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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
June 27, 2003
Dear Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders of
MediaBay, Inc. (the "Company"), which will be held on Monday, August 11, 2003 at
9:00 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 preferred notes issued to certain officers and directors 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,
Carl Wolf
Chairman
MEDIABAY, INC.
2 Ridgedale Avenue - Suite 300
Cedar Knolls, New Jersey 07927
----------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MONDAY, AUGUST 11, 2003
----------
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 Monday, August
11, 2003, at 9:00 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:
To elect two Class III directors to hold office until the 2005 Annual
Meeting of Shareholders and until their respective successors have been duly
elected and qualified;
To authorize the Company to issue Common Stock upon conversion of
convertible preferred stock issued to certain officers and directors of the
Company as set forth in the Proxy Statement; and
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 June 20, 2003 are
entitled to notice of and to vote at the Annual Meeting or any adjournments
thereof.
By Order of the Board of Directors,
Carl Wolf
Chairman
June 27, 2003
MEDIABAY, INC.
2 Ridgedale Avenue - Suite 300
Cedar Knolls, New Jersey 07927
----------
PROXY STATEMENT
----------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MONDAY, AUGUST 11, 2003
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 Monday, August 11, 2003 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 June 30, 2003.
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 June 20, 2003 (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 14,341,376 shares of the
Company's Common Stock, no par value (the "Common Stock"), 25,000 shares of the
Company's Series A Preferred Stock, no par value (the "Series A Preferred
Shares"), and 3,350 shares of Series B Preferred Stock, no par value (the
"Series B 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
Series A 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 Series A Preferred Shares are entitled to an aggregate of 1,428,571
votes. Holders of the Series A 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. The holders of Series B Shares do not have any vote
rights, except as required by law, and, accordingly, are not entitled to vote on
the election of directors on the Proposal.
VOTING PROCEDURES AND PROXY INFORMATION
The Class III directors will be elected by the affirmative vote of a
plurality of the votes represented by the shares of Common Stock and Series A
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 Series A 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 Series B Preferred Shares
issued to certain officers and directors 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 Series A 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. 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.
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
III directors will be elected to hold office for a term expiring at the Annual
Meeting of Shareholders to be held in 2006. It is the intention of the Board of
Directors to nominate Howard Herrick and Carl Wolf as Class III 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 III DIRECTORS
(To be Elected)
Howard Herrick, 38, 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. 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, a director of the
Company, and brother of Michael Herrick, a director of the Company.
Carl Wolf, 60, has been a director of the Company since March 1998 and
Chairman of the Company since May 2003, and was Co-Chairman of the Company from
November 2002 through April 2003. 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 is with respect to incumbent directors in
Class I and Class II of the Board of Directors who are not nominees for election
at this Annual Meeting of Shareholders:
-2-
CLASS I DIRECTORS
(Term Expires in 2004)
Norton Herrick, 64, a co-founder of the Company, has been a director since
the Company's inception. Mr. Herrick served as Chairman of the Company from its
inception to April 2003, 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. 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.
Joseph R. Rosetti, 69, has been a director of the Company since December
2002. Mr. Rosetti is President of SafirRosetti, an investigative and security
firm owned by Omnicom Group, Inc. Prior to forming SafirRosetti, Joseph R.
Rosetti was the Vice Chairman of Kroll Associates. As Vice Chairman, he had
responsibility for Corporate Security/Crisis Management, which provides industry
and professional organizations with preventive measures to combat corporate and
financial crimes. From 1971 to 1987 he had worldwide responsibility at IBM for
security programs in physical security, investigations, personnel security,
trade secret protection, information asset security, real and movable and
financial asset security and Department of Defense Security. Mr. Rosetti was a
member of the U.S. National Chamber of Commerce Crime Reduction Panel and was
Staff Director for the Conference of the National Commission on Criminal Justice
Standards and Goals, a member of the private Security Task Force to the National
Advisory Committee on Criminal Justice Standards and Goals and Chairman of the
American Management Association's Council on Crimes against Business. Prior to
joining IBM, Mr. Rosetti was the Northeast Director for the Law Enforcement
Assistance Administration of the U.S. Department of Justice and a Special Agent,
Group Supervisor, and Special Assistant to the Assistant Commissioner for
Compliance in the Intelligence Division, U.S. Treasury Department.
CLASS II DIRECTORS
(New Term Expires in 2005)
Michael Herrick, 36, co-founder of the Company, has been a director from
the Company's inception. Mr. Herrick was Chief Executive Officer from January
2000 through December 2002, Co-Chief Executive Officer from April 1998 to
January 2000 and has held various other offices with the Company from its
inception. Mr. Herrick is a former member of the Board of Directors of the Audio
Publisher's Association. Mr. Herrick is currently a principal of MEM Consulting
Services, Inc., a business advisory and Consulting firm. 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.
Mark P. Hershhorn, 53, has been a director of the Company since February
2003. Mr. Hershhorn is currently President and CEO of CKS & Associates and CEO
for Midwest Real Estate Investment LLC, real estate development firms
specializing in renovation and rehabilitation of apartment buildings in urban
areas. Mr. Hershhorn was formerly President, CEO and a Director of National
Media Corporation, a publicly held transactional television marketing company.
Prior to National Media Corporation, Mr. Hershhorn served as Senior Vice
President of Food Operations and Joint Ventures for NutriSystems, Inc. Mr.
Hershhorn also served as Chief Financial Officer, Treasurer, Vice President and
Director of The Franklin Mint, a global direct marketing company operating in
ten countries. Mr. Hershhorn began his career at the accounting and auditing
firm of Price Waterhouse. Mr. Hershhorn is a member of the Graduate Executive
Board of the Wharton Graduate Division of the University of Pennsylvania and an
active participant in the Wharton School Mentoring program. He is also Vice
Chairman of the Board of Overseas and Executive Committee of the Rutgers
University Foundation, a member of the Rutgers University Board of Trustees,
Chairman of the Executive Committee of Rutgers University Scarlet R Club,
Chairperson of the Rutgers University Annual Fund, a member of the Dean's
Advisory Council for Rutgers College and a member of Rutgers University
President's Council. Mr. Hershhorn is also a Board Member and Chairman of
-3-
the Development Committee of Carelift International, a not-for-profit
organization, which rebuilds and outfits hospitals in Eastern European countries
with current medical technology and supplies. Mr. Hershhorn holds a Bachelor of
Arts Degree in Economics from Rutgers University where he was a Henry Rutgers
Scholar in Economics, and an MBA from the Wharton School of the University of
Pennsylvania.
Executive Officers
The following is information with respect to certain of the Company's
officers who are not directors or nominees for directors.
Hakan Lindskog, 42, has been Chief Executive Officer of the Company since
January 2003, has been President of the Company since November 2001, was Chief
Operating Officer of the Company from June 2000 through November 2001, and has
been Chief Executive Officer of its Audio Book Club division since joining the
Company in June 2000. 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 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.
John Levy, 47, joined 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.
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 and Artificial Intelligence Labs.
Robert Toro, 38, has been Senior Vice President of Finance of the Company
since July 1999, Chief Financial Officer of the Company's 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 Arthur Andersen
where he was employed immediately prior to joining Marvel Entertainment Group.
Board Meetings
The Company's Board of Directors held two meetings during the fiscal year
ended December 31, 2002. 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.
-4-
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), Hershhorn and Rosetti. Mr. Ehrlich received a cash fee of $5,000 for
serving as Chairman of the Audit Committee in 2002 and will receive a cash fee
of $7,500 for serving as Chairman of the Audit Committee during 2003.
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 Herrick and Michael Herrick.
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 Herrick 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 during
the fiscal year ended December 31, 2002 (the "Named Executives").
-5-
Summary Compensation Table
Annual Compensation
Long-Term
Compensation Awards
Securities Underlying
Name and Principal Position Year Salary Bonus Options/SAR's (#)
--------------------------- ---- ------ ----- -----------------
Michael Herrick 2002 $175,000 $50,000 --
Chief Executive Officer 2001 175,000 50,000 150,000
2000 154,167 50,000 600,000
Hakan Lindskog 2002 317,187 45,000 200,000
President and Chief 2001 264,063 50,000 175,000
Operating Officer 2000 107,015 -0- 150,000
John Levy 2002 181,414 17,500 50,000
Executive Vice President and 2001 180,000 17,500 --
Chief Financial Officer 2000 167,027 15,000 --
Stephen McLaughlin 2002 188,684 -- 10,000
Executive Vice President and 2001 178,750 -- --
Chief Technology Officer 2000 167,500 25,000 35,000
Robert Toro 2002 176,752 18,500 --
Senior Vice President 2001 159,087 17,500 50,000
Finance 2000 141,784 10,000 20,000
----------
(1) Effective January 1, 2003, Michael Herrick resigned as Chief Executive
Officer and Hakan Linkskog was appointed Chief Executive Officer.
(2) Mr. Lindskog joined MediaBay in June 2000.
Employment Agreements
The Company entered into a two-year employment agreement with Carl Wolf on
November 15, 2002. The agreement provides for a base salary of $135,000 during
the first year of the agreement. Mr. Wolf's employment under the agreement
automatically terminates on November 14, 2004, unless prior to such date at
least 75% of the Board of Directors vote affirmatively to continue Mr. Wolf's
employment. Under the terms of the agreement, Mr. Wolf is required to devote at
least 20 hours per week to the Company's business and activities. Pursuant to
the agreement, Mr. Wolf was granted options to purchase 570,000 shares of Common
Stock. Of the total options granted, options with respect to 285,000 shares have
an exercise price of $1.25 and vest on November 15, 2003 and options with
respect to 285,000 shares have an exercise price of $3.25 and vest on November
15, 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
lesser of Mr. Wolf's base salary for the unexpired period of his employment
under the agreement or one year's base salary.
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
-6-
based on the Company achieving minimum adjusted EBITDA (earnings before
interest, taxes, depreciation and amortization) targets, as defined in the
agreement. These performance bonuses, if any, would be payable on April 1, 2003,
2004 and 2005. Pursuant to the agreement, as amended, the Company granted to Mr.
Lindskog options to purchase 200,000 shares of Common Stock. Of the total
options granted, options with respect to 100,000 shares have an exercise price
of $1.25 and vest on October 18, 2003 and options with respect to 100,000 shares
have an exercise price of $3.25 and vest on October 18, 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. Lindskog'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 entered into a 38-month employment agreement with Howard
Herrick dated October 30, 2002. The agreement provides for an annual base salary
of $175,000 in the first year of the agreement and four percent increases in
each succeeding year. Mr. Herrick's agreement also provides for a minimum annual
bonus of $30,000. Pursuant to the agreement, the Company granted to Mr. Herrick
options to purchase 100,000 shares of common stock with an exercise price of
$1.00, which immediately vested. 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 total compensation received by Mr.
Herrick during the twelve months prior to termination.
The Company 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 vested 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 Stephen
McLaughlin effective February 15, 2003. The agreement provides for an annual
base salary of $200,000, in the first year of the agreement and an annual base
compensation of $210,000 in the second year of the agreement. Mr. McLaughlin's
agreement also provides for a minimum bonus of $10,000 in the first year of the
agreement and a minimum bonus of $15,000 in the second year of the agreement.
Pursuant to the agreement, the Company granted to Mr. McLaughlin options to
purchase 40,000 shares of common stock with an exercise price $1.50. Of the
total options granted, options with respect to 20,000 shares vest on February
15, 2004; and options with respect to 20,000 vest on February 15, 2005. 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. 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 50% of the balance of Mr.
McLaughlin's base salary for the unexpired period of his employment under the
agreement
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 $1.00 per share. Of the total options granted, 20,000 vested on July 19, 2002
and 20,000 vest on July 19, 2003. In the event of termination of employment
under circumstances described in the employment agreement, including as a result
of a change in control, the Company will be required to provide severance pay
equal to Mr. Toro's base salary for the unexpired period of his employment under
the agreement.
-7-
Option Grants for Fiscal 2002
The following table discloses options granted during the fiscal year ended
December 31, 2002 to the Named Executives:
Option/SAR Grants in Fiscal Year Ending December 31, 2002:
Potential Realizable
% of Total Value At Assumed
Number of Options Annual Rates of Stock
Shares Granted to Price Appreciation for
Underlying Employees Exercise Option Term
Options in Fiscal Price Expiration -----------------------
Name Granted Year ($/share) Date 5% ($) 10% ($)
---- ------- ---- --------- ---- ------ -------
Michael Herrick -- -- -- -- -- --
Hakan Lindskog 100,000(1) 8% $1.25 10/18/08 23,751 71,643
100,000(2) 8% $3.25 10/18/09 (7) (7)
John F. Levy 17,000(3) 1% $1.00 1/02/07 (7) 796
17,000(4) 1% $1.50 11/10/07(3) (7) (7)
16,000(5) 1% $2.00 11/10/08(4) (7) (7)
Steven M. McLaughlin 10,000(6) 1% $1.00 01/03/08(5) -- 1,869
Robert Toro -- -- -- -- -- --
----------
(1) These options vest on October 18, 2003.
(2) These options vest on October 18, 2004.
(3) These options vested on January 2, 2002.
(4) These options vested on November 10, 2002.
(5) These options vest on November 10, 2003.
(6) These options vested on January 3, 2003.
(7) These options do not have any realizable value based on the assumed annual
rates of stock price appreciation presented in the table because the
exercise price of the options was significantly greater than the market
price of the common stock on the grant date and will exceed the assumed
market price of the common stock on the expiration date of the option
based on such assumed stock price appreciation.
-8-
Option Exercises and Values for Fiscal 2002
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, 2002.
Aggregated Option Exercises And Fiscal Year-End Option Values
Shares Number of Securities
Acquired Value Underlying Unexercised Value of Unexercised In-the-Money
Name on Exchange Realized Options at December 31, 2001 Options at December 31, 2001
---- ----------- -------- ---------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Michael Herrick 150,000 $109,500 850,000 -- -- --
Hakan Lindskog -- -- 50,000 300,000 $9,500 --
Steven McLaughlin -- -- 148,000 45,000 1,520 $1,900
John F. Levy -- -- 84,000 16,000 3,230 --
Robert Toro -- -- 100,000 20,000 4,750 3,800
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, 2002
was $1.19.
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 1,635,000 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 991,850 shares of
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 2,927,250 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, options to purchase 670,000 shares of Common Stock have
been granted under the 2001 plan.
As of the Record Date, of the options granted under the plans, options to
purchase 5,675,000 shares of Common Stock have been granted to the Company's
officers and directors as follows: Norton Herrick - 2,800,000 shares, Carl Wolf
- 725,000 shares, Hakan Linkskog - 200,000 shares; Howard Herrick - 750,000
shares; John F. Levy - 100,000 shares; Robert Toro - 120,000 shares; Stephen
McLaughlin - 75,000 shares, Paul Ehrlich - 15,000 shares; Michael Herrick
850,000 shares; Mark Hershhorn - 40,000 shares; Joseph Rosetti - 40,000 shares.
-9-
Performance Graph
The following line graph compares from December 31, 1997 through December
31, 2002, the cumulative total shareholder return on the Company's Common Stock
with the cumulative total return on the stock comprising the Nasdaq Market Value
Index and an index of issuers classified under the Retail-Catalog and Mail Order
Houses Standard Industrial Classification ("SIC") number. This comparison
assumes $100.00 was invested on December 31, 1997 in the Company's common stock
and in each of the foregoing indices and assumes reinvestment of all cash
dividends, if any, paid on such securities.
The Company has not paid any dividends and, therefore, the cumulative
total return calculation for the Company is based solely upon the fluctuations
in the stock price. The Historical stock price is not necessarily indicative of
future stock price performance.
Stock Performance Graph
[LINE 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,
---------------------------------------------------------
1997 1998 1999 2000 2001 2002
------- ------- ------- ------- ------- -------
MediaBay, Inc. ..... $100.00 $238.46 $229.49 $ 33.33 $ 12.72 $ 24.59
SIC Number Index ... 100.00 92.50 79.92 29.28 40.68 31.04
Nasdaq Index ....... 100.00 141.04 248.76 156.35 124.64 86.94
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, 2002, all filing requirements applicable to its officers, directors, and
greater than 10% shareholders were fulfilled on a timely basis.
-10-
Audit Committee Report
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. 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, 2002.
Paul Ehrlich
Mark Hershhorn
Joseph Rosetti
-11-
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:
Unless otherwise indicated the address of each beneficial owner is c/o
MediaBay, Inc., 2 Ridgedale Avenue, Cedar Knolls, New Jersey 07927. Unless
otherwise indicated, the Company's believes that all persons named in the
following table have sole voting and investment power with respect to all shares
of Common Stock that they beneficially own.
For purposes of this table, a person is deemed to be the beneficial owner
of the securities if that person can currently acquire such securities upon the
exercise of options, warrants or other convertible securities. In determining
the percentage ownership of the persons in the table above, we assumed in each
case that the person exercised and converted all options, warrants or
convertible securities which are currently held by that person and which are
currently exercisable, but that options, warrants or other convertible
securities held by al other persons were not exercised or converted
Number of Percentage
Shares of Shares
Beneficially Beneficially
Name and Address of Beneficial Owner Owned Owned
--------------------------------------------------------------- ------------- -------------
Norton Herrick 26,684,617(1) 73.5%
Howard Herrick 9,559,782(2) 44.4
Michael Herrick 1.437,484(3) 9.5
Carl T. Wolf 399,590(4) 2.8
Stephen M. McLaughlin 193,300(5) 1.3
Robert Toro 100,000(6) *
John F. Levy 85,000(7) *
Hakan Lindskog 50,000(8) *
Joseph Rosetti 25,000(9) *
Paul Ehrlich 10,000(10) *
Mark Hershhorn 0(9) *
All directors and executive officers as a group (11 persons) 29,682,491 77.0%
----------
* Less than 1%
(1) Represents (a) 992,750 shares of Common Stock held by Norton Herrick, (b)
488,460 shares of common stock held by Howard Herrick, Norton Herrick's
son, (c) 285,000 shares held by M. Huddleston Enterprises, Inc., (d)
2,800,000 shares of Common Stock issuable upon exercise of options, (e)
928,701 shares of common stock issuable upon exercise of warrants, (f)
2,302,500 shares of Common Stock issuable upon exercise of warrants held
by Huntingdon Corporation, (g) 3,543,303 shares of Common Stock issuable
upon conversion of convertible promissory notes held by Huntingdon
Corporation, (h) 7,022,581 shares of Common Stock issuable upon conversion
of convertible notes held by Huntingdon Corporation, (i) 2,964,180 shares
of common stock held by Norton Herrick Irrevocable ABC Trust (the
"Trust"), (j) 892,857 shares of Common Stock issuable upon conversion of a
convertible promissory note held by the Trust, and (k) 4,464,285 shares of
Common Stock issuable upon conversion of 25,000 shares of preferred stock
held by the Trust. Howard Herrick has irrevocably granted to Norton
Herrick sole dispositive power with respect to the 488,460 shares of
common stock held by Howard Herrick. Mr. Herrick is the sole stockholder
of M. Huddleston Enterprises, Inc. and Huntingdon Corporation and has sole
voting and dispositive power over the securities held by these
corporations. Does not include 363,265
-12-
shares of Common Stock held by Evan Herrick, Norton Herrick's son and as
to which Mr. Herrick may be deemed to be the beneficial owner. In
addition, does not include (i) 46,229 shares of Common Stock which may
become issuable to Mr. Herrick upon exercise of warrants which may be
required to be issued to Mr. Herrick, (ii) 750,000 shares of Common Stock
issuable upon exercise of options held by Howard Herrick, Norton Herrick's
son, and (iii) 587,484 shares of Common Stock and 850,000 shares of Common
Stock issuable upon exercise of options held by Michael Herrick, Norton
Herrick's son. See "Certain Relationships and Related Transactions."
(2) Represents (a) 2,964,180 shares of Common Stock held by Norton Herrick
Irrevocable ABC Trust (the "Trust"), (b) 488,460 shares of Common Stock
held by Howard Herrick, (c) 750,000 shares of Common Stock issuable upon
exercise of options, (d) 892,857 shares of Common Stock issuable upon
conversion of convertible promissory notes held by the Trust and (e)
4,464,285 shares of Common Stock issuable upon conversion of 25,000 shares
of Series A preferred stock held by the Trust. 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 488,460 shares of Common Stock held
by Howard Herrick.
(3) Represents 587,484 shares and 850,000 shares of Common Stock issuable upon
exercise of options.
(4) Represents 247,090 shares of Common Stock and 152,500 shares of Common
Stock issuable upon exercise of options. Does not include 181,818 shares
of Common Stock issuable upon conversion of Series B Convertible Preferred
Stock, subject to the Company's shareholders adopting Proposal 1, and
570,000 shares of Common Stock issuable upon exercise of options.
(5) Represents 300 shares and 193,000 shares of Common Stock issuable upon
exercise of options. Does not include 40,000 shares of Common Stock
issuable upon exercise of options.
(6) Represents shares of Common Stock issuable upon exercise of options.
(7) Represents 1,000 shares of Common Stock and 84,000 shares of Common Stock
issuable upon exercise of options. Does not include 25,974 shares of
Common Stock issuable upon conversion of Series B Convertible Preferred
Stock, subject to the Company's shareholders adopting Proposal 1, and
16,000 shares issuable upon exercise of options.
(8) Represents shares of Common Stock issuable upon exercise of options. Does
not include 200,000 shares issuable upon exercise of options.
(9) Does not include 40,000 shares of Common Stock issuable upon exercise of
options.
(10) Represents shares of Common Stock issuable upon exercise of options. Does
not include 10,000 shares of Common Stock issuable upon exercise of
options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Companies wholly owned by Norton Herrick, a director and principal
shareholder of the Company, have in the past provided accounting,
administrative, legal and general office services to the Company at cost since
the Company's inception. Companies wholly owned by Norton Herrick have also
assisted the Company in obtaining insurance coverage without remuneration. The
Company paid or accrued to these entities $430,000 and $88,000 for these
services during the years ended December 31, 2002 and 2001, respectively. In
addition, a company wholly owned by Norton Herrick provides us 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 $14,000 in each of
2002 and 2001, respectively, to Mr. Herrick's affiliate. The Company anticipates
obtaining similar services from time to time from companies affiliated with
Norton Herrick, and we will reimburse their costs in providing the services to
the Company.
On January 18, 2002, Evan Herrick, a son of Norton Herrick, a brother of
Howard Herrick, an Executive Vice President and director, and a brother of
Michael Herrick, a director, exchanged $2.5 million principal amount of a $3.0
million principal amount convertible note of MediaBay (the "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% ($9.00 per share) is the same as the interest rate of the
Note, and is payable in additional Preferred Shares, shares of Common Stock or
cash, at the holder's option, provided that if the holder elects to receive
payment in cash, the payment will accrue until MediaBay is permitted to make the
payment under
-13-
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 shall have 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. On December 31,
2002, Evan Herrick sold the Note and Preferred shares to N. Herrick Irrevocable
ABC Trust of which Norton Herrick is the sole beneficiary and Howard Herrick is
the sole Trustee.
As previously agreed to with the Company, if the Company required, on
February 22, 2002, Huntingdon purchased a $500,000 principal amount convertible
senior promissory note due June 30, 2003 (the "February Note"). The February
Note is convertible into shares of Common Stock at the rate of $1.82 of
principal and/or interest per share. The February Note was issued in
consideration of a $500,000 loan made by Huntingdon to the Company. 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 of Common Stock
at an exercise price of $0.56 per share. The warrants are exercisable until May
14, 2011.
On March 1, 2002, the Company acquired inventory and licensing agreements,
including the exclusive license to The Shadow radio programs. A payment of
$333,000 was made at that time and additional payments of nine monthly
installments of $74,000 commenced on June 15, 2002. All of the required payments
have been made and the Company has satisfied its obligation. Norton Herrick
guaranteed the payments for no consideration from the Company.
On October 3, 2002, the Company and Huntingdon entered into an agreement
pursuant to which Huntingdon agreed to loan the Company $1.5 million (the
"October Agreement"). During August and September of 2002, Norton Herrick
advanced $1.0 million to the Company, which was converted into a $1.0 million
principal amount convertible promissory note payable to Huntingdon (the "Initial
Note") under the October Agreement. The Initial Note bears interest at the prime
rate plus 2 1/2 %, is convertible into shares of Common Stock at a rate of $2.00
per share and is due September 30, 2007, provided that the holder may make a
demand for repayment after the Company's existing credit facility is repaid. In
connection with the transaction, the Company issued to Huntingdon a ten-year
warrant to purchase 250,000 shares of Common Stock at an exercise price of $2.00
per share.
Pursuant to the October Agreement, on October 10, 2002, the Company issued
to Huntingdon an additional $150,000 principal amount convertible promissory
note to Huntingdon (the "Second Note"). The Second Note is convertible into
shares of Common Stock at a rate of $2.00 per share. The remaining terms of the
Second Note are similar to those of the Initial Note. Warrants to purchase
37,500 of shares of Common Stock at an exercise price of $2.00 were also issued
to Huntingdon. The remaining terms of this warrant are similar to those of the
Initial Warrant.
Pursuant to the October Agreement, on November 15, 2002, the Company
issued to Huntingdon an additional $350,000 principal amount convertible
promissory note to Huntingdon (the "Third Note"). The Third Note is convertible
into shares of Common Stock at a rate of $1.25 per share. The remaining terms of
the Third Note are similar to those of the Initial Note. At the time of the
loan, warrants to purchase a number of shares of Common Warrants to purchase
140,000 of shares of Common Stock at an exercise price of $1.25 were also issued
to Huntingdon. The remaining terms of this warrant are similar to those of the
Initial Warrant.
Pursuant to the October Agreement, each of the $2.5 million and $500,000
principal amount convertible notes previously issued to Huntingdon were amended
to, among other things, extend the maturity date to September 30, 2007, provided
that the holder of either note may demand repayment of the note on or after the
Company's credit facility is repaid. The $800,000 principal amount convertible
note issued to Huntingdon was also amended on October 3, 2002 to, among other
things, extend the maturity date to September 30, 2007, provided that beginning
on the 90th day after the Company's credit facility is repaid the holder may
demand repayment.
Also on October 3, 2002, the $1,984,000 principal amount convertible
promissory note previously issued to Norton Herrick and the $500,000 principal
amount convertible promissory note issued to Evan Herrick were amended to, among
other things, extend the maturity dates to September 30, 2007; provided that the
holder may demand repayment of the note on or after October 31, 2004 if the
Company's credit facility has been repaid.
On October 18, 2002, the Company entered into a consulting agreement with
MEH Consulting Services, Inc., ("MEH") a company wholly-owned by Michael
Herrick, the Company's former CEO and the son of Norton
-14-
Herrick. The agreement, effective January 1, 2003, provides, among other things
that Mr. Herrick will provide consulting and advisory services to the Company,
that Mr. Herrick will devote a minimum of 30 hours per week and that Mr. Herrick
will be under the direct supervision of our Board of Directors. For his
services, MEH receives a fee of $16,666 per month plus health insurance and
other benefits applicable to the Company's officers are provided to Mr. Herrick
to the extent such benefits may be provided under the Company's benefit plans.
In connection with entering into the consulting agreement, the Company
entered into an indemnification agreement with MEH and Michael Herrick to
indemnify MEH and 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 or in connection with MEH's and Mr. Herrick's service under the
agreement or in any other capacity.
On November 15, 2002, the Company entered into an agreement with Norton
Herrick pursuant to which Norton Herrick agreed to resign as Chairman upon the
lenders' consent under the senior credit facility consent to such resignation or
the Company's repayment of the facility as to permit Carl Wolf to become
Chairman. As consideration, Mr. Herrick was given the right to nominate up to
four members of the Board of Directors of the Company and the Company agreed not
to increase the number of directors to more than seven members without Mr.
Herrick's consent. On April 28, 2003, the lenders consented to Mr. Herrick
resigning as Chairman and on May 1, 2003, Mr. Herrick resigned as Chairman and
Mr. Wolf became Chairman.
On November 15, 2002, in connection with entering into an employment
agreement with Norton Herrick, we entered into an indemnification agreement with
Mr. Herrick 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.
In December 2002, Michael Herrick exercised options to purchase 150,000
shares of Common Stock under an option granted to him on November 23, 2001, by
delivering to the Company 60,976 shares of Common Stock previously issued to
him.
In 2002, Norton Herrick advanced $372,000 to certain of the Company's
vendors and professional firms as payment of amounts owed to them. As the
Company makes payments to these vendors, the vendors repay the amounts advanced
to them by Mr. Herrick. Mr. Herrick received no interest or other compensation
for advancing the monies.
On May 1, 2003, the effective date of Norton Herrick's resignation as
Chairman the Company entered into a two-year consulting agreement with XNH, Inc.
("XNH"), a company wholly-owned by Norton Herrick. The agreement provides, among
other things, that Norton Herrick will provide consulting and advisory services
to the Company under the direct supervision of the Board of Directors. For his
services, XNH receives a fee of $8,333 per month plus health insurance and other
benefits applicable to officers of the Company are provided to Mr. Herrick to
the extent such benefits may be provide under the Company's benefit plans. Under
the consulting agreement, the indemnification rights of Mr. Herrick under his
indemnification agreement were extended to cover XNH.
On May 7, 2003, the Company sold 3,350 Series B Preferred Shares for an
aggregate purchase price of $335,000 of which 1,400 shares ($140,000) were
purchased by Carl Wolf, Chairman and a director of the Company, and 200 shares
($20,000) were purchased by John Levy, Executive Vice President and Chief
Financial Officer of the Company, purchased 1,400 and 200 Series B Preferred
Shares, respectively, at purchase prices of $140,000 and $20,000, respectively.
Messrs. Wolf and Levy agreed not to covert the Series B Preferred Shares
purchased by them unless and until the Company's shareholders approve the
issuance of Common Stock upon such conversion. The terms of the Series B
Preferred Shares are described under Proposal 1 below.
-15-
PROPOSAL I
TO AUTHORIZE THE COMPANY TO ISSUE COMMON STOCK UPON CONVERSION OF SERIES B
PREFERRED SHARES ISSUED TO CERTAIN OFFICERS AND DIRECTORS 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 Series B Preferred Shares issued to Carl
Wolf, the Company's Chairman, and John Levy, Executive Vice President and Chief
Financial Officer of the Company.
On May 7, 2003, the Company sold 3,350 shares of a newly created series of
convertible preferred stock Series B Convertible Preferred Stock with a
liquidation preference of $100 per shares for $335,000. Of the total shares
sold, 1,400 shares were purchased by Carl Wolf for $140,000 and 200 shares were
purchased by John Levy for $20,000 on the same terms as the other purchasers of
Series B Preferred Shares, except that Messrs. Wolf and Levy agreed not to
convert their Series B Preferred Shares they purchased unless and until the
Company's shareholders approve the issuance of Common Stock upon such
conversion.
The holders of Series B Preferred Shares 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 existing credit
agreement with its senior lenders.
The Series B Preferred Shares are convertible into shares of Common Stock
at a conversion rate equal to a fraction, (i) the numerator of which is equal to
the number of Series B Preferred Shares being converted multiplied by the sum of
$100 plus accrued and unpaid dividends through the date of conversion and (ii)
the denominator is $0.77.
In the event of a liquidation, dissolution or winding up of the Company,
the holders of Series B Preferred Shares 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 Common Stock and on a pari passu basis
with the holders of the Series A Preferred Shares. The holders of Series B
Preferred Shares 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 Preferred Shares, voting separately as a class, is required for any
amendment, alteration or repeal of the terms of the Series B Preferred Shares
that adversely effects the rights, preferences or privileges of the Series B
Preferred Shares.
Reasons for the Transaction
The Company required funds to finance its working capital requirements.
Although the Company sought and is seeking other sources of financing, it was
unable to obtain all of the financing it needed to satisfy its immediate cash
needs from third parties. As a result, the Company determined to sell the Series
B Preferred Shares and to permit Messrs. Wolf and Levy to purchase shares.
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 the issuance of common stock of the listed company or securities
convertible into or exercisable for common stock of the listed company. The
issuance of Common Stock upon conversion of the Series B Preferred Shares issued
to Carl Wolf and John Levy requires shareholder approval under Nasdaq
Marketplace Rule 4350(i). Accordingly, the Company has submitted this Proposal
for shareholder approval in accordance with NASD Marketplace Rule 4350(i).
Recommendation
The Board unanimously recommends that the shareholders vote for the
proposal to issue Common Stock to Carl Wolf and John Levy at such time, if ever,
as either such person elects to convert the Series B Preferred Shares held by
him.
-16-
INDEPENDENT AUDITORS
Deloitte & Touche LLP reported on the financial statements of the Company
for the fiscal year ended December 31, 2002. A representative of Deloitte &
Touche LLP is not expected to be present at the Annual Meeting.
Fees Paid to Independent Auditors
Audit Fees
The aggregate fees billed by Deloitte & Touche LLP for professional
services rendered for the audit of the Company's annual financial statements for
the fiscal year ended December 31, 2002 and for the reviews of the financial
statements included in the Company's Quarterly Reports on Form 10-Q for that
year were $228,000.
Financial Information Systems Design and Implementation Fees
There were no fees billed by Deloitte & Touche LLP for professional
services rendered for information technology services relating to financial
information systems design and implementation for the fiscal year ended December
31, 2002.
All Other Fees
The aggregate fees billed by Deloitte & Touche LLP for services rendered
to the Company, other than the services described above under "Audit Fees" and
"Financial Information Systems Design and Implementation Fees," for the fiscal
year ended December 31, 2002 were $38,000, which includes fees for accounting
research and the filing of a registration statement on Form S-3.
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Shareholders who wish to present proposals appropriate for consideration
at the Company's Annual Meeting of Shareholders to be held in the year 2004 must
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 February 28, 2004 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. Such proposals must
be presented in a manner consistent with the Company's By-laws and applicable
laws. Any such proposals, as well as any questions related thereto, should be
directed to the Secretary of the Company.
After the February 24, 2004 deadline, a shareholder may present a proposal
at the Company's 2004 Annual Meeting if it is submitted to the Company's
secretary at the address set forth above no later than May l6, 2004. If timely
submitted, the shareholder may present the proposal at the 2004 Annual Meeting
but the Company is not obligated to present the matter in its proxy statement.
OTHER INFORMATION
A COPY OF THE COMPANY'S ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2002 IS
BEING FURNISHED HEREWITH TO EACH SHAREHOLDER OF RECORD AS OF THE CLOSE OF
BUSINESS ON JUNE 20, 2003.
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,
Carl Wolf
Chairman
June 27, 2003
-17-
MEDIABAY, INC.
2 Ridgedale Avenue - Suite 300
Cedar Knolls, New Jersey 07297
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON WEDNESDAY,
AUGUST 11, 2003 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints NORTON HERRICK, CARL WOLF 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 Monday, August 11, 2003, 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 nominees
contrary below). listed below.
Howard Herrick and Carl Wolf
(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
Series B Preferred Shares issued to certain officers and directors 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: _______________________, 2003
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
Presi-dent 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