SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 OR | | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ________ Commission file number 1-13469 MediaBay, Inc. (Exact name of Registrant as Specified in its Charter) Florida 65-0429858 (State or other jurisdiction of (I.R.S. Employment incorporation or organization) Identification No.) 2 Ridgedale Avenue, Cedar Knolls, New Jersey 07927 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (973) 539-9528 Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirement for the past 90 days. Yes |X| No |_| Indicate by check mark whether the Registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes | | No |X| The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 28, 2002 (the last business day of the Registrant's most recently completed second quarter) was approximately $45,504,807. As of May 15, 2003, there were 14,341,376 shares of the Issuer's Common Stock outstanding. 1 MEDIABAY, INC. Quarter ended March 31, 2003 Form 10-Q Index Page ---- PART I: Financial Information Item 1: Financial Statements (unaudited) Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002, (unaudited) 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3: Quantitative and Qualitative Disclosures of Market Risk 18 Item 4: Controls and Procedures 19 PART II: Other Information Item 2: Changes in Securities and Use of Proceeds 19 Item 6: Exhibits and Reports on Form 8-K 19 Signatures 20 Certification of Principal Executive Officer 21 Certification of Principal Financial Officer 22 2 PART I: FINANCIAL INFORMATION Item 1: Financial Statements MEDIABAY, INC. Condensed Consolidated Balance Sheets (Dollars in thousands) (Unaudited) March 31, 2003 December 31, 2002 -------------- ----------------- Assets Current assets: Cash and cash equivalents $ 10 $ 397 Accounts receivable, net of allowances for sales returns and doubtful accounts of $4,753 and $5,325 at March 31, 2003 and December 31, 2002, respectively 6,154 7,460 Inventory 5,211 5,244 Prepaid expenses and other current assets 842 503 Royalty advances 1,076 1,044 -------- -------- Total current assets 13,293 14,648 Fixed assets, net of accumulated depreciation of $704 and $665 at March 31, 2003 and December 31, 2002, respectively 329 358 Deferred member acquisition costs 6,985 7,396 Deferred income taxes 16,224 16,224 Other intangibles, net 170 122 Goodwill 9,658 9,871 -------- -------- $ 46,659 $ 48,619 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 16,467 $ 16,616 Current portion - long-term debt 2,385 2,368 -------- -------- Total current liabilities 18,852 18,984 -------- -------- Long-term debt, net of original issue discount of $460 and $567 at March 31, 2003 and December 31, 2002, respectively 14,372 14,680 -------- -------- Common stock subject to contingent put rights 4,550 4,550 -------- -------- Preferred stock, no par value, authorized 5,000,000 shares; 25,000 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively 2,500 2,500 Common stock; no par value, authorized 150,000,000 shares; issued and outstanding 14,341,376 at March 31, 2003 and December 31, 2002 94,794 94,800 Contributed capital 8,274 8,251 Accumulated deficit (96,683) (95,146) -------- -------- Total stockholders' equity 8,885 10,405 -------- -------- $ 46,659 $ 48,619 ======== ======== See accompanying notes to consolidated financial statements. 3 MEDIABAY, INC. Condensed Consolidated Statements of Operations (Dollars in thousands, except per share data) (Unaudited) Three months ended March 31, ------------------------- 2003 2002 -------- -------- Sales, net of returns, discounts and allowances of $4,378 and $2,131 for the three months ended March 31, 2003 and 2002, respectively $ 10,697 $ 9,480 Cost of sales 5,234 4,289 -------- -------- Gross profit 5,463 5,191 Expenses: Advertising and promotion 2,847 2,188 General and administrative 3,475 2,487 Depreciation and amortization 99 498 -------- -------- Operating (loss) profit (958) 18 Interest expense 523 732 -------- -------- Loss before income taxes (1,481) (714) Income taxes -- -- -------- -------- Net loss (1,481) (714) Dividends on preferred stock 56 45 -------- -------- Net loss applicable to common shares $ (1,537) $ (759) ======== ======== Basic and diluted loss per common share: Basic loss per common share $ (.11) $ (.05) ======== ======== Diluted loss per common share $ (.11) $ (.05) ======== ======== See accompanying notes to consolidated financial statements. 4 MEDIABAY, INC. Condensed Consolidated Statements of Cash Flows (Dollars in thousands) (Unaudited) Three months ended March 31, ----------------------- 2003 2002 ------- ------- Cash flows from operating activities: Net loss applicable to common shares $(1,537) $ (759) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 99 498 Amortization of deferred member acquisition costs 1,575 1,264 Amortization of deferred financing costs and original issue discount 119 377 Non-current accrued interest and dividends payable 261 -- Changes in asset and liability accounts, net of asset acquisition: Decrease in accounts receivable, net 1,305 567 Decrease in inventory 33 23 (Increase) decrease in prepaid expenses (353) 293 (Increase) decrease in royalty advances (31) 14 Increase in deferred member acquisition costs (1,163) (2,617) Increase in accounts payable and accrued expenses 74 555 ------- ------- Net cash provided by operating activities 382 215 ------- ------- Cash flows from investing activities: Acquisition of fixed assets (11) (77) Intangible assets acquired (243) (379) ------- ------- Net cash used in investing activities (254) (456) ------- ------- Cash flows from financing activities: Proceeds from issuance of long-term debt -- 500 Payment of long-term debt (510) (300) Increase in deferred financing costs (5) -- ------- ------- Net cash (used in) provided by financing activities (515) 200 ------- ------- Net decrease in cash and cash equivalents (387) (41) Cash and cash equivalents at beginning of period 397 64 ------- ------- Cash and cash equivalents at end of period $ 10 $ 23 ======= ======= See accompanying notes to consolidated financial statements. 5 MEDIABAY, INC. Notes to Consolidated Financial Statements (Dollars in thousands, except per share data) (Unaudited) (1) Organization MediaBay, Inc. (the "Company"), a Florida corporation, was formed on August 16, 1993. MediaBay, Inc. is a marketer of spoken audio products, including audiobooks and old-time radio shows, through direct response, retail and Internet channels. The Company markets audiobooks primarily through its Audio Book Club. Its old-time radio programs are marketed through direct-mail catalogs, over the Internet at RadioSpirits.com and, on a wholesale basis, to major retailers. (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. Revenue Recognition The Company derives 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 sells classic radio shows to retailers either directly or through distributors. The Company derives additional revenue through rental of its proprietary database of names and addresses to non-competing third parties through list rental brokers. The Company also derives 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. Shipping and Handling Revenue and Costs Amounts paid to the Company for shipping and handling by customers is included in sales. Amounts the Company incurs for shipping and handling costs are included in cost of sales. The Company recognizes shipping and handling revenue upon shipment of merchandise. Shipping and handling expenses are recognized on a monthly basis from invoices from the third party fulfillment houses, which provide the services. Cost of Sales Cost of sales includes the following: o Product costs (including free audiobooks in the initial enrollment offer to prospective members) o Royalties to publishers and rightsholders o Fulfillment costs, including shipping and handling 6 o Customer service o Direct response billing, collection and accounts receivable management. Cooperative Advertising and Related Selling Expenses The Company classifies the cost of certain credits, allowances, adjustments and payments given to customers for the services or benefits provided as a reduction of net sales. 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. Had compensation expense for the Company's stock options been recognized on the fair value on the grant date under SFAS 123, the Company's net loss and net loss per share for the three months ended March 31, 2003 and 2002 would have been as follows: Three Months Ended March 31, ---------------------------- 2003 2002 ------- ------- Net loss applicable to common shares, as reported $(1,537) $ (759) 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 (36) (147) ------- ------- Pro forma net loss applicable to common shares $(1,573) $ (906) ======= ======= Net loss per share Basic and diluted - as reported $ (.11) $ (.05) ======= ======= Basic and diluted - pro forma $ (.11) $ (.07) ======= ======= No dividend yield and the following assumptions were used in the pro forma calculation of compensation expense: No. of Exercise Assumed Risk-free Fair Value Date Shares Price Volatility Interest Rate per Share ---- ------- ----- ---------- ------------- --------- First Quarter 2002 140,500 $1.88 165% 4.49% $1.05 First Quarter 2003 40,000 $1.50 165% 4.85% $ .98 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. 7 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, which has been determined to be generally 30 months. The costs are being amortized on accelerated basis consistent with the recognition of related revenue. 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. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. (3) Goodwill and Other Intangibles In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The Company adopted SFAS 142 on January 1, 2002. SFAS 142 changed the accounting for goodwill and indefinite-lived intangible assets from an amortization method to an impairment-only approach. 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 over periods from three to seven years. Other intangible assets primarily relate to mailing and non-compete agreements, customer lists, and license agreements associated with the Company's Audio Book Club and Radio Spirits divisions. Amortization expense for other intangible assets was $59 and $436 for the three months ended March 31, 2003 and 2002, respectively. The Company estimates intangible amortization expenses of the following: 9 months ended December 31, 2003 $117 2004 23 2005 8 2006 8 2007 8 2008 1 ---- Total $165 ==== 8 The following table presents details of Other Intangibles at March 31, 2003 and December 31, 2002: March 31, 2003 December 31, 2002 -------------------------------- ----------------------------- Accumulated Accumulated Cost Amortization Net Cost Amortization Net ------- ------------- ----- ------ ------------- ---- Mailing Agreements $ 592 $ 561 $ 31 $ 592 $ 524 $ 68 Customer Lists 4,380 4,380 -- 4,380 4,380 -- Non-Compete Agreements 307 173 134 200 151 49 Other 5 -- 5 5 -- 5 ------- ------- ----- ------ ------ ---- Total Other Intangibles $ 5,285 $ 5,102 $ 170 $5,177 $5,055 $122 ======= ======= ===== ====== ====== ==== Goodwill of $9,658 and $9,871 as of March 31, 2003 and December 31, 2002 respectively is attributable to the Company's Radio Spirits business. The change of $213 is related to the finalization of the acquisition of Great American Audio, which occurred in March 2002. (4) Long-term Debt Bank Debt As of May 15, 2003, the Company had $3,850 of indebtedness outstanding under the Amended and Restated Credit Agreement dated as of October 3, 2002, as amended, by and among the Company and Radio Spirits, Inc. and Audio Book Club, Inc., wholly-owned subsidiaries of the Company, as co-borrowers, and ING (U.S.) Capital LLC, as administrative agent, and the other lenders named therein (the "Credit Agreement"). The maturity date of the Credit Agreement is April 30, 2004; provided however, that the Company is required to make monthly payments of principal of $180 in April through June 2003, $190 in July through September 2003, $200 in October through December 2003 and $225 in January through March 2004. The Company is not permitted to make any additional borrowings under the Credit Agreement. The interest rate on the credit facility is equal to the prime rate plus 2 1/2%. The Company granted the lenders under the Credit Agreement a security interest in substantially all of the Company's assets and the assets of its subsidiaries and pledged the stock of its subsidiaries. The Company is required to maintain Minimum EBITDA, as defined below, of the following: o $3,000,000 for the period beginning on January 1, 2001 and ending prior to March 31, 2003; o $4,000,000 for the period beginning on January 1, 2001 and ending prior to June 30, 2003; o $5,000,000 for the period beginning on January 1, 2001 and ending prior to September 30, 2003; o $6,000,000 for the period beginning on January 1, 2001 and ending prior to December 31, 2003. o $7,000,000 for the period beginning on January 1, 2001 and ending prior to March 31, 2004 Under the Credit Agreement, "EBITDA" means, for any period, the sum of (i) net income, (ii) interest expense, (iii) income tax expense, (iv) depreciation expense, (v) extraordinary and nonrecurring losses and (vi) amortization expense, less extraordinary and nonrecurring gains (in each case, determined in accordance with generally accepted accounting principles) plus adjustments for (x) the pro forma effect of any Permitted Acquisition (as defined in the Credit Agreement) and (y) non-cash stock compensation; provided that EBITDA shall be adjusted for the effect of treating the Company's advertising expense and new member acquisition costs as expensed as incurred. The Company was in compliance with this covenant at March 31, 2003. In addition to limiting the Company's ability to incur additional indebtedness, the Credit Agreement prohibits the Company from, among other things: o merging into or consolidating with another entity; o selling all or substantially all of its assets; o declaring or paying cash dividends; and o materially changing the nature of its business. 9 We anticipate making the principal payments from cash flow generated from operations. The balance of our bank debt, after making the above payments, of $1.6 million is due April 30, 2004. We are currently seeking to refinance or extend this debt. Historically we have been able to extend the maturity of this debt. (5) Stockholders' Equity and Stock Options and Warrants Stock Options and Warrants From January 1, 2003 to March 31, 2003, the Company issued options to purchase 85,000 shares of its common stock to certain directors, employees and consultants to the Company under its 2000 Stock Option plan. The Company also cancelled options to purchase 5,000 shares of its common stock. The Company also issued non-plan warrants to purchase 90,000 shares of its common stock to a former employee and consultant at prices ranging from $1.50 to $3.00 per share as part of non-competition agreements. (6) Net Loss Per Share of Common Stock Basic loss per share was computed using the weighted average number of common shares outstanding for the three months ended March 31, 2003 and 2002 of 14,341,376 and 13,865,834, respectively. For the three months ended March 31, 2003, common equivalent shares, which were not included in the computation of diluted loss per share because they would have been anti-dilutive were 986,894 common equivalent shares, as calculated under the treasury stock method and 16,634,000 common equivalent shares relating to convertible subordinated debt and preferred stock calculated under the "if-converted method". Interest expense on the convertible subordinated debt added back to net loss would have been $278 and preferred dividends added back to net loss applicable to common shares would have been $56 for the three months ended March 31, 2003. For the three months ended March 31, 2002, common equivalent shares, which were not included in the computation of diluted loss per share because they would have been anti-dilutive were 2,095,945 common equivalent shares, as calculated under the treasury stock method and 15,966,000 common equivalent shares relating to convertible subordinated debt and preferred stock calculated under the "if-converted method". Interest expense on the convertible subordinated debt added back to net loss would have been $237 and preferred dividends added back to net loss applicable to common shares would have been $45 for the three months ended March 31, 2002. (7) Supplemental Cash Flow Information Cash paid for interest expense was $147 and $162 for the three months ended March 31, 2003 and 2002, respectively. (8) Segment Reporting For 2003 and 2002, the Company has divided its operations into four reportable segments: Corporate; Audio Book Club ("ABC") a membership-based club 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. The Company did not expend any funds or receive any income in the three months ended March 31, 2003 and 2002 from its newest subsidiary RadioClassics. Inter-segment sales are recorded at prevailing sales prices. 10 Segment Reporting Three Months Ended March 31, 2003 Inter- Corporate ABC RSI Mbay.com segment Total --------- ------- ------- -------- ------- ------- Sales, net of returns, discounts and allowances $ -- $ 8,106 $ 2,600 17 (26) $ 10,697 Operating profit (loss) (1,225) 334 85 (157) 5 (958) Depreciation and amortization -- 74 25 -- -- 99 Interest expense 519 -- 4 -- -- 523 Dividends on Preferred Stock 56 -- -- -- -- 56 Net (loss) income applicable to common shares (1,800) 334 81 (157) 5 (1,537) Total assets -- 30,170 16,549 -- (60) 46,659 Acquisition of fixed assets -- 10 1 -- -- 11 Segment Reporting Three Months Ended March 31, 2002 Inter- Corporate ABC RSI Mbay.com segment Total --------- ------- ------- -------- ------- ------- Sales, net of returns, discounts and allowances $ -- $ 7,921 $ 1,532 $ 50 ($23) $ 9,480 Operating profit (loss) (1,013) 1,052 95 (116) -- 18 Depreciation and amortization -- 468 30 -- -- 498 Interest expense 724 -- 8 -- -- 732 Dividends on Preferred Stock 45 -- -- -- -- 45 Net (loss) income applicable to common shares (1,782) 1,052 87 (116) -- (759) Total assets -- 31,661 14,169 1 (76) 45,755 Acquisition of fixed assets -- 70 7 -- -- 77 (9) Recent Accounting Pronouncements In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities"("SFAS 149"). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. With certain exceptions, SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Management does not believe adoption of this standard will have a material impact on the Company's financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." This interpretation defines when a business enterprise must consolidate a variable interest entity. This interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of this statement is not expected to have a material effect on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure" ("SFAS 148") which amends SFAS No. 123. This statement provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS No. 123. The transition guidance and disclosure requirements are effective for fiscal years ending after December 15, 2002. The Company has included the required interim disclosure in Note 2 to these Financial Statements. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This interpretation requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. It also enhances guarantor's disclosure requirements to be made in its interim and annual financial statements about its obligations under certain guarantees it has issued. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. In the normal course of business, the Company does not issue guarantees to third parties; accordingly, this interpretation will not have an effect on the Company's financial position or results of operations. 11 In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", was approved by the FASB. This statement is effective January 1, 2003. Among other things, this statement requires that gains or losses on the extinguishment of debt will generally be required to be reported as a component of income from continuing operations and will no longer be classified as an extraordinary item. Therefore, beginning in 2003, the Company's prior financial statements will need to be reclassified to include those gains and losses previously recorded as an extraordinary item as a component of income from continuing operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities" (SFAS 146 "). SFAS 146 requires the recognition of a liability for costs associated with an exit plan or disposal activity when incurred and nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)", which allowed recognition at the date of an entity's commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by the Company after December 31, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. This statement addresses the diverse accounting practices for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. (10) Subsequent Events On April 28, 2003, the Company cancelled five-year options to purchase 150,000 shares of its common stock at prices ranging from $1.00 to $5.00 with a plan to issue new options with similar terms on November 1, 2003. On April 9, 2003 the maturity date of the principal amount of the senior credit facility of $4,030, as of April 9, 2003, was extended to April 30, 2004 with certain conditions. In addition to its scheduled principal payments through 2003, the Company is required to make payments of $225 per month for the months of January, February and March 2004. The interest rate for the revolving credit facility is the prime rate plus 2.5%. On April 18, 2003, the Company signed a sixty-six month extension of its lease on its office space in Cedar Knolls, New Jersey. Minimum annual lease commitments including capital improvement payments under all non-cancelable operating leases are as follows: Year ending December 31, 2003..................................... $ 156 2004..................................... 168 2005..................................... 192 2006..................................... 198 2007..................................... 204 Thereafter............................... 310 ------ Total lease commitments.................. $1,228 ====== On May 1, 2003, the Company entered into a two-year consulting agreement with XNH Consulting Services, Inc. ("XNH"), a company wholly-owned by Norton Herrick, the Company's former Chairman. The agreement provides, among other things that XNH will provide consulting and advisory services to MediaBay and that XNH will be under the direct supervision of the Company's Board of Directors. For its services, the Company has agreed to pay XNH a fee of $8 per month and to provide Mr. Herrick with health insurance and other benefits applicable to the Company's officers to the extent such benefits may be provided under the Company's benefit plans. The consulting agreement provides that the indemnification agreement with Mr. Herrick entered into on November 15, 2002 pursuant to which, the Company agreed to indemnify Mr. Herrick to the maximum extent permitted by the corporate laws of the State of Florida or, if more favorable, the Company's Articles of Incorporation and By-Laws in effect at the time the agreement 12 was executed, against all claims (as defined in the agreement) arising from or out of or related to Mr. Herrick's services as an officer, director, employee, consultant or agent of the Company or any subsidiary or in any other capacity shall remain in full force and effect and to also indemnify XNH on the same basis. Mr. Herrick resigned as Chairman of MediaBay, Inc. effective May 1, 2003 and the Company and Mr. Herrick terminated the employment agreement effective November 2, 2002 on May 1, 2003. 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, Executive Vice President 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. 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 $0.77, 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. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except per share data) Forward-looking Statements Certain statements in this Form 10-Q 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 Report, including, without limitation, statements regarding the Company's 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 the Company believes 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 the Company's actual results, performance or achievements to be materially different from any results, performances or achievements express or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations, without limitation, the Company's history of losses, its ability to meet stock repurchase obligations, anticipate and respond to changing customer preferences, license and produce desirable content, protect its databases and other intellectual property from unauthorized access, pay trade creditors and collect receivables, dependence on third-party providers, suppliers and distribution channels; competition; the costs and success of its marketing strategies, product returns and member attrition. Undue reference should not be placed on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements. Introduction The Company is a marketer of spoken audio products, including audiobooks and old-time radio shows, through direct response, retail and Internet channels. The Company's content and products are sold in multiple formats, including physical (cassette and compact disc) and secure digital download formats. The Company reports financial results on the basis of four business segments; Corporate, Audio Book Club ("ABC"), Radio Spirits ("Radio Spirits" or "RSI") and MediaBay.com. A fifth division, Radio Classics, 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. Results of Operations Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 Sales, net of returns, discounts and allowances for the three months ended March 31, 2003 were $10,697, an increase of $1,217 or 12.8%, as compared to $9,480 for the three months ended March 31, 2002. The increase in sales was primarily attributable to a $1,068 increase in sales at the Company's Radio Spirits business. This increase is due to $648 of sales, in the three months ended March 31, 2003, of The World's Greatest Old-Time Radio continuity program, a program introduced in the third quarter of 2002, which is similar to Audio Book Club and offers old-time radio products, a $249 increase in Radio Spirits direct mail catalog sales in the first quarter of 2003 as compared to the first quarter of 2002, due principally to a radio advertising campaign, an increase of $144 in wholesale sales and an increase of $27 in advertising sold on our syndicated radio shows. Cost of sales for the three months ended March 31, 2003 increased $945 to $5,234 from $4,289 in the prior comparable period. Cost of sales as a percentage of net sales increased to 48.9% for the three months ended March 31, 2003 compared to 45.2% in the three months ended March 31, 2002. The increase in cost of goods sold as a percentage of net sales is principally due to a higher percentage of wholesale sales at Radio Spirits with correspondingly higher cost of goods sold, an increase in new members in The World's 14 Greatest Old-Time Radio continuity, whose initial purchases are at substantially reduced prices, discounting at both Audio Book Club and Radio Spirits direct mail business, which resulted in lower average selling prices and an increase in returns at Audio Book Club due to a higher percentage of members receiving automatic shipments, with correspondingly higher return rates, which increased fulfillment costs. As a result of higher net sales, partially offset by higher cost of sales, gross profit increased $273 to $5,463 from $5,191 for the three months ended March 31, 2002. Advertising and promotion expenses increased $659 to $2,847 for the three months ended March 31, 2003 as compared to $2,188 in the prior comparable period. The increase is principally due to increased advertising expenditures during the year ended December 31, 2002, which resulted in increased amortization of deferred member costs in the three months ended March 31, 2003. General and administrative expenses for the three months ended March 31, 2003 increased $988 to $3,475 from $2,487 for the three months ended March 31, 2002. The increase in general and administrative expenses relate to an increase in bad debt expenses of $513, due to higher net sales and more sales to Audio Book Club members obtained through the Internet who have higher non-pay rates, and an increase in professional fees of $562 of which approximately $420 represented legal and other costs incurred in connection with legal proceedings in which the Company is the plaintiff. Depreciation and amortization expenses for the three months ended March 31, 2003 were $99, a decrease of $399, as compared to $498 for the prior comparable period. The decrease is principally attributable to reductions in the amortization of intangibles, which had been fully amortized or written off during the year ended December 31, 2002. Net interest expense for the three months ended March 31, 2003 was $523 as compared to $732 for the three months ended March 31, 2002. The decrease in interest expenses is principally due to the inclusion in the three months ended March 31, 2002 of $377 for amortization of debt discount and deferred financing fees as compared to $119 for the three months ended March 31, 2003, partially offset by increased borrowings in the fourth quarter of 2002, which resulted in increased interest expense in the three months ended March 31, 2003. Primarily due to increased advertising expenses, increased bad debt expense and legal and other costs relating to legal proceedings in which the Company is the plaintiff, we had a net loss of $1,537, or $.11 per common share for the three months ended March 31, 2003, as compared to a net loss of $759, or $.05 per common share, for the three months ended March 31, 2002. Liquidity and Capital Resources Historically, the Company has funded its cash requirements through sales of equity and debt securities and borrowings from financial institutions and the Company's principal shareholders. At March 31, 2003, the Company owed approximately $12,119 to trade and other creditors. Approximately $5,243 of these accounts payable were more than 60 days past due. If the Company does not make satisfactory payments to its vendors they may refuse to continue to provide it products or services on credit, which could interrupt the Company's supply of products or services. The Company has implemented a series of initiatives to increase cash flow. There can be no assurance that the Company will not in the future require additional capital to pay its creditors, fund the expansion of operations, make acquisitions or for working capital. Management believes that additional sources of capital are available if required. For the three months ended March 31, 2003, cash decreased by $387, as the Company had net cash provided by operating activities of $382 and used net cash of $254 and $515 for investing and financing activities, respectively. Net cash provided by operating activities principally consisted of depreciation and amortization expenses of $99, amortization of deferred financing costs and original issue discount of $119, non-current accrued interest and dividends payable of $261, decreases in accounts receivable and inventory of $1,305 and $33, respectively, increases in accounts payable and accrued expenses of $74 and a net 15 decrease in deferred member acquisition costs of $412, partially offset by the net loss of $1,537 and increases in prepaid expenses and royalty advances of $353 and $31, respectively. The decrease in accounts receivable was primarily attributable to the collection of retail receivables from the holiday selling season from our radio programs and increases in the reserves for returns and bad debts. The significant growth in new Audio Book Club members during 2002 resulted in increases in bad debts and returns as the performance of new members is generally weaker as compared to long-standing members. We also believe that poor general economic conditions resulted in increases in the required level of reserves. The decrease in deferred member acquisition cost is due to the timing of direct-response advertising campaigns and a decrease in the size of the marketing campaigns. The increase in prepaid expenses is principally due to the timing of marketing activities. Net cash used in investing activities consists of acquisition of fixed assets of $11, principally computer equipment and the acquisition of intangible assets and goodwill, including legal fees and other costs incurred in obtaining covenants not to compete from a former employee and a former consultant of $85, and the acquisition of certain old-time radio assets of $158. In accordance with the terms of its senior credit facility, the Company repaid $510 of principal on its senior credit facility in the three months ended March 31, 2003. On April 9, 2003, the maturity date of the principal amount of the senior credit facility of $4,030, as of April 9, 2003, was extended to April 30, 2004 with certain conditions. In addition to its scheduled monthly principal payments of $180 in May and June 2003; $190 in July through September 2003 and $200 in October through December 2003; the Company is required to make payments of $225 per month for the months of January, February and March 2004. The interest rate for the revolving credit facility is the prime rate plus 2.5%. On April 18, 2003 the Company signed a sixty-six month extension of its lease on its office space in Cedar Knolls, New Jersey. Minimum annual lease commitments including capital improvement payments under all non-cancelable operating leases are as follows: Year ending December 31, 2003..................................... $ 156 2004..................................... 168 2005..................................... 192 2006..................................... 198 2007..................................... 204 Thereafter............................... 310 ------ Total lease commitments.................. $1,228 ====== On May 1, 2003, the Company entered into a two-year consulting agreement with XNH Consulting Services, Inc. ("XNH"), a company wholly-owned by Norton Herrick, the Company's former Chairman. The agreement provides, among other things that XNH will provide consulting and advisory services to MediaBay and that XNH will be under the direct supervision of the Company's Board of Directors. For its services, the Company has agreed to pay XNH a fee of $8 per month and to provide Mr. Herrick with health insurance and other benefits applicable to the Company's officers to the extent such benefits may be provided under the Company's benefit plans. The consulting agreement provides that the indemnification agreement with Mr. Herrick entered into on November 15, 2002 pursuant to which, the Company agreed to indemnify Mr. Herrick to the maximum extent permitted by the corporate laws of the State of Florida or, if more favorable, the Company's Articles of Incorporation and By-Laws in effect at the time the agreement was executed, against all claims (as defined in the agreement) arising from or out of or related to Mr. Herrick's services as an officer, director, employee, consultant or agent of the Company or any subsidiary or in any other capacity shall remain in full force and effect and to also indemnify XNH on the same basis. Mr. Herrick resigned as Chairman of MediaBay, Inc. effective May 1, 2003 and the Company and Mr. Herrick terminated the employment agreement effective November 2, 2002 on May 1, 2003. 16 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, Executive Vice President 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. 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 the $0.77, the closing sale price of the Company's stock on May 6, 2003. In the event of a liquidation, dissolution or winding up of MediaBay, the holders of Series B 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 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. Recent Accounting Pronouncements In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. With certain exceptions, SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Management does not believe adoption of this standard will have a material impact on the Company's financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." This interpretation defines when a business enterprise must consolidate a variable interest entity. This interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of this statement is not expected to have a material effect on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB Statement 123" which amends SFAS No. 123. This statement provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS No. 123. The transition guidance and annual disclosure provisions are effective for fiscal years ending after December 15, 2002. The Company has included the required interim disclosure in Note 2 to the Financial Statements presented elsewhere in this report. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This interpretation requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. It also enhances guarantor's disclosure requirements to be made in its interim and annual financial statements about its obligations under certain guarantees it has issued. The initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are 17 effective for financial statements of interim or annual periods ending after December 15, 2002. In the normal course of business, the Company does not issue guarantees to third parties; accordingly, this interpretation will not have an effect on the Company's financial position or results of operations. In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", was approved by the FASB. This statement is effective January 1, 2003. Among other things, this statement requires that gains or losses on the extinguishment of debt will generally be required to be reported as a component of income from continuing operations and will no longer be classified as an extraordinary item. Therefore, beginning in 2003, our prior financial statements will need to be reclassified to include those gains and losses previously recorded as an extraordinary item as a component of income from continuing operations. In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires the recognition of a liability for costs associated with an exit plan or disposal activity when incurred and nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)", which allowed recognition at the date of an entity's commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated by the Company after December 31, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. This statement addresses the diverse accounting practices for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. Quarterly Fluctuations The Company's operating results vary from period to period as a result of purchasing patterns of members, the timing, costs, magnitude and success of direct mail campaigns and Internet initiatives and other new member recruitment advertising, member attrition, the timing and popularity of new audiobook releases and product returns. The timing of new member enrollment varies depending on the timing, magnitude and success of new member advertising, particularly Internet advertising and direct mail campaigns. The Company believes that a significant portion of our sales of old-time radio and classic video programs are gift purchases by consumers. Therefore, we tend to experience increased sales of these products in the fourth quarter in anticipation of the holiday season and the second quarter in anticipation of Fathers' Day. Item 3: Quantitative and Qualitative Disclosures of Market Risk The Company is exposed to market risk for the impact of interest rate changes. As a matter of policy the Company does not enter into derivative transactions for hedging, trading or speculative purposes. The Company's exposure to market risk for changes in interest rates relates to its variable rate debt. The Company has total debt outstanding as of March 31, 2003, net of original issue discount of $460, of $16,757 of which interest on $5,530 principal amount of this debt is payable at the prime rate plus 2.5%. If the prime rate were to increase the Company's interest expense would increase, however a hypothetical 10% change in interest rates would not have had a material impact on its fair values, cash flows, or earnings for the three months ended March 31, 2003. All of the Company's other debt is at fixed rates of interest. 18 Item 4. Controls and Procedures Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. Part II - Other Information Item 2: Changes in Securities and Use of Proceeds (Dollars in thousands, except per share date) In the first quarter of 2003, the Company issued plan options to purchase 85,000 shares of its common stock to officers, employees and Board members. The options have exercise prices ranging from $1.25 to $1.50, vest at various times and have a five-year exercise period. The Company also cancelled five-year plan options to purchase a total of 5,000 shares of common stock. We also issued non-plan warrants to purchase 90,000 shares of its common stock to a former employee and consultant at prices ranging from $1.50 to $3.00 per share The foregoing securities were issued in private transactions pursuant to an exemption from the registration requirement offered by Section 4(2) of the Securities Act of 1933. Item 6: Exhibits and Reports on Form 8-K. (a) Exhibits 3.5 Articles of Amendment to Articles of Incorporation 10.1 Amendment No. 4 to the Credit Agreement dated April 28, 2003 10.2 Consulting and Termination Agreement dated as of May 1, 2003 between XNH Consulting Services, Inc. (the "Consultant") and the Registrant 99.1 Certification of Hakan Lindskog, Chief Executive Officer of MediaBay, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of John Levy, Executive Vice President and Chief Financial Officer of MediaBay, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K None. 19 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, MediaBay, Inc. has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MediaBay, Inc. Dated: May 15, 2003 By: /s/ Hakan Lindskog -------------------------------------------- Hakan Lindskog Chief Executive Officer and President Dated May 15, 2003 By: /s/ John F. Levy -------------------------------------------- John F. Levy Chief Financial Officer (principal accounting and financial officer) 20 MediaBay, Inc. Certification of Chief Executive Officer I, Hakan Lindskog, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of MediaBay, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Hakan Lindskog ----------------------- Hakan Lindskog Chief Executive Officer 21 MediaBay, Inc. Certification of Chief Financial Officer I, John F. Levy, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of MediaBay, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ John F. Levy ------------------------ John F. Levy Chief Financial Officer 22