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MediaBay, Inc.
(Name of Registrant as Specified in Its Charter)
--------------------------------------------------------------------------------
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MediaBay, Inc.
2 Ridgedale Avenue - Suite 300
Cedar Knolls, New Jersey 07927
October 18, 2002
Dear Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders of
MediaBay, Inc. (the "Company"), which will be held on Wednesday, November 27,
2002 at 8:30 A.M. local time at the Company's offices located at 2 Ridgedale
Avenue - Suite 300, Cedar Knolls, New Jersey 07927.
The Notice of Annual Meeting and Proxy Statement which follow describe the
business to be conducted at the meeting.
Your Board of Directors unanimously believes that the election of the
nominees specified in the Proxy Statement as directors of the Company and the
proposal to authorize the Company to issue common stock upon conversion of
certain convertible notes or equity securities and exercise of certain warrants
issued and which may be issued to affiliates of the Company as set forth in the
Proxy Statement is in the best interests of the Company and its shareholders
and, accordingly, recommends a vote "FOR" the election of the nominees and the
proposal on the enclosed proxy card.
Whether or not you plan to attend the meeting in person, it is important
that your shares be represented and voted. After reading the enclosed Notice of
Annual Meeting and Proxy Statement, may I urge you to complete, sign, date and
return the enclosed proxy card in the envelope provided. If the address on the
accompanying material is incorrect, please advise our Transfer Agent,
Continental Stock Transfer & Trust Company, in writing, at 2 Broadway, New York,
New York 10004.
Your vote is very important, and we will appreciate a prompt return of
your signed proxy card. We hope to see you at the meeting and appreciate your
continued support.
Sincerely yours,
Norton Herrick
Chairman
MEDIABAY, INC.
2 Ridgedale Avenue - Suite 300
Cedar Knolls, New Jersey 07927
--------------------
NOTICE OF ANNUAL ON MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, NOVEMBER 27, 2002
--------------------
To the Shareholders of MEDIABAY, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting ("Annual Meeting") of
Shareholders of MediaBay, Inc. (the "Company") will be held on Wednesday,
November 27, 2002, at 8:30 A.M. local time at the Company's offices located at 2
Ridgedale Avenue - Suite 300 Cedar Knolls, New Jersey 07927, for the following
purposes:
1. To elect two Class II directors to hold office until the 2005 Annual
Meeting of Shareholders and until their respective successors have been duly
elected and qualified;
2. To authorize the Company to issue Common Stock upon conversion of
certain convertible notes or equity securities and exercise of certain warrants
issued and which may be issued to affiliates of the Company as set forth in the
Proxy Statement; and
3. To transact such other business as may properly come before the Annual
Meeting or any adjournment or adjournments thereof.
Only shareholders of record at the close of business on October 15, 2002
are entitled to notice of and to vote at the Annual Meeting or any adjournments
thereof.
By Order of the Board of Directors,
Norton Herrick
Chairman
October 18, 2002
MEDIABAY, INC.
2 Ridgedale Avenue - Suite 300
Cedar Knolls, New Jersey 07927
--------------------
PROXY STATEMENT
--------------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, NOVEMBER 27, 2002
This proxy statement (the "Proxy Statement") is furnished in connection
with the solicitation of proxies by the Board of Directors of MediaBay, Inc.
(the "Company") for use at the Annual Meeting of Shareholders (the "Annual
Meeting") to be held on Wednesday, November 27, 2002 including any adjournment
or adjournments thereof, for the purposes set forth in the accompanying Notice
of Meeting.
Management intends to mail this proxy statement and the accompanying form
of proxy to shareholders on or about October 25, 2002.
Proxies in the accompanying form, duly executed and returned to the
management of the Company and not revoked, will be voted at the Annual Meeting.
Any proxy given pursuant to such solicitation may be revoked by the shareholder
at any time prior to the voting of the proxy by a subsequently dated proxy, by
written notification to the Secretary of the Company, or by personally
withdrawing the proxy at the Annual Meeting and voting in person.
The address and telephone number of the principal executive offices of the
Company are: 2 Ridgedale Avenue - Suite 300, Cedar Knolls, New Jersey 07927,
Telephone No.: (973) 539-9528.
OUTSTANDING SHARES AND VOTING RIGHTS
Only shareholders of record at the close of business on October 15, 2002
(the "Record Date") are entitled to notice of and to vote at the Annual Meeting.
As of the Record Date, there were issued and outstanding 14,252,352 shares of
the Company's Common Stock, no par value (the "Common Stock"), and 25,000 shares
of the Company's Series A Preferred Stock, no par value (the "Preferred
Shares"). Each share of Common Stock entitles the holder to one vote on each
matter submitted to a vote at the Annual Meeting and each Preferred Share
entitles the holder to approximately 57.14 votes on each matter submitted to a
vote at the Annual Meeting. Accordingly, the holders of the Preferred Shares are
entitled to an aggregate of 1,428,571 votes. Holders of the Preferred Shares
vote together with the holders of the Common Stock as a single class on all
actions to be voted on by the Company's shareholders.
VOTING PROCEDURES AND PROXY INFORMATION
The Class II directors will be elected by the affirmative vote of a
plurality of the votes represented by the shares of Common Stock and Preferred
Shares present in person or represented by proxy at the Annual Meeting voting as
a single class, provided a quorum exists. A quorum is established if, as of the
Record Date, at least a majority of the votes represented by the outstanding
shares of Common Stock and Preferred Shares are present in person or represented
by proxy at the Annual Meeting. The proposal to authorize the Company to issue
Common Stock upon conversion of certain convertible notes or equity securities
and exercise of certain warrants issued and which may be issued to affiliates of
the Company as more fully described in Proposal I and all other matters at the
meeting will be decided by the affirmative vote of a majority of the votes
represented by the shares of Common Stock and Preferred Shares present in person
or represented by proxy at the meeting and entitled to vote on the subject
matter voting as a single class, provided a quorum exists. In addition, the
proposal to authorize the
Company to issue Common Stock upon conversion of certain convertible notes or
equity securities and exercise of certain warrants issued and which may be
issued to affiliates of the Company as more fully described in this Proxy
Statement also requires the consent of a majority of the votes represented by
the Preferred Shares outstanding. Votes will be counted and certified by one or
more Inspectors of Election who are expected to be employees of Continental
Stock Transfer & Trust Company, the Company's transfer agent.
In accordance with Florida law, abstentions and "broker non-votes" (i.e.,
proxies from brokers or nominees indicating that such persons have not received
instructions from the beneficial owner or other persons entitled to vote shares
as to a matter with respect to which the brokers or nominees do not have
discretionary power to vote) will be treated as present for purposes of
determining the presence of a quorum. For purposes of determining approval of a
matter presented at the meeting, abstentions will be deemed present and entitled
to vote and will, therefore, have the same legal effect as a vote "against" a
matter presented at the meeting. Broker non-votes will be deemed not entitled to
vote on the subject matter as to which the non-vote is indicated and will,
therefore, have no legal effect on the vote on that particular matter.
The enclosed proxies will be voted in accordance with the instructions
thereon. Unless otherwise stated, all shares represented by such proxy will be
voted as instructed. Proxies may be revoked as noted above.
ELECTION OF DIRECTORS
The Company's By-Laws provide that the Board of Directors of the Company
is divided into three classes (Class I, Class II and Class III). At each Annual
Meeting of Shareholders, directors constituting one class are elected for a
three-year term. At this year's Annual Meeting of Shareholders, two (2) Class II
directors will be elected to hold office for a term expiring at the Annual
Meeting of Shareholders to be held in 2005. It is the intention of the Board of
Directors to nominate Michael Herrick and Roy Abrams as Class II directors. Each
director will be elected to serve until a successor is elected and qualified or
until the director's earlier resignation or removal.
At this year's Annual Meeting of Shareholders, the proxies granted by
shareholders will be voted individually for the election, as directors of the
Company, of the persons listed below, unless a proxy specifies that it is not to
be voted in favor of a nominee for director. In the event any or all of the
nominees listed below shall be unable to serve, it is intended that the proxy
will be voted for such other nominees as are designated by the Board of
Directors. Each of the persons named below has indicated to the Board of
Directors that he will be available to serve.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION
OF THE NOMINEES SPECIFIED BELOW.
The following information is with respect to the nominees for election at
this Annual Meeting of Shareholders:
CLASS II DIRECTORS
(To be Elected)
(New Term Expires in 2005)
Michael Herrick, 35, co-founded the Company and has been Executive Officer
since January 2000 and a director from the Company's inception. Mr. Herrick has
tendered his resignation as Chief Executive Officer, effective January 1, 2003
and has agreed to serve as a consultant upon such resignation. Mr. Herrick was
Co-Chief Executive Officer and has held various other offices with the Company
from its inception until October 2002. Since August 1993, Michael Herrick has
been an officer (since January 1994, Vice President) of the corporate general
partner of a limited partnership which is a principal shareholder of The Walking
Company, a nationwide retailer of comfort and walking footwear and related
apparel and accessories. Mr. Herrick is a former member of the Board of
Directors of the Audio Publisher's Association. Mr. Herrick is the son of Norton
Herrick, Chairman of the Company, and brother of Howard Herrick, Executive Vice
President and a director of the Company. Mr. Herrick received his B.A. degree
from the University of Michigan.
-2-
Roy Abrams, 58, has been a director of the Company since October 1997.
Since April 1993 and from 1986 through March 1990, Mr. Abrams has owned and
operated Abrams Direct Marketing, a marketing consulting firm.
The following information is with respect to incumbent directors in Class
I and Class III of the Board of Directors who are not nominees for election at
this Annual Meeting of Shareholders:
CLASS I DIRECTORS
(Term Expires in 2004)
Norton Herrick, 63, a co-founder of the Company, has been Chairman since
the Company's inception. Mr. Herrick served as President of the Company from its
inception until January 1996 and was Chief Executive Officer from January 1996
through January 2000. Mr. Herrick has been a private businessman for over 30
years and through his wholly-owned affiliates, Mr. Herrick has completed
transactions, including building, managing and marketing primarily real estate
valued at an aggregate of approximately $2 billion. Mr. Herrick served on the
advisory board of the Make-A-Wish Foundation, the advisory committee of the
National Multi Housing Council and currently the National Board of Directors for
People for the American Way. Mr. Herrick is the father of Michael Herrick, a
director of the Company, and Howard Herrick, Executive Vice President and a
director of the Company.
Paul Ehrlich, 58, has been a director of the Company since May 2001. Since
August 2000, Mr. Ehrlich has been a partner in Edwards & Topple, LLP, a tax and
financial consulting firm, as well as President of Paul D. Ehrlich, CPA, P.C., a
tax and financial consulting corporation. From 1981 until August 1, 2000, Mr.
Ehrlich was a shareholder, Tax Specialist, Director of Personal Finance Services
at Feldman Sherb & Co., P.C. Mr. Ehrlich has served on the Board of Directors of
several companies and is a member of the American Institute of Certified Public
Accountants, the New York Society of Certified Public Accountants (appointed
committee member), and the International Association for Financial Planning.
CLASS III DIRECTORS
(Term Expires in 2003)
Howard Herrick, 37, a co-founder of the Company, has been the Company's
Executive Vice President and a director since its inception, and Editorial
Director of its Passages Christian audiobook club. Since August 1993, Howard
Herrick has been Vice President of the corporate general partner of a limited
partnership which is a principal shareholder of The Walking Company. Since 1988,
Mr. Herrick has been an officer of The Herrick Company, Inc. and is currently
its President. Mr. Herrick is also an officer of the corporate general partners
of numerous limited partnerships which acquire, finance, manage and lease
office, industrial and retail properties; and which acquire, operate, manage,
redevelop and sell residential rental properties. Mr. Herrick is the son of
Norton Herrick, the Company's Chairman and a director of the Company, and
brother of Michael Herrick, director of the Company.
Carl Wolf, 58, has been a director of MediaBay since March 1998. Mr. Wolf
is the managing partner of the Lakota Investment Group. Mr. Wolf was formerly
Chairman of the Board, President and Chief Executive Officer of Alpine Lace
Brands, Inc. Mr. Wolf founded Alpine Lace and its predecessors and had been the
Chief Executive Officer of each of them since the inception of Alpine Lace in
1983. Mr. Wolf became a director of Alpine Lace shortly after its incorporation
in February 1986.
The following is information with respect to certain of the Company's
officers who are not directors or nominees for director:
Hakan Lindskog, 42, joined the Company in June 2000 as Chief Operating
Officer of the Company and Chief Executive Officer of its Audio Book Club
division and became President of the Company in November 2001 and Chief
Executive Officer of the Company in October 2002. In that capacity Mr. Lindskog
manages all day-to-day operations, including the Audio Book Club division. Mr.
Lindskog has agreed to serve as Chief Executive Officer of the Company effective
January 1, 2003. Mr. Lindskog has 15 years management experience in direct
marketing, publishing and Internet consumer services. Before joining the
Company, he was the former Executive Vice President and Chief Operating Officer
of RealHome.com, a free membership web service that provides
-3-
information and services regarding home buying and home ownership. Prior to
joining RealHome.com, Mr. Lindskog was Group Executive Vice President and Chief
Operating Officer of International Masters Publishers Group (IMP), a $740
million direct marketer, operating in 19 countries.
Stephen McLaughlin, 36, has been Executive Vice President and Chief
Technology Officer of the Company since February 1999. Prior to joining the
Company, Mr. McLaughlin was Vice President, Information Technology for Preferred
Healthcare Staffing, Inc., a nurse-staffing division of Preferred Employers
Holdings, Inc. Mr. McLaughlin co-founded and was a director, Chief Operating
Officer and Chief Information Officer of NET Healthcare, Inc., from 1997 until
it was acquired by Preferred Employers Holdings in August 1998. In 1994, Mr.
McLaughlin founded FX Media, Inc., an Internet and multimedia development
company. As CEO of FX Media, he served as senior software engineer for all of
its projects. Mr. McLaughlin holds a degree in Computer Science and Engineering
from the Massachusetts Institute of Technology and conducted research at the MIT
Media lab.
John Levy, 47, has been an employee of the Company since November 1997 and
has served Executive Vice President and Chief Financial Officer of the Company
since January 1998. Prior to joining the Company, Mr. Levy was Senior Vice
President of Tamarix Capital Corporation and had previously served as Chief
Financial Officer of both public and private entertainment and consumer goods
companies. Mr. Levy is a Certified Public Accountant with nine years experience
with the national public accounting firms of Ernst & Young, Laventhol & Horwath
and Grant Thornton.
Robert Toro, 38, has been Senior Vice President of Finance of the Company
since July 1999, Chief Financial Officer of our Audio Book Club division since
November 2001 and an employee since April 1999. Prior to joining the Company,
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 the national public accounting
firm of Arthur Andersen where he was employed immediately prior to joining
Marvel Entertainment Group.
Board Meetings
The Company's Board of Directors held three meetings during the fiscal
year ended December 31, 2001. The meetings were attended by all of the
directors. The Board also took action by unanimous written consent in lieu of
meetings.
The Company reimburses directors for reasonable travel expenses incurred
in connection with their activities on the Company's behalf, but the Company
does not pay directors any fees for Board participation.
Board Committees
The Company has established an Audit Committee, a Plan Committee and an
Operations Committee. The Audit Committee is responsible for making
recommendations concerning the engagement of independent public accountants,
reviewing the plans and results of the audit engagement with the independent
public accountants, approving professional services provided by the independent
public accountants and reviewing the adequacy of the Company's internal
accounting controls. The Audit Committee's specific representatives are set
forth in its written charter as previously filed as Appendix I to the Company's
Proxy Statement filed on September 21, 2001 with the Securities and Exchange
Commission. The Audit Committee is currently comprised of Messrs. Paul Ehrlich
(Chairman), Roy Abrams and Carl Wolf.
The Company does not have standing compensation or nominating committees.
The Plan Committee is responsible to administer grants of awards under
MediaBay's 2000 and 2001 Stock Incentive Plans and all other matters relating to
the Plans, except with respect to persons subject to Section 16 of the
Securities Exchange Act of 1934. The Plan Committee is currently comprised of
Messrs. Norton and Michael Herrick.
-4-
The Operations Committee is empowered to authorize the Company to issue or
grant a limited number of equity securities to persons or entities not
affiliated with MediaBay or any of its officers or directors. The Operations
Committee is currently comprised of Messrs. Norton and Michael Herrick.
EXECUTIVE COMPENSATION
Executive Compensation
The following table discloses for the fiscal years ended December 31,
1999, 2000 and 2001, compensation paid to Michael Herrick, the Company's Chief
Executive Officer and the next four highly compensated executive officers of the
Company whose salary together with any bonus was in excess of $100,000 during
the fiscal year ended December 31, 2001 (the "Named Executives").
Summary Compensation Table
Annual Compensation Long-Term Compensation Awards
------------------- -----------------------------
Securities Underlying
Name and Principal Position Year Salary Bonus Options/SAR's (#)
--------------------------- ---- ------ ----- -----------------
Michael Herrick 2001 $175,000 $50,000 150,000
Chief Executive Officer 2000 154,167 50,000 600,000
1999 125,000 -0- -0-
Hakan Lindskog
President and Chief 2001 $264,063 $50,000 175,000
Operating Officer 2000 107,015 -0- 150,000
John Levy 2001 $180,000 $17,500 -0-
Executive Vice President and 2000 167,027 15,000 -0-
Chief Financial Officer 1999 152,125 12,500 30,000
Stephen McLaughlin 2001 $178,750 $ -0- -0-
Executive Vice President and 2000 167,500 25,000 35,000
Chief Technology Officer 1999 131,250 -0- 158,000
Robert Toro 2001 $159,087 $17,500 50,000
Senior Vice President 2000 141,784 10,000 20,000
Finance 1999 97,125 -0- 50,000
Michael Herrick has tendered his resignation as Chief Executive Officer of
the Company, effective January 1, 2003. Mr. Lindskog joined MediaBay in June
2000 and has agreed to serve as Chief Executive Officer of the Company beginning
January 1, 2003. Mr. McLaughlin joined the Company in February 1999 and Mr. Toro
joined the Company in April 1999.
Employment Agreements
Effective as of October 22, 2001, the Company entered into a one-year
employment agreement with Norton Herrick which provides for an annual base
salary of $100,000 and such increases and bonuses as the Board of Directors may
determine from time to time. The employment agreement does not require Mr.
Herrick to devote any stated amount of time to the Company's business and
activities and contains noncompetition and nonsolicitation provisions for the
term of the employment agreement and for two years thereafter. If Mr. Herrick's
employment is terminated under circumstances described in the employment
entitled to receive severance pay equal to the greater
-5-
of $200,000 or two times the total compensation received by Mr. Herrick from the
Company during the twelve months prior to the date of termination.
Effective January 1, 2002, the Company entered into a one-year employment
agreement with Michael Herrick, which provides for an annual base salary of
$175,000 and an annual bonus of $50,000. The employment agreement requires Mr.
Herrick to devote substantially all of his business time to the Company's
business and affairs. The agreement contains non-competition and
non-solicitation provisions for the term of the employment agreements and for
two years thereafter. In the event of termination of employment under
circumstances described in the employment agreement, including as a result of a
change in control, the Company will be required to provide severance pay equal
to the greater of $525,000 or three times the total compensation received from
the Company during the twelve months prior to the date of termination.
The Company entered into a 39-month employment agreement with Hakan
Lindskog effective October 1, 2001. The agreement, as amended, provides for an
annual base salary of $306,250 in the first 12 months of his employment, an
annual base salary of $350,000 for October 1, 2002 through December 31, 2003 and
an annual base salary of $400,000 during 2004. Mr. Lindskog's agreement also
provides for a minimum bonus of $45,000 payable August 15, 2002, August 15, 2003
and August 15, 2004, and a bonus of $25,000 on March 31, 2003, in each case, if
he is employed by the Company on each such date. Mr. Lindskog may also receive
performance-based bonuses based on the Company achieving minimum adjusted EBITDA
targets. These performance bonuses, if any, would be payable on April 1, 2003,
2004 and 2005. Pursuant to the agreement, the Company agreed to grant to Mr.
Lindskog options to purchase 150,000 shares of common stock. Of the total
options granted, options with respect to 50,000 shares have an exercise price of
$1.00 and vest on December 31, 2002; options with respect to 50,000 shares have
an exercise price of $3.00 and vest on December 31, 2003; and options with
respect to 50,000 shares have an exercise price of $5.00 and vest on December
31, 2004. In the event of termination of employment under circumstances
described in the employment agreement, including as a result of a change in
control, the Company will be required to provide severance pay equal to the
greater of 50% of the balance of Mr. Linskog's base salary for the unexpired
period of his employment under the agreement or his last six months base salary
immediately prior to the termination.
The Company has entered into a two-year employment agreement with John
Levy effective November 2001. The agreement provides for an annual base salary
of $180,000, in the first year of the agreement and an annual base compensation
of $190,000 in the second year of the agreement. Mr. Levy's agreement also
provides for a minimum bonus of $27,000 in the first year of the agreement and a
minimum bonus of $30,000 in the second year of the agreement. Pursuant to the
agreement, the Company granted to Mr. Levy options to purchase 50,000 shares of
common stock. Of the total options granted, options with respect to 17,000
shares have an exercise price of $1.00 and vested on January 2, 2002; options
with respect to 17,000 shares have an exercise price of $1.50 and vest on
November 10, 2002 and options with respect to 16,000 shares have an exercise
price of $2.00 and vest on November 10, 2003. In the event of termination of
employment under circumstances described in the employment agreement, including
as a result of a change in control, the Company will be required to provide
severance pay equal to $100,000.
The Company entered into a two-year employment agreement with Robert Toro
effective July 19, 2001. The agreement provided for an annual base salary of
$170,000 in the first year of the agreement and $185,000 in the second year of
the agreement. Mr. Toro's agreement also provided for a minimum bonus of $16,500
in the first year of the agreement and a minimum bonus of $18,000 in the second
year of the agreement. Pursuant to the agreement, the Company agreed to grant to
Mr. Toro options to purchase 40,000 shares of common stock at an exercise price
of $1.00 per share. Of the total options granted, 20,000 vest on July 19,2002
and 20,000 vest on July 19,2003. In the event of termination of employment under
circumstances described in the employment agreement, including as a result of a
change in control, the Company will be required to provide severance pay equal
to Mr. Toro's base salary for the unexpired period of his employment under the
agreement.
-6-
Option Grants for Fiscal 2001
The following table discloses options granted during the fiscal year ended
December 31, 2001 to the Named Executives:
Option/SAR Grants in Fiscal Year Ending December 31, 2001:
Number of % of Total Options
Shares Underlying Granted to Employees in Exercise Price
Name Options Granted Fiscal Year ($/share) Expiration Date
---- --------------- ----------------------- -------------- ---------------
Michael Herrick 150,000 16.7% $ .50 11/23/11
Hakan Lindskog 10,000 1.1 $1.00 04/02/07
10,000 1.1 $2.00 04/02/07
5,000 .6 $3.00 04/02/07
50,000 5.6 $1.00 12/31/07
50,000 5.6 $3.00 12/31/08
50,000 5.6 $5.00 12/31/09
John F. Levy -- -- -- --
Steven M. McLaughlin -- -- -- --
Robert Toro 5,000 .6 $1.00 04/02/07
5,000 .6 $2.00 04/02/07
20,000 2.2 $1.00 07/18/07
20,000 2.2 $1.00 07/18/08
Option Exercises and Values for Fiscal 2001:
The following table sets forth information concerning the number of
options owned by these executives and the value of any in-the-money unexercised
options as of December 31, 2001. No options were exercised by any of these
executives during fiscal 2001.
Aggregated Option Exercises And Fiscal Year-End Option Values
Number of Securities Underlying Value of Unexercised In-the-Money
Name Unexercised Options at December 31, 2001 Options at December 31, 2001
---- ---------------------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Michael Herrick 1,000,000 -- 18,000 --
Hakan Lindskog 75,000 250,000 -- --
Steven McLaughlin 123,000 70,000 4,160 --
John F. Levy 80,000 -- -- --
Robert Toro 70,000 50,000 -- --
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, 2001 was $.62.
-7-
Stock Plans
The Company's 1997 Stock Option Plan provides for the grant of stock
options to purchase up to 2,000,000 shares. As of the Record Date, options to
purchase an aggregate of 1,785,500 shares of its Common Stock have been granted
under the 1997 plan.
The Company's 1999 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 2,500,000 shares
of common stock have been reserved for distribution pursuant to the 1999 Plan.
As of the Record Date, options to purchase an aggregate of 1,141,850 shares of
our common stock have been granted under the 1999 Plan.
The Company's 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 3,500,000 shares
of Common Stock have been reserved for distribution pursuant to the 2000 Plan.
As of the Record Date, options to purchase an aggregate of 3,037,250 shares of
Common Stock have been granted under the 2000 Plan.
The Company's 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 3,500,000 shares
of Common Stock have been reserved for distribution pursuant to the 2001 plan.
As of the Record Date, no options to purchase shares of our common stock have
been granted under the 2001 plan.
Of the options granted under our plans, as of the date of this Proxy,
options to purchase 5,257,500 shares of Common Stock have been granted to the
Company's officers and directors.
Performance Graph
The following chart sets forth a line graph comparing the performance of
the Company's common stock, from October 22, 1997, the first day on which the
Common Stock first became publicly traded through December 31, 2001. This graph
assumes the investment of $100 on October 23, 1997, in the Company's common
stock, and compares the performance with the Nasdaq Market Index and an index of
issuers classified under the Retail-Catalog and Mail Order Houses Standard
Industrial Classification ("SIC") number.
The Company pays no dividends. The Nasdaq Market Index and the Company's
SIC number index reflect a cumulative total return based upon the reinvestment
of dividends of the stocks included in those indices. The historical information
set forth below is not necessarily indicative of future performance.
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Stock Performance Graph
[GRAPH OMITTED]
Comparative Cumulative Total Return Among the Company, Nasdaq Market
Index and the Retail-Catalog and Mail Order Houses SIC Number Index
At December 31,
October 22, -----------------------------------------------------
1997 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
MediaBay, Inc.................. $100.00 $46.99 $112.05 $107.83 $15.66 $5.98
SIC Number Index............... 100.00 97.56 90.24 77.96 28.56 39.69
Nasdaq Index................... 100.00 98.77 139.30 245.69 154.43 123.10
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's officers,
directors, and persons who own more than 10% of a registered class of its equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors, and greater than 10%
shareholders are required by Securities and Exchange Commission regulations to
furnish the Company with copies of all forms that they file pursuant to Section
16(a).
Based solely upon the Company's review of the copies of such forms that
the Company received, the Company believes that, during the year ended December
31, 2001, all filing requirements applicable to its officers, directors, and
greater than 10% shareholders were fulfilled on a timely basis, except for a
Form 4 for purchases in August 2001 by Norton Herrick.
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Audit Committee Report
In March 2002, the Audit Committee met with management to review and
discuss the audited financial statements. The Audit Committee conducted
discussions with its independent auditors, Deloitte & Touche LLP, regarding the
matters required by the Statement on Auditing Standards ("SAS") No. 61. As
required by Independence Standards Board Standard No. 1, "Independence
Discussion with Audit Committees," the Audit Committee has discussed with, and
received the required written disclosures and confirming letter from, Deloitte &
Touche LLP regarding its independence. Based upon the review and discussions
referred to above, the Audit Committee recommended to the Board of Directors
that the audited financial statements be included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
Paul Ehrlich
Roy Abrams
Carl Wolf
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VOTING SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the Record Date
relating to the beneficial ownership of shares of Common Stock by (i) each
person or entity who is known by the Company to own beneficially 5% or more of
the outstanding Common Stock according to Schedules 13G and 13D filed with the
SEC, (ii) each of the Company's directors and nominees for director, (iii) each
of the Named Executives, and (iv) all directors and executive officers of the
Company as a group:
Percentage of
Number of Shares Shares of Common
Beneficially Stock Beneficially
Name and Address of Beneficial Owner(1)(2) Owned Owned
------------------------------------------ ----- -----
Norton Herrick 17,292,245 (3) 56.5%
Evan Herrick 5,652,222 (4) 28.6%
Howard Herrick 4,102,640 (5) 27.5%
Michael Herrick 1,488,460 (6) 9.8%
Stephen M. McLaughlin 158,300 (7) 1.1%
Carl T. Wolf 157,500 (8) 1.1%
Robert Toro 100,000 (9) *
John F. Levy 85,000 (10) *
Roy Abrams 20,000 (11) *
Paul Ehrlich 10,000 (12) *
Hakan Lindskog 0 (13) *
All directors and executive officers as a group
(10 persons) 22,925,685 70.0%
-------------
* Less than 1%
(1) Unless otherwise indicated, the address of each beneficial owner is care
of MediaBay, Inc., 2 Ridgedale Avenue - Suite 300, Cedar Knolls, New
Jersey 07927.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days of the Record Date upon the exercise of options, warrants or
convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options, warrants or convertible securities
that are held by such person (but not those held by any other person) and
which are exercisable within 60 days of the Record Date have been
exercised and converted.
(3) Represents (a) 191,700 shares of common stock held by Norton Herrick, (b)
488,460 shares of common stock held by Howard Herrick, (c) 285,000 shares
held by M. Huddleston Enterprises, Inc., (d) 2,800,000 shares of common
stock issuable upon exercise of options, (e) 150,000 shares of common
stock issuable upon exercise of options granted to Evan Herrick, (f)
3,091,201 shares of common stock issuable upon exercise of warrants, and
(g) 10,285,884 shares issuable upon conversion of convertible promissory
notes, Does not include (i) 2,964,180 shares held by the Norton Herrick
Irrevocable ABC Trust and (ii) 46,229 shares which may become issuable to
Mr. Herrick upon exercise of warrants which may be required to be issued
to Mr. Herrick. Evan Herrick has irrevocably granted to Norton Herrick
sole voting and dispositive power with respect to the shares of common
stock issuable upon exercise of the options held by Evan Herrick referred
to in (e) above. Except as set forth above, does not include shares of
common stock held, directly or indirectly, by his sons, Michael Herrick,
Howard Herrick and Evan Herrick, or any other family
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member, as to which Norton Herrick disclaims beneficial ownership. See
"Certain Relationships and Related Transactions."
(4) Represents (a) 145,080 shares of common stock, (b) 892,857 shares of
common stock issuable upon conversion of a convertible promissory notes
(c) 150,000 shares of common stock issuable upon exercise of options and
(d) 4,464,285 shares of common stock issuable upon conversion of shares of
Series A preferred stock. Does not include 150,000 shares of common stock
issuable upon exercise of options as to which Evan Herrick has irrevocably
granted to Norton Herrick sole voting and dispositive power. Does not
include shares held directly or indirectly by Norton Herrick, Evan
Herrick's father, Michael Herrick or Howard Herrick, Evan Herrick's
brothers, or any other family member, as to which Evan Herrick disclaims
beneficial ownership. See "Certain Relationships and Related
Transactions."
(5) Represents (a) 2,964,180 shares held by the Norton Herrick Irrevocable ABC
Trust, (b) 488,460 shares of common stock held by Howard Herrick, and (c)
650,000 shares of common stock issuable upon exercise of options. Howard
Herrick is the sole trustee and Norton Herrick is the sole beneficiary of
the Norton Herrick Irrevocable ABC Trust. The trust agreement provides
that Howard Herrick shall have sole voting and dispositive power over the
shares held by the trust. Howard Herrick has irrevocably granted to Norton
Herrick sole dispositive power with respect to the shares of common stock
held by Howard Herrick. Does not include shares held directly or
indirectly by Norton Herrick, Michael Herrick, Evan Herrick or any other
family member, as to which Howard Herrick disclaims beneficial ownership.
(6) Represents 488,460 shares and 1,000,000 shares of common stock issuable
upon exercise of options. Does not include shares held directly or
indirectly by Norton Herrick, Howard Herrick or Evan Herrick, as to which
Michael Herrick disclaims beneficial ownership.
(7) Represents 300 shares and 158,000 shares of common stock issuable upon
exercise of options. Does not include 35,000 shares of common stock
issuable upon exercise of options.
(8) Represents 5,000 shares of common stock and 152,500 shares of common stock
issuable upon exercise of options.
(9) Represents shares of common stock issuable upon exercise of options. Does
not include 20,000 shares of common stock issuable upon exercise of
options.
(10) Represents 1,000 shares of common stock and 84,000 shares of common stock
issuable upon exercise of options. Does not include 16,000 shares issuable
upon exercise of options.
(11) Represents shares of common stock issuable upon exercise of options.
(12) Represents shares of common stock issuable upon exercise of options.
(13) Represents shares of common stock issuable upon exercise of options. Does
not include 150,000 shares issuable upon exercise of options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Companies wholly-owned by Norton Herrick, the Company's Chairman, have in
the past provided accounting, administrative and general office services to us
and obtained insurance coverage for the Company at cost since our inception. The
Company paid these entities $133,000 and $88,000 for these services during the
years ended December 31, 2000 and 2001. In addition, a company wholly-owned by
Norton Herrick provides the Company access to a corporate airplane. The Company
generally pays the fuel, fees and other costs related to its use of the airplane
directly to the service providers. For use of this airplane, the Company paid
rental fees of approximately $25,000 and $14,000 in 2000 and 2001 to Mr.
Herrick's affiliate. The Company anticipates obtaining
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similar services, including services of its general counsel, from time to time
from companies affiliated with Norton Herrick, and the Company will reimburse
their costs in providing the services to the Company.
From December 1999 through February 2000, Norton Herrick sold $6,200,000
principal amount of the note issued to him in December 1998 to two third
parties. Under a December 1998 agreement, the Company issued to Mr. Herrick
warrants to purchase 145,221 shares of Common Stock at an exercise price of
$8.41 per share on terms which were identical to the warrants issued to Mr.
Herrick in December 1998.
In January and February 2000, Norton Herrick sold $4,2000,000 principal
amount of the note issued to him in December 1998 to two unaffiliated third
parties. Under a December 1998 letter agreement, the Company issued to Norton
Herrick warrants to purchase an additional 98,554 shares of Common Stock at an
exercise price of $8.41 per share. No compensation has been recognized in
relation to this transaction.
From December 1999 through February 2000, Evan Herrick, son of the
Company's Chairman, loaned the Company $3,000,000 for which he received
$3,000,000 principal amount 9% convertible promissory notes due December 31,
2004. The notes were initially convertible into shares of Common Stock at
$11.125 per share, which was the market value on the date the note was issued.
The loans evidenced by the notes were intended to be short-term and serve as a
"bridge" to replacement financing. At the time of issuance of the convertible
notes, the Board of Directors resolved to seek to replace or refinance the
convertible notes and accept a proposal for refinancing, whether or not (i) as
favorable as the convertible notes including, without limitation, providing for
a higher interest rate or lower conversion price, (ii) requiring the issuance of
equity securities and/or (iii) requiring the payment of fees.
In April and August 2000, the Company's Board of Directors determined that
reducing the conversion price of the $3,000,000 principal amount 9% convertible
notes due December 31, 2004 issued to Evan Herrick to the then current market
value of the Common Stock would be more favorable to us than accepting the
alternatives, if any, available to the Company to refinance or replace the
notes. The Company revised the terms of the $3.0 million principal amount 9%
convertible promissory notes due December 31, 2004 to Evan Herrick to be
convertible into shares of Common Stock at $1.75 per share, which was the market
value on the date the terms were revised. Evan Herrick waived interest on the
notes from July 1, 2000 to December 31, 2000 and after December 31, 2000 has
agreed to accept payment of interest in cash or Common Stock at the Company's
option under certain circumstances.
In August 2000, Norton Herrick sold the remaining $2,800,000 principal
amount of the note issued to him in December 1998 to two unaffiliated third
parties. The terms of subordinated debt were modified so that the third parties
agreed to waive any interest due to them and convert the entire subordinated
debt by December 31, 2000. One of the unaffiliated third parties converted
$800,000 principal amount of the note into 440,000 shares of Common Stock. The
third parties failed to pay Mr. Herrick the entire purchase price of the note
they purchased. In December 2000, the parties rescinded the transaction as to
$2,000,000 principal amount of the note, which was not converted or paid for. As
a result of these transactions, under the December 1998 letter agreement, the
Company issued to Mr. Herrick Warrants to purchase an additional 18,480 shares
of Common Stock at an exercise price of $8.41 per share. No compensation has
been recognized in relation to this transaction.
In the fourth quarter of 2000, Glebe Resources, Inc., a company
wholly-owned by Norton Herrick ("Glebe"), purchased $200,000 of audiobook
inventory from Doubleday Direct, Inc. The audiobooks were subsequently sold by
the Company and the funds were remitted to Glebe in March 2001. The inventory
was sold at Glebe's cost and Glebe did not profit by the transaction.
Interest on subordinated debentures held by a third party in the amount of
$97,000 for the three months ended September 30, 2000 was advanced by a company
wholly-owned by the Herrick family in November 2000. In 2001, the same company
advanced an additional $97,000 in interest for the three months ended December
31, 2000 to the same third party. The Company subsequently paid the interest,
and neither Mr. Herrick nor his wholly-owned company received any compensation
for or profit from these transactions.
In December 2000, Huntingdon Corporation, an affiliate of Norton Herrick
("Huntingdon") lent the Company $0.5 million and in February 2001 an additional
$0.3 million. On May 14, 2001, Huntingdon was issued a
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senior subordinated convertible note secured by a second lien on all of the
Company's assets and the assets of its subsidiaries, except inventory,
receivables and cash. The note bears interest at 12%, with such interest being
payable in kind, Common Stock or cash at the holder's option, provided that, if
the holder elects to receive an interest payment in cash, that payment will
accrue until the Company is permitted under the Company's revolving credit
facility to make the cash payment. The notes are convertible into shares of
Common Stock at the rate of $0.56 principal amount per share, the market price
of the Common Stock at the time Huntingdon agreed to the financing transaction.
On May 14, 2001 the Company issued a $2,500,000 secured senior convertible
note to Huntingdon, in consideration for loans made by Huntingdon to the Company
in the amount of $2,500,000. This note does not provide for cash interest to be
paid until MediaBay's revolving credit facility is repaid and is convertible
into Common Stock at a conversion rate of $.56 per share, the market price of
the common stock at the time that Huntingdon agreed to the financing
transaction. The convertible note ranks pari passu with the Company's existing
revolving credit facility and has a security interest in all of the assets of
the Company, except inventory, receivables and cash. The note bears interest at
the prime rate plus 2% and matures on January 15, 2003. Interest, at
Huntingdon's option, (i) is payable in-kind, (ii) is payable in shares of Common
Stock or (iii) will accrue until the revolving credit facility is repaid in full
and, thereafter, payable in cash.
On May 14, 2001, the Company also modified a $1,984,250 million senior
subordinated convertible note held by Norton Herrick as consideration for Mr.
Herrick's consent to the above transactions, elimination of the variable
conversion price feature of the note and foregoing current cash interest until
MediaBay's revolving credit facility is repaid. The modified note is convertible
into Common Stock at a conversion rate of $.56 per share (the market price of
the Common Stock at the time Huntingdon agreed to the financing transaction) and
interest, at Mr. Herrick's option, (i) is payable in-kind, (ii) is payable in
shares of common stock or (iii) will accrue until the revolving credit facility
is repaid in full and, thereafter, payable in cash. Mr. Herrick was granted
registration rights relating to the shares of Common Stock issuable upon
conversion of the notes and exercise of the warrants. Additionally, Mr. Herrick
and the Company agreed that (i) the note shall mature after the maturity of the
Company's existing credit facility or any new bank debt or institutional debt
secured by all or a portion of the Company's assets or any refinancing thereof
(the "Bank Debt"), (ii) that any extension of Bank Debt shall automatically
extend the maturity date of the note, and (iii) if requested by the Company, to
extend the maturity date of the note until such time as the Company has the
funds available to repay the note.
In connection with these financing transactions described above, on May
14, 2001, Huntingdon was granted ten-year warrants to purchase 1,650,000 shares
of Common Stock at an exercise price of $.56 per share (the market price of the
Common Stock at the time Huntingdon agreed to the financing transaction) as
consideration of the $800,000 and $2,500,000 loans, plus ten-year warrants to
purchase an additional 250,000 shares of Common Stock at an exercise price of
$.56 per share if Huntingdon loans the Company an additional $500,000.
Additionally, Huntingdon and the Company agreed that (i) the $800,000 Note, the
$2,500,000 Note and the 2002 Note defined below (collectively, the "Huntingdon
Notes") shall mature after the maturity of any Bank Debt, (ii) that any
extension of Bank Debt shall automatically extend the maturity dates of the
Huntingdon Notes, and (iii) if requested by the Company, to extend the maturity
dates of the Huntingdon Notes until such time as the Company has the funds
available to repay the Huntingdon Notes.
In 2001, Glebe, on the Company's behalf, provided a security deposit to a
vendor in the amount of $100,000. Glebe received no compensation for and did not
profit from this transaction.
On January 18, 2002, Evan Herrick exchanged $2.5 million principal amount
of a $3.0 million principal amount convertible note of the Company (the "EH
Note") in exchange for 25,000 shares of Series A Preferred Stock of the Company
(the "Preferred Shares"), having a liquidation preference of $2.5 million. The
Preferred Share dividend rate of 9% is the same as the interest rate of the EH
Note, and is payable in additional Preferred Shares, shares of common stock of
the Company or cash, at the holder's option, provided that if the holder elects
to receive payment in cash, the payment will accrue until the Company is
permitted to make the payment under its existing credit facility. The conversion
rate of the Preferred Shares is the same as the conversion rate of the Note. The
Preferred Shares vote together with the common stock as a single class on all
matters submitted to stockholders for a vote, and certain matters require the
majority vote of the Preferred Shares. The holder of each Preferred Share is
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entitled to a number of votes for each Preferred Share held multiplied by a
fraction, the numerator of which is the liquidation preference and the
denominator of which is $1.75. In May 2001, Mr. Herrick and the Company agreed
that (i) the $500,000 note shall mature after Bank Debt, (ii) that any extension
of Bank Debt shall automatically extend the maturity date of such note, and
(iii) if requested by the Company, to extend the maturity dates of the note
until such time as the Company has the funds available to repay the notes.
On February 22, 2002, as previously committed to on May 14, 2001,
Huntingdon purchased a $500,000 principal amount convertible senior promissory
note due June 30, 2003 (the "2002 Note"). The 2002 Note was issued in
consideration of a $500,000 loan made to the Company by Huntingdon and is
substantially identical to the $2,5000,000 Note issued to Huntingdon, except
that the 2002 Note is due June 30, 1993 and the conversion rate of the 2002 Note
is $1.82 (the market price on February 22, 2002). As partial consideration for
the loan and pursuant to an agreement dated April 30, 2001, the Company granted
to Huntingdon warrants to purchase 250,000 shares of Common Stock at an exercise
price of $.56 per share (the market price of the Common Stock at the time
Huntingdon agreed to the financing transaction). The warrants are exercisable
until May 14, 2011.
On March 31, 2002, the Company and Huntingdon agreed to extend the
maturity dates of the $2,500,000 Note to January 15, 2003 and the $800,000 Note
to April 15, 2003. On August 12, 2002, Huntingdon agreed to extend the date on
which interest on the $2,500,000 Note, $800,000 Note and $500,000 Note is due
until the date of ten business days after the Company's revolving credit
facility is repaid in full or January 15, 2004.
On October 3, 2002, the Company entered into agreements with Huntingdon,
Evan Herrick and Norton Herrick as described under Proposals I and II below.
On October 18, 2002, the Company entered into a consulting agreement with
MEH Consulting Services, Inc. ("MEH Consulting"), of which Michael Herrick, the
Company's Chief Executive Officer and a director, is the sole stockholder and
officer. This agreement effective as of January 1, 2003, has a one-year term and
provides for MEH Consulting to provide the services of Michael Herrick. Mr.
Herrick will be required to devote a minimum of 30 hours per week to the
Company's business and affairs for which MEH Consulting will receive a fee of
$16,666 per month, as well as insurance and other benefits for Michael Herrick
and reimbursement of expenses.
Companies affiliated with Norton Herrick may continue to provide
accounting, legal, general and administrative services to the Company at cost,
provide it with access to a corporate airplane at cost and obtain insurance
coverage for it at cost.
It is the Company's policy that each transaction between the Company and
its officers, directors and 5% or greater shareholders will be on terms no less
favorable than could be obtained from independent third parties.
PROPOSAL I
TO AUTHORIZE THE COMPANY TO ISSUE COMMON STOCK UPON CONVERSION OF CERTAIN
CONVERTIBLE NOTES OR EQUITY SECURITIES AND EXERCISE OF CERTAIN WARRANTS
ISSUED AND WHICH MAY BE ISSUED TO AFFILIATES OF THE COMPANY
The Board of Directors has unanimously adopted a resolution, and submits
to shareholders for approval, a proposal to authorize the Company to issue
Common Stock upon conversion of the New Notes and Existing Notes (each as
defined below) and/or preferred stock which may be issued as described below and
upon exercise of New Warrants (as defined below) to affiliates of the Company.
The Company has issued and currently outstanding the following promissory
notes to certain affiliates of the Company (the "Existing Notes"):
o $1,984,250 principal amount convertible senior subordinated
promissory note issued to Norton Herrick, the Company's Chairman;
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o $2,500,000 principal amount convertible senior promissory note,
issued to Huntingdon Corporation ("Huntingdon"), an affiliate of Mr.
Herrick;
o $800,000 principal amount convertible senior subordinated promissory
note issued to Huntingdon;
o $500,000 principal amount convertible senior promissory note issued
to Huntingdon; and
o $500,000 principal amount convertible senior subordinated promissory
note issued to Evan Herrick.
Each of the Notes is convertible into shares of the Company's Common
Stock. The terms of the Notes, including the conversion rates, are more fully
described under "Certain Relationships and Related Transactions."
On October 3, 2002, the Company and Huntingdon entered into an
agreement pursuant to which the Company will borrow at least $1,500,000 from
Huntingdon and the maturity dates of the Existing Notes held by Huntingdon will
be extended to September 30, 2007 (the "2002 Huntingdon Agreement"). Huntingdon
loaned the Company $1,000,000 prior to the date of the 2002 Huntingdon Agreement
and agreed to loan the Company $150,000 on October 10, 2002 and $350,000 on
November 15, 2002. Under the 2002 Huntingdon Agreement, the amount of borrowings
may increase to $3,000,000; provided, however, that the making, timing and
amount of any additional loans under the agreement, if any, are subject to the
mutual agreement of the Company and Huntingdon. The Company will issue to
Huntingdon a senior secured convertible note, in the case of the first
$1,500,000 of borrowings, and a senior subordinated unsecured convertible note,
in the case of any additional borrowings (each, a "New Note" and collectively,
the "New Notes"), in each case, in the same principal amount of each loan and
warrants (the "New Warrants") to purchase a number of shares of common stock
equal to 50 % of the principal amount of such loan divided by the Conversion
Rate (defined below) of the New Note, with an exercise price equal to the
Conversion Rate of the New Note. As consideration of the $1,000,000 loan, upon
entering into the 2002 Huntingdon Agreement, the Company issued to Huntingdon a
$1,000,000 New Note and New Warrants to purchase 250,000 shares of Common Stock
with an exercise price of $2.00 per share. On October 10, 2002, Huntingdon
loaned the Company $150,000 for which the Company issued to Huntingdon a
$150,000 New Note with a conversion price of $2.00 per share and New Warrants to
Purchase 37,500 shares of Common Stock with an exercise price of $2.00 per
share.
The New Notes are not convertible until the Company's shareholders
approve this Proposal I at the Annual Meeting. The Conversion Rate of the
$1,000,000 Note is $2.00, which was above the closing sale price of the Common
Stock on October 3, 2002 (the date of the 2002 Huntingdon Agreement). The
initial Conversion Rate of subsequent New Notes for (i) any loan made on or
prior to December 24, 2002 shall be equal to (a) $2.00, which was above the
closing sale price of the Common Stock on October 3, 2002 (the date of the 2002
Huntingdon Agreement) or (b) the closing sale price of the Common Stock on the
date on which the loan is made, whichever is lower, and (ii) any loan made after
December 24, 2002, the closing sale price of the Common Stock on the date of
such loan. Interest on the New Notes rate shall be payable monthly, in arrears,
at Huntingdon's option, (i) in cash (subject to any restrictions imposed by the
Company's existing credit facility or any other debt at the time the New Note is
issued, including, requiring that any cash payments accrue until after such
other indebtedness is repaid); (ii) shares of Common Stock at the closing sale
price of the Common Stock on the interest payment date, or (iii) in kind. The
interest rate on the unpaid balance of each New Note (and on any interest on a
New Note which is not paid on the date such interest payment is due, including
due to the fact that the interest is accrued in accordance with the terms of the
New Note) is equal to the prime rate plus 2 1/2%. Each New Note shall initially
be due on September 30, 2007; provided, however, that Huntingdon will be
entitled to demand repayment of any or all of the New Notes at any time on or
after the date on which the Company has repaid all of its obligations under its
existing credit facility. New Notes in the principal amount of $1,500,000 will
be secured by all of the assets (other than cash, accounts receivable and
inventory) of the Company and any other New Notes, if issued, will be unsecured.
New Warrants issued in connection with a New Note shall be exercisable
for a period of ten years from the date of issuance. In the event of any
adjustment to the exercise price of a New Warrant, the number of shares of
Common Stock issuable upon exercise of the warrants shall be appropriately
adjusted.
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In addition, as partial consideration for entering into the 2002
Huntingdon Agreement, (i) each Existing Note held by Huntingdon was amended to
(a) entitle Huntingdon to demand repayment of the Existing Note at any time on
or after the date (90 days after the date in the case of the $800,000 Note) on
which the Company has repaid all of its obligations under its existing credit
facility and (b) provide that interest will accrue on unpaid interest on each
Existing Note (including due to the fact that interest is accrued in accordance
with the terms of the note) at the interest rate of such Note and (ii) the
Company agreed to provide Huntingdon with 90 business days prior written notice
before any prepayment of any of the Existing Notes held by Huntingdon.
Additionally, the 2002 Huntingdon Agreement provides that, in the event that the
Company and Huntingdon mutually agree to exchange the debt represented by one or
more of the Existing Notes and/or New Notes for equity securities of the
Company, in lieu of converting such note, all or a portion of one or more of the
Existing Notes and/or New Notes may be exchanged for shares of one or more newly
created series of preferred stock which series shall rank pari passu in all
respects with the Preferred Shares, and otherwise have substantially similar
rights, preferences and privileges as, the Preferred Shares, except that the
conversion rate of any newly created series of preferred stock shall be the same
as the conversion rate of the Existing Note or New Note it is issued in exchange
for. The Company granted to Huntingdon demand and piggyback registration rights
with respect to the shares of Common Stock issuable upon conversion of the New
Notes, as interest (as Common Stock and/or upon conversion of additional New
Notes issued as paid in-kind interest) on the New Notes and upon exercise of the
New Warrants and upon conversion or payment of dividends on the shares of
preferred stock which may be issued in exchange for Financing Notes and/or New
Notes.
On October 3, 2002, the Company entered into an agreement with Norton
Herrick pursuant to which (i) the maturity date of the $1,984,250 Existing Note
held by Mr. Herrick was extended to September 30, 2007, and (ii) the $1,984,250
Existing Note was amended to (a) entitle Mr. Herrick to demand repayment of such
note at any time on commencing on December 31, 2004, provided that the Company
has repaid all of its obligations under its existing credit facility, and (b)
provide that interest will accrue on unpaid interest on the note (including due
to the fact that interest is accrued in accordance with the terms of the note)
at the interest rate of such note and (iii) the Company agreed to provide Mr.
Herrick at least 90 business days prior written notice of any repayment of such
note. Additionally, the agreement provides that in the event that the Company
and Mr. Herrick mutually agree to exchange the debt represented by the Existing
Note held by Mr. Herrick for equity securities of the Company, in lieu of
converting such note, all or a portion of such note may be exchanged for shares
of a newly created series of preferred stock, which series shall rank pari passu
in all respects with the Preferred Shares, and otherwise shall have
substantially similar rights, preferences and privileges as, the Preferred
Shares, except that the conversion rate of any newly created series of preferred
stock shall be the same as the conversion rate of the note it is issued in
exchange for. In addition, Mr. Herrick consented as a holder of such note to the
Company's incurrence of debt through the issuance of the Financing Notes.
On October 3, 2002, the Company entered into an agreement with Evan
Herrick pursuant to which (i) the maturity date of the $500,000 Existing Note
held by Mr. Herrick was extended to September 30, 2007, (ii) the $500,000
Existing Note held by Mr. Herrick was amended to (a) entitle Mr. Herrick to
demand repayment of such note at any time commencing on December 31, 2004,
provided that the Company has repaid all of its obligations under its existing
credit facility, and (b) provide that interest will accrue on unpaid interest on
the Note (including due to the fact that interest is accrued in accordance with
the terms of the note) at the interest rate of such note and (iii) the Company
agreed to provide Mr. Herrick at least 90 business days prior written notice of
any repayment of such note. In addition, Mr. Herrick consented as a holder of
such note and as the holder of all of the outstanding Preferred Shares to the
Company's incurrence of debt through the issuance of the Financing Notes.
Reasons for the Transaction
As a condition to the extension of the Company's obligations under the
credit facility, the lenders under the existing credit facility required the
Company to obtain at least $1,500,000 of financing by November 15, 2002 and the
extension of the maturity dates of the Existing Notes issued to Huntingdon.
Additionally, the Company currently requires funds to finance its working
capital requirements. Although the Company has sought and is seeking other
sources of financing, it has not been able to obtain any financing from a third
party on terms acceptable to the Company. As a result, the Company determined to
enter into the 2002 Huntingdon Agreement to receive at least $1,500,000 of
financing.
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The Company believes that the extension of the maturity dates of all of
the Existing Notes is in the Company's best interest because it provides the
Company with greater flexibility at the time any particular Existing Note
becomes due and/or in negotiating with the Company's senior lenders to further
extend the maturity date of the Company's obligations under its existing credit
facility.
The lenders under the Company's credit facility will not further extend
the maturity date of the Company's obligations under the credit facility unless
any Existing Note due earlier than any requested extension date is also
extended. Any further extension of the maturity date of the Company's
obligations under its credit facility are subject to future negotiation with the
lenders and there can be no assurance that any extension, if requested, will be
obtained.
The Company may, in the future request that Huntingdon, Norton Herrick
and/or Evan Herrick, exchange the debt represented by the Existing Notes and/or
New Notes for equity securities of the Company. Accordingly, the Company
believes it is in its best interest to obtain shareholder approval to issue
Common Stock upon exercise of preferred stock which may be issued in exchange
for all or a portion of the Existing Notes and/or New Notes in the event the
Company makes such a request and the holder of a note agrees to such exchange.
Necessity for Shareholder Approval
Because the Company's Common Stock is listed on the NASDAQ National
Market, the Company is subject to NASD Marketplace Rules. NASD Marketplace Rule
4350(i) requires that a company listed on NASDAQ obtain shareholder approval in
connection with (i) the issuance of common stock of the listed company or
securities convertible into or exercisable for common stock of the listed
company (with certain exceptions) to officers and directors of a listed company
and (ii) the issuance or potential issuance by the listed company of common
stock or securities convertible into or exercisable for common stock equal to
20% or more of the common stock outstanding before the issuance for less than
the greater of book or market value of the stock. NASDAQ could determine that
the extension of the maturity date of an Existing Note is an "issuance" of a new
security, because the Existing Note is convertible into the Company's Common
Stock. Additionally, (i) the New Notes will be convertible into Common Stock and
the New Warrants will be exercisable to purchase Common Stock and (ii) the New
Notes and warrants will be issued to Huntingdon, an affiliate of Norton Herrick,
Chairman, and (iii) the issuance of New Notes and New Warrants involve the
potential issuance of 20% or more of the Common Stock outstanding before the
issuance because the Conversion Rate of the New Notes (other than the $1,150,000
of New Notes which have been issued) and exercise price of the New Warrants to
be issued with subsequent New Notes cannot currently be determined and the
Company may issue Common Shares as payment of interest. Moreover, if one or more
of the Existing Notes or New Notes is exchanged for preferred stock, the
preferred stock will be issued to Huntington or Norton Herrick, the issuance of
preferred stock involves the potential issuance of 20% or more of the Common
Stock outstanding before any such exchange because the conversion rate of the
New Preferred Shares (which will be the same as the conversion rate of the
Existing Note or New Note for which it is exchanged) may be below the market
price of the Common Stock at the time of the exchange, and preferred stock
issued in exchange for the Existing Note will contain anti-dilution provisions.
Accordingly, the Company has submitted this proposal for shareholder approval in
accordance with NASD Marketplace Rule 4350(i).
Recommendation
Therefore, the Board unanimously recommends that the shareholders vote for
the proposal to issue Common Stock to (i) Huntingdon upon conversion of New
Notes and the Existing Note held by Huntingdon (or any preferred stock which may
be issued in exchange for any such note) and New Warrants; (ii) Norton Herrick
upon conversion of the Existing Note (or preferred stock which may be issued in
exchange for such note) held by him; and (iii) Evan Herrick upon conversion of
the Existing Note held by him.
INDEPENDENT AUDITORS
Deloitte & Touche LLP reported on the financial statements of the Company
for the fiscal year ended December 31, 2001. It is currently anticipated that
Deloitte & Touche LLP will examine and report on the financial statements of the
Company for the year ending December 31, 2002. A representative of Deloitte &
Touche LLP is expected to be present at the Annual Meeting.
-18-
Fees Paid to Independent Auditors
Audit Fees
For fiscal 2001, the Company incurred professional fees and out-of-pocket
expense reimbursements to Deloitte & Touche LLP, its independent auditors, in
the amount of approximately $230,000 related to auditing services and the
reviews of the financial statements included in the Company's Form 10-K and
Forms 10-Q for the 2001 fiscal year.
Financial Information Systems Design and Implementation Fees
For fiscal 2001, the Company did not pay its principal independent
auditors for services related to financial information systems design and
implementation, as they were not engaged to perform such services.
All Other Fees
For fiscal 2001, the Company paid its principal independent accountants
$5,000 in connection with the filing of a registration statement on Form S-3.
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
The Company anticipates that the proxy materials relating to the 2003
Annual Meeting of Shareholders will be mailed to shareholders in April 2003.
Therefore, shareholders who wish to present proposals appropriate for
consideration at the Company's Annual Meeting of Shareholders to be held in the
year 2003 must (i) submit the proposal in proper form to the Company at its
address set forth on the first page of this Proxy Statement not later than April
1, 2003 and (ii) must satisfy the conditions established by the Securities and
Exchange Commission and the Company's By-laws for shareholder proposals in order
for the proposition to be considered for inclusion in the Company's proxy
statement and form of proxy relating to such annual meeting. Any such proposals,
as well as any questions related thereto, should be directed to the Secretary of
the Company.
For any proposal that is not submitted for inclusion in next year's proxy
statement (as described in the preceding paragraph) but is instead sought to be
presented directly at next year's annual meeting, SEC rules permit management to
vote proxies in its discretion if (a) the Company received notice of the
proposal before the close of business on May 1, 2003 and advised stockholders in
next year's proxy statement about the nature of the matter and how management
intends to vote on such matter or (b) does not receive notice of the proposal
prior to the close of business on May 1, 2003.
OTHER INFORMATION
A COPY OF THE COMPANY'S ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2001
IS BEING FURNISHED HEREWITH TO EACH SHAREHOLDER OF RECORD AS OF THE CLOSE OF
BUSINESS ON OCTOBER 15, 2002.
The Board of Directors is aware of no other matters, except for those
incident to the conduct of the Annual Meeting, that are to be presented to
shareholders for formal action at the Annual Meeting. If, however, any other
matters properly come before the Annual Meeting or any adjournments thereof, it
is the intention of the persons named in the proxy to vote the proxy in
accordance with their judgment.
By order of the Board
Of Directors,
Norton Herrick
Chairman
October 18, 2002
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MEDIABAY, INC.
2 Ridgedale Avenue - Suite 300
Cedar Knolls, New Jersey 07297
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON WEDNESDAY,
NOVEMBER 27, 2002 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints NORTON HERRICK, MICHAEL HERRICK and JOHN
LEVY and each of them, Proxies, with full power of substitution in each of them,
in the name, place and stead of the undersigned, to vote at the Annual Meeting
of Shareholders of MediaBay, Inc. (the "Company") on Wednesday, November 27,
2002, at the Company's offices located at 2 Ridgedale Avenue - Suite 300, Cedar
Knolls, New Jersey 07927 or at any adjournment or adjournments thereof,
according to the number of votes that the undersigned would be entitled to vote
if personally present, upon the following matters:
1. ELECTION OF CLASS III DIRECTORS:
|_| FOR all nominees listed below |_| WITHHOLD AUTHORITY
(Except as marked to the to vote for all
contrary below). nominees listed below.
Michael Herrick and Roy Abrams
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space below.)
--------------------------------------------------------------------------------
(Continued and to be signed on reverse side)
2. Proposal to authorize the Company to issue common stock upon conversion of
certain convertible notes or equity securities and exercise of certain
warrants issued and which may be issued to affiliates of the Company as
set forth in the Proxy Statement.
|_| FOR |_| AGAINST |_| ABSTAIN
3. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS GIVEN ABOVE. IF NO
INSTRUCTIONS ARE GIVEN, THIS PROXY WILL BE VOTED FOR THOSE NOMINEES AND THE
PROPOSALS LISTED ABOVE.
DATED: ________________________________, 2002
Please sign exactly as name
appears hereon. When shares are
held by joint tenants, both
should sign. When signing as
attorney, executor,
administrator, trustee or
guardian, please give full title
as such. If a corporation,
please sign in full corporate
name by President or other
authorized officer. If a
partnership, please sign in
partnership name by authorized
person.
--------------------------------
Signature
--------------------------------
Signature if held jointly
Please mark, sign, date and return this proxy card using the enclosed envelope