and the Series A Preferred Stock and Series C Preferred
Stock.
As
of
January 9, 2006, 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
The
following table sets forth our contractual obligations as of December 31, 2004:
|
$(000’s)
|
Payments
Due by Period
|
|||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than
1
Year
|
1-3
Years
|
3-5
Years
|
More
Than
5
Years
|
|||||||||||
|
Debt
obligations
|
$
|
18,022
|
$
|
284
|
$
|
17,195
|
$
|
466
|
$
|
77
|
||||||
|
Capital
lease obligations
|
25
|
18
|
7
|
—
|
—
|
|||||||||||
|
Operating
lease obligations
|
771
|
186
|
387
|
198
|
—
|
|||||||||||
|
Purchase
obligations
|
1,134
|
303
|
693
|
138
|
—
|
|||||||||||
|
Interest
payments on debt
|
4,428
|
1,142
|
3,286
|
|||||||||||||
|
Dividend
payments on preferred stock
|
4,580
|
—
|
2,290
|
2,290
|
*
|
|||||||||||
|
Total
|
$
|
28,960
|
$
|
1,933
|
$
|
23,858
|
$
|
3,092
|
$
|
77
|
||||||
|
*
|
Dividends
payable on the outstanding preferred stock as of December 31, 2004
are
$1,145,000 per year, subject to reduction to the extent the preferred
stock is redeemed or converted.
|
In
March
2005, an aggregate of $9,400,000 of debt and $2,271,000 of accrued interest
and
dividends were repaid from the proceeds of the March 2005 financing, and an
additional $5,784,000 of convertible debt was converted into common stock
pursuant to its terms. Accordingly, our debt obligations were reduced to
$657,000 and interest payments on debt were reduced to $209,000 as of March
31,
2005. Interest and principal are payable in monthly installments of $7,000
through May 2007 and $19,000 through April 2010. As of September 30, 2005,
dividends payable on our outstanding preferred stock are approximately
$1,270,000 per year, subject to reduction to the extent the preferred stock
is
converted or redeemed.
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 (in thousands):
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 agreements were $59,000, $53,000 and $53,000 in 2004, 2003 and
2002,
respectively. The amount of equipment capitalized under the leases and included
in fixed assets is $196,000, and net of depreciation the fixed asset balance
is
$24,000 and $94,000 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 $9,000 and
$71,000, respectively.
Minimum
annual lease commitments under capital leases are as follows (in
thousands):
|
Year
ending December 31,
|
||||
|
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.
As
of
September 30, 2005, we had past due royalty payments under our licensing
agreements aggregating $1,300,000. The publishers and other rightsholders to
whom these payments would be payable have not requested royalty statements
or
payments. These amounts are accrued for and reflected in our financial
statements.
Minimum
advances required to be paid under existing agreements for the next five years
are as follows:
|
Year
ended December 31,
|
||||
|
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 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.
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.
We
have
no exposure to market risk for changes in interest rates. We had total debt
outstanding as of September 30, 2005 of $825,000 (including $179,000 of original
issue discount), 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 nine months ended September 30, 2005.
Introduction
We
are a
digital media and publishing company specializing in spoken audio entertainment,
such as audio readings of books, newspapers, magazines, original productions
and
radio broadcast transcripts, each of which audio readings is referred to as
a
title. We offer thousands of audio titles, comprising over 75,000 hours of
aggregate audio content, which we distribute via mail order, our websites and
some of the nation’s largest retailers. Our titles can be purchased in digital
format via Internet downloads through subscription services at a flat monthly
fee for a specified number of titles per month, and/or on a per title, or a
la
carte, basis. Our titles can also be obtained in hard copy format, such as
CDs
and cassettes.
Today
we
have two principal content libraries; (1) audiobooks which we sell via digital
download and on compact disc 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 compact disc 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 a per title basis or as part of a monthly subscription. The service offers
users audio content that can be downloaded directly to the users’ personal
computers, burned to CD or transferred to any Window’s Media compatible device
that plays secured WMA (Windows Media Audio) files. There are over 70 digital
devices on the market today that are compliant with Microsoft Corporation’s
PlaysforSure”™ digital rights management and device platform, which means they
can play WMA formatted digital files, and we are working closely with Microsoft
Corporation to ensure that our content works seamlessly on these devices and
the
many new smart cellular phones that will run the new Windows Mobile 5.0
operating system.
To
expand
the digital distribution of our audio content, we recently executed 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 a distribution
agreement with Music Net, a business-to-business digital music service provider,
to serve as its exclusive spoken word content aggregator. 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 compact discs
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.
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 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™” digital rights management and device platform became available
for sale by many of the leading device manufacturers. Examples of companies
offering a “PlaysforSure™” 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 CD and audio cassette tape distribution 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.
Downloading provides consumers a more convenient way to purchase audio in real
time and an incredible opportunity for broad choice since there are no inventory
requirements. We believe that download distribution is better for the
environment because it eliminates the need for the physical storage format
of
the content, such as the CD or cassette, and it enables us to provide real
savings to the consumer, as two audiobooks can be downloaded for $19.95 whereas
we typically charge $25.00 for one audiobook on CD or cassette.
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.
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.
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. 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, AOL Music Now, 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, from 1973 to 2003,
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 1,013 hours
listening to the radio in 2003, compared to 911 hours in 1998, which averages
out to an additional approximately 2 hours a week spent listening to the radio
in 2003. In comparison, Veronis Suhler Stevenson estimates that book reading
declined among Americans from an average of 118 hours in 1998 to 110 hours
in
2003. According to the 2000 United States Census, 97 million people drove to
and
from work alone that year, an increase of 15% from 1990. The average travel
time to work increased to 25.5 minutes each way, an increase of 14% from 1990.
In addition, more than 42 million individual drivers have a commute of at least
30 minutes or more each way.
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 2004 Sales Survey, the U.S. market for
audiobooks has reached an estimated $800 million. The APA also estimated that
one in five, or 23 million, American households listened to audiobooks in
2001.
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 a 2001 report by market analyst International Data Corp. (IDC), worldwide
sales of smart handheld devices were expected to grow at a rate of 48% per
year
over the next four years, reaching approximately $26 billion by
2004.
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% per year through 2006.
According to Jupiter, shipments of MP3 players in the U.S. for 2003 were
forecasted at over 3.5 million. Jupiter also predicted that there would be
an
installed based of more than 26 million MP3 players by 2006 and that, starting
in 2004, the demand for players with hard drives would surpass that of players
with flash memory. According to a Consumer Electronics Market Association study
from June 2005, nearly 20 million DVD players were shipped in 2004 and household
penetration of DVD players rose from 60% at the beginning of 2004 to 75%, or
over 86 million households, at the beginning of 2005.
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. Research
firm IDC published a report in February 2004 in which it noted that smartphones
showed significant growth and future promise and that, 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.
Businesses
Soundsgood.com
SoundsGood.com
which was launched in October 2005, provides consumers with an easy way to
access thousands of best selling audio books, classic radio shows and theatre
performances, as well as a growing collection of audio newspapers, magazines,
lectures, self help and wellness courses, modern day radio shows and other
spoken word entertainment.
SoundsGood.com
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 and had a negative option requirement. This meant that, unless a member
affirmatively declined the featured selection in our mailing on or prior to
the
designated reply date, the selection was automatically shipped to the member
and
the member was billed. We recently transitioned this business to one that has
a
positive option drop ship format, meaning that products are shipped only if
the
customer affirmatively orders the product, and that sells audiobooks via
download, CD and cassette format.
We
mail
one catalog approximately every month, which offers between 50 and 75 audio
book
titles. Audiobook Club customers are encouraged to make their purchases on
Soundsgood.com by downloading their selections. Alternatively, customers can
purchase their selections in traditional CD or cassette format. We purchase
audiobooks on a wholesale basis and utilize the services of a third-party
fulfillment provider which allows us to ship the titles from its inventory.
We
also utilize the services of a third-party which provides order processing
and
data processing services. These services include accepting customer orders,
implementing our credit policies, billing and invoicing.
Radio
Spirits
Radio
Spirits sells old-time radio programs 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.
We
have
acquired exclusive licensing rights to a substantial majority of our old time
radio library. These rights have been principally acquired from the original
rights holders (actors, directors, writers, producers or others) or their
estates. Our engineers use digital sound equipment to improve the sound quality
of our old time radio programs and then we contract with third-party
manufacturers to duplicate and manufacture our old time radio program cassettes
and CDs.
We
utilize the services of a third-party fulfillment provider to warehouse and
track our inventory, ship the ordered product, implement our credit policies,
and provide data processing services, including billing and invoicing
services.
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.
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.
Warranties
and return policies
Our
policy is to accept returns of damaged audiobooks and old time radio programs.
In order to maintain favorable customer relations, we generally accept returns
of unopened audiobooks and old time radio products sold through our catalogs
within 30 days of purchase. We also accept returns of unsold products sold
on a
wholesale basis.
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
December 31, 2005 we had 28 full-time employees. Of these employees, 3 served
in
corporate management; 14 served in operational positions at our Audio Book
Club
operations; 4 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.
Properties
Our
executive office is currently located at 2 Ridgedale Avenue, Cedar Knolls,
New
Jersey, where we lease approximately 12,000 square feet of office space. The
lease expires in October 2008 and provides for minimum annual payments of
$186,000 in 2005, $189,000 in 2006 and $198,000 in each of 2007 and
2008.
We
are
not a party to any lawsuit or proceeding which we believe is likely to have
a
material adverse effect on us.
MANAGEMENT
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
|
Chief
Financial Officer and 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
R. Rosetti
was
appointed Chairman of our Board of Directors in August 2004 and has been a
member of our board of directors since December 2002. Since December 1, 2001,
Mr. Rosetti has been President of SafirRosetti, an investigative and security
firm owned by Omnicom Group, Inc. From 1987 to 1991, Mr. 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, publicity traded
investment company focused on early stage, new media and software investments
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 golf tournament
that raises money for Leukemia and Lymphoma research. Mr. Dittus earned a
Bachelor of Science 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 to 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.
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 Food Services, the parent corporation
of
Caterair International, Inc., and LSG/SKY Chefs from September 1995 to June
2001. 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. Since January 2006, Mr. Berman has been Chief Executive
Officer of Nexmed, Inc., a publicly traded biotechnology company. From 2000
to
March 2004, Mr. Berman was Chairman of the Board of KnowledgeCube Group, Inc.,
an internet commerce firm. From September, 1998 to June, 2000, Mr. Berman was
Chairman of the Board and C.E.O. of Internet Commerce Corporation (Nasdsaq:
ICCA), a leading e-commerce business-to-business service provider. From 1982
to
1998, Mr. Berman was President of the American Acquisitions Company, a
privately-held merchant banking firm, and from 1983 to 1993, Chairman of the
Board of Prestolite Battery Company of Canada, the largest battery producer
in
Canada. From 1975 to 1982, Mr. Berman served in various executive positions
at
Banker’s Trust Company, including Senior Vice President responsible for managing
the M&A and Equity Buyout Departments. Mr. Berman currently serves on the
board of directors of Internet Commerce Corporation (Nasdaq: ICCA), Nexmed,
Inc.
(Nasdaq: NexM), Advaxis (OTCBB: ADVS), GVI Security Solutions Inc. (OTCBB:
GVIS), Dyadic International, Inc. (OTCBB: DYAD) International Microcomputer
Software (OTCBB: IMSI) Nayna networks, Inc. (OTCBB:NAYN) and National Investment
Managers (OTLBB:NIVM). Mr. Berman holds a J.D. from Boston College Law School
and an M.B.A. in Finance from New York University.
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 Chief Executive Officer 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.
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.
Board
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.
Board
Committees
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
have
adopted a Code of Ethics and Business Conduct that applies to our employees,
including our senior management, including our 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.
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”).
Summary
Compensation Table
|
Long-Term
compensation awards
securities
underlying
|
||||||||||||||||
|
Annual
compensation
|
||||||||||||||||
|
Name
and principal position
|
Year
|
Salary
|
Bonus
|
Options/SAR’s
(#)
|
All
other compensation
|
|||||||||||
|
Carl
Wolf
|
2004
|
$
|
61,923
|
$
|
—
|
83,333
|
$
|
—
|
||||||||
|
Former
Chairman and Former Chief Executive Officer (1)
|
2003 | 135,000 | — | 97,500 | — | |||||||||||
| 2002 | 15,688 | — | 107,500 | — | ||||||||||||
|
Joseph
Rosetti
Chairman
(2)
|
2004
|
33,750
|
—
|
95,833
|
—
|
|||||||||||
|
Ronald
Celmer
|
2003
|
85,608
|
—
|
250,000
|
—
|
|||||||||||
|
Former
Chief Executive Officer (3)
|
||||||||||||||||
|
Jeffrey
Dittus
Chief
Executive Officer (4)
|
2004
|
222,172
|
—
|
375,000
|
—
|
|||||||||||
|
John
F. Levy
|
2004
|
190,048
|
—
|
150,000
|
||||||||||||
|
Vice
Chairman and Chief
Financial Officer
|
2003
|
190,000
|
35,705
|
10,040
|
—
|
|||||||||||
|
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 $56,250 in six semi-monthly payments
commencing January 15, 2004.
|
|
(4)
|
Jeffrey
Dittus became Chief Executive Officer on January 29,
2004.
|
The
following table discloses options granted during the fiscal year ended December
31, 2004 to the Named Executives:
Option/SAR
Grants in Fiscal Year Ending December 31, 2004
|
Number
of shares
underlying
|
%
of total options granted to employees
in
|
Exercise
price
|
Potential
realizable
value
at
assumed annual rates of stock price appreciation
for
option term
|
||||||||||||||||
| Name |
options
granted
|
fiscal
year
|
($/share)
|
Expiration
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
|
Name
|
Number
of securities underlying
unexercised
options at
December
31, 2004
|
Value
of unexercised
in-the-money
options
at
December 31, 2004
|
|||||||||||
|
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
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 our 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.
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 January 9, 2006, options to purchase all of the shares
available under this plan 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 January 9, 2006, options to purchase all of the shares available
under this plan 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 January 9, 2006,
options to purchase all of the shares available under this plan 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 January 9, 2006,
options to purchase all of the shares available under this plan have been
granted under the 2001 plan.
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 January 9, 2006,
options to purchase an aggregate of 1,226,073 shares of our common stock have
been granted under the 2004 plan.
As
of
January 9, 2006, of the options outstanding under our plans, options to purchase
1,558,527 shares of our common stock which are outstanding to our officers
and
directors as follows: Joseph R. Rosetti - 160,834 shares; Jeffrey Dittus -
741,667 shares; Patricia Campbell - 301,667 shares; Robert Toro - 208,524
shares; Daniel J. Altobello - 25,000 shares; Richard J. Berman - 70,834 shares;
Robert B. Montgomery - 16,667 shares; Marshall C. Phelps — 16,667 shares; and
Carl U.J. Rossetti - 16,667 shares.
The
following table sets forth certain information as of January 19, 2005 relating
to the beneficial ownership of shares of our common stock by (i) each person
or
entity who is known by us to own beneficially 5% or more of our 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.
|
Name
and address of beneficial owner (1)(2)
|
Number
of shares
beneficially
owned
|
Percentage
of
shares
beneficially
owned
|
|||||
|
Jeffrey
Dittus
|
453,667
|
(3)
|
4.2
|
%
|
|||
|
Joseph
Rosetti
|
141,667
|
(4)
|
1.3
|
||||
|
Patricia
Campbell
|
126,667
|
(5)
|
1.2
|
||||
|
Robert
Toro
|
103,524
|
(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
U. J. Rossetti
|
8,333
|
(7)
|
|||||
|
Radcliffe
SPC, Ltd.
|
989,958
|
(9)
|
9.5
|
||||
|
Satellite
Strategic Finance, LLC
|
990,119
|
(10)
|
9.5
|
||||
|
SF
Capital Partners Ltd.
|
606,060
|
(11)
|
5.5
|
||||
|
Wood
River Capital Management, L.L.C.
|
|||||||
|
Wood
River Associates, L.L.C.
|
6.9
|
||||||
|
Wood
River Partners, L.P.
|
625,835
|
(12)
|
6.0
|
||||
|
All
directors and executive officers as a group (9 persons)
|
925,524
|
8.2
|
|||||
| * |
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 January 9, 2006 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. Pursuant
to the
Certificate of Designation of the Series D preferred stock and the
terms
of the March 2005 warrants, the selling security holder is not permitted
to convert or exercise the foregoing securities to the extent any
such
conversion or exercise would result in its beneficial ownership of
more
than 4.99% of our outstanding common stock after giving effect to
such
conversion or exercise.
|
|
(3)
|
Represents
(i) 2,833 shares of common stock, and (ii) 450,834 shares issuable
upon
exercise of options. Does not include 290,836 shares issuable upon
exercise of options.
|
|
(4)
|
Represents
(i) 10,833 shares of common stock, and (ii) 130,834 shares issuable
upon
exercise of options. Does not include 30,000 shares issuable upon
exercise
of options.
|
|
(5)
|
Represents
shares issuable upon exercise of options. Does not include 175,000
shares
issuable upon exercise of options.
|
|
(6)
|
Represents
shares issuable upon exercise of options. Does not include 105,000
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 is based upon a Schedule 13G filed with the SEC on August
16,
2005. Represents shares of our common stock held by Radcliffe SPC,
Ltd.,
for and on behalf of the Class A Convertible Crossover Segregated
Portfolio. Does not include 212,424 shares of common stock issuable
upon
conversion of 701 shares of Series D preferred stock and 606,060
shares of
common stock issuable upon exercise of warrants. Pursuant to an investment
management agreement, RG Capital Management, L.P. (“RG Capital”) serves as
the investment manager of Radcliffe SPC, Ltd.’s Class A Convertible
Crossover Segregated Portfolio. RGC Management Company, LLC (“RGC
Management”) is the general partner of RG Capital. Steve Katznelson and
Gerald Stahlecker serve as the managing members of RGC Management.
Each of
RG Capital, RGC Management and Messrs. Katznelson and Stahlecker
disclaims
beneficial ownership of the securities owned by Radcliffe SPC, Ltd.
for
and on behalf of the Class A Convertible Crossover Segregated Portfolio.
The address of Radcliffe SPC, Ltd. is c/o SEI Investments Global
Fund
Services, Ltd., Styne House, Upper Hatch Street, Dublin 2
Ireland.
|
|
(10)
|
The
following information is based upon a Schedule 13G filed September
2,
2005. Represents 389,590 shares of our common stock. Represents 389,590
shares held by Satellite Strategic Finance Associates, L.L.C. and
600,529
shares of our common stock held by Satellite Strategic Finance Partners,
Ltd. (collectively, the “Satellite Finance Funds”). Does not include
1,396,667 shares of common stock issuable upon conversion of 4,609
shares
of Series D preferred stock and 893,939 shares of common stock issuable
upon exercise of warrants held by Satellite Strategic Finance Associates,
L.L.C. and 2,154,545 shares of commons stock issuable upon conversion
of
7,110 shares of Series D Preferred Stock and 1,378,787 shares of
common
stock issuable upon exercise of
warrants held by Satellite Strategic Finance Partners, Ltd. Satellite
Asset Management is the investment manager to each of the Satellite
Finance Funds and exercises investment discretion over each of the
Satellite Finance Funds’ portfolios. The general partner of Satellite
Asset Management, L.P. is Satellite Fund Management LLC. Satellite
Fund
Management LLC has four members that make investment decisions on
behalf
of the Satellite Finance Funds, and investment decisions made by
such
members, when necessary, are made through the approval of a majority
of
such members. The address of the Satellite Finance Funds is 623 Fifth
Avenue, 20th
Floor, New York, New York 10022.
|
|
(11)
|
The
following information is based upon a Schedule 13G filed with the
SEC on
March 31, 2005. Represents an aggregate of 606,060 shares of common
stock
held by SF Capital Partners Ltd. (“SF Capital”). 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% of the common
stock, giving effect to such exercise. According to this Schedule
13G,
Michael A. Roth and Brian J. Stark may be deemed to be beneficial
owners
of these shares as a result of their acting as managing members of
Stark
Offshore Management, LLC, which acts as investment manager and has
sole
power to direct the management of SF Capital. The address for SF
Capital
Partners Ltd. Is 3600 South Lake Drive St. Francis, WI
53235.
|
|
(12)
|
The
following information is based on a Schedule 13G/A No. 1 filed with
the
SEC on November 17, 2005. According to such Schedule 13G/A, Wood
River
Capital Management, L.L.C., Wood River Associates, L.L.C. and Arthur
Steinberg have shared voting power and sole dispositive power over
the
shares and Wood River Partners, L.P. has sole voting power and sole
dispositive power over the shares. Mr. Steinberg has been appointed
as the
receiver of these entities pursuant to an order of the United States
District Court of the Southern District of New York. The address
for these
entities is c/o Kaye Scholer LLP, 425 Park Avenue, New York, New
York
10022.
|
As
of
December 31, 2004, we owed to Norton Herrick, referred to as 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., referred to as XNH, a company wholly-owned by Herrick. Pursuant
to the agreement, XNH provided advice and strategy relating to our debt and
equity financings, real estate, litigation and compensation activities.
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 we
are
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, in a private offering we issued $4,000,000 aggregate principal
amount of promissory notes, referred to as the 2004 notes") and warrants to
purchase 392,158 shares of common stock to 13 institutional and accredited
investors in which we received gross proceeds of $4,000,000. In connection
with
this offering, Herrick and Huntingdon, together referred to as 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 under the 2004 notes (as defined in the 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 could have, following an event
of
default under the 2004 notes, take actions necessary to enforce the note
holder’s rights under the letter agreement, including enforcing the Herrick
entities' rights under the security agreements. On April 12, 2004, the 2004
notes were converted into 888,888 shares of common stock. In consideration
for
Huntingdon's consent to the January 2004 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.
On
April
28, 2004, we entered into a new credit agreement. Herrick, Huntingdon and N.
Herrick Irrevocable ABC Trust, referred to as the Herrick 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 Herrick 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 Herrick 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 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 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 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 Preferred
Stock.
The
Herrick entities and the Herrick Trust 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 Herrick 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 for the remaining
principal amount. The new ABC note extended 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
note into shares of common stock pursuant to the terms of the note.
In
December 2004, we entered into a letter agreement with Forest Hill Capital,
LLC,
at that time a principal shareholder, as the manager of Forest Hill Select
Fund,
L.P., Forest Hill Select Offshore, Ltd. And Lone Oak Partners L.P., collectively
referred to as the Forest entities, extending the date by which we were required
to file a registration statement covering the securities issued to them 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
further extending the date by which we were required to file the registration
statement covering their securities to May 1, 2005. As consideration for the
second extension, we issued an aggregate of 19,841 shares of common stock,
referred to as the extension shares, based on the last sale price of our 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 covering their
securities is declared effective by the SEC is below $4.50, we would pay an
aggregate of $250,000 less the value of the extension 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 them 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. We timely complied with our obligations
to file the Forest entities’ registration statement.
As
part
of the March 2005 financing, the Forest entities exchanged the 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 securities issued in the March 2005
financing. The Forest entities also purchased an additional $1.0 million of
the
securities in the March 2005 financing. 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 registration statement filed
on
behalf of the investors in the March 2005 financing.
In
connection with the March 2005 financing, we also entered into an agreement
with
the Herrick entities, pursuant to which, concurrently with the
financing:
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·
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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 Stock were converted into an aggregate of approximately
2,033,333 shares of our common stock, referred to as the Herrick
Shares,
at their stated conversion rate of $3.36 per
share;
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·
|
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
Series C Preferred Stock 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 securities to be redeemed,
referred
to as the redemption securities, and the redemption price were placed
into
escrow pending such date;
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·
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the
Herrick entities waived certain of their registration rights and
we agreed
to include the Herrick Shares for resale in the registration statement
filed on behalf of the investors in the March 2005 financing, so
long as
such Herrick Shares were owned by the Herrick entities and not otherwise
transferred, including, but not limited to, in the Herrick Financing
described below;
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·
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the
Herrick entities consented to the terms of the March 2005 financing
and
the agreements entered into in connection with such 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
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·
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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
of
such consent.
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Also
on
March 23, 2005 in connection with the March 2005 financing, we entered into
a
registration rights agreement with the Herrick entities in which they were
granted the same automatic registration rights as the investors in the March
2005 financing 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 them in a registration statement to be filed with the SEC within 30 days
following the effective date of the registration statement filed on behalf
of
the investors in the March 2005 financing.
We
also
paid to the Herrick entities all accrued and unpaid interest dividends due
to
them in the amount of $2,271,000 on March 23, 2005 and redeemed the redemption
securities on May 3, 2005 (the effective date of the Shareholder Consent) for
$5.8 million.
The
following table sets forth information as of January 19, 2006, with respect
to
the securityholder for which shares are being registered for resale.
The
shares being offered by the selling securityholder as set forth in the table
below include (1) shares of common stock issuable upon conversion of its shares
of Series D preferred stock, referred to as “conversion shares,” (2) shares of
common stock issuable upon exercise of its March 2005 warrants, referred to
as
“warrant shares,” and (3) its pro rata portion of the shares that have been
reserved for issuance by us in the event we elect to make dividend payments
on
the Series D preferred stock in the form of common stock and/or we are required
to make conversion price or exercise price anti-dilution adjustments with
respect to the Series D preferred stock or March 2005 warrants, referred to
as
“potential additional shares.”
Percentage
ownership of common stock is based on 10,439,284 shares of our common stock
outstanding as of January 19, 2006. In addition, the table below assumes for
calculating the selling securityholder’s beneficial ownership, both prior to and
after this offering, as well as the selling securityholder’s percentage
ownership following this offering, that options, warrants and convertible
securities held by such securityholder (but not those held by any other person)
that are exercisable or convertible within 60 days as of January 19, 2006 have
been exercised or converted and the shares underling them added to the number
of
shares of our common stock deemed to be outstanding. The calculation of the
selling securityholder’s beneficial ownership and percentage ownership following
this offering also assumes that all of the potential additional shares included
in those that have been registered for resale by the selling securityholder
pursuant to this prospectus (but not those that may be issued to any other
holder of Series D preferred stock or March 2005 warrants) were issued and
added
to the number of shares of our common stock deemed to be outstanding.
|
Common
stock beneficially
owned
after the offering
|
|||||||||||||
| Name of selling securityholder |
Number
of shares
of
common stock
beneficially
owned
prior
to the offering
|
Number
of
shares
registered
for
resale pursuant to this prospectus
|
Number
of
shares
|
Percentageof
outstanding
shares
|
|||||||||
|
Goldman,
Sachs & Co.(1)
|
548,279
|
(2)
|
2,130,682
|
(3)
|
8
|
(4)
|
*
|
||||||
|
*
|
Less
than 1%
|
|
(1)
|
The
selling securityholder was an investor in our March 2005 financing
in
which it acquired shares of our Series D Preferred Stock and March
2005
warrants. The selling securityholder has no other material relationship
with us.
|
|
(2)
|
The
selling security holder owns 8 shares of our common stock, 3,000
shares of
our Series D preferred stock, convertible into 909,091 shares of
our
common stock, 454,545 March 2005 warrants exercisable for 454,545
shares
of our common stock and a warrant, exercisable until February 9,
2006 to
purchase an additional 750 shares of our Series D preferred stock
convertible into 227,273 shares of our common stock and 113,637 March
2005
warrants exercisable for 113,637 shares of our common stock. Pursuant
to
the Certificate of Designation of the Series D preferred stock and
the
terms of the March 2005 warrants, the selling security holder is
not
permitted to convert or exercise the foregoing securities to the
extent
any such conversion or exercise would result in its beneficial ownership
of more than 4.99% of our outstanding common stock after giving effect
to
such conversion or exercise. Accordingly, an aggregate of 1,156,275
of the
registered shares issuable upon conversion and/or exercise of the
foregoing securities are not included in the selling securityholder’s
beneficial ownership prior to the offering.
|
|
(3)
|
Represents
(i) 1,136,364 conversion shares, (ii) 568,182 warrant shares, and
(iii)
426,136 potential additional shares.
|
|
(4)
|
Represents
shares acquired by the selling shareholder in the open
market.
|
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 January __, 2006,
there were 10,439,284 shares of common stock outstanding, 3,350 shares of Series
B Preferred Stock outstanding and 21,063 shares of Series D 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. 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.
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.
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.
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 our
company 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.
The
selling securityholder and any of its 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 securityholder may use any one or more of the
following methods when selling shares:
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·
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ordinary
brokerage transactions and transactions in which the broker/dealer
solicits purchasers;
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·
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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;
|
|
·
|
purchases
by a broker/dealer as principal and resale by the broker/dealer for
its
account;
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·
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an
exchange distribution in accordance with the Rules of the applicable
exchange;
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·
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privately
negotiated transactions;
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·
|
settlement
of short sales;
|
|
·
|
broker/dealers
may agree with the selling shareholders to sell a specified number
of such
shares at a stipulated price per
share;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
selling securityholder may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
In
general under Rule 144 as currently in effect, after beneficially owning
restricted shares of our common stock for at least one year, the selling
securityholder would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of:
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·
|
1%
of the number of shares of common stock then outstanding (currently
104,392 shares); and
|
|
·
|
the
average recently trading volume of the common stock during the four
calendar weeks preceding the filing of a notice on Rule 144 with
respect
to the sale.
|
Sales
under Rule 144 are also limited by manner of sale provisions and notice
requirements and to the availability of current public information about
us.
Broker/dealers
engaged by the selling securityholder may arrange for other brokers/dealers
to
participate in sales. Broker/dealers may receive commissions from the selling
securityholder (or, if any broker/dealer acts as agent for the purchaser of
shares, from the purchaser) in amounts to be negotiated. The selling
securityholder does not expect these commissions to exceed what is customary
in
the types of transactions involved.
The
selling securityholder may from time to time pledge or grant a security interest
in some or all of the shares of common stock owned by it and, if it defaults
in
the performance of its 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 securityholder 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.
We
are
required to pay all fees and expenses incident to the registration of the shares
and have agreed to indemnify the selling securityholder against certain losses,
claims, damages and liabilities, including liabilities under the Securities
Act.
Our
articles of incorporation and bylaws 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.
The
legality of the shares of common stock offered hereby was passed upon for
MediaBay, Inc. by Blank Rome LLP, New York, New York.
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.
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 100 F. Street, N.E., Room
1580,
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.
MediaBay,
Inc.
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F-2
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F-3
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F-4
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F-5
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F-6
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F-7
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F-8
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F-30
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F-31
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F-32
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F-33
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The
Board
of Directors and Stockholders
MediaBay,
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.
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
MEDIABAY,
INC.
(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, 2003
|
—
|
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
|
||||
See
accompanying notes to consolidated financial statements.
MEDIABAY,
INC.
(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.
MEDIABAY,
INC.
Years
ended December 31, 2004, 2003 and 2002
(Amounts
in thousands)
|
|
|
Series
A Preferred stock - number of shares
|
|
Series
A Preferred stock no par value
|
|
Series
B Preferred stock - number of shares
|
|
Series
B Preferred stock no par value
|
|
Series
C Preferred stock - number of shares
|
|
Series
C Preferred stock no par value
|
|
Common
stock -number of shares
|
|
Common
stock - no par value
|
|
Contributed
capital
|
|
Accumulated
deficit
|
|||||||||||
|
Balance
at January 1, 2002
|
—
|
$
|
—
|
—
|
$
|
—
|
—
|
$
|
—
|
2,310
|
$
|
93,468
|
$
|
7,730
|
$
|
(92,636
|
)
|
||||||||||||||
|
Conversion
of convertible debt to preferred stock
|
25,000
|
2,500
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||
|
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
|
25,000
|
2,500
|
—
|
—
|
—
|
—
|
2,390
|
94,800
|
8,251
|
(95,146
|
)
|
||||||||||||||||||||
|
Issuance
of Series B Preferred Stock
|
—
|
—
|
3,350
|
328
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||
|
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
|
25,000
|
$
|
2,500
|
3,350
|
$
|
328
|
—
|
—
|
2,176
|
$
|
94,567
|
$
|
11,569
|
(102,015
|
)
|
||||||||||||||||
|
Conversion
of Series B Preferred Stock, net of fees
|
|
|
—
|
|
|
—
|
|
|
(3,150
|
)
|
|
(308
|
)
|
|
—
|
|
|
—
|
|
|
78
|
|
|
365
|
|
|
—
|
|
|
—
|
|
|
Issuance
of Series C Preferred Stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43,527
|
|
|
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
|
25,000
|
$
|
2,500
|
200
|
$
|
20
|
43,527
|
$
|
4,353
|
4,141
|
$
|
101,965
|
$
|
17,682
|
$
|
(132,702
|
)
|
See
accompanying notes to consolidated financial statements.
MEDIABAY,
INC.
(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
|
||||
See
accompanying notes to consolidated financial statements.
MEDIABAY,
INC.
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, such as audio readings of books, newspapers, magazines, original
productions and radio broadcast transcripts. 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.
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:
|
·
|
Product
costs (including free audiobooks in the initial enrollment offer
to
prospective members)
|
|
·
|
Royalties
to publishers and rightsholders
|
|
·
|
Fulfillment
costs, including shipping and
handling
|
|
·
|
Customer
service
|
|
·
|
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:
|
·
|
Payroll
and related items
|
|
·
|
Commissions
|
|
·
|
Insurance
|
|
·
|
Office
expenses
|
|
·
|
Telephone
and postage
|
|
·
|
Public
and investor relations
|
|
·
|
Dues
and subscriptions
|
|
·
|
Rent
and utilities
|
|
·
|
Travel
and entertainment
|
|
·
|
Bank
charges
|
|
·
|
Professional
fees, principally legal and auditing
fees
|
|
·
|
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.
|
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 more likely than not that it will, in the
foreseeable future, be unable 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.
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®
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.
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
|
|||
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
|
||||||||||||||||||
|
Cost
|
Accumulated
Amortization
|
Net
|
Cost
|
Accumulated
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.
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.
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”). Premier had previously
exercised its right to put its shares of Common Stock to MediaBay for $1,100,000
pursuant to a Put Agreement dated December 11, 1998. Pursuant to the settlement,
among other things, MediaBay is paying Premier $950 as payment of the amounts
due to Premier. 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.
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.
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:
|
Shares
|
Weighted
average
exercise
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
|
||||
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:
|
Date
|
No.
of Shares
|
Exercise
Price
|
Assumed
Volatility
|
Risk-free
interest rate
|
Fair
Value 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
|
||||||||||||||||
|
Range
of Prices
|
Number
|
Options
Outstanding
Weighted
Average
Remaining
Life in Years
|
Weighted
Average Exercise Price
|
Number
|
Weighted
Average 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.
The
following table summarizes information for warrants and non-plan options
outstanding and exercisable at December 31, 2002:
|
Options
Exercisable
|
||||||||||||||||
|
Range
of Prices
|
Number
|
Options
Outstanding
Weighted
Average
Remaining
Life in Years
|
Weighted
Average Exercise Price
|
Number
|
Weighted
Average 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 54,167 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 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.
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.
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
|
)
|
$
|
(797
|
)
|
|
|
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.
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
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.
As
of December 31, 2004, the Company will pay Mr. Herrick (i) $40.5 per month
on
the first of each month through and including July 2005 and (ii) $31.41 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 $7.5 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 $7.5 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.
On
January 29, 2004, the Company issued $4,000 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 principal amount of convertible
promissory notes held by Huntingdon from $2.00 to $1.27 and $500 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
(“Permissible Debt”) by June 1, 2004, and that the Permissible Debt be further
reduced by up to an additional $1,800 if the Company does not raise at least
$2,000 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 $1,181.4 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 principal amount note, $1,000 principal amount note,
$150
principal amount note and $350 principal amount note held by Huntingdon, plus
accrued and unpaid interest owed to Huntingdon aggregating $1,171.2 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
$1,600 principal amount of the $3,200 principal amount convertible note issued
to ABC Investments, L.L.C., a principal shareholder of the Company. We 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 our common stock on the
closing date was $2.88. During October 2004, ABC Investments, L.L.C. converted
$1,000 principal amount of the New ABC into shares of Common Stock pursuant
to
the terms of the note.
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. Of the total sold, 200 shares
($20) 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.
|
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.
|
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”).
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:
| · |
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;
|
| · |
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;
|
| · |
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
|
| · |
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.
|
| · |
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.
|
| · |
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.
|
| · |
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.
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.
Pro
Forma Balance Sheet
The
following pro forma balance sheet reflects the effects of the March
transactions:
MEDIABAY,
INC.
|
(Dollars
in thousands)
|
|
(Unaudited
September
30,
|
December
31,
|
||||||
|
2005
|
2004
|
||||||
|
Assets
|
|||||||
|
Current
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
10,362
|
$
|
3,122
|
|||
|
Accounts
receivable, net of allowances for sales returns and doubtful accounts
of
$1,638 and $2,708 at September 30, 2005 and December 31, 2004,
respectively
|
696
|
1,285
|
|||||
|
Inventory
|
937
|
1,530
|
|||||
|
Prepaid
expenses and other current assets
|
268
|
199
|
|||||
|
Royalty
advances
|
382
|
489
|
|||||
|
Total
current assets
|
12,646
|
6,625
|
|||||
|
Fixed
assets, net
|
1,398
|
243
|
|||||
|
Other
intangibles
|
44
|
50
|
|||||
|
Goodwill
|
9,658
|
9,658
|
|||||
|
$
|
23,745
|
$
|
16,576
|
||||
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
4,334
|
$
|
5,361
|
|||
|
Accounts
payable, related party
|
—
|
315
|
|||||
|
Short-term
debt, net of original issue discount of $53 at September 30, 2005
and $54
December 31, 2004, respectively
|
31
|
29
|
|||||
|
Preferred
dividends payable
|
319
|
—
|
|||||
|
Current
portion of long-term debt
|
—
|
200
|
|||||
|
Total
current liabilities
|
4,684
|
5,905
|
|||||
|
Long-term
debt, net of original issue discount of $126 and $908 at September
30,
2005 and December 31, 2004
|
615
|
9,102
|
|||||
| Related party long-term debt including accrued interest | -- | 7,750 | |||||
|
Total
liabilities
|
5,299
|
22,757
|
|||||
|
Commitments
and Contingencies
|
—
|
—
|
|||||
|
Preferred
stock, no par value, authorized 5,000,000 shares; no shares of Series
A
outstanding at September 30, 2005 and 25,000 shares of Series A
outstanding at December 31, 2004; 200 shares of Series B issued and
outstanding at September 30, 2005 and December 31, 2004; no shares
of
Series C issued and outstanding at September 30, 2005 and 43,527
shares of
Series C issued and outstanding at December 31, 2004; and 21,063
shares of
Series D issued and outstanding at September 30, 2005 and no shares
of
Series D issued and outstanding at December 31, 2004
|
11,502
|
6,873
|
|||||
|
Common
stock, no par value, authorized 300,000,000, issued and outstanding
10,439,284 as of September 30, 2005; and authorized 150,000,000 shares,
issued and outstanding 4,140,663 at December 31, 2004
|
121,432
|
101,966
|
|||||
|
Contributed
capital
|
42,638
|
17,682
|
|||||
|
Accumulated
deficit
|
(157,126
|
)
|
(132,702
|
)
|
|||
|
Total
stockholders’ equity (deficit)
|
18,446
|
(6,181
|
)
|
||||
|
$
|
23,745
|
$
|
16,576
|
||||
See
accompanying notes to condensed consolidated financial statements.
MEDIABAY,
INC.
(Dollars
in thousands, except per share data)
(Unaudited)
|
Three
months ended
September
30,
|
Nine
months ended
September
30,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Sales,
net of returns, discounts and allowances of $124 and $983
and $1,554 and $4,286 for the three and nine months
ended September 30, 2005 and 2004, respectively
|
$
|
1,387
|
$
|
3,849
|
$
|
7,012
|
$
|
14,334
|
|||||
|
Cost
of sales
|
1,002
|
1,875
|
4,101
|
6,672
|
|||||||||
|
Cost
of sales - strategic charges
|
—
|
2,100
|
305
|
2,100
|
|||||||||
|
Gross
profit
|
385
|
(126
|
)
|
2,606
|
5,562
|
||||||||
|
Expenses:
|
|||||||||||||
|
Advertising
and promotion
|
478
|
1,131
|
1,265
|
3,758
|
|||||||||
|
General
and administrative
|
1,708
|
1,559
|
5,295
|
5,301
|
|||||||||
|
Termination
charges
|
—
|
—
|
697
|
—
|
|||||||||
|
Depreciation
and amortization
|
15
|
28
|
58
|
116
|
|||||||||
|
Operating
loss
|
(1,816
|
)
|
(2,844
|
)
|
(4,709
|
)
|
(3,343
|
)
|
|||||
|
Interest
income
|
92
|
—
|
167
|
—
|
|||||||||
|
Interest
expense
|
126
|
741
|
752
|
6,808
|
|||||||||
|
Loss
on early extinguishment of debt
|
—
|
—
|
579
|
1,532
|
|||||||||
|
Loss
before income taxes
|
(1,850
|
)
|
(3,585
|
)
|
(5,873
|
)
|
(11,683
|
)
|
|||||
|
Income
tax expense
|
—
|
—
|
—
|
—
|
|||||||||
|
Net
loss
|
(1,850
|
)
|
(3,585
|
)
|
(5,873
|
)
|
(11,683
|
)
|
|||||
|
Dividends
on preferred stock
|
390
|
199
|
1,127
|
378
|
|||||||||
|
Deemed
dividend on beneficial conversion of
Series
D Preferred Stock
|
—
|
—
|
17,423
|
—
|
|||||||||
|
Net
loss applicable to common shares
|
$
|
(2,240
|
)
|
$
|
(3,784
|
)
|
$
|
(24,423
|
)
|
$
|
(12,061
|
)
|
|
|
Basic
and diluted loss applicable to common shares per
common share:
|
$
|
(0.25
|
)
|
$
|
(1.23
|
)
|
$
|
(3.82
|
)
|
$
|
(4.40
|
)
|
|
See
accompanying notes to condensed consolidated
financial statements.
|
MEDIABAY,
INC.
(Dollars
in thousands)
|
| (Unaudited)
Nine
months ended September 30,
|
|||||||
|
2005
|
2004
|
||||||
|
Cash
flows used in operating activities:
|
|||||||
|
Net
loss applicable to common shares
|
$
|
(24,423
|
)
|
$
|
(12,061
|
)
|
|
|
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
|
1,090
|
|||||
|
Amortization
of deferred financing costs and original issue discount
|
225
|
1,060
|
|||||
|
Depreciation
and amortization
|
58
|
116
|
|||||
|
Cost
of sales - strategic charges
|
305
|
2,100
|
|||||
|
Payment
of accrued dividends through issuance of common stock
|
85
|
—
|
|||||
|
Amortization
of deferred member acquisition costs
|
16
|
2,203
|
|||||
|
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 strategic charges:
|
|||||||
|
Decrease
in accounts receivable, net
|
811
|
1,977
|
|||||
|
Increase
in inventory
|
593
|
62
|
|||||
|
Increase
in prepaid expenses
|
(121
|
)
|
(40
|
)
|
|||
|
Decrease
(increase) in royalty advances
|
108
|
(790
|
)
|
||||
|
Increase
in deferred member acquisition costs
|
—
|
(339
|
)
|
||||
|
Decrease
in accounts payable, accrued expenses and preferred dividends
payable
|
(1,515
|
)
|
(5,656
|
)
|
|||
|
Net
cash used in operating activities
|
(5,550
|
)
|
(4,282
|
)
|
|||
|
Cash
flows used in investing activities:
|
|||||||
|
Acquisition
of fixed assets, including website development costs
|
(1,207
|
)
|
(77
|
)
|
|||
|
Acquisition
of intanglible assets
|
—
|
(20
|
)
|
||||
|
Net
cash used in investing activities
|
(1,207
|
)
|
(97
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Net
proceeds from issuance of preferred stock
|
31,488
|
—
|
|||||
|
Proceeds
from issuance of long-term debt
|
—
|
13,500
|
|||||
|
Proceeds
from exercise of stock options
|
40
|
1
|
|||||
|
Payment
of long-term debt
|
(11,742
|
)
|
(5,988
|
)
|
|||
|
Redemption
of Series A and Series C Preferred Stock
|
(5,789
|
)
|
—
|
||||
|
Increase
in deferred financing costs
|
—
|
(2,071
|
)
|
||||
|
Net
cash provided by financing activities
|
13,997
|
5,442
|
|||||
|
Net
increase in cash and cash equivalents
|
7,240
|
1,063
|
|||||
|
Cash
and cash equivalents at beginning of period
|
3,122
|
683
|
|||||
|
Cash
and cash equivalents at end of period
|
$
|
10,362
|
$
|
1,746
|
|||
See
accompanying notes to condensed consolidated financial statements.
MEDIABAY,
INC.
(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 digital media, marketing and publishing company
specializing in spoken audio entertainment, such as audio readings of books,
newspapers, magazines, original productions and radio broadcast transcripts.
Today, the Company has two principal content libraries: (1) Audiobooks which
it
sells via digital download and on COMPACT DISC and cassette through
Soundsgood.com, the Audio Book Club and third-party websites; and (2) an archive
of the history of American radio which it produces and sells on COMPACT DISC
and
cassettes through its catalog, a mail order-based continuity program, retail
outlets, its on-line download subscription service and third-party websites.
The
Company broadcasts its 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.
(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.
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 September 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 nine months ended September 30, 2005 and September 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.
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:
· Product
costs (including free audiobooks in the initial enrollment offer to prospective
members)
· Royalties
to publishers and rightsholders
· Fulfillment
costs, including shipping and handling
· Customer
service
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:
· Bad
debt
expense
· Payroll
and related items
· Commissions
· Insurance
· Office
expenses
· Telephone
and postage
· Public
and investor relations
· Dues
and
subscriptions
· Rent
and
utilities
· Travel
and entertainment
· Bank
charges
· Professional
fees, principally legal and auditing fees
· 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
September 30, 2005 and 2004 would have been as follows:
|
Three
Months Ended
September
30,
|
Nine
months Ended
September
30,
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Net
loss applicable to common shares, as reported
|
$
|
(
2,240
|
)
|
$
|
(3,784
|
)
|
$
|
(24,423
|
)
|
$
|
(12,061
|
)
|
|
|
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
|
—
|
(206
|
)
|
(755
|
)
|
(1,828
|
)
|
||||||
|
Pro
forma net loss applicable to common shares
|
$
|
(2,240
|
)
|
$
|
(3,990
|
)
|
$
|
(25,178
|
)
|
$
|
(13,889
|
)
|
|
|
Net
loss per share
|
|||||||||||||
|
Basic
and diluted - as reported
|
$
|
(0.25
|
)
|
$
|
(1.23
|
)
|
$
|
(3.82
|
)
|
$
|
(4.40
|
)
|
|
|
Basic
and diluted - pro forma
|
$
|
(0.25
|
)
|
$
|
(1.30
|
)
|
$
|
(3.93
|
)
|
$
|
(4.69
|
)
|
|
No
dividend yield and the following assumptions were used in the pro forma
calculation of compensation expense:
|
Date
|
No.
of Shares
|
Exercise
Price
|
Assumed
Volatility
|
Risk-free
Interest
Rate
|
Fair
Value
per
Share
|
|||||||||||
|
First
Nine months 2004
|
601,250
|
$
|
5.52
|
97
|
%
|
4.00
|
%
|
$
|
.51
|
|||||||
|
First
Nine 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.
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 $6 and $30 for the nine
months ended September 30, 2005 and 2004, respectively. The Company estimates
intangible amortization expenses of $8 in 2005:
The
following table presents details of Other Intangibles at September 30, 2005
and
December 31, 2004:
|
September
30, 2005
|
December
31, 2004
|
||||||||||||||||||
|
Cost
|
Accumulated
Amortization
|
Net
|
Cost
|
Accumulated
Amortization
|
Net
|
||||||||||||||
|
Mailing
Agreements
|
$
|
592
|
$
|
592
|
$
|
—
|
$
|
592
|
$
|
592
|
$
|
—
|
|||||||
|
Customer
Lists
|
4,380
|
4,380
|
—
|
4,380
|
4,380
|
—
|
|||||||||||||
|
Non-Compete
Agreements
|
313
|
294
|
19
|
313
|
288
|
25
|
|||||||||||||
|
Other
|
25
|
—
|
25
|
25
|
—
|
25
|
|||||||||||||
|
Total
Other Intangibles
|
$
|
5,310
|
$
|
5,266
|
$
|
44
|
$
|
5,310
|
$
|
5,260
|
$
|
50
|
|||||||
Goodwill
of $9,658 as of September 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, which did not result in an impairment loss. Any future impairment
losses incurred will be reported in operating results.
(4)
Debt
|
As
of
|
|||||||
|
September
30,
|
December
31,
|
||||||
|
2005
|
2004
|
||||||
|
Credit
agreement, senior secured debt, net
of original issue discount
|
$
|
—
|
$
|
8,661
|
|||
|
Premier
debt, net of original issue discount
|
646
|
670
|
|||||
|
Related
party notes and related accrued interest, net
of original issue discount
|
—
|
7,750
|
|||||
|
Total
debt
|
646
|
17,081
|
|||||
|
Less:
current portion
|
(31
|
)
|
(229
|
)
|
|||
|
Long-term
debt
|
$
|
615
|
$
|
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 1.7 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 September 30, 2005 and December 31, 2004:
|
As
of
|
|||||||
|
September
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 September 30,
2005
$21,063, net of cash fees and expenses of $2,048; value ascribed
to
investors’ and advisors’ warrants of $7,533
|
11,482
|
—
|
|||||
|
Total
Preferred Stock
|
$
|
11,502
|
$
|
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 10,878,788 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”).
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 $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 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
two-thirds 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 February 9, 2006 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
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 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:
|
·
|
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;
|
|
·
|
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);
|
|
·
|
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
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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 1,193,182 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 $3,512. 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
September 30, 2005, 14,837 shares of Series D Preferred Stock plus accrued
dividends thereon were converted into 4,521,599 shares of common stock and
21,063 shares of Series D Preferred Stock are outstanding.
Stock
Options and Warrants
From
January 1, 2005 to September 30, 2005, the Company issued options to purchase
801,667 shares of its common stock to employees, officers, directors and
consultants under its stock incentive plans. From January 1, 2005 to September
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 nine months ended September 30, 2005, the Company cancelled non-plan
warrants to purchase 76,667 shares of its common stock.
(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 September 30, 2005.
The
Company 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.
(7)
Supplemental Cash Flow Information
|
·
|
No
cash has been expended for income taxes for the nine months ended
September 30, 2005 and 2004. Cash paid for interest expense was $2,015
and
$536 for the nine months ended September 30, 2005 and 2004,
respectively.
|
The
Company had the following non-cash activities for the nine months ended
September 30, 2005:
|
2005
|
||||
|
Conversions
of subordinated notes into common stock
|
$
|
5,784
|
||
|
Conversion
of preferred shares into common stock
|
$
|
14,837
|
||
|
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 nine months ended September 30,
2005
of 8,989,725 and 6,400,211, respectively and for the three and nine months
ended
September 30, 2004 of 3,077,271 and 2,738,765.
For
the
three months ended September 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 49,019 common equivalent shares, as calculated under
the
treasury stock method and 7,820,544 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 $390 for
the three months ended September 30, 2005.
For
the
nine months ended September 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 780,501 common equivalent shares, as calculated under
the treasury stock method and 8,635,463 common equivalent shares relating to
convertible subordinated debt and convertible preferred stock calculated under
the “if-converted method”. Interest expense and dividends on the convertible
subordinated debt and convertible preferred stock added back to net income
applicable to common stockholders would have been $1,303 for the nine months
ended September 30, 2005.
For
the
three months ended September 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 4,170 common equivalent shares, as calculated under
the
treasury stock method and 4,001,458 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 September 30, 2004.
For
the
nine months ended September 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 146,156 common equivalent shares, as calculated under
the treasury stock method and 3,257,112 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 nine months
ended
September 30, 2004.
(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.
|
Three
Months Ended September 30, 2005
|
|||||||||||||||||||
|
Corporate
|
ABC
|
RSI
|
Mbay.com
|
Inter-segment
|
Total
|
||||||||||||||
|
Sales,
net of returns, discounts and allowances
|
$
|
—
|
$
|
531
|
$
|
815
|
$
|
42
|
$
|
0
|
$
|
1,387
|
|||||||
|
Operating
profit (loss)
|
(742
|
)
|
(781
|
)
|
(124
|
)
|
(154
|
)
|
—
|
(1,801
|
)
|
||||||||
|
Depreciation
|
—
|
10
|
3
|
—
|
—
|
13
|
|||||||||||||
|
Amortization
|
2
|
—
|
—
|
—
|
—
|
2
|
|||||||||||||
|
Depreciation
and amortization
|
2
|
10
|
3
|
—
|
—
|
15
|
|||||||||||||
|
Interest
expense, net
|
(34
|
)
|
—
|
—
|
—
|
—
|
(34
|
)
|
|||||||||||
|
Loss
on early retirement of debt
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Loss
before income taxes
|
(778
|
)
|
(791
|
)
|
(127
|
)
|
(154
|
)
|
—
|
(1,850
|
)
|
||||||||
|
Dividends
on Preferred Stock
|
(390
|
)
|
—
|
—
|
—
|
—
|
(390
|
)
|
|||||||||||
|
Net
(loss) income applicable to common shares
|
(1,168
|
)
|
(791
|
)
|
(127
|
)
|
(154
|
)
|
—
|
(2,240
|
)
|
||||||||
|
Total
assets
|
—
|
10,850
|
12,932
|
9
|
(46
|
)
|
23,745
|
||||||||||||
|
Acquisition
of fixed assets
|
—
|
627
|
—
|
—
|
—
|
627
|
|||||||||||||
|
|
|||||||||||||||||||
|
Three
Months Ended September 30, 2004
|
|||||||||||||||||||
|
Corporate
|
ABC
|
RSI
|
Mbay.com
|
Inter-segment
|
Total
|
||||||||||||||
|
Sales,
net of returns, discounts and allowances
|
$
|
—
|
$
|
2,654
|
$
|
1,154
|
$
|
52
|
$
|
(11
|
)
|
$
|
3,849
|
||||||
|
Operating
profit (loss)
|
(353
|
)
|
(2,103
|
)
|
(270
|
)
|
(99
|
)
|
9
|
(2,816
|
)
|
||||||||
|
Depreciation
|
—
|
17
|
9
|
—
|
—
|
26
|
|||||||||||||
|
Amortization
|
2
|
—
|
—
|
—
|
—
|
2
|
|||||||||||||
|
Depreciation
and amortization
|
2
|
17
|
9
|
—
|
—
|
28
|
|||||||||||||
|
Interest
expense
|
(740
|
)
|
—
|
(1
|
)
|
—
|
—
|
(741
|
)
|
||||||||||
|
Loss
on early retirement of debt
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||
|
Loss
before income taxes
|
(1,095
|
)
|
(2,120
|
)
|
(280
|
)
|
(99
|
)
|
9
|
(3,585
|
)
|
||||||||
|
Dividends
on Preferred Stock
|
(199
|
)
|
—
|
—
|
—
|
—
|
(199
|
)
|
|||||||||||
|
Net
(loss) income applicable to common shares
|
(1,294
|
)
|
(2,120
|
)
|
(280
|
)
|
(99
|
)
|
9
|
(3,784
|
)
|
||||||||
|
Total
assets
|
—
|
19,096
|
13,623
|
10
|
(62
|
)
|
32,667
|
||||||||||||
|
Acquisition
of fixed assets
|
—
|
10
|
—
|
—
|
—
|
10
|
|||||||||||||
|
Nine
Months Ended September 30, 2005
|
|||||||||||||||||||
|
Corporate
|
ABC
|
RSI
|
Mbay.com
|
Inter-Segment
|
Total
|
||||||||||||||
|
Sales,
net of returns, discounts and allowances
|
$
|
—
|
$
|
4,093
|
$
|
2,786
|
$
|
133
|
$
|
(0
|
)
|
$
|
7,012
|
||||||
|
Operating
profit (loss)
|
(2,949
|
)
|
(951
|
)
|
(331
|
)
|
(429
|
)
|
9
|
(4,651
|
)
|
||||||||
|
Depreciation
|
—
|
34
|
17
|
—
|
—
|
51
|
|||||||||||||
|
Amortization
|
7
|
—
|
—
|
—
|
—
|
7
|
|||||||||||||
|
Depreciation
and amortization
|
7
|
34
|
17
|
—
|
—
|
58
|
|||||||||||||
|
Interest
expense, net
|
(584
|
)
|
—
|
(1
|
)
|
—
|
—
|
(585
|
)
|
||||||||||
|
Loss
on early retirement of debt
|
(579
|
)
|
—
|
—
|
—
|
—
|
(579
|
)
|
|||||||||||
|
Loss
before income taxes
|
(4,119
|
)
|
(985
|
)
|
(349
|
)
|
(429
|
)
|
9
|
(5,873
|
)
|
||||||||
|
Dividends
on Preferred Stock
|
(18,550
|
)
|
—
|
—
|
—
|
—
|
(18,550
|
)
|
|||||||||||
|
Net
(loss) income applicable to common shares
|
(22,669
|
)
|
(985
|
)
|
(349
|
)
|
(429
|
)
|
9
|
(24,423
|
)
|
||||||||
|
Total
assets
|
—
|
10,850
|
12,932
|
9
|
(46
|
)
|
23,745
|
||||||||||||
|
Acquisition
of fixed assets
|
—
|
1,207
|
—
|
—
|
—
|
1,207
|
|||||||||||||
|
Nine
Months Ended September 30, 2004
|
|||||||||||||||||||
|
Corporate
|
ABC
|
RSI
|
Mbay.com
|
Inter-Segment
|
Total
|
||||||||||||||
|
Sales,
net of returns, discounts and allowances
|
$
|
—
|
$
|
9,719
|
$
|
4,514
|
$
|
158
|
$
|
(57
|
)
|
$
|
14,334
|
||||||
|
Operating
profit (loss)
|
(1,194
|
)
|
(2,230
|
)
|
501
|
(315
|
)
|
10
|
(3,227
|
)
|
|||||||||
|
Depreciation
|
—
|
66
|
28
|
—
|
—
|
94
|
|||||||||||||
|
Amortization
|
22
|
—
|
—
|
—
|
—
|
22
|
|||||||||||||
|
Depreciation
and amortization
|
22
|
66
|
28
|
—
|
—
|
116
|
|||||||||||||
|
Interest
expense, net
|
(6,805
|
)
|
—
|
(3
|
)
|
—
|
—
|
(6,808
|
)
|
||||||||||
|
Loss
on early retirement of debt
|
(1,532
|
)
|
—
|
—
|
—
|
—
|
(1,532
|
)
|
|||||||||||
|
Loss
before income taxes
|
(9,553
|
)
|
(2,296
|
)
|
470
|
(315
|
)
|
10
|
(11,683
|
)
|
|||||||||
|
Dividends
on Preferred Stock
|
(378
|
)
|
—
|
—
|
—
|
—
|
(378
|
)
|
|||||||||||
|
Net
(loss) income applicable to common shares
|
(9,931
|
)
|
(2,295
|
)
|
470
|
(315
|
)
|
10
|
(12,061
|
)
|
|||||||||
|
Total
assets
|
—
|
19,096
|
13,623
|
10
|
(62
|
)
|
32,667
|
||||||||||||
|
Acquisition
of fixed assets
|
—
|
68
|
9
|
—
|
—
|
77
|
|||||||||||||
(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
September 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.
(11)
Subsequent Events
The
Company effected 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 commons shares have been restated to
reflect the effect of the stock split for all periods presented.
On
November 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 further extended to February 9,
2006.
|
Page
|
|
|
1
|
|
|
3
|
|
|
10
|
|
|
11
|
|
|
11
|
|
|
11
|
|
|
12
|
|
|
15
|
|
|
45
|
|
|
46
|
|
|
52
|
|
|
62
|
|
|
64
|
|
|
67
|
|
|
68
|
|
|
70
|
|
|
71
|
|
|
71
|
|
|
71
|
|
|
72
|
|
|
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.
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 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 5 individual accredited investors, including two former officers
of
the Company. 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. The securities were issued in the financing without
registration under the Securities Act in reliance upon the exemptions from
registration provided under Section 4(2) of the Securities Act and Regulation
D
promulgated hereunder. The issuances did not involve any public offering; the
Company made no solicitation in connection with the financing other than
communications with the investors; the Company obtained representations from
the
investors regarding their investment intent, experience and sophistication;
the
investors either received or had access to adequate information about the
Company in order to make informed investment decisions; the Company reasonably
believed that the investors were sophisticated within the meaning of Section
4(2) of the Act and “accredited investors” as defined in Regulation D; and the
securities were issued with restricted securities legends.
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 who was
performing product licensing services at prices ranging from $9.00 to $18.00
per
share as ------- for their non-competition agreements. The
securities were issued without registration under the Securities Act in reliance
upon the exemptions from registration provided under Section 4(2) of the
Securities Act and Regulation D promulgated thereunder. The issuances did not
involve any public offering; the Company made no solicitation in connection
with
the issuance other than communications with the recipients; the Company obtained
representations from the recipients regarding their investment intent,
experience and sophistication; the recipients either received or had access
to
adequate information about the Company in order to make informed investment
decisions; the Company reasonably believed that the recipients were
sophisticated within the meaning of Section 4(2) of the Act and “accredited
investors” as defined in Regulation D; and the securities were issued with
restricted securities legends.
In
August
2003 we granted a consultant a warrant to purchase 2,222 shares of common stock
for management consulting services rendered valued at $7,000. The warrants
were
issued without registration under the Securities Act in reliance upon the
exemptions from registration provided under Section 4(2) of the Securities
Act
and Regulation D promulgated thereunder. The issuances did not involve any
public offering; the Company made no solicitation in connection with the
issuance other than communications with the consultant; the Company obtained
representations from the consultant regarding its investment intent, experience
and sophistication; the consultant either received or had access to adequate
information about the Company in order to make informed investment decisions;
the Company reasonably believed that the consultant was sophisticated within
the
meaning of Section 4(2) of the Act and “accredited investors” as defined in
Regulation D; and the warrants were issued with restricted securities
legends.
In
October 2003 we granted a consultant a warrant to purchase 2,564 shares of
common stock for management consulting services rendered valued at $7,000.
The
warrants were issued without registration under the Securities Act in reliance
upon the exemptions from registration provided under Section 4(2) of the
Securities Act and Regulation D promulgated thereunder. The issuances did not
involve any public offering; the Company made no solicitation in connection
with
the issuance other than communications with the consultant; the Company obtained
representations from the consultant regarding its investment intent, experience
and sophistication; the consultant either received or had access to adequate
information about the Company in order to make informed investment decisions;
the Company reasonably believed that the consultant was sophisticated within
the
meaning of Section 4(2) of the Act and “accredited investors” as defined in
Regulation D; and the warrants were issued with restricted securities
legends.
On
October 1, 2003, we issued to 9 individual -------- investors, including a
former officer and director of the Company 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 warrants were issued without registration under
the
Securities Act in reliance upon the exemptions from registration provided under
Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
The
issuances did not involve any public offering; the Company made no solicitation
in connection with the financing other than communications with the investors;
the Company obtained representations from the investors regarding its investment
intent, experience and sophistication; the investors either received or had
access to adequate information about the Company in order to make informed
investment decisions; the Company reasonably believed that the investors were
sophisticated within the meaning of Section 4(2) of the Act and “accredited
investors” as defined in Regulation D; and the warrants were issued with
restricted securities legends.
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. The
notes, the warrants and the placement agent warrant (the “Financing Securities”)
were issued in the financing without registration under the Securities Act
in
reliance upon the exemptions from registration provided under Section 4(2)
of
the Securities Act and Regulation D promulgated thereunder. The issuances did
not involve any public offering; the Company made no solicitation in connection
with the financing other than communications with the investors; the Company
obtained representations from the investors and placement agent regarding its
investment intent, experience and sophistication; the investors and placement
agent either received or had access to adequate information about the Company
in
order to make informed investment decisions; the Company reasonably believed
that the investors and placement were sophisticated within the meaning of
Section 4(2) of the Act and “accredited investors” as defined in Regulation D;
and securities were issued with restricted securities legends.
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 issued in
the
July 29, 2004 Note Offering. 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. The issuance was an exchange of securities by the Company and an existing
securityholder, exclusively where no commission or other renumeration was paid
or given directly or indirectly for soliciting the exchange.
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 pursuant to the terms
of
the placement agent agreement entered into on January 29, 2004. 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. The issuance was an exchange
of a
security by the Company and an existing securityholder, exclusively where no
commission or other remuneration was paid or given directly or indirectly for
soliciting the exchange. The issuance did not involve any public offering;
the
Company made no solicitation in connection with the issuance; the Company
obtained representations from the placement agent regarding their investment
intent, experience and sophistication; the placement agent either received
or
had access to adequate information about the Company in order to make informed
investment decisions; the Company reasonably believed that the placement agent
was sophisticated within the meaning of Section 4(2) of the Act and “accredited
investors” as defined in Regulation D; and the warrants were issued with
restricted securities legends.
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. These securities were issued pursuant to an exemption from the
registration requirements offered by Section 3(a)(9) of the Securities Act
of
1933. The issuance was an exchange of securities by the Company and an existing
securityholder, exclusively where no commission or other remuneration was paid
or given directly or indirectly for soliciting the exchange.
On
October 11, 2004, we entered into a Securities Purchase Agreement (the “October
Agreement”) pursuant to which we issued to three --------- accredited investors,
the Forest entities an aggregate of 300,000 shares of our common stock and
warrants to purchase 66,667 shares of common stock. 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. The issuances did not involve any public offering;
the
Company made no solicitation in connection with the transaction 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 “accredited investors” as defined in Regulation D; and the
shares and warrants were issued with restricted securities legends.
In
November 2004 we issued to a consultant 4,167 shares of common stock valued
at
$17,000 pursuant to a license agent. The Warrants were issued without
registration under the Securities Act in reliance upon the exemptions from
registration provided under Section 4(2) of the Securities Act and Regulation
D
promulgated thereunder. The issuances did not involve any public offering;
the
Company made no solicitation in connection with the issuance other than
communications with the consultant; the Company obtained representations from
the consultant regarding its investment intent, experience and sophistication;
the consultant either received or had access to adequate information about
the
Company in order to make informed investment decisions; the Company reasonably
believed that the consultant was sophisticated within the meaning of Section
4(2) of the Act and “accredited investors” as defined in Regulation D; and the
warrants were issued with restricted securities legends.
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 Forest entities 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 securities were issued without registration under the Securities
Act in reliance upon the exemptions from registration provided under Section
4(2) of the Securities Act and Regulation D promulgated thereunder. The
issuances did not involve any public offering; the Company made no solicitation
in connection with the issuance other than communications with the recipients;
the Company obtained representations from the recipients regarding its
investment intent, experience and sophistication; the recipients either received
or had access to adequate information about the Company in order to make
informed investment decisions; the Company reasonably believed that the
recipients were sophisticated within the meaning of Section 4(2) of the Act
and
“accredited investors” as defined in Regulation D; and the securities were
issued with restricted securities legends.
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 9 institutional 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 1,1931,82 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. The issuances
did not involve any public offering; the Company made no solicitation in
connection with the Financing other than communications with the Investors;
the
Company obtained representations from the Investors and Merriman regarding
their
investment intent, experience and sophistication; the Investors and Merriman
either received or had access to adequate information about the Company in
order
to make informed investment decisions; the Company reasonably believed that
the
Investors and Merriman were sophisticated within the meaning of Section 4(2)
of
the Act and “accredited investors” as defined in Regulation D; and the Offering
Securities, the Satellite Warrant and the Merriman Warrant were issued with
restricted securities legends.
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
|
Amendment
to the Articles of Incorporation of MediaBay, Inc. regarding the
designation of the Series D Preferred Stock. (14)
|
|
|
3.7
|
Articles
of Amendment to the Articles of Incorporation of MediaBay, Inc. filed
with
the Department of State of the State of Florida on May 3, 2005.
(18)
|
|
|
3.8
|
Articles
of Amendment to the Articles of Incorporation of MediaBay, Inc. filed
with
the Department of State of the State of Florida on October 20, 2005
(22)
|
|
|
3.9
|
Amended
and Restated By-Laws of the Registrant. (8)
|
|
|
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)
|
|
|
21.1
|
Subsidiaries
of the Company. (11)
|
|
| 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.
|
|
(22)
|
Incorporated
by reference to the applicable exhibit contained in our Quarterly
Report
on Form 10-Q for the quarterly period ended September 30,
2005.
|
(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
The
undersigned registrant hereby undertakes:
(1) To
file,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement:
(i) To
include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To
reflect in
the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in
the
information set forth 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 20 percent change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee”
table in the effective registration statement;
(iii) To
include
any material information with respect to 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 any liability under the Securities Act of 1933, each
such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered 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 which remain unsold at the termination of the offering.
(4) That,
for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant’s annual report pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an
employee benefit plan’s annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering
thereof.
(5) That,
for the
purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(A) Each
prospectus filed by a Registrant pursuant to Rule 424(b)(3) shall be deemed
to be part of the registration statement as of the date the filed prospectus
was
deemed part of and included in the registration statement; and
(B) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5) or
(b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii) or
(x) for the purpose of providing the information required by Section 10(a)
of the Securities Act of 1933 shall be deemed to be part of and included in
the
registration statement as of the earlier of the date such form of prospectus
is
first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided in
Rule 430B, for liability purposes of the issuer and any person that is at
that date an underwriter, such date shall be deemed to be a new effective date
of the registration statement relating to the securities in the registration
statement to which the prospectus relates, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering
thereof. Provided,
however,
that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of
the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made
in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective
date.
That,
for
the purpose of determining liability of a Registrant under the Securities Act
of
1933 to any purchaser in the initial distribution of the securities, each
undersigned Registrant undertakes that in a primary offering of securities
of an
undersigned Registrant pursuant to this registration statement, regardless
of
the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned Registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) Any
preliminary prospectus or prospectus of an undersigned Registrant relating
to
the offering required to be filed pursuant to Rule 424;
(ii) Any
free
writing prospectus relating to the offering prepared by or on behalf of an
undersigned Registrant or used or referred to by an undersigned Registrant;
(iii) The
portion
of any other free writing prospectus relating to the offering containing
material information about an undersigned Registrant or its securities provided
by or on behalf of an undersigned Registrant; and
(iv) Any
other
communication that is an offer in the offering made by an undersigned Registrant
to the purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
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 Act and will be governed by the final adjudication
of
such issue.
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 19th day of January 2006.
| MEDIABAY, INC. | ||
| |
|
|
| By: | /s/ ROBERT TORO | |
|
|
||
|
Name:
Robert Toro
Title:
Chief Financial Officer and
Senior Vice President of Finance
|
||
|
Signature
|
Title
|
Date
|
||
|
/s/
|
Director
and Chairman
|
January
19, 2006
|
||
| Joseph R. Rosetti | ||||
|
/s/
|
Director
and Chief Executive Officer (Principal Executive Officer)
|
January
19, 2006
|
||
| Jeffrey Dittus | ||||
|
/s/
|
Chief
Financial Officer and Senior Vice President of Finance
|
January
19, 2006
|
||
| Robert Toro | (Principal Financial and Accounting Officer) | |||
|
/s/
|
Director
|
January
19, 2006
|
||
| Daniel Altobello | ||||
|
/s/
|
Director
|
January
19, 2006
|
||
| Richard Berman | ||||
|
/s/
|
Director
|
January
19, 2006
|
||
| Robert B. Montgomery | ||||
|
/s/
|
Director
|
January
19, 2006
|
||
| Marshall C. Phelps | ||||
|
/s/
|
Director
|
January
19, 2006
|
||
| Carl U.J. Rossetti | ||||
| By Attorney-in-fact | ||||
| /s/ Robert Toro | ||||
| Robert Toro | ||||
| Attorney-in-fact |
SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For
the years ended December 31, 2004, 2003 and 2002
|
Balance
Beginning of Period
|
Amounts
Charged to Net Income
|
Amounts
Acquired
|
Write-Offs
Against Reserves
|
Balance
End 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
|
||||||||||
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
|
Amendment
to the Articles of Incorporation of MediaBay, Inc. regarding the
designation of the Series D Preferred Stock. (14)
|
|
|
3.7
|
Articles
of Amendment to the Articles of Incorporation of MediaBay, Inc.
filed with
the Department of State of the State of Florida on May 3, 2005.
(18)
|
|
|
3.8
|
Articles
of Amendment to the Articles of Incorporation of MediaBay, Inc.
filed with
the Department of State of the State of Florida on October 20,
2005
(22)
|
|
|
3.9
|
Amended
and Restated By-Laws of the Registrant. (8)
|
|
|
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)
|
|
|
21.1
|
Subsidiaries
of the Company. (11)
|
|
| Power of Attorney, included in the signature page of this Registration Statement | ||
| * | Previously filed |
|
(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.
|
|
(22)
|
Incorporated
by reference to the applicable exhibit contained in our Quarterly
Report
on Form 10-Q for the quarterly period ended September 30,
2005.
|