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As filed with the Securities and Exchange Commission on February 16, 2000
Registration No. 333-95793
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
AMENDMENT NO. 1
to
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MEDIABAY, INC.
(Exact name of registrant as specified in its charter)
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Florida 5961 65-0429858
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification number) identification number)
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20 Community Place
Morristown, New Jersey 07960
(973) 539-9528
(Address and telephone number of principal executive offices)
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20 Community Place
Morristown, NJ 07960
(Address of principal place of business)
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Michael Herrick, Chief Executive Officer
MediaBay, Inc.
20 Community Place
Morristown, New Jersey 07960
(973) 539-9528
(Name, address and telephone number of agent for service)
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Copies to:
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Robert J. Mittman, Esq. Stephen T. Burdumy, Esq.
Blank Rome Tenzer Greenblatt LLP Klehr, Harrison, Harvey, Branzburg & Ellers LLP
The Chrysler Building 260 S. Broad Street
405 Lexington Avenue Philadelphia, PA 19102-5003
New York, NY 10174 Telephone No. (215) 569-4646
Telephone No. (212) 885-5000 Telecopier No. (215) 568-6603
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Telecopier No. (212) 885-5001
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same
offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
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The information in this prospectus is not complete and may be changed. MediaBay
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, FEBRUARY 16, 2000
PROSPECTUS
4,000,000 Shares
[GRAPHIC OMITTED]
[GRAPHIC OMITTED]
Common Stock
---------------------
We are a leading provider of premium spoken word content and products via the
Internet, direct mail and retail. We are offering 4,000,000 shares of common
stock.
Our shares are listed on the Nasdaq National Market under the symbol "MBAY." On
February 15, 2000, the last reported sale price on the Nasdaq National Market
was $14.4375 per share.
See "Risk Factors" on pages 8 to 15 for factors that should be considered
before investing in our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
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Per Share Total
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Public offering price ........................... $ $
Underwriting discounts and commissions .......... $ $
Proceeds, before expenses, to MediaBay .......... $ $
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The underwriters may, under certain circumstances, for 45 days after the date
of this prospectus, purchase up to 600,000 additional shares from us at the
public offering price, less underwriting discounts and commissions.
ROTH CAPITAL PARTNERS, INC.
L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, LLC
PENNSYLVANIA MERCHANT GROUP
The date of this prospectus is , 2000
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INSIDE FRONT COVER
[GRAPHICS OMITTED: Image of the MediaBay.com logo and home web page, as
well as web pages illustrating the audiobook, video, old time radio and
music channels. Images of our products.]
INSIDE FRONT COVER - GATE FOLD
[GRAPHICS OMITTED: Images of various old time radio web pages from our
MediaBay.com site, offline marketing materials and our products. Images of
classic video marketing materials and products.]
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TABLE OF CONTENTS
Page
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Prospectus Summary ............................ 3
Risk Factors .................................. 8
Forward-Looking Statements .................... 16
Use of Proceeds ............................... 17
Price Range of Common Stock ................... 18
Dividend Policy ............................... 18
Capitalization ................................ 19
Selected Consolidated Financial Data .......... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................. 21
Page
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Business ...................................... 27
Management .................................... 38
Principal Shareholders ........................ 44
Related Party Transactions .................... 46
Description of Capital Stock .................. 48
Shares Eligible for Future Sale ............... 50
Underwriting .................................. 51
Legal Matters ................................. 52
Experts ....................................... 52
Additional Information ........................ 52
Index to Financial Statements ................. F-1
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"MediaBay," "MediaBay.com," "audiobookclub.com," and the Audio Book Club
and MediaBay logos are trademarks of MediaBay.
- --------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any jurisdiction where the offer or
sale is not permitted. You should not assume that the information contained in
this prospectus is accurate as of any date other than the date on the front
cover of this prospectus.
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[THIS PAGE INTENTIONALLY LEFT BLANK]
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary is not complete and may not contain all of the
information that investors should consider before investing in the common stock
of MediaBay. Investors should read the entire prospectus carefully.
MediaBay
MediaBay, Inc. is a leading provider of premium spoken word content and
products in hard goods and digital download formats via the Internet and
various offline methods. Our content library includes approximately 72,000
audiobook titles, 59,000 old time radio programs and 3,500 classic video
programs. We market our content to our customer database of 2.3 million names
and on our web site which is currently attracting over 1.1 million unique
visitors per month. We market our audiobooks through Audio Book Club, the
largest membership-based club of its kind with approximately 1.8 million
members, and our audiobookclub.com web site. Our old time radio and classic
video programs are marketed through the Internet and direct mail catalogs and,
on a wholesale basis, to major retailers, including Costco, Best Buy, Sam's
Club, Barnes & Noble, Waldenbooks, B. Dalton Booksellers and Amazon.com. All of
our products are available for purchase over the Internet through our
content-rich portal located at MediaBay.com. In addition, we are currently
encoding our library of proprietary and licensed content to offer products in
digital download format.
We believe that we were the first significant entrant into the spoken word
content e-commerce market. We operate the MediaBay network which consists of
MediaBay.com, audiobookclub.com and bestbookclubs.com. MediaBay.com is an
innovative content and e-commerce web site that combines the entertainment of
content driven web sites with the product selection and service of e-commerce
sites, while providing a sense of community for visitors. We launched
MediaBay.com to (1) capitalize on our substantial customer base and ability to
drive traffic to our web sites and (2) transport our unique spoken word,
audiobook, old time radio and video content library online. MediaBay.com
utilizes our extensive library of premium spoken word content and various
product offerings to attract visitors, increase the duration and frequency of
their visits and expand our e-commerce opportunities.
According to PC Data Online, audiobookclub.com ranked as the third most
visited web site for books, the 69th most visited retail shopping web site and
the 34th fastest growing web site during November 1999. From January 1998 to
December 1999, over 100,000 members have enrolled at audiobookclub.com and we
are currently attracting over 1.1 million unique visitors per month. We
evaluate our click-through rates and rate of conversions of visitors to
customers on a daily basis and alter our initiatives to maximize our Internet
marketing and advertising activities. This focus and our ability to negotiate
favorable agreements has resulted in a cost to acquire new members on the
Internet which is lower than our offline cost. We intend to increasingly use
the Internet to acquire new audiobookclub.com members. We have also established
an Associates Network program of over 13,500 affiliate web sites which
advertise audiobookclub.com and receive a commission for each member obtained
through a link from their site.
We have consolidated the club industry for audiobooks by acquiring what we
believe to be our only competitors, The Columbia House Company's Audiobook Club
and Doubleday Direct Inc.'s Audiobooks Direct club. As part of these
acquisitions, we added over 1.1 million members and gained access to their
other club mailing lists of over 34 million existing members, as well as future
members they acquire. We have the exclusive right to market audiobooks to these
members without paying list rental or insertion fees. We also acquired
businesses within the old time radio and classic video area which provided us
with a content library of over 59,000 old time radio programs, most of which
are exclusively licensed, and provided us with a list of over 400,000 customers
of old time radio and classic video programs. Our recent acquisitions have
provided us with increased economies of scale, which have enabled us to
negotiate better pricing for products and lower our per unit advertising,
mailing and printing costs.
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We emphasize the use of our offline marketing efforts to our 2.3 million
customers to attract visitors to our web sites. We promote MediaBay.com and
audiobookclub.com by inserting promotional advertisements in our product
packages, product shipments, direct mailings, inserts and other selected
mailings.
From 1989 through 1998, the market for audiobooks grew at a compound
annual growth rate of approximately 27% from an estimated $250 million in 1989
to approximately $2.2 billion in 1998. According to Jupiter Communications,
almost 33% of online consumers, representing 43 million people worldwide, often
listen to spoken word content on their personal computers. An industry research
analyst estimates that sales of Internet-connected portable audio players will
increase from under 1.0 million units in 1999 to over 6.5 million units in
2002. We believe that the emergence of digital download technologies will
accelerate growth in the market for spoken word content.
We consider ourselves the leader in the market for spoken word content and
are implementing the following strategies to capture additional market share:
o Increase Internet Presence. MediaBay.com combines the entertainment of
content-driven web sites with the product selection and service of
e-commerce sites, while providing a sense of community for visitors. We
are continuously enhancing our web sites and are actively leveraging our
customer base, web site visitor traffic, Internet marketing, customer
service and fulfillment expertise and capabilities to grow our online
business.
o Capitalize on Emerging Digital Delivery Technologies. We have entered
into arrangements with Microsoft and Reciprocal and now have the
infrastructure necessary to provide customers with secure digital
downloads of our content. As digital download becomes an increasingly
accepted method for delivery of spoken word content, we will expand our
offering of products in this format.
o Expand Marketing Strategy. We have developed a marketing strategy which
incorporates a broad range of online and offline marketing methods to
increase our customer base and revenues, including Internet marketing and
advertising, targeted e-mails to our database, growing our online
Affiliate Network and direct marketing. We devote significant efforts to
developing and testing various online and offline marketing strategies in
a concerted effort to increase revenue and reduce marketing costs.
o Leverage our Unique Content. We offer approximately 135,000 spoken word
and video products which we sell online and offline. We are able to use
this content to attract and retain web site visitors and to offer this
content to strategic partners in exchange for directing traffic to our
sites.
We were incorporated in Florida in August 1993 under the name Audio Book
Club, Inc. In October 1999, we changed our name to MediaBay, Inc. Our principal
executive offices are located at 20 Community Place, Morristown, New Jersey
07960. Our telephone number is (973) 539-9528. Our principal Internet addresses
are MediaBay.com and audiobookclub.com. Information contained on these web
sites and our other web sites is not deemed part of this prospectus.
4
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The Offering
Shares offered by MediaBay........... 4,000,000 shares
Total shares outstanding after
this offering........................ 13,771,866 shares
Use of proceeds...................... To repay outstanding indebtedness, for
Internet marketing and advertising, for
membership recruitment advertising, for
content acquisition and digital encoding
and for working capital and general
corporate purposes.
Nasdaq National Market symbol........ MBAY
The information above in regard to the number of shares outstanding is as
of February 14, 2000. You should be aware that the total shares outstanding
after this offering does not include:
o 377,529 shares reserved for issuance upon conversion of convertible
promissory notes with a conversion price of $11.125 per share;
o Approximately 2.9 million shares reserved for issuance upon exercise of
outstanding warrants and non-plan options with a weighted average exercise
price of $11.31 per share;
o Approximately 3.9 million shares reserved for issuance upon exercise of
outstanding options granted under our stock option and incentive plans
with a weighted average exercise price of $8.26 per share; and
o 600,000 shares that the underwriters may purchase if they exercise their
over-allotment option in full.
Risk Factors
You should consider the risk factors before investing in our common stock
and the impact from various events which could adversely affect our business.
5
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Summary Financial Data
The following tables present our summary historical consolidated financial
data for each year in the five-year period ended December 31, 1999, as well as
pro forma combined and as adjusted financial data. The summary historical
consolidated annual financial data was derived from our audited consolidated
financial statements. You should read this financial information in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the historical and pro forma financial statements and the
related notes included elsewhere in this prospectus.
The balance sheet and statement of operations data for the year ended
December 31, 1999 presented in this prospectus gives effect to the purchase of
Doubleday Direct's Audiobooks Direct club on June 15, 1999. The balance sheet
and statement of operations data for the year ended December 31, 1998 gives
effect to the following transactions:
o The acquisitions of Radio Spirits, Inc., the assets of an affiliated
company, Buffalo Productions, Inc., and a 50% interest in a joint venture
owned by the sole shareholder of Radio Spirits on December 14, 1998.
o The acquisition of substantially all of the assets used by Metacom, Inc.
in connection with its Adventures in Cassettes business on December 14,
1998.
o The acquisition of substantially all of the assets used by Premier
Electronic Laboratories, Inc. in connection with its business of
producing, marketing, and selling old time radio and classic video
programs on December 14, 1998.
o The acquisition of substantially all of the assets of Columbia House's
Audiobook Club on December 31, 1998.
The unaudited combined pro forma statement of operations data being
presented for the year ended December 31, 1999 combines (1) the historical
consolidated statement of operations of MediaBay and its subsidiaries, which
includes the effect of the acquisitions completed in December 1998 discussed
above for the entire year and the statement of operations of Doubleday Direct's
Audiobooks Direct from the closing date of the acquisition through December 31,
1999; and (2) Doubleday Direct's Audiobooks Direct's statement of operations for
the six months ended March 31, 1999, the latest period available, less the 15
day period from June 16 through June 30, 1999, as if this acquisition was
completed on January 1, 1999.
The unaudited combined pro forma financial information is intended for
information purposes only and is not necessarily indicative of the future
financial position or future results of operations of our combined company, or
of the financial position or results of operations of our combined company that
would have actually occurred had the acquisitions taken place as of the date or
for the periods presented. See our Pro Forma Combined Statement of Operations
included elsewhere in this prospectus.
Our statement of operations data, selected operating data and balance
sheet data include the following items that require further explanation:
o Our total customer file includes all active and inactive members of Audio
Book Club and customers of our old time radio and classic video programs.
o Total customers acquired represents new members obtained by Audio Book
Club through our marketing efforts, as well as the addition of
approximately (1) 625,000 customers in December 1998 through our
acquisition of Columbia House's Audiobook Club, (2) 400,000 customers of
old time radio and classic video programs through our acquisitions in
December 1998 and (3) 500,000 customers in June 1999 through our
acquisition of Doubleday Direct's Audiobooks Direct club.
o The pro forma information included in the balance sheet data gives effect
to the following events which occurred after December 31, 1999:
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o the conversion of $4.8 million of indebtedness into 433,594 shares of
our common stock;
o the incurrence of $2.0 million of indebtedness; and
o the termination of put rights relating to 50,000 shares of our common
stock valued at $644,000.
o The as adjusted information included in the balance sheet data gives
effect to the sale of 4,000,000 shares of our common stock and our
anticipated use of the estimated net proceeds, after deducting
underwriting discounts and commissions and estimated expenses of this
offering, including the repayment of $33.1 million of indebtedness.
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Years Ended December 31,
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1999 Pro
1995 1996 1997 1998 1999 Forma(1)
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(in thousands, except per share data)
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Statement of Operations Data:
Sales ............................... $ 3,406 $ 8,343 $ 15,119 $ 22,242 $ 62,805 $ 74,105
Returns, discounts and
allowances ......................... 771 2,743 5,041 7,348 16,578 19,832
-------- --------- --------- ---------- ---------- ----------
Net sales .......................... 2,635 5,600 10,078 14,894 46,227 54,273
Cost of sales ....................... 2,145 4,327 5,495 9,452 23,687 27,468
-------- --------- --------- ---------- ---------- ----------
Gross profit ....................... 490 1,273 4,583 5,442 22,540 26,805
Advertising and promotion
expense ............................ 2,671 5,470 6,843 8,910 8,118 11,810
General and administrative
expense ............................ 1,209 2,048 2,217 3,330 9,799 11,470
Depreciation and amortization
expense ............................ 2 5 8 367 6,812 7,812
-------- --------- --------- ---------- ---------- ----------
Operating loss ..................... (3,392) (6,250) (4,485) (7,165) (2,189) (4,287)
Interest (expense) income, net ...... (4) (211) (436) 180 (4,518) (5,058)
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Net loss ........................... $ (3,396) $ (6,461) $ (4,921) $ (6,985) $ (6,707) $ (9,345)
========== ========= ========= ========== ========== ==========
Basic and diluted net loss per
share .............................. $ (1.04) $ (1.98) $ (1.29) $ (1.13) $ (.82) $ (1.14)
========== ========= ========= ========== ========== ==========
Weighted average number of
shares outstanding ................. 3,256 3,256 3,820 6,188 8,205 8,205
========== ========= ========= ========== ========== ==========
Selected Operating Data:
Total customer file at end of
period ............................. 64,000 155,000 260,000 1,474,000 2,307,000 2,307,000
Total customers acquired during
period ............................. 52,000 90,000 105,000 1,214,000 833,000 833,000
Customers acquired via Internet
during period ...................... 0 0 2,000 41,000 60,000 60,000
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December 31, 1999
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Actual Pro Forma As Adjusted
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(in thousands)
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Balance Sheet Data:
Working capital ....................................... $ 5,967 $ 7,967 $
Total assets .......................................... 93,973 95,973
Current liabilities ................................... 20,275 20,275
Long-term debt ........................................ 37,383 34,559
Common stock subject to contingent put rights ......... 4,283 3,639
Shareholders' equity .................................. 32,032 37,500
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(1) The pro forma combined financial statements do not include any adjustments
for any realized or anticipated elimination of duplicative costs,
including, but not limited to, payroll, rent and other general and
administrative costs, or economies of scale resulting from the
acquisitions.
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RISK FACTORS
You should carefully consider the following risk factors, in addition to
the other information set forth in this prospectus before purchasing shares of
our common stock. Each of these risks could adversely affect our business,
operating results and financial condition, as well as adversely affect the
value of an investment in our common stock. This investment involves a high
degree of risk.
Risks Related to our Financial Condition
We have a history of losses, are not currently profitable and may incur
future losses.
Since our inception, we have incurred significant losses. We had losses of
$7.0 million during the year ended December 31, 1998 and $6.7 million during
the year ended December 31, 1999. On a pro forma basis, giving effect to our
acquisitions, our loss for the year ended December 31, 1998 was $20.6 million
and our loss for the year ended December 31, 1999 was $9.3 million. As of
December 31, 1999, we had an accumulated deficit of $30.2 million.
As we continue to implement our growth strategy, we intend to incur
significant expenses in acquiring additional customers, attracting visitors to
our web sites and enhancing our product offerings by adopting new technologies,
including digital download capabilities. We will incur these expenses before
any related anticipated revenues are received. As a result, losses and negative
cash flow from operations may continue. We are not currently profitable and may
not become profitable in the future.
Our intangible assets and goodwill represent a significant portion of our
assets. Amortization of our intangible assets will adversely impact our net
income, and we may never realize the full value of our intangible assets.
As of December 31, 1999, we had $59.3 million of intangible assets,
representing approximately 63.1% of our total assets. These intangible assets
consist primarily of goodwill arising from our acquisitions. We will incur
amortization expenses relating to these intangible assets of $7.2 million in
each of 2000 and 2001. These expenses will decrease from $3.6 million in 2002
to $2.5 million in 2018. These expenses will reduce our future earnings or
increase our future losses. We may not receive the recorded value for our
intangible assets if we sell or liquidate our business or assets. In addition,
if the value of any of our intangible assets declines, we could incur
significant additional non-cash charges, and the market price of our common
stock could be adversely affected.
We may not be able to meet our obligations to repurchase shares of our
common stock in the future.
We granted sellers in our recent acquisitions the right to sell back to us
shares of our common stock that we issued to them. Unless our common stock
satisfies specific price targets and/or trading volume requirements, these
rights could require us to purchase up to 305,000 shares in the future as
follows:
o 25,000 shares at a price of $14.00 per share beginning on December 31,
2003;
o up to 230,000 shares at a price of $15.00 per share beginning on
December 31, 2004; and
o 50,000 shares at a price of $15.00 per share beginning on December 31,
2005.
If we were required to repurchase all 305,000 shares, it would cost us
$4.6 million. We may not have sufficient funds to meet these obligations to
repurchase stock in the future.
Risks Related to our Operations
Our products are sold in a niche market that is still evolving and may have
limited future growth potential.
We believe that the market for audiobooks and old time radio and classic
video programs has expanded rapidly in recent years. However, consumer interest
in audiobooks and old time radio and classic video programs may decline in the
future, and growth trends in these markets may stagnate or decline. The sale of
audiobooks through mail order clubs and over the Internet are emerging retail
concepts, and audiobooks are
8
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still evolving as a niche market. As is typically the case in an evolving
industry, the ultimate level of demand and market acceptance for our products
is subject to a high degree of uncertainty. A decline in the popularity of
audiobooks and old time radio and classic video programs would limit our future
growth potential and negatively impact our future operating results.
We may be unable to anticipate changes in consumer preference for our
products and may lose capital or sales opportunities.
Our success depends largely on our ability to anticipate and respond to a
variety of changes in the audiobook, old time radio and classic video
industries. These changes include economic factors affecting discretionary
consumer spending, modifications in consumer demographics and the availability
of other forms of entertainment. The audiobook, old time radio and classic
video markets are characterized by changing consumer preferences, which could
affect our ability to:
o plan for catalog offerings;
o introduce new titles;
o anticipate order lead time;
o accurately assess inventory requirements; and
o develop new product delivery methods.
Although we evaluate many factors and attempt to anticipate the popularity
and life cycle of audiobook titles, the ultimate level of demand for specific
titles is subject to a high level of uncertainty. Sales of audiobook titles
typically decline rapidly after the first few months following release. If
sales of specific titles decline more rapidly than we expect, we could be left
with excess inventory, which we might be forced to sell at reduced prices. If
we fail to anticipate and respond to factors affecting the audiobook industry
in a timely manner, we could lose significant amounts of capital or potential
sales opportunities.
The market for digital download of spoken word content is uncertain, and we
may not be able to participate in this market effectively or at all.
Digital download of spoken word content from the Internet is a relatively
new method of distribution and its growth and market acceptance is uncertain.
Purchasing spoken word content over the Internet in digital download format
involves adjustments in general consumer purchasing patterns, and consumers may
not be willing to purchase spoken word content in digital download format. If
we invest significant amounts of money and effort in developing digital
download products which do not achieve widespread popularity, or if the market
for digital download of spoken word content does not evolve as we anticipate,
we may not be able to recover our investment.
Since pricing patterns for the supply and sale of digital download of
spoken word content have not yet been established, we may not be able to buy
these products on the same terms as our existing products. Our profit margin
for these products also may not be as favorable as our profit margins for our
existing products.
We may not be able to license or produce desirable spoken word content,
which could reduce our revenues.
We could lose sales opportunities if we are unable to continue to obtain
the rights to additional audiobook libraries or selected audiobook titles. Many
of our license agreements with audiobook publishers are short-term,
non-exclusive agreements, typically one to three years in length, and some of
our agreements will expire over the next several months unless they are
renewed. We may not be able to renew existing license and supply arrangements
for audiobook publishers' libraries or enter into additional arrangements for
the supply of new audiobook titles.
If our third-party providers fail to perform their services properly, our
business and results of operations could be adversely affected.
Third-party providers conduct all of our Audio Book Club customer service
operations, process orders and collect payments for us. If these providers fail
to perform their services properly, Audio Book Club members could develop
negative perceptions of our business, collections of receivables could be
delayed and our operations might not function efficiently.
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We could experience delays or difficulties with the consolidation of our
operations, which could result in a material interruption of our
operations.
We are completing the consolidation of all of our fulfillment, warehousing
and distribution operations with Doubleday Direct. If we experience delays or
difficulties in completing this transition, our operations could be materially
interrupted and we may not achieve expected cost savings and efficiencies.
Our marketing strategy to acquire new members could result in increased
costs, and we may not acquire as many members as we anticipate, which would
inhibit our sales growth.
If our direct mail and other marketing strategies are not successful, our
per member acquisition costs may increase, and we may acquire fewer new members
than anticipated, which would slow our sales growth. We use a variety of
modeling and list analysis procedures and techniques as part of our efforts to
target our direct mail campaigns efficiently, and we intend to increase the
number of prospective members to which member solicitation packages will be
mailed. However, the success of our planned direct mail campaigns is subject to
a high degree of risk and uncertainty, and we may fail to accurately target the
type of persons who are likely to join our Audio Book Club.
Increased member attrition could negatively impact our future revenues and
operating results.
Increases in membership attrition above the rates we anticipate could
materially reduce our future revenues. We incur significant up front
expenditures in connection with acquiring new members. A member may not honor
his or her commitment, or we may choose to terminate a specific membership for
several reasons, including failure to pay for purchases, excessive returns or
cancelled orders. As a result, we may not be able to fully recoup our costs
associated with acquiring new members. In addition, once a member has satisfied
his or her initial commitment to purchase additional audiobooks at regular
prices, the member has no further commitment to make purchases.
If third parties obtain unauthorized access to our member and customer
databases and other proprietary information, we would lose a competitive
advantage.
We believe that our Audio Book Club member file and customer lists are
valuable proprietary resources, and we have expended significant amounts of
capital in acquiring these names. Our member and customer lists, trade secrets,
trademarks and other proprietary information have limited protection. Third
parties may copy or obtain unauthorized access to our member and customer
databases and other proprietary know-how, trade secrets, ideas and concepts.
Competitors could also independently develop or otherwise obtain access to our
proprietary information. In addition, we rent our lists for one-time use only
to third parties that do not compete with us. This practice subjects us to the
risk that these third parties may use our lists for unauthorized purposes,
including selling them to our competitors. Our confidentiality agreements with
our executive officers, employees, list managers and appropriate consultants
and service suppliers may not adequately protect our trade secrets. If our
lists or other proprietary information were to become generally available, we
would lose a significant competitive advantage.
Higher than anticipated product return rates could reduce our future
operating results.
We experienced a product return rate of approximately 33% in 1998 and 26%
in 1999. If members and customers return products to us in the future at higher
rates than in the past or than we currently anticipate, our net sales would be
reduced and our operating results would be adversely affected.
If we are unable to collect our receivables in a timely manner, it may
negatively impact our cash flow and our operating results.
We are subject to the risks associated with selling products on credit,
including delays in collection or uncollectibility of accounts receivable. As
of December 31, 1999, our allowance for doubtful accounts was approximately
$2.9 million. If we experience significant delays in collection or
uncollectibility of accounts receivable, our liquidity and working capital
position could suffer and we could be required to increase our allowance for
doubtful accounts which would increase our expenses. Our accounts receivable
have historically increased from period to period, and we expect them to
continue to increase as our revenues increase.
10
<PAGE>
Increases in costs of postage could negatively impact our operating
results.
We distribute millions of mailings each year, and postage is a significant
expense in the operation of our business. We do not pass on the costs of member
mailings and member solicitation packages. Even small increases in the cost of
postage multiplied by the millions of mailings we conduct would result in
increased expenses and would negatively impact our operating results.
We face significant competition from a wide variety of sources for the sale
of our products.
We compete with other web sites which offer similar entertainment products
or content, including digital download of spoken word content. New competitors,
including large companies, may elect to enter the markets for audiobooks and
spoken word content. We also compete for discretionary consumer spending with
mail order clubs and catalogs, other direct marketers and retailers that offer
products with similar entertainment value as audiobooks and old time radio and
classic video programs, such as music on cassettes and compact discs, printed
books, videos, and laser and digital video discs. Many of these competitors are
well-established companies which have greater financial resources that enable
them to better withstand substantial price competition or downturns in the
market for spoken word content.
The audiobook and mail order industries are intensely competitive. We
compete with all other outlets through which audiobooks and other spoken word
content are offered, including:
o bookstores;
o audiobook stores which rent or sell only audiobooks;
o mail order companies that offer audiobooks for rental and sale through
catalogs; and
o retail establishments such as convenience stores, video rental stores and
wholesale clubs.
The loss or unavailability of our key personnel could have a material
adverse effect on our business.
Our success depends largely on the efforts of Norton Herrick, our
Chairman, and Michael Herrick, our Chief Executive Officer and President.
Norton Herrick is actively involved in the management and operation of several
businesses and is required to devote only as much time to our business and
affairs as he deems necessary to perform his duties. Norton Herrick may
experience a conflict in the allocation of his time among his various business
ventures. The loss of the service of either of these officers or of other key
personnel could have a material adverse effect on our business. We do not
maintain key-man insurance on the lives of these officers or any other key
personnel.
Risks Related to the Internet and Technology
We have a limited history of operations on the Internet, which makes it
difficult to evaluate our future Internet prospects.
In January 1998, we launched our Internet marketing strategy to acquire
members online and began to enter into agreements to attract visitors to our
web site. We launched MediaBay.com in July 1999 and jointly launched
bestbookclubs.com, our co-branded web site with Doubleday Direct, in September
1999. We are still developing some of the other web sites in our networked
community. Although we devote significant resources to develop and promote our
networked community of web sites, our efforts may not result in profits from
our Internet operations. In addition to the risks of our business generally,
the risks associated with developing operations in a new and rapidly evolving
market, such as online commerce, include our ability to:
o successfully implement our brand awareness and marketing campaigns;
o successfully compete against other companies that sell similar products
online;
o develop new strategic and marketing relationships, including agreements
with Internet portals, to advertise and direct customers to our web
sites;
o continue to develop and upgrade our technology;
o respond to changes in a rapidly evolving and unpredictable business
environment, including the risk that the Internet may not continue to
grow as rapidly as expected; and
o attract, retain and motivate qualified personnel.
11
<PAGE>
We may not be able to continue to license rights to sell spoken word
content in new formats, such as digital download of audio files, or to
respond rapidly to technological developments in the spoken word content
industry.
If we are unable to adapt our content and our web sites to evolving
entertainment technologies and to continue to license the rights to sell spoken
word content in new and emerging formats, such as digital download of audio
files and enabling technologies, our product offerings may become obsolete and
consumers may purchase spoken word content elsewhere. Some of our arrangements
with audiobook publishers permit us to produce and sell audiobooks in cassette
and CD format, and they may not permit us to adapt our licenses to new
technologies. Although we have the ability to offer secure digital download of
our spoken word content to personal computers, we believe that the introduction
by third parties of portable consumer electronic devices will be necessary for
broad consumer acceptance of digital download files. In addition, the
technology used in delivering spoken word content over the Internet may
continue to evolve rapidly.
We may experience system interruptions which affect access to our web sites
and our ability to sell products over the Internet.
Our marketing efforts have increasingly focused on our Internet
operations, and our future revenues may depend in part on the number of web
site visitors who join as Audio Book Club members and who make online
purchases. The satisfactory performance, reliability and availability of our
web sites, transaction-processing systems and network infrastructure are
critical to our ability to attract and retain visitors at our web sites. If we
experience system interruptions that prevent customers and potential customers
from accessing our web sites, consumer perception of our on-line business could
be adversely affected, and we could lose sales opportunities and visitor
traffic.
Security risks of electronic commerce could discourage the purchase of our
products over the Internet or expose us to claims.
The transmission of private information, such as credit card numbers, over
the Internet is vulnerable to exposure and use by hackers and other
unauthorized persons. Advances in computer hacking or cryptographic decoding
could result in a compromise of the technology or other software used by us to
protect customer transactions and other data. If there is any significant
compromise of our systems' security or if customers perceive our web sites as
not secure, we could lose business or be exposed to potential claims of failure
to protect or misuse of confidential information.
Unauthorized duplication of our licensed content could adversely affect our
business.
Our attempts to ensure secure delivery of spoken word content to customers
over the Internet may not prevent the unauthorized duplication of content that
we license for distribution. Unauthorized duplication of our content could
discourage content providers from entering into future licensing agreements
with us. If we inadvertently permit unauthorized duplication of the content we
sell, we could become liable to content providers for substantial damages.
Furthermore, we may be required to spend increasing amounts of time and money
to attempt to reduce possible unauthorized duplication of the content we offer.
We could be sued for content that we distribute over the Internet and could
become subject to substantial damage claims.
As a distributor and publisher of content over the Internet, we could
become liable for copyright or trademark infringement, defamation, indecency or
other claims based on the nature and content of materials that we offer to
consumers. Lawsuits based on our content could be expensive to defend and
damaging to our business. We could be liable for damage claims in excess of the
amount of indemnification payments or insurance reimbursement, if any, that we
might obtain.
The inability to acquire or maintain effective Internet web domain names
could create confusion and direct traffic away from our web sites.
We currently hold various Internet web addresses relating to our network.
If we are not able to prevent third parties from acquiring web addresses that
are similar to our addresses, third parties could acquire similar domain names
which could create confusion that diverts traffic away from our web sites,
which would
12
<PAGE>
adversely affect our business. In addition, infringement claims by third
parties which challenge our use of these names could result in the expenditure
of significant financial and managerial resources or cause us to lose such
names and the benefits of brand awareness we are spending resources to develop.
The acquisition and maintenance of web addresses generally is regulated by
governmental agencies and their designees. The regulation of web addresses in
the United States and in foreign countries is subject to change. As a result,
we may not be able to acquire or maintain relevant web addresses in all
countries where we conduct business. Furthermore, the relationship between
regulations governing these addresses and laws protecting proprietary rights is
unclear.
The Internet is subject to legal uncertainties and potential government
regulation that could impair the growth of the Internet, decrease demand
for products we offer on our web sites and increase our costs.
The application of existing laws to the Internet, particularly with
respect to property ownership, libel, pricing and user privacy is uncertain.
Government agencies and regulatory authorities may adopt future laws and
regulations governing electronic commerce or Internet consumer protection.
These laws and regulations could:
o impose burdensome requirements on our ability to conduct our business
over the Internet;
o discourage consumer use of the Internet;
o decrease demand for our products; or
o increase our costs.
We may become subject to liability for taxes in connection with our
Internet sales.
We currently are not required to collect sales or other taxes on Internet
sales of content products in most states. Our business could be harmed if
additional sales or similar taxes are imposed on us or if jurisdictions in
which purchasers of our content reside require that we collect sales or similar
taxes when selling over the Internet. Significant tax requirements could
increase our costs associated with Internet sales. Additionally, increased
costs associated with taxes passed on to consumers could discourage consumers
from making purchases from us.
Year 2000
We have not experienced any business interruptions or supplier delays from
year 2000 problems to date and have not discovered any year 2000 problems in
internal computer systems material to our operations. We intend to continue to
monitor our internal systems for year 2000 problems. There can be no assurance,
however, that we or our suppliers may not face future problems as a result of
year 2000 issues.
Risks Related to our Capital Structure and this Offering
The Herrick family will continue to exert significant influence over
shareholder matters after this offering.
Following this offering and the intended use of proceeds, Norton Herrick,
Michael Herrick and Howard Herrick and their affiliates will own approximately
26.9% of our outstanding common stock (25.7% if the underwriters exercise their
over-allotment option in full). As significant shareholders and directors, they
will be able generally to direct our affairs, including electing our Board of
Directors, amending our Articles of Incorporation or approving the dissolution,
merger, or sale of MediaBay or its subsidiaries. This concentration of
ownership in the Herrick family could also delay or prevent a change in
control, even when a change in control might be in the best interests of other
stockholders.
13
<PAGE>
The terms of our debt impose restrictions on our business.
Following this offering, we will have $4.8 million principal amount of
debt outstanding under a convertible promissory note. In addition to limiting
our ability to incur additional indebtedness, our existing indebtedness limits
or prohibits us from:
o merging or consolidating with another corporation;
o selling all or substantially all of our assets;
o declaring or paying cash dividends; or
o materially changing the nature of our business.
In addition, if an event of default occurs under the convertible
promissory note, the indebtedness could become due and payable. We might not
have sufficient funds to repay this indebtedness in the future.
Our ability to use our net operating losses may be limited in future
periods, which could increase our tax liability.
Under Section 382 of the Internal Revenue Code of 1986, utilization of
prior net operating losses is limited after an ownership change, as defined in
Section 382, to an annual amount equal to the value of the corporation's
outstanding stock immediately before the date of the ownership change
multiplied by the long-term tax exempt rate. The additional equity financing we
obtained in connection with recent financings and this offering may result in
an ownership change and, thus, may limit our use of prior net operating losses.
In the event we achieve profitable operations, any significant limitation on
the utilization of net operating losses would have the effect of increasing our
tax liability and reducing net income and available cash reserves. We are
unable to determine the availability of net operating losses since this
availability is dependent upon profitable operations, which we have not
achieved in prior periods.
Our stock price has been and could continue to be extremely volatile.
The market price of our common stock has been subject to significant
fluctuations since our initial public offering in October 1997. The securities
markets have experienced, and are likely to experience in the future,
significant price and volume fluctuations which could adversely affect the
market price of our common stock without regard to our operating performance.
In addition, the trading price of our common stock could be subject to
significant fluctuations in response to:
o actual or anticipated variations in our quarterly operating results;
o announcements by us or other industry participants;
o factors affecting the market for spoken word content;
o changes in national or regional economic conditions;
o changes in securities analysts' estimates for us, our competitors or our
industry or our failure to meet securities analysts' expectations; and
o general market conditions.
Most of our shares of common stock are currently eligible for sale and
could be sold in the market in the near future, which could depress our
stock price.
After this offering, we will have outstanding 13,771,866 shares of common
stock (14,371,866 shares if the underwriters exercise their over-allotment
option in full). This includes the 4,000,000 shares we are selling in this
offering (4,600,000 shares if the underwriters exercise their over-allotment
option in full) and the 3,700,057 shares which are currently freely tradeable
without restriction under the Securities Act of 1933. The remaining 6,071,809
shares of our total outstanding shares are or will become available for resale
in the public market.
The sale of a significant number of shares of common stock following the
closing of this offering could adversely affect the market price of our common
stock. Moreover, as these shares are sold, the market price could drop
significantly if the holders of these restricted shares sell them or if the
market perceives that the holders intend to sell these shares.
14
<PAGE>
The following table sets forth the approximate number of restricted shares
of common stock, including shares issuable upon exercise or conversion of
outstanding options, warrants and convertible securities, and the dates on
which these shares become available for resale in the public market.
<TABLE>
<CAPTION>
Approximate
Number of
Restricted
Shares Date of availability of restricted shares for resale into public market
- ------------ ---------------------------------------------------------------------------------------
<S> <C>
2,500,000 Immediately available.
500,000 60 days after the date of this prospectus due to lock-up agreements with the managing
underwriter.
550,000 90 days after the date of this prospectus due to lock-up agreements with the managing
underwriter.
8,650,000 120 days after the date of this prospectus due to lock-up agreements with the managing
underwriter.
</TABLE>
After this offering, there will be outstanding options and warrants and
other convertible securities to purchase approximately 7.2 million shares of
common stock at prices ranging from $3.50 to $21.00 per share, as well as
options to purchase 8,000 shares at a price of $.10 per share. Substantially
all of the shares issuable upon exercise of these options, warrants and
convertible notes have been registered for resale and may be sold, subject, in
some cases, to lock-up agreements, in the public market by their holders upon
exercise. To the extent they are exercised or converted, your percentage
ownership will be further diluted and our stock price could be further
adversely affected. This could also adversely affect the terms upon which we
will be able to obtain additional equity capital, since the holders of
outstanding options and warrants can be expected to exercise them at a time
when we would, in all likelihood, be able to obtain any needed capital on terms
more favorable to us than those provided in the outstanding options and
warrants.
You will incur immediate and substantial dilution because the net tangible
book value per share of our common stock issued in this offering will be
less than the offering price.
Purchasers of common stock in this offering will experience an immediate
and substantial dilution of $____per share in the net tangible book value per
share of common stock from the public offering price. Our net tangible book
value as of December 31, 1999 would have been $____per share after giving
effect to this offering.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends affecting the financial
condition of our business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions about MediaBay, including, among
other things:
o general economic and business conditions, both nationally and in our
markets,
o our history of losses,
o our expectations and estimates concerning future financial performance,
financing plans and the impact of competition,
o our ability to implement our growth strategy,
o anticipated trends in our business,
o advances in technologies,
o our dependence on third party providers and suppliers,
o acquisition opportunities,
o other risk factors set forth under "Risk Factors" in this prospectus.
In addition, in this prospectus, the words "believe", "may", "will",
"estimate", "continue", "anticipate", "intend", "expect", "plan" and similar
expressions, as they relate to MediaBay, our business or our management, are
intended to identify forward-looking statements.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise after the date of this prospectus. In light of these risks
and uncertainties, the forward-looking events and circumstances discussed in
this prospectus may not occur and actual results could differ materially from
those anticipated or implied in the forward-looking statements.
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<PAGE>
USE OF PROCEEDS
The net proceeds to MediaBay from the sale of common stock in this
offering are estimated to be $_______($_____if the underwriters exercise their
over-allotment option in full), after deducting underwriting discounts and
commissions and estimated offering expenses of $______. We intend to use these
net proceeds as follows:
o to repay $28.3 million of indebtedness under our credit agreement, the
approximately $2.8 million principal amount of a convertible promissory
note held by Norton Herrick, our Chairman, and $3.0 million principal
amount of convertible promissory notes held by Evan Herrick, Norton
Herrick's son and brother of Michael Herrick and Howard Herrick, officers
and directors of MediaBay;
o for Internet marketing and advertising;
o for membership recruitment advertising, including direct mail campaigns;
o for content acquisition and digital encoding; and
o for general corporate purposes, including capital expenditures and
potential acquisitions.
Borrowings under our credit agreement consist of $21.2 million as a term
loan and $7.1 million under a revolving line of credit. The principal amount of
the term loan is payable in quarterly payments through March 2003. For more
information regarding repayment of the term loan, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." The revolving line of credit expires on December 31, 2003.
The interest rate is currently 3.75% above LIBOR. Interest on the convertible
promissory note is payable monthly. The interest rate of the approximately $2.8
million principal amount note is 11% per year and the interest rate of the $3.0
million principal amount note is 9% per year. These notes are due December 31,
2004. The proceeds from these borrowings were used primarily to finance our
acquisitions in December 1998 and June 1999 and for working capital and general
corporate purposes.
Pending these uses, we may invest the net proceeds temporarily in U.S.
government or investment grade securities, short-term certificates of deposit,
money market funds or other short-term interest bearing investments.
17
<PAGE>
PRICE RANGE OF COMMON STOCK
MediaBay's common stock has been quoted in the Nasdaq National Market
under the symbol "MBAY" since November 15, 1999. From October 23, 1997 until
November 12, 1999, MediaBay's common stock was listed on the American Stock
Exchange under the symbol "KLB". The following table shows the high and low
sales prices of our common stock as reported by the Nasdaq National Market
since November 15, 1999 and by the American Stock Exchange until November 12,
1999.
<TABLE>
<CAPTION>
High Low
------------ -----------
<S> <C> <C>
1997
Fourth Quarter (from October 23, 1997) ............ $ 11.13 $ 4.00
1998
First Quarter ..................................... 7.38 4.00
Second Quarter .................................... 13.25 3.38
Third Quarter ..................................... 20.88 3.94
Fourth Quarter .................................... 16.63 5.00
1999
First Quarter ..................................... 14.38 7.38
Second Quarter .................................... 19.94 10.00
Third Quarter ..................................... 15.88 7.25
Fourth Quarter .................................... 15.00 10.25
2000
First Quarter (through February 15, 2000) ......... 16.375 10.25
</TABLE>
On February 15, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $14.4375 per share. As of February 15, 2000,
there were approximately 58 record owners of our common stock.
DIVIDEND POLICY
We have never declared or paid and do not anticipate declaring or paying
any dividends on our common stock in the near future. The terms of our debt
agreements prohibit us from declaring or paying any dividends or distributions.
Any future determination as to the declaration and payment of dividends will be
at the discretion of our Board of Directors and will depend on then existing
conditions, including our financial condition, results of operations, capital
requirements, business factors and other factors as our Board of Directors
deems relevant.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999
on (1) an actual basis, (2) a pro forma basis and (3) an as adjusted basis. The
following table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and MediaBay's
financial statements and related notes included elsewhere in this prospectus.
The pro forma information gives effect to the following events which
occurred after December 31, 1999:
o the conversion of $4.8 million of indebtedness into 433,594 shares of
our common stock;
o the incurrence of $2.0 million of indebtedness; and
o the termination of put rights relating to 50,000 shares of our common
stock valued at $644,000.
The as adjusted information in the table below gives effect to the sale of
4,000,000 shares of our common stock and our anticipated use of the estimated
net proceeds, after deducting underwriting discounts and commissions and
estimated expenses of this offering, including the repayment of $33.1 million
of indebtedness.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------
Actual Pro Forma As Adjusted
------------ --------------- ------------
(in thousands)
<S> <C> <C> <C>
Current portion of long-term debt ...................... $ 3,720 $ 3,720 $
--------- --------- --------
Long-term debt ......................................... $ 37,383 $ 34,559 $
--------- --------- --------
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized; no shares issued or outstanding ......... -- --
Common stock subject to contingent puts ............... 4,283 3,639
Common stock, no par value;
75,000,000 shares authorized; 9,338,272 shares
issued and outstanding, actual; 9,771,866
shares issued and outstanding, pro forma; and
13,771,866 shares issued and outstanding, as
adjusted ............................................ 58,743 64,211
Contributed capital ................................... 3,455 3,455
Accumulated deficit ................................... (30,166) (30,166)
--------- ---------
Total shareholders' equity .......................... $ 32,032 $ 37,500 $
--------- --------- --------
Total capitalization ............................... $ 77,418 $ 79,418 $
========= ========= ========
</TABLE>
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present our selected historical consolidated
statement of operations data for each year in the five-year period ended
December 31, 1999 and balance sheet data as of December 31, 1998 and 1999. The
selected historical consolidated annual financial data was derived from our
audited consolidated financial statements. You should read this financial
information in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical and pro forma
financial statements and the related notes included elsewhere in this
prospectus.
The balance sheet and statement of operations data for the year ended
December 31, 1999 presented in this prospectus gives effect to the purchase of
Doubleday Direct's Audiobooks Direct club on June 15, 1999. Additionally, the
balance sheet and statement of operations data for the year ended December 31,
1998 gives effect to the following transactions:
o The acquisitions of Radio Spirits, Inc., the assets of an affiliated
company, Buffalo Productions, Inc., and a 50% interest in a joint venture
owned by the sole shareholder of Radio Spirits on December 14, 1998.
o The acquisition of substantially all of the assets used by Metacom, Inc.
in connection with its Adventures in Cassettes business on December 14,
1998.
o The acquisition of substantially all of the assets used by Premier
Electronic Laboratories, Inc. in connection with its business of
producing, marketing, and selling old time radio and classic video
programs on December 14, 1998.
o The acquisition of substantially all of the assets of Columbia House's
Audiobook Club on December 31, 1998.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- ------------ ------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales ......................................... $ 3,406 $ 8,343 $ 15,119 $ 22,242 $ 62,805
Returns, discounts and allowances ............. 771 2,743 5,041 7,348 16,578
------- -------- -------- -------- --------
Net sales .................................... 2,635 5,600 10,078 14,894 46,227
Cost of sales ................................. 2,145 4,327 5,495 9,452 23,687
------- -------- -------- -------- --------
Gross profit ................................. 490 1,273 4,583 5,442 22,540
Advertising and
promotion expense ............................ 2,671 5,470 6,843 8,910 8,118
General and administrative expense ............ 1,209 2,048 2,217 3,330 9,799
Depreciation and amortization expense ......... 2 5 8 367 6,812
------- -------- -------- -------- --------
Operating loss ............................... (3,392) (6,250) (4,485) (7,165) (2,189)
Interest (expense) income, net ................ (4) (211) (436) 180 (4,518)
-------- -------- -------- -------- --------
Net loss ..................................... $(3,396) $ (6,461) $ (4,921) $ (6,985) $ (6,707)
======== ======== ======== ======== ========
Basic and diluted net loss per share .......... $ (1.04) $ (1.98) $ (1.29) $ (1.13) $ (.82)
========= ========= ========= ========= ========
Weighted average number of shares
outstanding .................................. 3,256 3,256 3,820 6,188 8,205
========= ========= ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
---------- ---------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Working capital ....................................... $ 6,571 $ 5,967
Total assets .......................................... 64,339 93,973
Current liabilities ................................... 8,231 20,275
Long-term debt ........................................ 40,000 37,383
Common stock subject to contingent put rights ......... 8,284 4,283
Shareholders' equity .................................. 7,824 32,032
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the accompanying financial statements and related
notes included elsewhere in this prospectus.
Overview
We are a leading provider of premium spoken word content and products in
hard goods and digital download formats via the Internet and various offline
methods. We market our audiobooks through Audio Book Club, the largest
membership-based club of its kind with approximately 1.8 million members, and
our audiobookclub.com web site. We sell audiobooks in a club format through our
Audio Book Club and via the Internet through our audiobookclub.com site, and on
a retail basis through the audiobook channel on MediaBay.com. We sell our old
time radio and classic video programs on a retail basis through direct
marketing and via the Internet through the old time radio and classic video
channels on MediaBay.com, as well as on a wholesale basis to major retailers.
Our marketing programs have consisted primarily of direct mail, media
advertising and marketing on the Internet. Online and offline direct response
marketing costs to current members are expensed on the date the promotional
materials are mailed. Online and offline direct response costs for any
premiums, gifts or discounted audiobooks in the promotional offer to new
members are expensed as incurred. Beginning in January 1999, we were required
to capitalize direct response marketing costs for the acquisition of new
members in accordance with AICPA Statement of Position 93-7 "Reporting on
Advertising Costs" and amortize these costs over the period of future benefit
which was estimated at 30 months based on our historical experience over the
last five years. We have also grown our membership base through acquisitions.
On December 14, 1998, we completed a series of acquisitions and combined the
acquired businesses within the old time radio and classic video programs area.
On December 31, 1998, we acquired from Columbia House substantially all of the
assets of its Audiobook Club and, on June 15, 1999, we acquired Audiobooks
Direct from Doubleday Direct. When reading the following results of operations,
please note:
o Our results of operations for the year ended December 31, 1998 reflect
the operations of Audio Book Club for the entire year and the operations
of the acquired companies in the old time radio and classic video programs
area from December 15, 1998 through December 31, 1998.
o Our results of operations for year ended December 31, 1999 reflect the
operations of our Audio Book Club, including Columbia House's Audiobook
Club, and our old time radio and classic video programs area for the
entire year, and the operations of Audiobooks Direct from June 16, 1999
through December 31, 1999.
As a result of the timing of our marketing activities within a given year
or quarter, the impact of capitalizing new member direct response marketing
costs and the timing of these acquisitions and related costs, including
increased interest expense and goodwill and other intangible asset amortization
expense, comparisons of our historical operating results from period to period
may not be meaningful to you.
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Results of Operations
The following table sets forth, for the periods indicated, historical
operating data as a percentage of net sales.
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Net sales ..................................... 100% 100%
=== ===
Cost of sales ................................. 63 51
Gross profit .................................. 37 49
Advertising and promotion expense ............. 60 18
General and administrative expense ............ 22 21
Depreciation and amortization expense ......... 1 15
Interest income (expense), net ................ 1 (10)
Net loss ...................................... (47) (15)
</TABLE>
Year ended December 31, 1999 compared with year ended December 31, 1998
Gross sales increased $40.6 million, or 182.4%, to $62.8 million for the
year ended December 31, 1999 from $22.2 million for the year ended December 31,
1998. The increase in gross sales was primarily attributable to (1) increased
sales of audiobooks resulting from the continued expansion of Audio Book Club's
membership base including sales and acquisition of members through
audiobookclub.com, our Audio Book Club web site, (2) sales from the Columbia
House Audiobook Club acquisition for the full year ended December 31, 1999, (3)
sales from our acquired businesses within the old time radio and classic video
programs area, and (4) the inclusion of sales from Audiobooks Direct since its
acquisition on June 15, 1999.
Returns, discounts and allowances for the year ended December 31, 1999
were $16.6 million, or 26.4% of gross sales, compared to $7.3 million, or 33.0%
of gross sales, for the prior comparable period. The decrease in returns as a
percentage of gross sales is due to the historically lower return rates for
sales of our old time radio and classic video programs and lower return rates
from sales to acquired members from Columbia House Audiobook Club as compared
to our historical return rate. The dollar increase in return rates, discounts
and allowances was primarily due to the increased gross sales.
Principally as a result of higher gross sales, net sales for the year
ended December 31, 1999 increased $31.3 million or 210.4% to $46.2 million from
$14.9 million.
Cost of sales increased $14.2 million, or 150.6%, to $23.7 million for the
year ended December 31, 1999 from $9.5 million in the prior comparable period.
Cost of sales as a percentage of net sales decreased to 51.2% from 63.5%. Gross
profit increased $17.1 million, or 314.2%, to $22.5 million for the year ended
December 31, 1999 from $5.4 million in the prior comparable period. Gross
profit as a percentage of net sales increased to 48.8% from 36.5% due to
improvement in the price we paid for products for our Audio Book Club based on
increased volume purchases as a result of our recent acquisitions, better
fulfillment arrangements and higher gross profit as a percentage of net sales
of our old time radio and classic video products.
Advertising and promotion expenses (for acquisition and retention of
members) decreased $792,000 or 8.9%, to $8.1 million for the year ended
December 31, 1999 compared to $8.9 million in the prior comparable period. The
decrease is due to the capitalization of direct response advertising in the
year ended December 31, 1999, when we first met the measurement criteria
required for capitalization. This decrease was partially offset by higher
advertising expenses to existing Audio Book Club members and to old time radio
and classic video customers which are expensed in the period incurred. The
higher advertising expenses to existing Audio Book Club members resulted from
an increase in membership through continued member growth and acquisitions.
General and administrative expenses increased $6.5 million, or 194.3%, to
$9.8 million for the year ended December 31, 1999 from $3.3 million for the
prior comparable period. General and administrative expense increases are
principally attributable to the acquisition and integration of the old time
radio and classic video operations, including its personnel and facilities, an
increase in the dollar amount of bad debt
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expenses as a result of sales increases and increased personnel and related
costs as we continue to grow and internalize services previously performed by
outside vendors. We did not retain any personnel from the acquisitions of
Columbia House Audiobook Club, Audiobooks Direct and Adventures in Cassettes.
Depreciation and amortization expenses increased $6.5 million to $6.8
million for the year ended December 31, 1999 from $367,000 for the prior
comparable period. The increase is principally due to amortization of goodwill
and other intangible assets in connection with our various acquisitions in the
amount of $6.3 million.
Net interest expense for the year ended December 31, 1999 was $4.5 million
as compared to net interest income of $180,000 for the year ended December 31,
1998. The interest expense in 1999 is attributable to debt incurred in
connection with our various acquisitions.
Primarily due to increased gross sales of $40.6 million, improvements in
gross profit as a percentage of net sales and the capitalization of direct
response advertising, our earnings before interest, taxes, depreciation and
amortization (EBITDA) increased $11.4 million to $4.6 million for the year
ended December 31, 1999. EBITDA is not a recognized measure of performance
under generally accepted accounting principles, however, management believes
that EBITDA is a relevant measure of performance because it reflects our
operations without giving effect to acquisition related costs. The calculation
of EBITDA may not be consistent with methods used by other companies. Net loss
for the year ended December 31, 1999 was $6.7 million or $.82 per share of
common stock as compared to a net loss of $7.0 million or $1.13 per share of
common stock for the year December 31, 1998. The decrease in net loss was
primarily attributable to increased gross sales, improvements in gross profit
as a percentage of net sales and the capitalization of direct response
advertising offset by increased interest expense and amortization of goodwill
and other intangibles in connection with our various acquisitions.
Liquidity and Capital Resources
Historically, we have funded our cash requirements through sales of our
equity and debt securities and borrowings from financial institutions and our
principal shareholders. Our capital requirements have been and will continue to
be significant due to expanding operations, costs associated with direct mail
campaigns, other new member recruitment advertising, promotion and brand
building and expanding Internet operations.
For the year ended December 31, 1999, our cash decreased by $2.5 million
as we used net cash of $6.6 million for operating and $20.3 million for
investing activities and had cash provided by financing activities of $24.4
million. Net cash used in operations principally consisted of the net loss of
$6.7 million, an increase in accounts receivable of $4.0 million, an increase
in inventory of $2.0 million, an increase in prepaid expenses of $383,000, an
increase in royalty advances of $1.5 million and an increase in deferred member
acquisition costs of $10.9 million, partially offset by an increase in accounts
payable and accrued expenses of $10.1 million. To arrive at net cash used in
operations, depreciation and amortization expenses of $8.8 million were added
to the net loss. The increase in accounts receivable during the year ended
December 31, 1999 is principally due to higher sales and the timing of those
sales. The increase in inventory supports our higher sales volume. The increase
in royalty advances relates to the advance payments to publishers and rights
holders of our various licensed products and is attributable to the growth of
our business. The increase in accounts payable and accrued expenses was
primarily attributable to the growth in our business and the timing of vendor
payments and invoicing.
Cash used in investing activities for the year ended December 31, 1999 was
primarily attributable to the acquisition of Audiobooks Direct. For the year
ended December 31, 1999, net cash provided by financing activities consisted of
increased borrowings under our credit agreement for the acquisition of
Audiobooks Direct, proceeds from the sales of common stock and the issuance of
a subordinated note in connection with the acquisition of Audiobooks Direct.
These increases were partially offset by $15.1 million of principal payments on
our long-term bank debt and payments on the subordinated loans.
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Recent Acquisitions and Financings
In December 1998, we completed the following acquisitions of old time
radio and classic video businesses:
o We acquired Radio Spirits, Inc., a company which specialized in
syndicating, selling and licensing old time radio programs, from Carl
Amari, who became an officer of MediaBay upon the closing. The purchase
price for the acquisition was $340,000 in cash, 425,000 shares of our
common stock and options to purchase 175,000 shares of our common stock.
We also paid $1.8 million of liabilities of Radio Spirits at the closing.
In connection with the Radio Spirits acquisition, we also acquired from
Mr. Amari (1) the assets of Buffalo Productions, Inc. relating to its
business of duplicating pre-recorded compact discs for $369,000 and (2) a
50% interest in a joint venture engaged in the production, broadcast,
marketing and distribution of old time radio programs for $2.3 million.
o We acquired the assets used by Metacom, Inc. for its Adventures in
Cassettes business of producing, marketing and selling old time radio
programs for $1.1 million, 50,000 shares of our common stock and warrants
to purchase 50,000 shares of our common stock.
o We acquired the assets used by Premier Electronic Laboratories, Inc.
relating to its business of producing, marketing and selling old time
radio and classic video programs for $240,000 and 125,000 shares of our
common stock.
On December 31, 1998, we acquired from Columbia House substantially all of
the assets of its Audiobook Club, including its membership file of over 600,000
members. We also entered into a marketing agreement with Columbia House in
which we received access to Columbia House's current and future club mailing
lists, which currently consist of over 20 million names of active and inactive
members, through 2006. In addition, Columbia House entered into a
non-competition agreement. As consideration for the acquisition, we paid to
Columbia House $30.8 million in cash and issued to Columbia House and its
designees, Sony Music Entertainment, Inc. and WCI Record Club Inc., a
subsidiary of Time Warner, a total of 325,000 shares of our common stock and
warrants to purchase an additional 100,000 shares of our common stock at a
price of $11.125 per share.
In December 1998, we obtained financing for these acquisitions from (1)
Fleet National Bank and ING (U.S.) Capital Corporation and (2) Norton Herrick,
our Chairman. Under the credit facility with Fleet and ING, we borrowed an
aggregate of $27.0 million, consisting of a $25.0 million term loan and a $2.0
million advance under a $9.0 million revolving line of credit. The term loan is
payable as follows: four quarterly payments of $930,000 in the year 2000; four
quarterly payments of $1.6 million in the year 2001; four quarterly payments of
$2.2 million in the year 2002; and the balance due on March 31, 2003. We
granted to the lenders a security interest in substantially all of our assets
and the assets of our subsidiaries and pledged the capital stock of our
subsidiaries to the lenders as collateral under the credit facility. We also
issued to the lenders three-year warrants to purchase up to 197,448 shares of
common stock at an exercise price of $9.967 per share. Our borrowings from Mr.
Herrick were made under a $15.0 million principal amount 9% convertible
promissory note due December 31, 2004, of which $1.0 million principal amount
was repaid in January 1999. Mr. Herrick subsequently sold $5.0 million
principal amount of the note to a third party, which has converted $800,000
principal amount of the note. The interest rate on this portion of the note
sold by Mr. Herrick is payable quarterly at an annual rate of 9%. From December
1999 through February 2000, Mr. Herrick also sold approximately $6.2 million
principal amount of the note to two third parties. The third parties converted
these portions of the note into 559,437 shares. See "Related Party
Transactions."
In connection with the acquisitions described above, we granted the
sellers the right, under specified conditions, to sell back to us up to an
aggregate of 675,000 shares issued to the sellers in connection with the
acquisitions. These rights have terminated as to 370,000 shares. The sellers
have the right under certain conditions to sell the remaining 305,000 shares of
stock to us at prices ranging from $14.00 to $15.00 per share at various times
commencing in December 2003 and expiring in December 2008, unless the rights
are terminated earlier as a result of our satisfying common stock price and/or
performance targets prior to exercise. If all of the rights are exercised prior
to termination, the maximum amount we could be required to pay for the
repurchase of all of the shares is approximately $4.6 million, payable as
follows: (1) $350,000 commencing December 2003; (2) $3.5 million commencing
December 2004; and (3) $750,000 commencing December 2005.
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From April through August 1999, we sold 2,040,000 shares of common stock
to qualified institutional buyers for gross proceeds of $24.9 million. We used
the proceeds primarily to finance the Audiobooks Direct acquisition described
below. Cash fees associated with these sales were $295,000 and were paid to an
unaffiliated third party.
In June 1999, we acquired from Doubleday Direct the assets of Audiobooks
Direct, including its membership file of approximately 500,000 members. We also
entered into a marketing agreement with Doubleday Direct in which we received
access to Doubleday Direct's and Doubleday Select's existing and future club
mailing lists, which currently consist of over 14 million names of active and
inactive members. In addition, Doubleday Direct entered into a non-competition
agreement and a transitional services agreement with us. As consideration for
the acquisition, we paid Doubleday Direct $18.6 million in cash. We also
incurred cash costs and fees of $184,000 and estimated additional costs and
fees of approximately $175,000.
In connection with the acquisition of Audiobooks Direct, we, Fleet and ING
amended the terms of our existing credit agreement to provide for an additional
$6.0 million of term loans. The interest rate under the credit agreement is
currently 3.75% above LIBOR and interest is payable at the expiration of the
respective LIBOR contracts. In connection with the additional loan in June
1999, we issued the lenders three-year warrants to purchase up to 119,940
shares at an exercise price of $14.20 per share.
We also obtained a portion of the financing for our acquisition of the
business of Doubleday Direct's Audiobooks Direct club by borrowing $4.4 million
from Norton Herrick under a convertible promissory note. This loan was repaid
in full in July 1999. See "Related Party Transactions."
At December 31, 1999, an aggregate of $28.3 million principal amount of
indebtedness was outstanding under our credit agreement with Fleet and ING.
From December 1999 through February 2000, we borrowed a total of $3.0
million from Evan Herrick, a son of Norton Herrick and brother of Michael
Herrick and Howard Herrick, by issuing to Evan Herrick 9% convertible
promissory notes due December 31, 2004. We used the proceeds of these loans for
working capital and corporate purposes.
We intend to use a significant portion of the proceeds of this offering to
repay the $28.3 million of indebtedness outstanding under the credit agreement,
the approximately $2.8 million principal amount convertible promissory note
held by Norton Herrick and the $3.0 million principal amount convertible
promissory notes held by Evan Herrick.
As a result of recent acquisition activity and sales of our common stock,
MediaBay, Fleet and ING amended the terms of our existing credit agreement
whereby certain covenants under the agreement were adjusted. In connection
therewith we paid legal expenses and fees of $317,000.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 provides a
comprehensive standard for the recognition and measurement of derivatives and
hedging activities in fiscal 2000 as the Statement is currently written.
However, the FASB has issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of Effective Date of SFAS No.
133", which will defer adoption to fiscal 2001. The statement will require all
derivatives to be recorded on the balance sheet at fair value and also
prescribes special accounting for certain types of hedges. We have not entered
into any derivative or hedge transactions, and, therefore, do not believe that
SFAS No. 133 will have a material effect on our financial condition or results
of operations.
Year 2000
We have not experienced any business interruptions or supplier delays from
year 2000 problems to date and have not discovered any year 2000 problems in
internal computer systems material to our operations. We intend to continue to
monitor our internal system for year 2000 problems. There can be no assurance,
however, that we or our suppliers may not face future problems as a result of
year 2000 issues.
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Net Operating Losses
Our net operating loss carryforwards expire in the years 2018 and 2019.
Under Section 382 of the Internal Revenue Code of 1986, utilization of prior
net operating losses is limited after an ownership change, as defined in
Section 382, to an annual amount equal to the value of the corporation's
outstanding stock immediately before the date of the ownership change
multiplied by the long-term tax exempt rate. The additional equity financing we
obtained in connection with recent financings and this offering may result in
an ownership change and, thus, may limit our use of its prior net operating
losses. In the event we achieve profitable operations, any significant
limitation on the utilization of net operating losses would have the effect of
increasing our tax liability and reducing net income and available cash
reserves. We are unable to determine the availability of net operating losses
since this availability is dependent upon profitable operations, which we have
not achieved in prior periods.
Quarterly Fluctuations
Our 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.
Our gross profit margin is affected by the percentage of new Audio Book
Club member enrollment purchases. Initial purchases by new members are at
substantially reduced prices to encourage enrollment. These offers, which are
typically four audiobooks for either $.99 or $.01 plus shipping and handling,
result in an initial loss to us which is expected to be recovered through
additional member purchases at regular prices. New member enrollment purchases
typically account for a higher percentage of sales following significant Audio
Book Club direct marketing activities.
We believe 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.
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BUSINESS
General
MediaBay, Inc. is a leading provider of premium spoken word content and
products in hard goods and digital download formats via the Internet and
various offline methods. Our content library includes approximately 72,000
audiobook titles, 59,000 old time radio programs and 3,500 classic video
programs. We market our audiobooks through Audio Book Club, the largest
membership-based club of its kind with approximately 1.8 million members, and
our audiobookclub.com web site. Our old time radio and classic video programs
are marketed through the Internet and direct mail catalogs and, on a wholesale
basis, to major retailers, including Costco, Best Buy, Sam's Club, Barnes &
Noble, Waldenbooks, B. Dalton Booksellers and Amazon.com. All of our products
are available for purchase over the Internet through our content-rich portal
located at MediaBay.com. MediaBay.com utilizes our extensive library of premium
spoken word content and various product offerings to attract visitors, increase
the duration and frequency of their visits and expand our e-commerce
opportunities. According to PC Data Online, audiobookclub.com ranked as the
third most visited web site for books, the 69th most visited retail shopping
web site and the 34th fastest growing web site during November 1999. In
addition, we are currently encoding our library of proprietary and licensed
content and are beginning to offer products in a digital download format.
We have consolidated the club industry for audiobooks by acquiring what we
believe to be our only competitors. As part of the acquisitions of Columbia
House's Audiobook Club and Doubleday Direct's Audiobooks Direct club, we
acquired over 1.1 million members and gained the exclusive right to access
their other club mailing lists of over 34 million existing active and inactive
members, as well as future members they acquire, without any list rental or
insertion fees. As a result of these acquisitions and our expanded customer
database, we have been able to negotiate better prices for products, enjoy
increased economies of scale with our advertising, printing and mailing costs,
stratify our member mailings to better serve our members and form specialty
clubs for audiobooks. In December 1998, we also acquired the assets of three
companies that produce, license, broadcast, syndicate and sell old time radio
and classic video programs. Through these acquisitions we obtained an extensive
library of over 59,000 old time radio and classic video programs, most of which
are exclusively licensed, and a customer list of over 400,000 names. We have
also enhanced our product offerings by acquiring and licensing diverse media
content and increased our customer base from approximately 260,000 customers at
December 31, 1997 to over 2.3 million customers at February 1, 2000.
Business Strategy
The market for spoken word content is large and growing rapidly. We
consider ourselves the market leader in this market and are implementing the
following strategies to capture additional market share:
o Increase Internet Presence. MediaBay.com is an innovative content and
e-commerce web site that combines the entertainment of content-driven web
sites, with the product selection and service of e-commerce sites, while
providing a sense of community for visitors. We launched MediaBay.com to
(1) capitalize on our substantial customer base and ability to drive
traffic to our web sites and (2) transport our unique spoken word,
audiobook and old time radio, and classic video content library online. We
believe that we were the first significant entrant into the spoken word
content e-commerce market. Since we launched our online strategy in
January 1998, we have added over 100,000 Audio Book Club members through
audiobookclub.com. New members are enrolling online at an average rate of
over 6,000 per month and the number of unique visitors to our web sites is
approximately 1.2 million per month. Since our current cost of acquiring
new members via the Internet is lower than through our offline marketing
activities, we intend to increasingly emphasize this method of membership
acquisition. We currently have a database of over 440,000 e-mail
addresses. We are continuously enhancing our web sites and are actively
leveraging our marketing, customer service and fulfillment expertise and
capabilities to grow our online business.
We believe that the club model used by Audio Book Club translates well to
an Internet model because the club model ensures communication between us
and our members and engenders a sense of belonging to a community. In
addition, the model provides a significant breadth of product offerings
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and substantial information about our products. Unlike traditional web
retailers, our members have a purchase obligation associated with their
membership and there is a strong likelihood that they will remain members
and repeat buyers for a sustained period.
o Capitalize on Emerging Digital Delivery Technologies. We have entered
into arrangements with Microsoft and Reciprocal and now have the
infrastructure necessary to provide customers with secure digital
downloads of our content. We are currently encoding our library of old
time radio programs and selected audiobook titles to offer these products
in a secure digital download format. We are finalizing agreements with
publishers of other forms of spoken word content, including audio versions
of newspapers, magazines and newsletters, to obtain the rights to market
these items on our sites in secure digital download format. As digital
download becomes an increasingly accepted method for delivery of spoken
word content, we will expand our offering of products in this format. We
believe that these distribution methods will further improve our product
margins as they eliminate the costs of reproduction, packaging and
warehousing.
o Expand Marketing Strategy. We have developed a marketing strategy which
incorporates a broad range of online and offline marketing methods to
increase our customer base and revenues, including Internet marketing and
advertising, targeted e-mails to our database, growing our online
Affiliate Network and direct marketing. We utilize our 2.3 million name
customer list, product inserts into our 750,000 retail packages, 3.7
million mail order packages and inserts into our 13.5 million mailings to
our customers to drive traffic to MediaBay.com and audiobookclub.com. We
continuously add affiliates to our Affiliate Network program, which
currently consists of approximately 13,500 other Internet sites which
promote our web sites. We also have the exclusive right to use Columbia
House's and Doubleday Direct's mailing lists, which provide us access to
over 34 million of their other club members for direct mail campaigns and
inserts into club member mailings to acquire Audio Book Club members
without any list rental or insertion fees. We use our substantial
knowledge relating to the use of third-party mailing lists to efficiently
and cost effectively target buyers on these lists and to continue to
acquire new members from third-party lists.
We devote significant efforts to developing and testing various online and
offline marketing strategies in a concerted effort to increase revenue and
reduce marketing costs. Through constant testing and refinement of our
marketing efforts we have grown, and are continuing to grow, our customer
lists and have reduced, and continue to reduce, our per-customer
acquisition costs. We have significantly reduced our costs to acquire
Audio Book Club members online to less than 5% of the per-member costs of
our initial Internet marketing campaigns and to less than the per-member
acquisition costs of our offline marketing campaigns while continuing to
attract qualified and desirable members.
o Leverage Our Unique Content. We offer approximately 135,000 spoken word
and video products which we sell online and offline. We are able to use
this content to attract and retain web site visitors and to offer this
content to strategic partners in exchange for directing traffic to our
sites. One method of attracting and retaining web site visitors is to
enable them to sample video and audio clips free of charge from our
library of audio books, old time radio programs and classic videos. Unlike
many web sites which purchase third-party content and resell products, we
own or license and manufacture a majority of our products and content. We
license the rights to sell audiobooks in a club format from major
publishers and pay royalties for each audiobook sold. We also own or
exclusively license substantially all of our old time radio and classic
video products. As a result, we believe that we have a low product cost
compared to retailers and online book sellers. We also utilize our content
to enter into content alliances whereby we offer leading web sites samples
or full length programs in exchange for their directing traffic to our web
sites. We currently have content alliances with Microsoft's
windowsmedia.com, Diamond Rio's media portal, rioport.com, and Real
Network's real.com.
Industry Overview
Audiobooks and Other Spoken Word Entertainment
First introduced to the mass market in 1985, audiobooks are literary
works, including best-selling selections from today's most popular writers, and
other printed materials, many of which are made more
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marketable through the use of readings by the author, a celebrity actor, or an
ensemble of readers or actors. Audiobooks are recorded on cassettes and on
compact discs. Most best-selling hardcover books printed today are released
simultaneously as audiobooks. Audiobooks are usually author approved abridged
versions of the original works converted to an audio format and are typically
three to six hours in length.
The audiobook market has increased at a nine-year compound annual growth
rate of approximately 27% from an estimated $250 million in 1989 to
approximately $2.2 billion in 1998. We believe that this sales growth is driven
by several factors, including:
o the expanding number of available titles in audiobook format;
o an increase in the number of retailers selling audiobooks;
o an increase in product quality;
o broadening public awareness of the portability and convenience of
audiobooks as a viable alternative to printed books and music recordings;
and
o increasing time constraints on consumers.
As the market for audiobooks grows, some titles are being released only in
audio format. In December 1999, Simon & Schuster published a Stephen King
title, Blood and Smoke in audio format only and not in the written format.
Audiobook titles span every genre, including non-fiction, fiction,
self-help, mystery, fantasy, business, science fiction, biography, romance,
religion, motivational and children's, among others. Audiobooks cover new
releases as well as many of the literary classics.
Consumers of audiobooks are traditionally individuals who do not read as
often as they desire due to time constraints. As an alternative, these
individuals listen to audiobooks while engaging in other activities such as
driving or exercising. This demographic group has expanded to encompass a wide
variety of consumers. A 1996 market study by the Yankee Group indicates that
87% of automobile commuters listened to the radio an average of 50 minutes a
day while commuting. As individuals look to use their commuting time more
efficiently and manage an increasing amount of available content, we believe
that audiobooks have emerged as a personalized pay-to-listen alternative to
radio.
Old Time Radio and Classic Video Products
Old time radio programs include radio dramas, mysteries, detective
stories, comedies, westerns, science fiction and adventure stories that
originally aired from the 1930s to the 1970s. Classic video programs include
films originally released from the silent film era of the 1930s through the
1970s.
We believe there has been a resurgence in consumer interest for old time
radio and classic radio programs, as demonstrated by the growth of our sales of
these products and increased opportunities to enter into co-branding and
cross-marketing agreements, such as our agreements with the Frank Sinatra
estate, Walter Cronkite, the Smithsonian Institute and American Movie Classics.
We also believe that these programs have become a niche entertainment market,
appealing to those consumers who remember the "golden age of radio" and their
childhood film favorites with nostalgia and to younger listeners seeking new
forms of entertainment. We believe that our old time radio and classic video
products can increase their share of this market.
Digital Delivery of Spoken Word Content
The Internet has recently emerged as a significant global communications
resource enabling millions of people to access and share information,
experience entertainment offerings and purchase products. Through the Internet,
users have the ability to quickly receive information in various forms, from
text and multimedia to newer technologies such as streaming audio. According to
Jupiter Communications, almost 33% of online consumers, representing 43 million
people worldwide, often listen to spoken word content on their personal
computers. The current environment available on the Internet generally
restricts consumers to listening at their personal computers. However, consumer
electronics and computer manufacturers are addressing this constraint by
developing a new generation of mobile devices that are capable of playing back
digital downloads of
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spoken word content. An industry research analyst estimates that sales of
Internet-connected portable audio players will increase from under 1.0 million
units in 1999 to over 6.5 million units in 2002. We believe that the emergence
of digital download technologies will accelerate growth in the market for
spoken word content.
MediaBay Network
We operate the MediaBay network of web sites which consists of
MediaBay.com, audiobookclub.com and bestbookclubs.com.
MediaBay.com
Our MediaBay.com media portal site is an innovative content and e-commerce
web site offering our 2.3 million customers and approximately 1.2 million
unique web site monthly visitors a single location for premium spoken word
content and products. MediaBay.com combines the entertainment of content-driven
web sites with the product selection and service of e-commerce sites, while
providing a sense of community for visitors. In July 1999, we launched
MediaBay.com to (1) capitalize on our substantial customer base and ability to
drive traffic our websites and (2) transport our unique spoken word, radio and
video content library online. We believe we were the first significant entrant
into the spoken word content e-commerce market.
In addition to providing our own content, we have entered into several
arrangements to provide unique content, such as webcasts, including the
American Express Blue concert series, celebrity and author interviews and audio
horoscopes to attract and retain web site visitors.
MediaBay.com was originally designed to network our various e-commerce
sites and is currently being redesigned as a true portal site. Redesigning
MediaBay.com into a channel format enables visitors to conveniently purchase
products from multiple channels in a single transaction and navigate
MediaBay.com without leaving the site. The redesigned site, which we expect to
re-launch by the end of the first quarter of 2000, will be comprised of the
following channels which are representative of our content and commerce
offerings:
o Audiobook channel. At this channel, visitors can purchase on a retail
basis almost any of the 72,000 audiobook titles in existence, sample
15,000 audio clips from various audiobook titles, listen to streaming
audio and digital downloads of selected audiobooks, read reviews, receive
recommendations and visit our chatrooms.
o Old time radio channel. This channel provides visitors with a searchable
database to select from over 59,000 programs from our old time radio
program library to purchase and offers free full-length programs in
streaming audio and digital download formats, information on the programs,
celebrities and talent of the Golden Age of Radio and contests and trivia
information. This site is heavily promoted by our nationally-syndicated
radio program "When Radio Was," which is heard by over 3 million listeners
weekly.
o Classic video channel. This channel is devoted to classic, nostalgic and
other unique film and video programs. This channel has a fully searchable
database of over 3,500 video programs from our classic video library for
purchase by visitors. We also intend to offer a large library of current
and vintage video programs in the near future.
o Newsstand channel. This channel offers newspapers, newsletters, magazines
and other time sensitive content for purchase as hard goods, as well as in
secure digital download formats and non-secure formats such as the mp3
format.
o Music channel. This channel is devoted to old time and current music in
CD format and has a searchable database of tens of thousands of titles in
addition to unique content, such as concert webcasts and archived
performances from prior webcasts.
Audiobookclub.com
Audiobookclub.com provides visitors the opportunity to become members of
our Audio Book Club and provides our members with the ability to order almost
any audiobook in existence. Audiobookclub.com has
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acquired over 100,000 members online since January 1998 and is currently
enrolling new members at an average rate of over 6,000 per month. This site
currently receives over 1.0 million unique visitors per month, according to
recent measurements by PC Data Online. Approximately 20% of the traffic to this
site comes directly to audiobookclub.com, and the remainder is driven to the
site through links with other sites. According to PC Data Online,
audiobookclub.com ranked as the third most visited web site for books, the 69th
most visited retail shopping web site and the 34th fastest growing web site
during November 1999.
Audiobookclub.com utilizes Net Perceptions GroupLens Recommendation
Engine, an advanced tool designed to deliver highly personalized content, to
attempt to create personalized audiobook buying experiences customized for each
member. Once members have logged onto audiobookclub.com, they are offered
audiobook selections that correspond to their previous buying patterns. Online
members also receive e-mail alerts that inform them of the addition of new
titles that may appeal to them. Members visiting audiobookclub.com are able to
sample over 15,000 audio clips from various audiobook titles, read reviews,
visit our chat room, "Coffee Talk", to discuss audiobook interests with other
members, and visit special sections such as CD Central and Unabridged Only.
Audiobookclub.com is updated simultaneously with the Audio Book Club catalog to
add new selections and the new current featured selection, as well as to add
new book cover images and audio clips to preview.
Bestbookclubs.com
Bestbookclubs.com, a co-branded web site with Doubleday Direct, was
established to accumulate a database of e-mail addresses, acquire new Audio
Book Club members and attract visitors to our web sites. We promote Doubleday
Direct's clubs and this joint web site on our audiobookclub.com and
MediaBay.com sites and Doubleday promotes our products and services on its web
sites, including doubledaybookclub.com, crossings.com and literaryguild.com.
Audio Book Club
We believe that we are the largest marketer of audiobooks through our
Audio Book Club, the largest membership-based club of its kind. Our total
member file, which includes active and inactive members, has grown
significantly from approximately 64,000 names at December 31, 1995 to
approximately 1.8 million names at December 31, 1999. Of these members, 625,000
members were added as a result of our acquisition of Columbia House's Audiobook
Club and 500,000 members were added as a result of our acquisition of Doubleday
Direct's Audiobooks Direct club. In addition, we added 200,000 members in 1999
through internal growth.
We emphasize the timely introduction of new audiobook titles to our
catalogs and attempt to offer a balance between various genres and between
unabridged and abridged audiobooks, cassettes and compact discs to satisfy
differing member preferences. We also offer a special order service which
enables members to call us and order virtually any of the approximately 72,000
published titles in existence, whether or not listed in our member mailings.
We are in the process of creating specialty clubs for audiobooks based on
consumer preferences which we have identified from our extensive database of
member information including a Christian audiobook club which is expected to be
launched by the second quarter of 2000. Our specialty clubs will feature a
specific interest, such as self help, religion, mystery, romance and science
fiction.
We engage in list rental programs to maximize the revenue generation
potential of these programs. As Audio Book Club's membership base continues to
grow, we anticipate that our member list will continue to be attractive to
direct marketers as a source of potential customers.
Our Audio Book Club is modeled after the Book-of-the-Month Club. Audio
Book Club members can enroll in the club through the mail by responding to
direct mail or print media advertisements, online through our web site or by
calling or faxing us. We typically offer new members four audiobooks at an
introductory price of $.99 or less. By enrolling, the member commits to
purchase a minimum number of additional audiobooks, typically two or four, at
Audio Book Club's regular prices which generally range from $10.00 to $35.00
per audiobook. Our members continue to receive member mailings and typically
purchase audiobooks beyond their minimum purchase commitment.
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Unique Spoken Word and Video Content
We have exclusive rights to a substantial portion of our library of
popular old time radio and classic video programs, including vintage comedy,
mystery, detective, adventure and suspense programs. Our library consists of
over 59,000 radio programs, most of which are licensed on an exclusive basis,
including:
o H.G. Wells' "War of the Worlds" broadcast;
o hit series, such as The Lone Ranger, Superman, Tarzan, Sherlock Holmes, The
Life of Riley and Lights Out;
o recordings of stars, such as Humphrey Bogart, Lucille Ball, Frank Sinatra
and Jack Benny; and
o recordings of comedy teams, such as Abbott and Costello, Burns and Allen,
Martin and Lewis and Baby Snooks and Daddy.
We also produce and syndicate three national "classic" radio programs:
"When Radio Was" hosted by Stan Freberg, "Radio Movie Classics" hosted by
Jeffrey Lyons, and "Radio Super Heroes." These three programs are collectively
heard in more than 450 markets, including one of the nation's largest radio
stations, KNX1070 Los Angeles, by over 3 million listeners weekly. Our library
of old time radio programs provides the content and the basis for these
programs.
We leverage the content of our old time radio and classic video library by
entering into marketing and co-branding arrangements which provide us a means
to repackage these programs. We offer the following collections:
o "The Greatest Old-Time Radio Shows of the 20th Century -- selected by
Walter Cronkite" -- a collection of approximately 60 old time radio
programs. We have entered into a license agreement to use Mr. Cronkite's
name and likeness. This collection includes approximately 30 hours of
radio's most memorable programs, a spoken foreword by Mr. Cronkite and a
companion informational booklet.
o "The Smithsonian Collection" -- a collection of old time radio programs
branded under this name. We entered into an agreement with the Smithsonian
Institution to produce a series of recordings of nostalgic radio programs
to be sold through all major bookstore chains carrying audio programs.
Each Smithsonian collection features a foreword by a recognized celebrity
from radio's golden age such as George Burns, Jerry Lewis and Ray
Bradbury.
o "AMC's Audio Movies to Go" -- a collection of old time radio adaptations
of classic movies branded under this name featuring film stars such as
Humphrey Bogart, Jimmy Stewart, John Wayne and Betty Davis. We entered
into an exclusive agreement with American Movie Classics in October 1999.
This product line is being sold on American Movie Classics' cable channels
reaching 69 million homes, in retail chains carrying audio and video
programs, in our product catalogs and on our web site and AMC's web site.
In the second quarter of 2000, we expect to release a collection of Frank
Sinatra's Greatest Radio Performances which we anticipate will contain
approximately 60 of Frank Sinatra's old time radio appearances. We have entered
into an agreement with Mr. Sinatra's estate for the use of Mr. Sinatra's name
and likeness in connection with a collection of his performances.
We also have an extensive library of over 3,500 video programs, including
an extensive collection of foreign and silent films, as well as classic films
from the 1930s through the 1970s.
We sell our old time radio and classic video programs on a retail basis
through our catalogs and direct mail. We maintain a list of over 400,000 names
of customers of radio and video programs through our catalogs. This list
includes all customers to which our radio and video programs or catalogs have
been mailed. We engage in list rental programs to maximize the revenue
generation potential of our customer list. We also sell our radio and video
programs on a wholesale basis through major retailers and online retailers,
including Costco, Best Buy, Sam's Club, Barnes & Noble, Waldenbooks, B. Dalton
Booksellers and Amazon.com.
Marketing
Since our inception, we have engaged in an aggressive marketing program to
expand our Audio Book Club member base, expand our Internet presence, develop
alliances with other Internet companies and attract
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visitors to our web sites. We devote significant efforts to developing various
online and offline marketing strategies in a concerted effort to increase
revenue and reduce marketing costs. We continually analyze the results of our
marketing activities in an effort to maximize sales, extend membership life
cycles, and efficiently target our marketing efforts to increase response rates
to our advertisements and reduce our per-member and per-customer acquisition
costs.
Internet Marketing
Our marketing activities on the Internet have resulted in the enrollment
of over 100,000 new Audio Book Club members through our web sites since January
1998, with an average of over 6,000 new members currently enrolling over the
Internet each month. Audiobookclub.com currently attracts over 1.0 million
unique visitors per month.
Our Internet marketing program focuses on developing alliances with other
Internet companies to attract visitors to our web sites to sell products and
obtain Audio Book Club members. We have entered into advertisement arrangements
with various Internet companies such as America Online, Yahoo!, Broadcast.com,
Mail.com, iVillage, Go2Net, Inc. and Microsoft for several of its web sites,
including its MSN.com portal site and its HotMail, WebTV and Link Exchange
properties, and we continue to explore arrangements with other Internet
companies. Most of the arrangements provide us with the flexibility to promote
one or more of our web sites to direct visitor traffic to the web site or sites
that we expect will benefit the most from the promotion.
We established an Internet department which evaluates our click-through
rates and rate of conversions of visitors to customers on a daily basis and
alters our initiatives to maximize our Internet marketing and advertising
activities. We believe that this focus and our ability to negotiate favorable
agreements has resulted in a cost to acquire new members on the Internet which
is lower than our offline cost. Since our current cost of acquiring new members
via the Internet is lower than through offline marketing activities, we intend
to increasingly emphasize this method of member acquisition.
We have established an Associates Network program of over 13,500 affiliate
web sites which advertise audiobookclub.com and receive a commission for each
member obtained through a link from their site.
We also use push-marketing programs consisting of targeted e-mail
campaigns to our existing e-mail address database of over 440,000 e-mail
addresses.
We utilize our content to enter into alliances with many leading web
sites, including Microsoft's windowsmedia.com, Diamond Rio's media portal,
rioport.com, and Real Network's real.com which enable us to drive traffic to
our web sites to sell products and build our e-mail address database.
In the belief that enticing, easy to use web sites are the best source of
marketing for repeat visitors, we continually make technological improvements
to our web sites to facilitate user access. By offering an increasingly varied
array of fresh content, audio and video clips and other features, we aim to
attract visitors to our Internet web sites both to remain at our sites to
purchase additional products and to return to our network of sites when they
choose to browse the Internet for entertainment options.
Offline Marketing to Attract Online Customers
We emphasize the use of our offline marketing efforts to attract visitors
to our web sites. We promote MediaBay.com and audiobookclub.com by inserting
promotional advertisements in our product packages, product shipments, direct
mailings, inserts and other selected mailings. In addition, we advertise our
web sites on our nationally syndicated radio program "When Radio Was," which is
heard seven days a week and has a weekly audience of over 3 million listeners.
Club Member Acquisition
We have historically acquired new Audio Book Club members primarily
through direct mailings of member solicitation packages, acquisitions, Internet
advertising, and to a lesser extent from advertisements in magazines,
newspapers and other publications and package insert programs. We seek to
attract a financially sound and responsible membership base and target these
types of persons in our direct mail and other advertising efforts.
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We select lists of names of membership candidates based on the extensive
knowledge and experience we have gained which we believe are characteristic of
persons who are likely to join Audio Book Club, purchase sufficient quantities
of audiobooks to be a profitable source of sales for us and remain long-term
members. We analyze our existing mailing lists and our promotional campaigns to
target membership lists which are more likely to yield higher response rates.
We have gained substantial knowledge relating to the use of third-party mailing
lists and believe we can target potential members efficiently and cost
effectively by utilizing third-party mailing lists.
In connection with our acquisitions of Columbia House's Audiobook Club and
Doubleday's Audiobooks Direct club, we obtained the exclusive right to use
their other current and future club mailing lists, which currently consist of
over 34 million active and inactive members, over the next several years,
without paying rental and insertion fees. Since these club mailing lists are
comprised of individuals who have previously joined other membership clubs, we
anticipate favorable future response rates and improved per-member acquisition
costs.
We also acquired mailing lists with an aggregate of approximately 400,000
names of buyers and prospective buyers of old time radio and classic video
programs in connection with the acquisition of our old time radio and classic
video operations in December 1998. Since these persons have previously
purchased spoken word content through direct marketing, we have begun to target
them as potential customers or members of Audio Book Club.
Member Retention and Recurring Revenue
We encourage Audio Book Club members to purchase more than their minimum
purchase commitment by offering all members special discount pricing and other
incentives based on the volume of their purchases. Audio Book Club members
receive one mailing approximately every three weeks. Audio Book Club mailings
typically include a multi-page catalog which, together with the "more titles"
insert, offers approximately 500 titles, including a featured selection, which
is usually one of the most popular titles at the time of mailing; alternate
selections, which are best selling and other current popular titles; and
backlist selections, which are long-standing titles that have continuously sold
well. Each member mailing also includes an order form and a
"Member-Get-a-Member" form.
In order to encourage members to maintain their relationship with Audio
Book Club and to maximize the long-term value of members, we seek to provide
friendly, efficient, personalized service. Our goal is to simplify the order
process and to make members comfortable shopping via the Internet and by mail
order. Audio Book Club's membership club format makes it easy for members to
receive the featured selection without having to take any action. Under the
membership club reply system, the member receives the featured selection unless
he or she replies by the date specified on the order form by returning the
order form, calling us with a reply, faxing a reply to us or replying online
via our Internet web site with a decision not to receive such selection.
Members can also use any of these methods to order additional selections from
each catalog.
We maintain a database of information on each name in our member file,
including number and genre of titles ordered, payment history and the marketing
campaign from which the member joined. We also maintain a lifetime value
analysis of each mailing list we use and each promotional campaign we
undertake. The substantially increased size of our database enables us to
better stratify our member mailings by sending marketing materials and monthly
selections that better reflect members' particular interests as evidenced by
their buying patterns and purchasing preferences, rather than sending the same
mailing and monthly selection to all members. Our objective is to use this
stratification technique and our database analysis expertise to decrease
members' returns of monthly selections, increase members' positive response to
our product offerings and thereby increase net sales and extend the membership
lifecycle.
Marketing of Old Time Radio and Classic Video Products
We sell our old time radio and classic video products primarily through
direct mail, radio and print advertisements and online marketing and promotion
of our web sites. Our catalogs offer cassettes and compact discs from our old
time radio library and videos from our classic video library. We mail our
catalogs four to six times each year to all persons on our customer list, as
well as to portions of our Audio Book Club member list. We also include product
insert advertisements for our radio and video programs in selected Audio Book
Club member mailings.
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We advertise these products on our nationally syndicated programs, which
reach an audience of 3 million listeners of old time radio programs weekly. We
also place advertisements in selected publications, including Reader's Digest,
TV Guide and Parent Magazine. We also offer our old time radio and classic
video programs to retail customers through our web sites, primarily on the old
time radio and classic video channels on MediaBay.com.
We market our old time radio and classic video programs to wholesale
customers through our inhouse sales personnel and through third-party
distributors. We also engage in cooperative advertising to induce retailers to
purchase our products.
Supply and Production
We have established relationships with substantially all of the major
audiobook publishers, including Random House Audio Publishing Group, Simon &
Schuster Audio, Harper Audio and Time Warner Audio Books for the supply of
audiobooks. For the years ended December 31, 1998 and 1999, approximately 55%
and 37% of our gross sales were from sales of titles licensed from the Random
House Audio Publishing Group.
As a membership club, our Audio Book Club enjoys a cost of goods advantage
over traditional audiobook retailers. Retailers and other online book sellers
purchase audiobooks from the finished inventory of either a publisher or a
third-party distributor. As a club operator, we license a recording or group of
recordings from the publisher for sale in a club format on a royalty or per
copy basis and subcontract the manufacturing, duplicating and printing to a
third party. As a result of the improved economies of scale achieved from our
acquisitions of Columbia House's Audiobook Club and Doubleday Direct's
Audiobooks Direct club, we have achieved significant cost savings in the
production of audiobooks.
Our licensing agreements generally are non-exclusive, have one to
three-year terms, require us to pay an advance against future royalties upon
signing the license, permit us to sell audiobooks in our inventory at the
expiration of the term during a sell-off period and prohibit us from selling an
audiobook prior to the publisher's release date for each audiobook. Most of the
license agreements permit us to make our own arrangements for the packaging,
printing and cassette duplication of audiobooks. Most of our license agreements
permit us to produce and sell audiobook titles in cassette and compact disc
form. A few of our license agreements grant us digital rights to the titles as
well. We are negotiating with publishers to obtain the rights to produce and
sell additional titles in a digital download format.
We have acquired exclusive licensing rights to a substantial majority of
our old time radio library. These rights have been principally acquired from
the original rights holders (actors, directors, writers, producers or others)
or their estates. Engineers in our Illinois facility use digital sound
equipment to improve the sound quality of our old time radio programs. We then
contract with third-party manufacturers to duplicate and manufacture the old
time radio cassettes and CDs which we sell. We duplicate or use third parties
to manufacture most of our videos.
We are also in the process of encoding some of our old time radio products
and audiobooks which we license to provide digital download delivery of these
products.
Fulfillment and Customer Service
Doubleday Direct currently provides order processing and data processing
services, warehousing and distribution services for our Audio Book Club
members. Doubleday Direct's services include accepting member orders,
implementing our credit policies, inventory tracking, billing, invoicing and
generating periodic reports, such as reports of sales activity, accounts
receivable aging, customer profile and marketing effectiveness. Doubleday
Direct also packs and ships the order, using the invoice as a packing list, to
the club member.
Doubleday Direct continued to provide these services to the members we
acquired through our acquisition of their Audiobooks Direct club in June 1999
and has provided these services for all of our Audio
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Book Club members since January 2000. We were able to negotiate a favorable
pricing structure with Doubleday Direct for these services based on the
increased volume of business we will provide to them. As a result, we currently
anticipate that we will begin to experience cost savings for these functions in
the first quarter of 2000.
For our Audio Book Club members, we offer fast ordering options, including
placing orders online through our web site, calling us with an order and faxing
an order to us. Orders are sent fourth class mail and are typically delivered
10 to 14 days following our receipt of orders. For an additional fee, members
can receive faster delivery of an order either by priority delivery, which
takes three to five days, or by overnight delivery.
Members are billed for their purchases at the time their orders are
shipped and are required to make payment promptly. We generally allow members
in good standing to order up to $50 of products on credit, which may be
increased if the member maintains a good credit history with us.
Our policy is to accept returns of damaged audiobooks. In order to
maintain favorable customer relations, we generally also accept prompt returns
of unopened audiobooks. We monitor each member's account to determine if the
member has made excessive returns. Our policy is to either terminate a
membership or change member status to positive option, if the member makes
three to five consecutive returns of either audiobooks ordered or of featured
selections received because the member did not return the reply card on time.
We will fulfill MediaBay.com orders from National Fulfillment Services,
Inc. National Fulfillment will accept orders, aggregate old time radio, classic
video, audiobook and third-party products, ship products to customers, invoice,
accept and apply collections and generate periodic reporting. We used National
Fulfillment for fulfillment services to our Audio Book Club prior to our using
Doubleday Direct.
We fulfill retail orders for old time radio programs at our Illinois
facility. Wholesale product orders are drop shipped directly from our tape
duplicator or our facility.
For our old time radio and classic video products, we only accept credit
card orders from retail customers and require wholesale customers to pay
invoices within 90 days. We maintain a toll-free customer service telephone
hotline for these customers and we can also be contacted by mail and e-mail.
Our policy is to accept returns of damaged products sold on a retail basis. We
accept returns of unsold products sold on a wholesale basis.
Competition
The audiobook and mail order industries are intensely competitive.
However, we believe that we operate the only club for audiobooks in the United
States and that we are the largest marketer of old time radio programs.
We compete with all other outlets through which audiobooks and other
spoken word content are offered, including bookstores, audiobook stores which
rent or sell only audiobooks, mail order companies that offer audiobooks for
rental and sale through catalogs and retail establishments such as convenience
stores, video rental stores and wholesale clubs.
As the markets for spoken word content increasingly shifts towards the
Internet, we face competition for the marketing and distribution of these
products from other highly trafficked sites, offering a variety of competing
products, including Amazon.com and Barnesandnoble.com. Currently, there are
several other sites offering streaming audio content and products in digital
download format, including audiohighway.com and audible.com, which offer
digital download spoken word content, including audiobooks.
We also compete for discretionary consumer spending with mail order clubs
and catalogs, other direct marketers and retailers that offer products with
similar entertainment value as audiobooks and old time radio and classic video
programs, such as music cassettes and compact discs, printed books, videos, and
laser and digital video discs.
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Intellectual Property
We have a United States registered trademark for the Audio Book Club logo
and have several pending United States trademark and service mark
registrations, including "MediaBay," "MediaBay.com," "audiobookclub.com" and
the MediaBay logos. We have applied for several additional service marks
relating to slogans and designs used in our advertisements, member mailings and
member solicitation packages. We believe that our trademarks and service marks
have significant value and are important to our marketing. We also own or
license the rights to the radio and video programs in our content library.
We rely on trade secrets and proprietary know-how and employ various
methods to protect our ideas, concepts and membership database. In addition, we
typically obtain confidentiality agreements with our executive officers,
employees, list managers and appropriate consultants and service suppliers.
Employees
As of January 24, 2000, we had 70 full-time employees. Of these employees,
7 served in management and 32 served in operational positions at our Audio Book
Club operations and 4 served in management and 27 served in operational
positions at our old time radio and classic video operations. We believe our
employee relations to be good. None of our employees is covered by a collective
bargaining agreement.
Properties
We lease 1,155 square feet of office space in Boca Raton, Florida pursuant
to a lease agreement which expires in November 2000 at a monthly rent of
$1,307. We have the option to renew the lease for two consecutive three-year
periods.
We sublease 828 square feet of space in Morristown, New Jersey from H.H.
Realty Investors, Inc., an affiliate of Norton Herrick, pursuant to a sublease
agreement that expires in December 2003 at a monthly rate of $1,340, the amount
paid by the related party to the landlord under the master lease.
We sublease 2,793 square feet of space in Morristown, New Jersey from H.H.
Realty Investors, Inc., an affiliate of Norton Herrick pursuant to a sublease
agreement on a month-to-month basis at a monthly rate of $3,215, the amount
paid by the related party to the landlord under the master lease.
We also lease approximately 3,655 square feet of space in Morristown, New
Jersey on a month-to-month basis at a current rent of $5,735 per month.
We lease 8,000 square feet of space in Schaumburg, Illinois pursuant to a
lease agreement which expires in December 2005, subject to a three-year renewal
option. Monthly rent under this lease is $4,667.
We lease a kiosk at a shopping mall in Aventura, Florida on a
month-to-month basis at a current rate of $5,000 per month.
Legal Proceedings
We are not a party to any lawsuit or proceeding which we believe is likely
to have a material adverse effect on us.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors are:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------- ----- ------------------------------------------------------
<S> <C> <C>
Norton Herrick ................. 61 Chairman and Director
Michael Herrick ................ 32 Chief Executive Officer, President and Director
Stephen M. McLaughlin .......... 33 Executive Vice President and Chief Technology Officer
Howard Herrick ................. 35 Executive Vice President and Director
John F. Levy ................... 44 Executive Vice President and Chief Financial Officer
Robert Toro .................... 35 Senior Vice President of Finance
Jesse Faber .................... 45 President of Audio Book Club, Inc. and Director
Carl P. Amari .................. 36 President of Radio Operations and Director
Roy Abrams ..................... 56 Director
Carl T. Wolf ................... 56 Director
</TABLE>
Norton Herrick, 61, is our co-founder and has been Chairman and Director
since our inception. Mr. Herrick served as our President from our inception
until January 1996 and was Chief Executive Officer from January 1996 through
January 2000. Mr. Herrick has been a private businessman for over 30 years and
through his wholly-owned affiliates, Mr. Herrick has completed transactions,
including building, managing and marketing primarily real estate valued at an
aggregate of approximately $2 billion. Mr. Herrick serves on the advisory board
of the Make-A-Wish Foundation, the advisory committee of the National Multi
Housing Council and the National Board of Directors for People for the American
Way. Mr. Herrick is the father of Michael Herrick, our Chief Executive Officer,
President, and a director, and Howard Herrick, our Executive Vice President and
a director.
Michael Herrick, 32, is our co-founder and has been our Chief Executive
Officer and President since January 2000 and a director since our inception.
Mr. Herrick was our Co-Chief Executive officer from April 1998 to January 2000
and has held various other offices with us since our inception. Since August
1993, Michael Herrick has been an officer (since January 1994, Vice President)
of the corporate general partner of a limited partnership which is a principal
shareholder of The Walking Company, a nationwide retailer of comfort and
walking footwear and related apparel and accessories. Mr. Herrick is a member
of the Board of Directors of the Audio Publisher's Association. Mr. Herrick is
the son of Norton Herrick, our Chairman, and brother of Howard Herrick, our
Executive Vice President and a director. Mr. Herrick received his B.A. degree
from the University of Michigan.
Stephen M. McLaughlin, 33, has been our Executive Vice President and Chief
Technology Officer since February 1999. Prior to joining us, 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 and Artificial
Intelligence labs.
Howard Herrick, 35, is our co-founder and has been our Executive Vice
President, Editorial Director and a director since our inception. Since August
1993, Howard Herrick has been Vice President of the corporate general partner
of a limited partnership which is a principal shareholder of The Walking
Company. Since 1988, Mr. Herrick has been an officer of The Herrick Company,
Inc. and is currently its President. Mr. Herrick is also an officer of the
corporate general partners of numerous limited partnerships which acquire,
finance, manage and lease office, industrial and retail properties; and which
acquire, operate, manage, redevelop and sell residential rental properties. Mr.
Herrick is the son of Norton Herrick, our Chairman and brother of Michael
Herrick, our Chief Executive Officer, President and director.
38
<PAGE>
John F. Levy, 44, has been our employee since November 1997 and has served
as our Executive Vice President and Chief Financial Officer since January 1998.
Prior to joining us, 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. During 1994, Mr. Levy
served as Chief Financial Officer of the Continuum Entertainment Group, Inc., a
publicly-held record label which filed for protection under Chapter 11 of the
United States Bankruptcy Code in 1995 after Mr. Levy had left that company. Mr.
Levy is a Certified Public Accountant with nine years experience with the
national public accounting firms of Ernst & Young, Laventhol & Horwath and
Grant Thornton.
Robert Toro, 35, has been our Senior Vice President of Finance since July
1999 and an employee since April 1999. Prior to joining us, Mr. Toro was Senior
Vice President of AM Cosmetics Co. and had previously served in senior
financial positions in both public and private entertainment and publishing
companies. From 1992 through early 1997, Mr. Toro served in various senior
financial positions with Marvel Entertainment Group, Inc., a publicly traded
youth entertainment company. Mr. Toro is a Certified Public Accountant with six
years of progressive experience with the national public accounting firm of
Arthur Andersen where he was employed immediately prior to joining Marvel
Entertainment Group.
Jesse Faber, 45, has been President of Audio Book Club, Inc. since January
2000 and a director since October 1997. Mr. Faber was our President from
October 1996 through January 2000. From 1989 to October 1996, Mr. Faber was
Senior Vice President and Partner of AyerDirect, a direct response advertising
agency wholly-owned by McManus, Inc., one of the ten largest advertising and
marketing agencies in the world.
Carl P. Amari, 36, has been the President of Radio Operations since we
acquired our old time radio and classic video operations in December 1998 and a
director of MediaBay since September 1999. Since 1989, Mr. Amari was the CEO
and principal shareholder of Radio Spirits, Inc. Radio Spirits is recognized as
the largest company in the world specializing in the syndication, sales and
licensing of old time radio programming. He is also the executive producer of a
nationally syndicated version of "When Radio Was" which airs on 450 affiliates,
as well as for three other related syndicated radio programs. Radio Spirits
twice made Inc's list of the fastest growing privately held companies. In
connection with our acquisition of Radio Spirits, Inc. from Mr. Amari, Norton
Herrick agreed to vote his shares to elect Mr. Amari as a director.
Roy Abrams, 56, has been a director of MediaBay since October 1997. Since
April 1993 and from 1986 through March 1990, Mr. Abrams has owned and operated
Abrams Direct Marketing, a marketing consulting firm.
Carl T. Wolf, 56, has been a director of MediaBay since March 1998. Mr.
Wolf is the managing partner of the Lakota Investment Group. Mr. Wolf was
formerly Chairman of the Board, President and Chief Executive Officer of Alpine
Lace Brands, Inc. Mr. Wolf founded Alpine Lace and its predecessors and had
been the Chief Executive Officer of each of them since the inception of Alpine
Lace in 1983. Mr. Wolf became a director of Alpine Lace shortly after its
incorporation in February 1986.
Our Board of Directors is classified into three classes, each with a term
of three years, with only one class of directors standing for election by the
shareholders in any year. Norton Herrick and Jesse Faber are Class I directors
and stand for re-election at the 2001 annual meeting of shareholders, Michael
Herrick, Roy Abrams and Carl Amari are Class II directors and stand for
re-election at the 2002 annual meeting of shareholders and Howard Herrick and
Carl Wolf are Class III directors and stand for re-election at the 2000 annual
meeting of shareholders. Our executive officers serve at the direction of the
Board and until their successors are duly elected and qualified.
We have agreed with L.H. Friend, Weinress, Frankson & Presson, LLC who
conducted our October 1997 initial public offering, to use our best efforts to
nominate and elect one director designated by the underwriters to serve on our
Board of Directors. This agreement expires on October 22, 2000. To date, they
have not exercised this right. Our Board of Directors held one meeting during
the fiscal year ended December 31, 1999. The meeting was attended by all of the
directors, either in person or by telephone. The Board also took action by
unanimous written consent in lieu of meetings.
39
<PAGE>
Board Committee
We have established an Audit Committee, which 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 our internal accounting
controls. The Audit Committee is currently comprised of Messrs. Michael
Herrick, Roy Abrams and Carl T. Wolf. We do not have standing compensation or
nominating committees.
We reimburse our directors for reasonable travel expenses incurred in
connection with their activities on our behalf, but we do not pay our directors
any fees for Board participation.
Executive Compensation
The following table discloses, for the periods indicated, compensation
paid to our Chief Executive Officer and other executive officers whose salary,
together with any bonus, exceeded $100,000 during the fiscal year ended
December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation Awards
------------------------------
Annual Compensation
-------------------------------- Securities Underlying
Name and Principal Position Year Salary Bonus Options/SAR's (#)
- --------------------------------------- ------ ----------- --------- ------------------------------
<S> <C> <C> <C> <C>
Norton Herrick ........................ 1999 $100,000 $ 0 775,000
Chairman 1998 100,000 0 1,000,000
1997 19,354 0 0
Michael Herrick ....................... 1999 125,000 0 0
Chief Executive Officer and President 1998 125,000 0 250,000
1997 72,879 0 0
Jesse Faber ........................... 1999 158,169 45,000 20,000
President of Audio Book Club, Inc. 1998 140,000 35,000 50,000
1997 128,417 40,000 50,000
John F. Levy .......................... 1999 152,125 12,500 30,000
Executive Vice President and Chief 1998 137,083 7,500 50,000
Financial Officer 1997 19,125 0 0
Steven M. McLaughlin .................. 1999 131,250 0 158,000
Executive Vice President
and Chief Technology Officer
Howard Herrick ........................ 1999 125,000 0 0
Executive Vice President 1998 125,000 0 250,000
1997 115,129 0 0
</TABLE>
Norton Herrick served as our Chief Executive Officer during the years
presented in the above table and Michael Herrick served as Co-Chief Executive
Officer from April 1998 through January 2000 and has served as Chief Executive
Officer and President since January 2000. Jesse Faber served as our President
from October 1996 through January 2000 and is currently President of Audio Book
Club, Inc.
The 50,000 options reflected above for Mr. Faber were originally granted
in the fiscal year ended December 31, 1997, but their exercise price was
reduced during the fiscal year ended December 31, 1998 to the fair market value
of the underlying common stock at the time of repricing. The options reflected
in the above table do not include warrants issued to Norton Herrick in
connection with financing provided by Mr. Herrick. For more information about
these warrants, see "Related Party Transactions."
Mr. McLaughlin joined our company in February 1999.
40
<PAGE>
The following table discloses options granted during the fiscal year ended
December 31, 1999 to these executives:
Option/SAR Grants in Fiscal Year Ending December 31, 1999
<TABLE>
<CAPTION>
Number of
Shares Underlying
Name Options Granted
- ------------------------------ -------------------
<S> <C>
Norton Herrick ............... 775,000
Michael Herrick .............. 0
Jesse Faber .................. 10,000
10,000
John F. Levy ................. 30,000(1)
Steven M. McLaughlin ......... 150,000
8,000
Howard Herrick ............... 0
<CAPTION>
% of Total Options Granted to Exercise Price
Name Employees in Fiscal Year ($/share) Expiration Date
- ------------------------------ ------------------------------- --------------- ---------------------------
<S> <C> <C> <C>
Norton Herrick ............... 63.6 $ 11.00 10/9/09
Michael Herrick .............. 0 $ -- --
Jesse Faber .................. .8 $ 8.00 10/31/04
.8 $ 12.00 10/31/05
John F. Levy ................. 2.5 $ 13.00 Five years from vesting(1)
Steven M. McLaughlin ......... 12.3 $ 9.75 Five years from vesting(2)
.7 $ .10 02/15/04
Howard Herrick ............... 0 $ -- --
</TABLE>
- ------------
(1) One third of the 30,000 options granted to Mr. Levy vest on November 10,
2000, and the balance will vest on November 10, 2001. All of the options
are exercisable for a period of five years commencing immediately upon the
applicable vesting period, subject to earlier expiration if Mr. Levy is
not employed by us.
(2) These options vested as to 25,000 shares on February 15, 1999 and will vest
as to (1) 25,000 shares on February 15, 2000, (ii) 30,000 shares on
February 15, 2001, (iii) 35,000 shares on February 15, 2002 and (iv)
35,000 shares on February 15, 2003. All of the options are exercisable for
a period of five years commencing immediately upon the applicable vesting
period.
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, 1999. No options were exercised by any of these
executives during fiscal 1999:
Aggregated Option Exercises And Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying
Value of Unexercised
Unexercised Options at In-the-Money
December 31, 1999 Options at December 31, 1999
------------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Norton Herrick ............ 1,775,000 0 $6,520,313 $ 0
Michael Herrick ........... 250,000 0 1,265,625 0
Jesse Faber ............... 30,000 40,000 185,625 230,625
John F. Levy .............. 20,000 60,000 153,750 230,625
Steven McLaughlin ......... 33,000 125,000 124,638 179,688
Howard Herrick ............ 250,000 0 1,265,625 0
</TABLE>
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, 1999
was $11.1875.
41
<PAGE>
Employment Agreements
Effective as of October 22, 1999, we entered into a one-year employment
agreement with Norton Herrick which provides for an annual base salary of
$100,000 and such increases and bonuses as the Board of Directors may determine
from time to time. The employment agreement does not require that Mr. Herrick
devote any stated amount of time to our business and activities and contains
noncompetition and nonsolicitation provisions for the term of the employment
agreement and for two years thereafter. If Mr. Herrick's employment is
terminated under circumstances described in the employment agreement, including
as a result of a change in control, Mr. Herrick will be entitled to receive
severance pay equal to the greater of $600,000 or six times the total
compensation received by Mr. Herrick from us during the twelve months prior to
the date of termination. If the severance payment is triggered, it is possible
that the payments may be deemed "excess parachute payments" under Section
280(g) of the Internal Revenue Code and, as a result, we may not receive a tax
deduction for those payments.
Effective October 22, 1997, we entered into three-year employment
agreements with each of Michael Herrick and Howard Herrick which provide for an
annual base salary of $125,000 and such increases and bonuses as the Board of
Directors may determine from time to time. The employment agreements require
each of Michael and Howard Herrick to devote substantially all of his business
time to our business and affairs. The agreements contain noncompetition and
nonsolicitation provisions for the term of the employment agreements and for
two years thereafter. In the event of termination of employment under
circumstances described in the employment agreements, including as a result of
a change in control, we will be required to provide severance pay equal to the
greater of $375,000 or three times the total compensation received from us
during the twelve months prior to the date of termination.
On October 22, 1999, we entered into an employment agreement with Jesse
Faber which provides for an annual base salary of $165,000. The agreement
expires on October 31, 2000 and provides for a bonus of $55,000 payable if Mr.
Faber is employed by us at the end of the term. Pursuant to the agreement, we
granted to Mr. Faber options to purchase 10,000 shares of the common stock at
an exercise price of $12.00 per share. The options vest on October 31, 2000,
provided that Mr. Faber is employed by us on such date.
We have entered into a two-year employment agreement with John Levy which
expires in November 2001. The agreement provides for an annual base salary of
$165,000, in the first year of the agreement and an annual base compensation of
$180,000 in the second year of the agreement. Mr. Levy's agreement also
provides for a minimum bonus of $15,000 in the first year of the agreement and
a minimum bonus of $17,500 in the second year of the agreement, provided Mr.
Levy is employed by us on each bonus date. Pursuant to the agreement, we agreed
to grant to Mr. Levy options to purchase 30,000 shares of common stock at an
exercise price of $13.00 per share. Options for 10,000 shares vest at the end
of the first year of the employment agreement and options for 20,000 shares
vest at the end of the second year of employment, provided Mr. Levy is employed
by us on the vesting dates. However, in the event of a change in control, all
options shall immediately vest and become exercisable.
We entered into a two-year employment agreement with Stephen McLaughlin,
effective February 15, 1999, which provides for an annual base salary of
$150,000, a performance-based bonus of $15,000 payable if Mr. McLaughlin is
employed by us at the end of the first year of the employment term, $10,000
reimbursement for moving expenses and a $35,000 interest free loan. Pursuant to
the agreement, we granted to Mr. McLaughlin options to purchase 150,000 shares
of the common stock at an exercise price of $9.75 per share and options to
purchase 8,000 shares of the common stock at an exercise price of $0.10 per
share. The 8,000 options exercisable at $0.10 per share vested on February 15,
1999. The 150,000 options exercisable at $9.75 vest as follows: options for
25,000 shares vested on February 15, 1999; options for 25,000 shares vest on
February 15, 2000; options for 30,000 shares vest on February 15, 2001; and
options for 35,000 shares vest on each of February 15, 2002 and February 15,
2003.
In December 1998, we entered into a three-year employment agreement with
Carl Amari. Pursuant to the agreement, Mr. Amari is entitled to receive a base
salary of $200,000 per year during the first 18 months of the agreement and
$300,000 per year during the second 18 months of the agreement. The agreement
also provides that Mr. Amari shall also be appointed as a member of our Board
of Directors for as long as he is employed by us.
42
<PAGE>
Stock Plans
Our 1997 Stock Option Plan provides for the grant of stock options to
purchase up to 2,000,000 shares. As of February 15, 2000, options to purchase
an aggregate of 1,989,400 shares of our common stock have been granted under
the 1997 plan.
Our 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 February 15, 2000, options to purchase an aggregate of 1,926,850 shares of
our common stock have been granted under the 1999 plan.
Of the options granted under our plans, options to purchase 3,235,000
shares of our common stock have been granted to our officers and directors as
follows: Norton Herrick -- 2,075,000 shares; Michael Herrick -- 550,000 shares;
Howard Herrick -- 400,000 shares; John F. Levy -- 80,000 shares; Jesse Faber --
70,000 shares; Robert Toro -- 50,000 shares; and Roy Abrams -- 10,000 shares.
Limitation on Liability and Indemnification Matters
Our Articles of Incorporation and By-Laws provide that we shall indemnify,
and upon request shall advance expenses to, our directors and officers to the
fullest extent permitted by the Florida Business Corporation Act. Our Articles
of Incorporation also include a provision that limits, to the fullest extent
now or hereafter permitted by the Florida Act, the personal liability of our
directors to us or our shareholders for monetary damages arising from a breach
of their fiduciary duties as directors. The Florida Act provides that no
director or officer shall be personally liable to us or our shareholders for
damages for breach of any duty owed to us or our shareholders, except for
liability for (1) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (2) any unlawful payment
of a dividend or unlawful stock repurchase or redemption in violation of the
Florida Act, (3) any transaction from which the director received an improper
personal benefit or (4) a violation of a criminal law.
We have entered into indemnification agreements with some of our
employees, officers and consultants in which we have agreed to indemnify them,
to the fullest extent permitted under law, against any amounts which the
employee, officer or consultant may become legally obligated to pay in
connection with any claim relating to any services performed on our behalf and
some related expenses. However, each employee, officer or consultant shall be
required to reimburse us if the individual is found not to have been entitled
to such indemnification, as finally judicially determined by a court of
competent jurisdiction.
Insofar as indemnification for liabilities arising under the Securities
Act of 1993 may be permitted to our directors, officers and controlling persons
pursuant to any charter provision, by-law, contract, arrangement, statute or
otherwise, we have been advised that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
43
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial
ownership of common stock, based on information provided by the persons named
below in publicly available filings, as of February 15, 2000 and as adjusted to
reflect the completion of this offering by:
o each of MediaBay's directors and executive officers;
o all directors and executive officers of MediaBay as a group; and
o each person who is known by MediaBay to beneficially own more than five
percent of our outstanding shares of common stock.
Unless otherwise indicated, the address of each beneficial owner is care
of MediaBay, Inc., 20 Community Place, Morristown, New Jersey 07960. Unless
otherwise indicated, we believe that all persons named in the following table
have sole voting and investment power with respect to all shares of common
stock that they beneficially own.
For purposes of this table, a person is deemed to be the beneficial owner
of the securities that person can acquire upon the exercise of options,
warrants or other convertible securities within 60 days of the date of this
prospectus. 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 exercisable within 60 days of the date of this prospectus,
but that options, warrants or other convertible securities held by all other
persons were not exercised or converted.
As of February 15, 2000, 9,771,866 shares of our common stock were issued
and outstanding.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Number of Shares -----------------------------------
Name and Address of Beneficial Owner Beneficially Owned Before Offering After Offering
- -------------------------------------------------- -------------------- ----------------- ---------------
<S> <C> <C> <C>
Norton Herrick ................................... 3,696,660(1) 28.5% 21.8%
Howard Herrick ................................... 3,602,640(2) 35.4 25.4
Michael Herrick .................................. 1,038,460(3) 10.1 7.3
Quantum Partners LDC ............................. 750,000 7.7 5.4
Kaya Flamboya
Willemsted, Curacao
Netherlands, Antilles
President and Fellows of Harvard College ......... 700,000 7.2 5.1
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, Massachusetts 02210
Carl P. Amari .................................... 447,875(4) 4.6 3.2
Carl T. Wolf ..................................... 102,750(5) 1.0 *
Stephen M. McLaughlin ............................ 58,300(6) * *
John F. Levy ..................................... 41,000(7) * *
Jesse Faber ...................................... 30,000(8) * *
Roy Abrams ....................................... 10,000(9) * *
Robert Toro ...................................... 0(10) * *
All directors and executive officers as a group
(10 persons) 8,539,225 59.9% 46.8%
</TABLE>
- ------------
* Less than 1%
44
<PAGE>
(1) Represents (a) 8,200 shares of common stock held by Norton Herrick, (b)
488,460 shares of common stock held by Howard Herrick, (c) 2,075,000
shares of common stock issuable upon exercise of options, (d) 150,000
shares of common stock issuable upon exercise of options granted to Evan
Herrick and (e) 975,000 shares of common stock issuable upon exercise of
warrants issued on December 31, 1998 or under a December 1998 letter
agreement. Does not include 2,714,180 shares held by the Norton Herrick
Irrevocable Trust. Evan Herrick has irrevocably granted to Norton Herrick
sole voting and dispositive power with respect to the shares of common
stock issuable upon exercise of the options held by Evan Herrick.
(2) Represents (a) 2,714,180 shares held by the Norton Herrick Irrevocable ABC
Trust, (b) 488,460 shares of common stock held by Howard Herrick, and (c)
400,000 shares of common stock issuable upon exercise of options. Howard
Herrick is the sole trustee and Norton Herrick is the sole beneficiary of
the Norton Herrick Irrevocable ABC Trust. The trust agreement provides
that Howard Herrick shall have sole voting and dispositive power over the
shares held by the trust. Howard Herrick has irrevocably granted to Norton
Herrick sole dispositive power with respect to the shares of common stock
held by Howard Herrick.
(3) Represents 488,460 shares and 550,000 shares of common stock issuable upon
exercise of options.
(4) Represents 395,125 shares of common stock and options to purchase 52,750
shares of common stock held by Mr. Amari. Does not include options to
purchase 100,000 shares of common stock held in escrow subject to release
to Mr. Amari if specific earnings performance targets are met by our old
time radio and classic video operations acquired from Mr. Amari.
(5) Includes 5,000 shares of common stock and 97,500 shares of common stock
issuable upon exercise of options.
(6) Represents 300 shares and 58,000 shares of common stock issuable upon
exercise of options. Does not include 100,000 shares of common stock
issuable upon exercise of options.
(7) Represents 1,000 shares of common stock and 40,000 shares of common stock
issuable upon exercise of options. Does not include 40,000 shares issuable
upon exercise of options.
(8) Represents shares of common stock issuable upon exercise of options. Does
not include 40,000 shares of common stock issuable upon exercise of
options.
(9) Represents shares of common stock issuable upon exercise of options.
(10) Does not include 50,000 shares issuable upon exercise of options.
45
<PAGE>
RELATED PARTY TRANSACTIONS
Companies wholly-owned by Norton Herrick, our Chairman, have in the past
provided accounting, administrative and general office services to us and
obtained insurance coverage for us at cost since our inception. We paid these
entities $73,000 and $90,000 for these services during the years ended December
31, 1998 and 1999. In addition, a company wholly-owned by Norton Herrick
provides us access to a corporate airplane. We generally pay the fuel, fees and
other costs related to our use of the airplane directly to the service
providers. For use of this airplane, we paid rental fees of less than $25,000
in each of 1998 and 1999 to Mr. Herrick's affiliate. We anticipate obtaining
similar services from time to time from companies affiliated with Norton
Herrick, and we will reimburse their costs in providing the services to us.
On March 18, 1998, we sold to Carl Wolf, one of our directors, a five-year
option to purchase 50,000 shares of our common stock at an exercise price of
$5.00 per share, the market value on the purchase date. The purchase price of
the option was $50,000. We also granted to Mr. Wolf the right to acquire a
second five-year option to purchase 25,000 shares at an exercise price of $5.00
per share for $25,000. Mr. Wolf exercised this right and purchased the
additional option in September 1998.
In December 1998, we acquired Radio Spirits, Inc. from Carl Amari, who
subsequently became one of our directors, as described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Recent Acquisitions and Financings."
In December 1998, we obtained a portion of the financing for our
acquisitions of Columbia House's Audiobook Club and our old time radio and
classic video operations from Norton Herrick by issuing him a $15.0 million
principal amount 9% convertible subordinated promissory note due December 31,
2004. In January 1999, we repaid $1.0 million of the note. In August 1999, Mr.
Herrick sold $5.0 million principal amount of the note to a third party.
Interest on this note is payable monthly. The note was initially convertible,
in whole or in part, at the holder's option, into shares of our common stock at
$11.125 per share. As additional consideration for the bridge loan, we issued
to Mr. Herrick five-year warrants to purchase 500,000 shares of our common
stock at an exercise price of $12.00 per share, subject to adjustment. Because
the bridge loan was not refinanced, repaid or replaced by September 30, 1999,
(1) the interest rate of the note increased to 11%, (2) the conversion price of
the note was adjusted to the lesser of $11.125 per share and the average
closing bid price of our common stock for the five trading days prior to
conversion and (3) the exercise price of the warrants was adjusted to $8.41.
The additional 2% interest on the note through December 31, 1999 is being added
to the principal amount of the note and is due on the maturity of the note, and
the additional 2% interest commencing January 1, 2000 is payable monthly. The
note is subordinated to our obligations under our credit facility with Fleet
and ING and is secured by a second lien security interest on assets of our old
time radio and classic video operations. The terms of Mr. Herrick's loan to us
were approved by the independent members of our Board of Directors. We also
received a fairness opinion in connection with this loan.
In December 1998, we also agreed that if the note is refinanced, repaid or
replaced by anyone other than Norton Herrick or a family member or affiliate of
Mr. Herrick, we will issue to Mr. Herrick warrants to purchase an additional
350,000 shares of our common stock on the same terms as those issued to him in
December 1998. In September 1999, we issued to Mr. Herrick warrants to purchase
140,000 shares of our common stock at a price of $8.41 per share.
From December 1999 through February 2000, Norton Herrick sold $6,223,750
principal amount of the note issued to him in December 1998 to two third
parties and, in January 2000, we issued to one of the third parties warrants to
purchase 340,000 shares of our common stock at an exercise price of $12.50 per
share. Under the December 1998 agreement, we issued to Mr. Herrick warrants to
purchase 145,221 shares of our common stock at an exercise price of $8.41 per
share on terms which were identical to the warrants issued to Mr. Herrick in
December 1998. Upon the repayment of the remaining $2,776,250 owed to Mr.
Herrick under the note with a portion of the proceeds of this offering, under
the December 1998 agreement we will issue to Mr. Herrick warrants to purchase
64,779 shares of our common stock at an exercise price of $8.41 per share on
terms which are identical to the warrants issued to Mr. Herrick in December
1998.
46
<PAGE>
In June 1999, we obtained a portion of the financing for our acquisition
of the business of Doubleday Direct's Audiobooks Direct club through a $4.4
million loan from Norton Herrick. In connection with this loan, we agreed,
subject to shareholder approval, that we would issue to Mr. Herrick warrants to
purchase 125,000 shares of our common stock at an exercise price of $8.41 per
share and on the same terms as the warrants issued to him in December 1998.
This loan was intended to be a bridge financing and was repaid in full in July
1999. Shareholder approval was obtained in September 1999, and we issued the
warrants to Mr. Herrick.
In December 1999 and January 2000, Evan Herrick, loaned the Company $3.0
million for which he received $3.0 million principal amount 9% convertible
promissory notes due December 31, 2004. The notes are convertible into shares
of our common stock at $11.125 per share. We intend to repay these notes from
the proceeds of this offering. Evan Herrick is Norton Herrick's son and Michael
Herrick's and Howard Herrick's brother.
We lease office space in New Jersey and Florida from affiliates of Norton
Herrick and other facilities in Illinois from Carl Amari. The terms of these
leases are described under "Business-Properties."
Companies affiliated with Norton Herrick may continue to provide
accounting and general and administrative services to us, provide us with
access to a corporate airplane and obtain insurance coverage for us at cost. It
is our policy that each transaction between us and our officers, directors and
5% or greater shareholders will be on terms no less favorable than could be
obtained from independent third parties.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 75,000,000 shares of common stock, no par
value, and 5,000,000 shares of preferred stock, no par value. As of February
15, 2000, there were 9,771,866 shares of common stock outstanding and no shares
of preferred stock outstanding.
Common Stock
The holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders, including the election of
directors, and, subject to preferences that may be applicable to any preferred
stock outstanding at the time, are entitled to receive ratably dividends, if
any, as may be legally declared from time to time by the board of directors. In
the event of liquidation or dissolution of MediaBay, the holders of common
stock are entitled to receive all assets available for distribution to the
shareholders, subject to any preferential rights of the holders of any
preferred stock then outstanding. The holders of our common stock have no
preemptive, subscription, conversion or redemption rights. The rights,
preferences and privileges of the holders of our common stock are subject to,
and may be adversely affected by, the right of the holders of any shares of
preferred stock which our board of directors may designate in the future.
Preferred Stock
Authorized but undesignated shares of preferred stock may be issued from
time to time in one or more series upon authorization by our board of
directors. Our board of directors, without further approval of the
shareholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
and other rights, preferences, privileges and restrictions applicable to each
series of preferred stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes could adversely affect the voting power of the holders of common stock
and make it more difficult for a third party to gain control of MediaBay,
prevent or substantially delay a change of control, discourage bids for our
common stock at a premium or otherwise adversely affect the market price of our
common stock.
Other Securities
Our 1997 Stock Option Plan provides for the grant of options to purchase
up to 2,000,000 shares of common stock. A total of 2,500,000 shares of common
stock have been reserved for distribution pursuant to our 1999 Stock Incentive
Plan. We have issued options to purchase an aggregate of 3,916,750 shares of
common stock at a weighted average price of $8.26 per share pursuant to the
1997 Stock Option Plan and the 1999 Stock Incentive Plan. After this offering,
we will also have issued non-plan options and warrants to purchase
approximately 2.9 million shares of common stock at a weighted average price of
approximately $11.31 per share.
Warrants to purchase a total of 197,450 shares at an exercise price of
$9.967 per share and warrants to purchase 119,940 shares at an exercise price
of $14.20 per share are subject to antidilution adjustment provisions for the
exercise price and number of warrants in connection with issuances below market
price, including the issuance of shares in this offering.
Warrants to purchase a total of 975,000 shares held by Norton Herrick, our
Chairman, are subject to anti-dilution protection for issuances below their
exercise price, currently $8.41 per share.
The conversion price of a $4.2 million principal amount convertible
promissory note that will be outstanding after this offering is subject to
anti-dilution protection for issuances of securities below the conversion
price, currently $11.125 per share. The conversion price of the convertible
promissory note may be adjusted as a result of this offering.
As a result of this offering, the number of shares of common stock
issuable upon exercise of outstanding warrants or upon conversion of the note
may increase, and the exercise or conversion prices may decrease as a result of
future issuances of our securities.
48
<PAGE>
Anti-Takeover Provisions under Florida Law
We are subject to several anti-takeover provisions under Florida law that
apply to public corporations organized under Florida law unless the corporation
has elected to opt out of those provisions in its articles of incorporation or
its bylaws. We have not elected to opt out of these provisions.
The Florida Business Corporation Act prohibits the voting of shares in a
publicly-held Florida corporation that are acquired in a "control share
acquisition" unless the board of directors approves the control share
acquisition or the holders of a majority of the corporation's voting shares
approve the granting of voting rights to the acquiring party. A "control share
acquisition" is defined as an acquisition that immediately thereafter entitles
the acquiring party, directly or indirectly, to vote in the election of
directors within any of the following ranges of voting power:
o 1/5 or more but less than 1/3;
o 1/3 or more but less than a majority; or
o a majority or more.
There are some exceptions to the "control share acquisition" rules.
Florida law also contains an "affiliated transaction" provision that
prohibits a publicly-held Florida corporation from engaging in a broad range of
business combinations or other extraordinary corporate transactions with an
"interested shareholder" unless:
o the transaction is approved by a majority of disinterested directors
before the person becomes an interested shareholder;
o the corporation has not had more than 300 stockholders of record during the
past three years;
o the interested shareholder has owned at least 80% of the corporation's
outstanding voting shares for at least five years;
o the interested shareholder is the beneficial owner of at least 90% of the
voting shares (excluding shares acquired directly from the corporation
in a transaction not approved by a majority of the disinterested
directors);
o consideration is paid to the holders of the corporation's shares equal to
the highest amount per share paid by the interested shareholder for the
acquisition of the corporation's shares in the last two years or fair
market value, and other specified conditions are met; or
o the transaction is approved by the holder of two-thirds of the company's
voting shares other than those owned by the interested shareholder.
An "interested shareholder" is defined as a person who, together with
affiliates and associates, beneficially owns more than 10% of a company's
outstanding voting shares. Florida law defines "beneficial ownership" in more
detail.
Classified Board of Directors
Our by-laws divide our board of directors into three classes, serving
staggered three-year terms. The staggered terms of the classes of directors may
make it more difficult for a third party to gain control of our board or to
acquire MediaBay and may discourage bids for our common stock at a premium. In
addition, our Articles of Incorporation provide that shareholders may not call
special meetings of shareholders unless they represent at least 25% of our
outstanding voting shares of stock.
Transfer Agent
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company, New York, New York.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The market price of our common stock could drop due to sales of large
number of shares of our common stock or the perception that these sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
After this offering, 13,771,866 shares of common stock will be outstanding
(14,371,866 shares if the underwriters exercise their over-allotment option in
full). Of these shares, 7,700,057 shares (8,300,057 shares if the underwriters
exercise their over-allotment option in full), including the 4,000,000 shares
sold in this offering, will be freely tradeable without restriction under the
Securities Act, except for any shares purchased by any of our affiliates, as
that term is defined in Rule 144 under the Securities Act. The remaining
6,071,809 shares are restricted securities within the meaning of Rule 144 under
the Securities Act. The restricted securities generally may not be sold unless
they are registered under the Securities Act or are sold pursuant to an
exemption from registration, such as the exemption provided by Rule 144 under
the Securities Act. Approximately 2.4 million of these restricted shares, plus
an approximately 3.0 million additional shares issuable upon exercise of
outstanding options, warrants and convertible notes, are currently registered
for resale and may, subject to lock-up agreements with the managing
underwriter, as described below, be sold in the public market by their holders.
Our officers and directors, their affiliates, our employees and
consultants and other shareholders have entered into lock-up agreements
pursuant to which they have agreed not to offer or sell any shares of common
stock or securities exercisable or convertible into common stock for periods of
60-120 days after the date of this prospectus without the prior written consent
of the managing underwriter, on behalf of the underwriters. The managing
underwriter may, at any time and without notice, waive any of the terms of
these lock-up agreements specified in the underwriting agreement.
The following table sets forth the approximate number of restricted shares
of common stock, including shares issuable upon exercise or conversion of
outstanding options, warrants and convertible securities, and the dates on
which these shares become available for resale in the public market.
<TABLE>
<CAPTION>
Approximate
Number of
Restricted Shares Date of availability of restricted shares for resale into public market
- ------------------- ---------------------------------------------------------------------------------------
<S> <C>
2,500,000 Immediately available.
500,000 60 days after the date of this prospectus due to lock-up agreements with the managing
underwriter.
550,000 90 days after the date of this prospectus due to lock-up agreements with the managing
underwriter.
8,650,000 120 days after the date of this prospectus due to lock-up agreements with the managing
underwriter.
</TABLE>
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned shares for a period of at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of
o 1% of the then-outstanding shares of common stock and
o the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which the notice of such
sale on Form 144 is filed with the SEC.
Sales under Rule 144 are also subject to provisions relating to notice and
manner of sale and the availability of current public information about us.
In addition, a person (or persons whose shares are aggregated) who has not
been an affiliate of ours at any time during the 90 days immediately preceding
a sale, and who has beneficially owned the shares for at least two years, would
be entitled to sell such shares under Rule 144(k) without regard to the volume
limitation and other conditions described above. Therefore, unless otherwise
restricted, Rule 144(k) shares may be sold immediately upon the completion of
this offering. The foregoing summary of Rule 144 is not intended to be a
complete description.
50
<PAGE>
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below, for whom Roth Capital Partners, Inc., L.H. Friend, Weinress, Frankson &
Presson, LLC and Pennsylvania Merchant Group are acting as representatives. We
are obligated to sell, and the underwriters are obligated to purchase, all of
the shares offered on the cover page of this prospectus, if any are purchased.
Subject to certain conditions of the underwriting agreement, each underwriter
has severally agreed to purchase the shares indicated opposite its name:
Number
Underwriters of Shares
- -------------------------------------------------------- ----------
Roth Capital Partners, Inc. ............................
L.H. Friend, Weinress, Frankson & Presson, LLC .........
Pennsylvania Merchant Group ............................
----------
Total ...............................................
The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and they have, for a period of 45
days from the date of this prospectus, an over-allotment option to purchase up
to 600,000 additional shares from us. If any additional shares are purchased,
the underwriters will severally purchase the shares in the same proportion as
per the table above.
The representatives of the underwriters have advised us that the shares
will be offered to the public at the offering price indicated on the cover page
of this prospectus. The underwriters may allow to selected dealers a concession
not in excess of $.___ per share and such dealers may reallow a concession not
in excess of $.___ per share to certain other dealers. After the shares are
released for sale to the public, the representatives may change the offering
price and the concessions.
We have agreed to pay to the underwriters the following fees, assuming
both no exercise and full exercise of the underwriters' over-allotment option
to purchase additional shares.
<TABLE>
<CAPTION>
Total Fees
--------------------------------------------------------------
Fee Without Exercise of Full Exercise of
Per Share Over-Allotment Option Over-Allotment Option
----------- ----------------------- ----------------------
<S> <C> <C> <C>
Fees paid by us ......... $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $_____in
expenses for this offering. We have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
contribute to payments that the underwriters may be required to make in respect
of these liabilities.
Our officers, directors, their affiliates, our employees and some
consultants and other shareholders have entered into lock-up agreements
pursuant to which they have agreed not to offer or sell any shares of common
stock or securities convertible into or exchangeable or exercisable for shares
of common stock for periods ranging from 60 to 120 days from the date of this
prospectus without the prior written consent of Roth Capital Partners, Inc., on
behalf of the underwriters. Roth Capital Partners, Inc. may, at any time and
without notice, waive the terms of these lock-up agreements specified in the
underwriting agreement.
Roth Capital Partners, Inc., on behalf of the underwriters, may engage in
the following activities in accordance with applicable securities rules:
o Over-allotments involving sales in excess of the offering size, creating
a short position. Roth Capital Partners, Inc. may elect to reduce this
short position by exercising some or all of the over-allotment option.
o Stabilizing and short covering; stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in the
open market may also reduce the short position. These activities may cause
the price of the shares to be higher than would otherwise exist in the
open market.
51
<PAGE>
o Penalty bids permitting the representatives to reclaim concessions from a
syndicate member for the shares purchased in the stabilizing or short
covering transactions.
These activities, which may be commenced and discontinued at any time, may
be effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
We have agreed with L.H. Friend, Weinress, Frankson & Presson, LLC who
conducted our October 1997 initial public offering, to use our best efforts to
nominate and elect one director designated by the underwriters to serve on our
Board of Directors. This agreement expires on October 22, 2000. To date, they
have not exercised this right.
LEGAL MATTERS
Blank Rome Tenzer Greenblatt LLP, New York, New York will pass upon the
validity of the common stock offered by us with this prospectus. Certain legal
matters in connection with this offering have been passed upon for the
underwriters by Klehr, Harrison, Harvey, Branzburg & Ellers LLP, Philadelphia,
Pennsylvania.
EXPERTS
The financial statements of MediaBay, Inc. (formerly Audio Book Club,
Inc.) and the related financial statement schedule as of and for the years
ended December 31, 1999 and 1998 and the financial statements of The Columbia
House Audiobook Club, a division of The Columbia House Company, as of and for
the year ended December 18, 1998 included in this prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein, and are included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing. The report of
Deloitte & Touche LLP, on the financial statements of The Columbia House
Audiobook Club as of and for the year ended December 18, 1998 includes an
explanatory paragraph stating that the financial statements have been prepared
from the separate records maintained by The Columbia House Company and may not
necessarily be indicative of conditions that would have existed or results of
operations if The Columbia House Audiobook Club had been operated as an
unaffiliated company.
The financial statements of Radio Spirits, Inc. as of December 31, 1997
and for the years then ended are included in this prospectus in reliance on the
report of BD&A Certified Public Accountants, Ltd., independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of Audio Books Direct (a wholly-owned operation
of Doubleday Direct, Inc.) as of June 30, 1998 and June 30, 1997 and for the
years then ended included in the Registration Statement of which this
prospectus is a part have been audited by KPMG LLP, independent certified
public accountants. Such financial statements are included in the Registration
Statement of which this prospectus is a part in reliance upon the report of
KPMG LLP and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG LLP includes an explanatory paragraph stating that
the club was operated as an integral part of Doubleday Direct, Inc. and had no
separate legal existence.
ADDITIONAL INFORMATION
We are subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended, and file reports, proxy statements and other
information with the SEC. These reports, proxy statements and other information
may be inspected and copied at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's
regional offices located at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048. You can obtain copies of these materials from the
Public Reference Section of the SEC upon payment of fees prescribed by the SEC.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC's Web site contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the SEC. The address of that site is
http://www.sec.gov.
52
<PAGE>
We have filed a registration statement on Form SB-2 with the SEC under the
Securities Act with respect to the securities offered in this prospectus. This
prospectus, which is filed as part of a registration statement, does not
contain all of the information set forth in the registration statement, some
portions of which have been omitted in accordance with the SEC's rules and
regulations. Statements made in this prospectus as to the contents of any
contract, agreement or other document referred to in this prospectus are not
necessarily complete and are qualified in their entirety by reference to each
such contract, agreement or other document which is filed as an exhibit to the
registration statement. The registration statement may be inspected without
charge at the public reference facilities maintained by the SEC, and copies of
such materials can be obtained from the Public Reference Section of the SEC at
prescribed rates.
53
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
MediaBay, Inc. (Formerly Audio Book Club, Inc.)
Index to Financial Statements
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Combined Pro Forma Financial Statements
Introduction .......................................................................... F-2
Combined Pro Forma Statement of Operations for the year ended December 31, 1999 and
related Notes (unaudited) ............................................................ F-3
Consolidated Financial Statements of MediaBay, Inc. (formerly Audio Book Club, Inc.)
Independent Auditors' Report ............................................................ F-4
Consolidated Balance Sheets as of December 31, 1999 and 1998 ............................ F-5
Consolidated Statements of Operations for the years ended December 31, 1999 and 1998 .... F-6
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999
and 1998 ............................................................................... F-7
Consolidated Statements of Cash Flows for the year ended December 31, 1999 and 1998 ..... F-8
Notes to Consolidated Financial Statements .............................................. F-9
Financial Statements of Audio Books Direct (a wholly-owned operation of Doubleday Direct,
Inc.)
Independent Auditors' Report .......................................................... F-24
Balance Sheets as of June 30, 1998 and 1997 ........................................... F-25
Statements of Operations for the years ended June 30, 1998 and 1997 ................... F-26
Statements of Divisional Deficit for the years ended June 30, 1998 and 1997 ........... F-27
Statements of Cash Flows for the years ended June 30, 1998 and 1997 ................... F-28
Notes to Financial Statements ......................................................... F-29
Carve-Out Financial Statements of The Columbia House Audiobook Club (a Division of The
Columbia House Company)
Independent Auditors' Report .......................................................... F-33
Balance Sheet as of December 18, 1998 ................................................. F-34
Statement of Operations for the fiscal year ended December 18, 1998 ................... F-35
Statement of Cash Flows for the fiscal year ended December 18, 1998 ................... F-36
Notes to Financial Statements ......................................................... F-37
Financial Statements of Radio Spirits, Inc.
Independent Auditors' Report .......................................................... F-40
Balance Sheet as of December 31, 1997 ................................................. F-41
Statement of Income for the year ended December 31, 1997 .............................. F-42
Statement of Retained Earnings for the year ended December 31, 1997 ................... F-43
Statement of Cash Flows for the year ended December 31, 1997 .......................... F-44
Notes to Financial Statements ......................................................... F-45
Schedules of Direct and Indirect Cost of Goods Sold for the year ended December 31,
1997 ................................................................................. F-49
Schedules of Selling and Administrative Expenses for the year ended December 31, 1997 . F-50
Schedule II-- Valuation and Qualifying Accounts and Reserves ............................. S-1
</TABLE>
F-1
<PAGE>
Combined Pro Forma Statement of Operations
(Unaudited)
The unaudited combined pro forma statement of operations being presented
for the year ended December 31, 1999 for MediaBay, Inc. (formerly Audio Book
Club, Inc.) combines (1) the historical consolidated statements of operations of
MediaBay and its subsidiaries, which includes the effect of the acquisitions
completed in December 1998 for the entire year ended December 31, 1999 and the
statement of operations of Audiobooks Direct from June 16, 1999 through December
31, 1999; and (2) Audiobooks Direct's statement of operations for the six months
ended March 31, 1999, less the 15 day period from June 16 through June 30, 1999,
as if this acquisition was completed on January 1, 1999.
The unaudited combined pro forma statement of operations is intended for
information purposes only and is not necessarily indicative of the future
results of operations of the combined company, or results of operations of the
combined company that would have actually occurred had the acquisition taken
place for the period presented. You should also note that the combined pro
forma statement of operations does not include any adjustments for any realized
or anticipated elimination of duplicative costs, including but not limited to,
payroll, rent and other general and administrative costs, or economies of scale
resulting from the acquisitions.
The unaudited combined pro forma statement of operations should be read in
conjunction with the historical financial statements, including the
accompanying notes included at F-4 through F-24.
F-2
<PAGE>
Combined Pro Forma Statement of Operations
For the year ended December 31, 1999
(Dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Audiobooks Pro Forma Combined
MediaBay Direct Adjustments Notes Pro forma
------------ ------------ ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Gross Sales ............................... $ 62,805 $11,300 $ 74,105
Returns, discounts and allowances ......... (16,578) (3,254) (19,832)
-------- ------- --------
Net sales ................................ 46,227 8,046 54,273
Cost of sales ............................. 23,687 3,781 27,468
-------- ------- --------
Gross profit ............................. 22,540 4,265 26,805
Expenses:
Advertising and promotion ................ 8,118 3,692 11,810
General and administrative ............... 9,799 1,671 11,470
Depreciation and Amortization ............ 6,812 (37) 1,037 (1) 7,812
-------- ------- ----- --- --------
Operating loss .......................... (2,189) (1,061) (1,037) (4,287)
Interest expense, net .................... 4,518 540 (2) 5,058
-------- ------- ------ --- --------
Net loss ................................ ($ 6,707) ($ 1,061) ($ 1,577) ($ 9,345)
======== ======= ======= ========
Net loss per share of common stock
(basic and diluted) .................... $ 0.82) $ 1.14)
======== ========
Weighted average number of common shares
outstanding (in thousands) ............. 8,205 8,205
======== ========
</TABLE>
- ------------
Notes:
(1) Represents amortization of goodwill and identifiable intangible assets in
connection with the acquisition of Doubleday Direct's Audiobooks Direct
club based on their estimated useful life as follows:
Goodwill 20 years
Customer list 3 years
Covenant not to compete 5 years
Mailing agreement 4 years
(2) Represents interest expense and amortization of deferred financing fees
associated with the acquisition of Doubleday Direct's Audiobooks Direct
club as described in F-12.
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MediaBay, Inc. (formerly Audio Book Club, Inc.)
We have audited the accompanying consolidated balance sheets of MediaBay, Inc.
(formerly Audio Book Club, Inc.) ("the Company") as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders
equity, and cash flows for the years then ended. Our audits also included the
financial statement schedule listed in the index at F-1. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1999 and 1998,
and the results of its operations and its cash flows for the years then ended
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/S/ Deloitte & Touche LLP
Parsippany, New Jersey
February 14, 2000
F-4
<PAGE>
MEDIABAY , INC.
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1998 1999
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................................... $ 2,686 $ 198
Short-term investments .............................................. 500 100
Accounts receivable, net of allowances for sales returns and doubtful
accounts of $1,840 and $5,911 at December 31, 1998 and 1999,
respectively ...................................................... 4,923 8,892
Inventory ........................................................... 5,331 7,386
Prepaid expenses and other current assets ........................... 401 1,517
Royalty advances .................................................... 961 3,781
Deferred member acquisition costs ................................... -- 4,368
--------- ---------
Total current assets .............................................. 14,802 26,242
Fixed assets, net .................................................... 1,328 1,519
Deferred member acquisition costs .................................... -- 4,928
Deferred financing costs ............................................. 1,516 1,723
Non-current prepaid expenses ......................................... 122 311
Other intangibles, net ............................................... 11,300 11,601
Goodwill, net ........................................................ 35,271 47,649
--------- ---------
$ 64,339 $ 93,973
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ............................... $ 6,231 $ 16,555
Current portion -- long-term debt ................................... 2,000 3,720
--------- ---------
Total current liabilities ......................................... 8,231 20,275
--------- ---------
Long-term debt ....................................................... 40,000 37,383
--------- ---------
Preferred Stock, no par value, authorized 5,000,000 shares; no shares
issued and outstanding ............................................ -- --
Common stock subject to contingent put rights ....................... 8,284 4,283
Common stock; no par value, authorized 25,000,000 shares; issued and
outstanding 7,078,920 and 9,338,272, at December 31, 1998 and 1999,
respectively ...................................................... 28,960 58,743
Contributed capital ................................................. 2,323 3,455
Accumulated deficit ................................................. (23,459) (30,166)
--------- ---------
Total common stockholders' equity ................................. 7,824 32,032
--------- ---------
$ 64,339 $ 93,973
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MEDIABAY, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
1998 1999
------------ ------------
<S> <C> <C>
Sales ................................................................. $ 22,242 $ 62,805
Returns, discounts and allowances ..................................... 7,348 16,578
-------- --------
Net sales .......................................................... 14,894 46,227
Cost of sales ......................................................... 9,452 23,687
-------- --------
Gross profit ....................................................... 5,442 22,540
Expenses:
Internet, direct mail and other advertising and promotion expenses for
acquisition and retention of members ............................... 8,910 8,118
General and administrative ........................................... 3,330 9,799
Depreciation and amortization ........................................ 367 6,812
-------- --------
Operating loss ..................................................... (7,165) (2,189)
Interest expense ...................................................... (94) (4,645)
Interest income ....................................................... 274 127
-------- --------
Net loss ........................................................... $ (6,985) $ (6,707)
======== ========
Net loss per share of common stock (basic and diluted) ................ $ (1.13) $ (.82)
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MEDIABAY, INC.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998 and 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
Common Common
stock subject stock Common
to contingent number of stock; no par Contributed Accumulated
puts shares value capital deficit
--------------- ----------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 ............ $ -- 6,154 $ 25,741 $ 486 $ (16,474)
Options sold to director ............. -- -- -- 75 --
Warrants for URL and phone
numbers ............................ -- -- -- 104 --
Warrants granted in acquisitions ..... -- -- -- 1,002 --
Warrants granted for financing and
consulting in connection with
the acquisitions ................... -- -- -- 656 --
Common stock issued in the
acquisitions ....................... 8,284 925 3,219 -- --
Net loss ............................. -- -- -- -- (6,985)
-------- ----- -------- ------- ---------
Balance at December 31, 1998 .......... 8,284 7,079 28,960 2,323 (23,459)
Sale of common stock ................. -- 2,040 24,921 -- --
Fees and costs related to
equity offerings ................... -- -- (1,434) -- --
Termination of contingent put
rights ............................. (4,001) -- 4,001 -- --
Proceeds from exercise of stock
options ............................ -- 21 95 -- --
Warrants granted for financing and
consulting services ................ -- -- -- 1,132 --
Conversion of convertible
subordinated notes ................. -- 198 2,200 -- --
Net loss ............................. -- -- -- -- (6,707)
-------- ----- -------- ------- ---------
Balance at December 31, 1999 .......... $ 4,283 9,338 $ 58,743 $ 3,455 $ (30,166)
======== ===== ======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
MEDIABAY, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................. $ (6,985) $ (6,707)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 367 6,812
Amortization of deferred member acquisition costs ....................... -- 1,603
Amortization of deferred financing costs ................................ 407
Changes in asset and liability accounts, net of acquisitions:
Increase in accounts receivable, net ................................... (895) (3,969)
Increase in inventory .................................................. (1,266) (2,055)
Increase in prepaid expenses and other current assets .................. (1,122) (383)
Increase in royalty advances ........................................... (72) (1,534)
Increase in deferred member acquisition costs .......................... -- (10,899)
Increase in accounts payable and accrued expenses ...................... 605 10,149
--------- ---------
Net cash used in operating activities ................................ (9,368) (6,576)
Cash flows from investing activities:
Purchase of short-term investments ........................................ (500) (100)
Purchase of fixed assets .................................................. (945) (713)
Sale of short-term investments ............................................ 5,144 500
Cash paid in acquisitions ................................................. (37,375) (19,985)
--------- ---------
Net cash used in investing activities ................................ (33,676) (20,298)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable - related parties ................. 15,000 5,350
Proceeds from borrowings with banks ....................................... 27,000 11,080
Repayment of long-term debt ............................................... -- (15,127)
Increase in deferred financing costs ...................................... -- (838)
Proceeds from issuance of options ......................................... 75 --
Proceeds from exercise of stock options ................................... -- 95
Proceeds from sale of common stock, net of costs .......................... -- 23,826
--------- ---------
Net cash provided by financing activities ............................ 42,075 24,386
--------- ---------
Net decrease in cash and cash equivalents .................................. (969) (2,488)
Cash and cash equivalents at beginning of period ........................... 3,655 2,686
--------- ---------
Cash and cash equivalents at end of period ................................. $ 2,686 $ 198
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(1) Organization
MediaBay, Inc. (formerly Audio Book Club, Inc.) (the "Company"), a Florida
corporation, was formed on August 16, 1993. MediaBay, Inc. is a leading
marketer of premium spoken word content, including audiobooks and old time
radio, and classic video programs. The Company markets audiobooks primarily
through its Audio Book Club. Its old time radio and classic video programs are
marketed through direct-mail catalogues and, on a wholesale basis, to major
retailers. All of the Company's products are also available for purchase over
the Internet through its content-rich media portal at MediaBay.com and its
channels and audiobookclub.com.
(2) Significant Accounting Policies
Principals of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts have
been eliminated.
Cash and Cash Equivalents
Securities with maturities of three months or less when purchased are
considered to be cash equivalents.
Fair Value of Financial Instruments
The carrying amount of cash, short-term investments, accounts receivable,
accounts payable and accrued expenses approximates fair value due to the short
maturity of those instruments.
The fair value of long-term debt is estimated based on the interest rates
currently available for borrowings with similar terms and maturities. The
Company's long-term debt is at a variable rate; therefore, the carrying value
approximates market prices.
Inventory
Inventory, consisting primarily of audiocassettes held for resale, is
valued at the lower of cost (weighted average cost method) or market.
Prepaid Expenses
Prepaid expenses consist principally of deposits and other amounts being
expensed over the period of benefit. All current prepaid expenses will be
expensed over a period no greater than the next twelve months.
Fixed Assets, Computer Software and Internet Web Site Development Costs
Fixed assets, consisting primarily of furniture, leasehold improvements,
computer equipment, and web site development costs are recorded at cost.
Depreciation and amortization, which includes the amortization of computer
equipment under a capital lease, is provided by the straight-line method over
the estimated useful life of three years (the lease term) for computer
equipment under a capital lease, five years for equipment, seven years for
furniture and fixtures, five years for leasehold improvements, and two years
for Internet web site development costs. Ongoing maintenance and other
recurring charges are expensed as incurred as are all internal costs and
charges.
Intangible Assets
Intangible assets, consisting of customer lists and certain agreements
acquired in the acquisitions, are being amortized over their estimated useful
life.
F-9
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(2) Significant Accounting Policies -- (Continued)
Goodwill
Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for using the purchase
method of accounting. Goodwill is amortized over the estimated period of
benefit not to exceed 20 years. Goodwill is reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable using the expected undiscounted future cash flow model.
Revenue Recognition
The Company recognizes revenue upon shipment of merchandise. Allowances
for doubtful accounts and future returns are based upon historical experience
and evaluation of current trends.
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.
Advertising and Promotional 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. Prior to 1999, the Company had expensed these
costs as incurred. Beginning in 1999, the Company is required to capitalize
such direct response advertising costs and amortize these costs over the period
of future benefit, which has been determined to be 30 months, in accordance
with SOP 93-7, because the Company, after five years of operations, now has a
sufficient historical pattern of results. The costs are being amortized on a
straight-line basis. If the Company had expensed the cost of direct response
advertising as incurred, which resulted in new members in the Company's Audio
Book Club who will generate revenue in the future, the Company would have
reported a net loss of $16,003 and a net loss per share (basic and diluted) of
common stock of $1.95 for the year ended December 31, 1999.
Royalties
The Company is liable for royalties to licensors based upon revenue earned
from the respective licensed product. Royalties, in excess of advances, are
payable based on contractual terms. Royalty advances not expected to be
recovered through royalties on sales are charged to royalty expense. For the
years ended December 31, 1998 and 1999, no writedowns of royalty advances were
required.
F-10
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(2) Significant Accounting Policies -- (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from
those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(3) Acquisitions
Radio and Video Program Acquisitions
In December 1998, through its wholly-owned subsidiary, Classic Radio
Holding Corp. ("Classic"), the Company acquired Radio Spirits, Inc. ("Radio
Spirits") for an aggregate base purchase price of $340, 425,000 shares of the
Company's common stock valued on the date of acquisition at $12.875 per share,
options to purchase an additional 175,000 shares of the Company's common stock
at an exercise price of $12.875 per share and payment of $1,841 of liabilities
at closing. The options have been valued at $3.04 per share using the
Black-Scholes valuation model. A total of 75,000 options are in escrow and are
subject to release if certain specified "EBITDA" (as defined in the purchase
agreement) levels for the acquired company are met for the year ending December
31, 2000. The acquisition was accounted for under the purchase method.
In connection with its acquisition of Radio Spirits, through its
indirectly wholly-owned subsidiary, Classic Radio Acquisition Corp. ("CRAC"),
the Company also acquired certain assets of Buffalo Productions, Inc.
("Buffalo"), an affiliate of Carl Amari (who was the sole stockholder and
Chairman of Radio Spirits prior to the acquisition), for $369, and Mr. Amari's
50% interest in a joint venture engaged in producing, broadcasting, marketing
and distributing a series of old-time radio programs for $2,326. The Company
also incurred costs and fees of $505 related to the acquisition. The assets
acquired from Buffalo were those relating to its business of duplicating
pre-recorded compact discs. The total purchase price of the acquisitions was
$11,384. The Company has accounted for the acquisitions using the purchase
method of accounting and has allocated a portion of the total purchase price to
certain identifiable intangible assets, based on their relative fair values
which will be amortized over their useful lives. The Company has recorded
$8,470 of goodwill which will be amortized over a period not to exceed 20
years.
In December 1998, through CRAC, the Company acquired all of the assets
used by Metacom, Inc. ("Metacom") in connection with its "Adventures in
Cassettes" business for $1,061, 50,000 shares of the Company's common stock
valued on the date of acquisition at $12.875 per share and warrants to purchase
up to 50,000 shares of the Company's common stock at an exercise price of
$8.125 per share. The warrants have been valued at $4.18 per share using the
Black-Scholes valuation model. The Company also paid costs and fees of $29 in
the acquisition. The total purchase price of $1,942 has been accounted for
under the purchase method of accounting. The Company has recorded $1,621 of
goodwill which will be amortized over a period not to exceed 20 years.
In December 1998, through CRAC, the Company acquired all the assets used
by Premier Electronic Laboratories, Inc. ("Premier") in connection with its
business of licensing, producing, marketing and selling classic videos and
radio for $240, 125,000 shares of the Company's common stock valued at the date
of closing at $12.875. The Company also incurred costs and fees of $46 relating
to the acquisition, for a total purchase price of $1,896. The Company has
recorded $1,710 of goodwill which will be amortized over a period not to exceed
20 years.
F-11
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(3) Acquisitions -- (Continued)
Acquisition of Columbia House's Audiobook Club Division
On December 31, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets used in the audiobook club division (the "CH
Audiobook Club") of The Columbia House Company ("Columbia House").
As part of the acquisition, the Company acquired Columbia House's
audiobook club's membership file of approximately 600,000 members, as well as
substantially all of Columbia House's other assets relating exclusively to the
CH Audiobook Club, including inventory and certain accounts receivable. The
Company also entered into a mailing agreement which allows the Company to (i)
use Columbia House's compact disc, VHS, laser and DVD video clubs' membership
lists for Audio Book Club new member acquisition campaigns, (ii) insert new
member acquisition material into Columbia House's member mailing programs sent
to various other clubs maintained by Columbia House, and (iii) be referred to
as the Columbia House recommended source for audiobooks in a club format, for a
period of seven years. In addition, Columbia House entered into a non-compete
agreement pursuant to which it agreed not to engage in certain activities that
compete with our operation of Audio Book Club for a period of five years.
Moreover, the Company entered into a transitional services agreement with
Columbia House.
As consideration for the acquisition and the related transactions,
including the mailing agreement, the non-compete agreement and the transitional
services agreement, Columbia House received from the Company cash consideration
of $30,750 plus expenses of $24. In addition, the Company issued to Columbia
House's designees (Sony Music Entertainment Inc. and WCI Record Club Inc.) an
aggregate of 325,000 shares of its common stock (the "Shares") valued on the
date of acquisition at $11.625 and warrants to purchase an additional 100,000
shares of its common stock at a price of $11.125 per share. The warrants have
been valued at $2.61 using the Black-Scholes valuation model.
The Company also incurred cash costs and fees of $675 and non-cash costs
and fees of $51 related to the acquisition. The total purchase price of $35,541
has been accounted for using the purchase method of accounting. The Company has
specifically identified $10,600 of intangible assets (customer lists, covenants
not to compete and certain agreements acquired in the acquisitions) which will
be amortized over their useful lives (ranging between three and seven years)
and $24,009 of goodwill which will be amortized over a period not to exceed 20
years.
In connection with the acquisitions described above, the Company granted
the sellers the right, under specified conditions, to sell back to the Company
up to an aggregate of 675,000 shares issued to the sellers in connection with
the acquisitions. At December 31, 1999, rights have terminated as to 320,000
shares. The sellers have the right under certain conditions to sell the
remaining 355,000 shares of stock to the Company at prices ranging from $14.00
to $15.00 per share at various times commencing in December 2003 and expiring
in December 2008, unless the rights are terminated earlier as a result of the
Company's stock meeting common stock price and/or performance targets prior to
exercise. If all of the rights were exercised prior to termination, the maximum
amount the Company would be required to pay for the repurchase of all of the
shares is approximately $5,300, payable as follows: (1) $175 commencing
December 2000, (2) $300 commencing December 2001, (3) $350 commencing December
2003; (4) $3,500 commencing December 2004; and (5) $750 commencing December
2005. Subsequent to December 31, 1999, rights to sell back to the Company
50,000 shares with a required payment, if exercised, of $475, have terminated
(see Note 16).
Acquisition of Doubleday's Direct Audiobooks Direct
On June 15, 1999, a wholly-owned subsidiary of the Company acquired from
Doubleday Direct, Inc. ("Doubleday") its business of direct marketing and
distribution of audiobooks and related products through Doubleday's Audiobooks
Direct Club ("Audiobooks Direct"). At the time of the acquisition, Audiobooks
Direct was one of the industry's leading direct marketers of audiobooks using a
membership club format.
F-12
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(3) Acquisitions -- (Continued)
As part of the acquisition, the Company acquired Audiobooks Direct's total
membership file of over 500,000 members as well as some other assets relating
exclusively to the Audiobooks Direct Club. The Company also entered into a
reciprocal marketing arrangement with Doubleday pursuant to which it received
the exclusive rights, with respect to audiobooks, for three years, subject to a
one-year extension, at no additional cost and an additional three years, at
market rates, to insert its new member acquisition materials into the member
mailings of Doubleday's consumer book clubs and Doubleday Select's professional
book clubs, as well as rights to distribute its member solicitation packages
via direct mail campaigns to the Doubleday and Doubleday Select book club
membership lists. Subject to exceptions, we will also be Doubleday's exclusive
source for audiobooks.
In addition, the Company entered into a non-compete agreement whereby
Doubleday agreed not to engage in designated activities which compete with the
operation of the Company's Audio Book Club for five years. Moreover, the
Company entered into a transitional services agreement with Doubleday.
At the time of the acquisition, together with Doubleday, the Company
announced the launch of a co-branded website to be coupled with an online
cross-marketing and advertising campaign. The website at bestbookclubs.com was
launched on September 15, 1999.
As consideration for the acquisition and the related transactions,
including the mailing, non-compete, and transitional services agreements,
Doubleday received from the Company cash consideration of $18,615.
The Company also incurred costs and fees of $646. The Company has
accounted for the acquisition using the purchase method of accounting. The
total purchase price of $19,261 has been accounted for under the purchase
method of accounting. The Company has identified $4,372 of intangible assets
(representing customer lists, a covenant not to compete and certain agreements
acquired in the acquisition) and $13,576 of goodwill. Identifiable intangible
assets will be amortized over their estimated useful lives (ranging from 3 to 5
years) and goodwill will be amortized over a period not to exceed 20 years.
The following unaudited combined pro forma results of operations for the
years ended December 31, 1998 and 1999 assume the that the following
transactions occurred as of January 1, 1998:
(1) The acquisitions of Radio Spirits, Inc., certain assets of an
affiliated company, Buffalo Productions, Inc. and a 50% interest in a
joint venture owned by the sole shareholder of Radio Spirits on December
14, 1998.
(2) The acquisition of substantially all of the assets used by Metacom,
Inc. in connection with its Adventures in Cassettes business on December
14, 1998.
(3) The acquisition of substantially all of the assets used by Premier
Electronic Laboratories, Inc. in connection with its business of
producing, marketing, and selling old time radio and classic video
programs on December 14, 1998.
(4) The acquisition of substantially all of the assets used by The Columbia
House Company in its Audio Book Club on December 31, 1998.
(5) The acquisition of substantially all of the assets used by Doubleday
Direct, Inc. in its Doubleday's Audiobooks Direct Club on June 15, 1999.
F-13
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(3) Acquisitions -- (Continued)
<TABLE>
<CAPTION>
Years ended December 31,
1998 1999
-------------- -------------
<S> <C> <C>
Net sales .................................. $ 57,281 $ 54,273
========== =========
Net loss ................................... $ (20,645) $ (9,345)
========== =========
Loss per share (basic and diluted) ......... $ (2.92) $ (1.14)
========== =========
</TABLE>
The following table represents the allocation of the purchase price of
acquisitions:
<TABLE>
<CAPTION>
Audiobooks Columbia Radio
Direct House Spirits Premier Metacom Total
------------ ---------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Cash ......................... $ $ -- $ 269 $ -- $ -- $ 269
Accounts receivable .......... -- -- 2,245 -- -- 2,245
Inventory .................... -- 629 1,180 156 400 2,365
Other current assets ......... 1,313 622 -- -- 71 2,006
Fixed assets ................. -- -- 659 30 -- 689
Goodwill ..................... 13,576 24,009 8,470 1,710 1,621 49,386
Other intangibles ............ 4,372 10,600 700 -- -- 15,672
Liabilities assumed .......... -- (319) (2,139) -- (150) (2,608)
------- -------- -------- ------ ------ --------
$19,261 $35,541 $ 11,384 $1,896 $1,942 $ 70,024
======= ======== ======== ====== ====== ========
</TABLE>
(4) Short-Term Investments to be Held to Maturity
At December 31, 1999, short-term investment to be held to maturity
consisted of a bank certificate of deposit in the amount of $100 bearing
interest at 4.9% maturing on May 16, 2000. At December 31, 1998, short-term
investments to be held to maturity consisted of a $500 bank certificate of
deposit plus accrued interest, bearing interest at 5.40%, maturing on April 1,
1999.
(5) Fixed Assets
Fixed Assets consist of the following:
1998 1999
----------- -----------
Capitalized computer lease .......... $ -- $ 136
Equipment ........................... 408 660
Furniture and fixtures .............. 90 96
Leasehold improvements .............. 419 419
Web site development costs .......... 781 1,100
------- -------
Total ............................... 1,698 2,411
Accumulated depreciation ............ (370) (892)
------- -------
$ 1,328 $ 1,519
======= =======
Depreciation expense for the years ended December 31, 1998 and 1999 was
$367 and $522, respectively.
F-14
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(6) Long-Term Debt
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Credit agreement, senior secured bank debt .......... $ 27,000 $ 28,303
Subordinated debt ................................... -- 4,800
Related party note .................................. 15,000 8,000
-------- --------
42,000 41,103
Less: current maturities ............................ (2,000) (3,720)
-------- --------
$ 40,000 $ 37,383
======== ========
</TABLE>
Bank Debt
In December 1998, the Company obtained Senior Secured Bank Debt from (i)
Fleet National Bank ("Fleet") and (ii) ING (U.S.) Capital Corporation pursuant
to a Credit Agreement dated December 31, 1998. The Company granted to the
lenders a security interest in substantially all of the Company's assets and
the assets of its subsidiaries and pledged the capital stock of its
subsidiaries to the lenders as collateral under the Credit Agreement. The
Company also agreed to a number of financial and business covenants including a
restriction on the payment of dividends. In June 1999, in connection with the
acquisition of Audiobooks Direct, the Company, Fleet National Bank and ING
(U.S.) Capital Corporation amended the terms of the Company's existing credit
agreement to provide for an additional $6,000 of term loans. The interest rate
under the credit agreement is currently 3.75% above LIBOR and interest is
payable at the expiration of the respective LIBOR contracts.
In connection with the financings, the Company has issued to the lenders
three-year warrants to purchase up to an aggregate of 317,388 shares of our
common stock. Warrants for 197,448 shares have an expiration date of December
31, 2003, an exercise price of $9.967 per share and have been valued at $2.95
using the Black-Scholes valuation model. Warrants for 119,940 shares have an
expiration date of June 15, 2004, an exercise price of $14.20, and have been
valued at $2.63 using the Black-Scholes valuation model. All warrants are
subject to certain adjustments and the total value of the warrants has been
included in deferred financing costs.
As a result of recent acquisition activity and sales of common stock, the
Company, Fleet and ING (U.S.) Capital Corporation amended the terms of the
Company's existing credit agreement whereby certain covenants under the
agreement were adjusted. In connection therewith, the Company paid legal
expenses and fees of $317.
At December 31, 1999, an aggregate of $28,303 principal amount of
indebtedness was outstanding under the credit agreement, $21,223 as a term loan
and $7,080 under a revolving line of credit. The principal amount outstanding
under the term advance is payable in quarterly installments as follows: four
quarterly payments of $930 in the year 2000, four quarterly payments of $1,550
in the year 2001, four quarterly payments of $2,170 in the year 2002 and the
balance due on March 31, 2003.
Subordinated Debt
In December 1998, the Company obtained a portion of the financing for its
acquisitions of Columbia House's Audiobook Club and our old time radio and
classic video products from Norton Herrick, Chairman of the Company, by issuing
him a $15,000 principal amount 9% convertible subordinated promissory note due
December 31, 2004. Interest on this note is payable monthly. In January 1999,
$1,000 of the note was repaid. The note was initially convertible, in whole or
in part, at the holder's option, into shares of our common stock at $11.125 per
share. As additional consideration for the bridge loan, Mr. Herrick was issued
five-year warrants to purchase 500,000 shares of our common stock at an
exercise price of $12.00 per share, subject to
F-15
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(6) Long-Term Debt -- (Continued)
adjustment. Pursuant to the terms of a letter agreement dated December 31, 1998
between the Company and Mr. Herrick, because the bridge loan was not
refinanced, repaid or replaced by September 30, 1999, (1) the interest rate of
the note increased to 11%, (2) the conversion price of the note is adjustable
to the lesser of $11.125 per share and the average closing bid price of our
common stock for the five trading days prior to conversion, and (3) the
exercise price of the warrants was adjusted to $8.41. Also pursuant to the
letter agreement, the Company agreed that if the note was refinanced by anyone
other than Mr. Herrick, a family member or an affiliate, the Company would
issue Mr. Herrick warrants to purchase an additional 350,000 shares of common
stock, which warrants would be identical to the warrants issued to him in
connection with the subordinated note. No compensation was recognized in
relation to these warrants. The additional 2% interest on the note is being
accrued and will be due on the maturity of the note. The note is subordinated
to the Company's obligations under its credit facility with Fleet and ING and
is secured by a second lien security interest on assets of the Company's old
time radio and classic video operations. The independent members of the
Company's Board of Directors approved the terms of Mr. Herrick's loan. The
Company also received a fairness opinion in connection with this loan.
The Company also obtained a portion of the financing for the acquisition
of Audio Books Direct by borrowing $4,350 from Mr. Herrick under a bridge
convertible senior subordinated promissory note. In a separate letter
agreement, the Company agreed, that if the Company repaid or refinanced this
note with debt or equity financing provided by anyone other than Mr. Herrick or
a family member or affiliate of Mr. Herrick, the Company would issue to Mr.
Herrick warrants to purchase an additional 125,000 shares of common stock at
$8.41 per share, which warrants would be identical to the warrants issued to
him in connection with the initial note issued to Mr. Herrick in December 1998.
In July 1999, this promissory note was repaid and the warrants were issued upon
receipt of stockholder approval in September 1999.
In August 1999, Norton Herrick sold $5,000 of the remaining $14,000 9%
convertible senior subordinated promissory note to ABC Investment, L.L.C., an
unaffiliated third party. The $5,000 promissory note has substantially the same
terms and conditions as the original promissory note bearing interest at 9% per
annum and convertible at $11.125 per share. In August 1999, ABC Investment
converted $200 of the note into 17,977 shares of the Company's common stock.
In December 1999, Mr. Herrick sold an additional $2,000 principal amount
of the note issued to him in December 1998 to an unaffiliated third party,
which was converted into 179,775 shares of the Company's common stock.
Under the December 1998 letter agreement, the Company issued to Mr.
Herrick warrants to purchase 140,000 and 46,667 shares of its common stock in
September 1999 and December 1999, respectively, at an exercise price of $8.41
per share.
In December 1999, Evan Herrick loaned the Company $1,000 for which he
received a $1,000 principal amount 9% convertible promissory note due December
31, 2004. The note is convertible into shares of the Company's common stock at
$11.125 per share. Evan Herrick is the son of the Company's Chairman and the
brother of its CEO and its Executive Vice President.
F-16
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(6) Long-Term Debt -- (Continued)
The loan maturities for the next five years are as follows:
Year Ending December 31,
- --------------------------------------
2000 ............................... $ 3,720
2001 ............................... 6,220
2002 ............................... 8,680
2003 ............................... 9,683
2004 ............................... 12,800
-------
Total maturities ................... $41,103
=======
(7) Commitments and Contingencies
Rent expense for the years ended December 31, 1998 and 1999 amounted to
$58 and $234, respectively.
Leases - Related Parties
The Company sublets office space from an entity, H.H. Realty Investors,
Inc., which is wholly-owned by officers and directors of the Company.
The Company subleases 828 square feet of space in Morristown, New Jersey,
from H.H. Realty Investors, Inc., pursuant to a sublease agreement that expires
in December 2003, at a monthly rate of $1, the amount paid by the related party
to the landlord under the master lease. The Company also subleases 2,793 square
feet of space in Morristown, New Jersey, from H.H. Realty Investors, Inc.
pursuant to a sublease agreement on a month to month basis at a monthly rate of
$3, the amount paid by the related party to the landlord under the master
lease.
The Company also leases 8,000 square feet of space in Schaumburg, Illinois
pursuant to a lease agreement from a trust owned by the President of the
Company's radio group. The lease expires in December 2005, and is subject to a
three-year renewal option. Monthly rent under this lease is $5.
Other Real Estate Leases
The Company leases 1,155 square feet of office space in Boca Raton,
Florida, pursuant to a lease agreement which expires in November 2000 at a
monthly rent of $1. The Company has the option to renew the lease for two
consecutive three-year periods.
The Company also leases approximately 3,655 square feet of space in
Morristown, New Jersey, on a month to month basis at a current rent of $6 per
month.
The Company leases a kiosk at a major shopping mall on a month to month
basis with monthly rental amounts of $5.
The Company entered into two ten-year leases on 7,000 square feet of space
in Bethel, Connecticut and 3,000 square feet in Sandy Hook, Connecticut. Lease
payments and mandatory capital improvement payments, starting in 2004, of $4
per year and $2 per year on the Bethel and Sandy Hook properties, respectively.
Capital Equipment Lease
The Company leases certain computer equipment under an agreement which is
classified as a capital lease. The lease term is three years and expires in
June 2002. Annual rent payments are $55 and the lease provides for a bargain
purchase option at the end of the lease term. Rents under this agreement in
1999 were
F-17
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(7) Commitments and Contingencies -- (Continued)
$28. The amount of equipment capitalized under the lease and included in fixed
assets on the consolidated balance sheet was $136 and the obligation of $136
under the lease was recorded in accounts payable and accrued expenses. At
December 31, 1999, accumulated amortization on the capitalized computer
equipment was $25.
Minimum annual lease commitments including capital improvement payments
under non-cancelable operating leases are as follows:
Year ending December 31,
- ---------------------------------------------
2000 ...................................... $142
2001 ...................................... 128
2002 ...................................... 100
2003 ...................................... 72
2004 ...................................... 61
Thereafter ................................ 56
----
Total lease commitments ................... $559
====
Employment Agreements
The Company has commitments pursuant to employment agreements with certain
of its officers. The Company's aggregate commitments under such employment
agreements are approximately $1,138 and $559 during 2000 and 2001,
respectively.
Litigation
The Company has been named as a co-defendant together with an established
collection agency used by the Company in a lawsuit filed in March 1999 in the
United States District Court for the Northern District of Illinois, Eastern
Division. The lawsuit alleges violations by the collection agency and the
Company of the Fair Debt Collection Practices Act. The lawsuit has been brought
as a class action on behalf of individuals who were sent certain collection
letters within the State of Illinois during the one year period preceding the
filing of the lawsuit. This lawsuit has subsequently been dismissed.
(8) Stock Option Plan
In June 1997, the Company adopted the 1997 Stock Option Plan, pursuant to
which the Company's Board of Directors may grant stock options to key employees
of the Company. In June 1998, the Company amended the 1997 Stock Option Plan to
authorize the grant of up to 2,000,000 shares of authorized but unissued common
stock.
In March 1999, the Company's stockholders approved an amendment to the
Company's Articles of Incorporation adopting the Company's 1999 Stock Incentive
Plan. The 1999 Stock Incentive Plan provides for grants of awards of stock
options, restricted stock, deferred stock or other stock based awards. A total
of 2,500,000 shares of common stock have been reserved for issuance pursuant to
the plan.
F-18
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(8) Stock Option Plan -- (Continued)
Stock option activity under both plans is as follows:
Weighted
average
Shares exercise price
------------ ---------------
Outstanding at January 1, 1998 ........... 50,000 $ 3.50
Granted ................................. 1,808,500 5.42
Exercised ............................... --- ---
Canceled ................................ --- ---
--------- ------
Outstanding at December 31, 1998 ......... 1,858,500 5.37
Granted ................................. 1,195,950 11.29
Exercised ............................... --- ---
Canceled ................................ (40,500) 11.76
--------- ------
Outstanding at December 31, 1999 ......... 3,013,950 $ 7.63
========= ======
The per share weighted-average fair value of stock options granted during the
year ended December 31, 1998 and 1999 is as follows using the Black-Scholes
option-pricing model with the following assumptions and no dividend yield. The
shares were granted as follows:
<TABLE>
<CAPTION>
No. of Assumed Risk-free Fair Value
Date Shares Exercise Price Volatility interest rate per Share
- --------------------------- ------------ ------------------ ------------ --------------- -----------
<S> <C> <C> <C> <C> <C>
1998 Grants:
June 1998 .............. 551,500 $ 3.50 25% 5.49% $ .86
September 1998 ......... 750,000 $ 5.25 25% 4.58% $ 1.21
November 1998 .......... 450,000 $ 7.875 25% 4.50% $ 1.82
Various ................ 57,000 $6.00 - $10.81
-------
Total ..................... 1,808,500
=========
1999 Grants:
First Quarter ............. 83,600 $ 11.04 25% 5.07% $ 3.59
Second Quarter ............ 875,500 $ 11.05 25% 4.99% $ 5.15
Third Quarter ............. 152,750 $ 12.01 25% 5.71% $ 4.07
Fourth Quarter ............ 84,100 $ 12.64 25% 6.13% $ 4.40
---------
Total .................... 1,195,950
=========
</TABLE>
The following table summarizes information for options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Exercisable
Options Outstanding -------------------------------
Range of Weighted Average Weighted Average Weighted Average
Prices Number Remaining Life Exercise Price Number Exercise Price
- --------------- ----------- --------------------- ------------------ ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ 3.50-5.25 1,374,000 8 yrs $ 4.48 1,280,500 $ 4.53
6.00-8.69 516,250 8 yrs 7.85 471,250 7.84
9.88-13.50 1,123,700 8 yrs 11.38 813,000 11.09
------------ --------- --------------------- ------ --------- ------
$3.50-13.50 3,013,950 8 yrs $ 7.63 2,564,750 $ 7.33
============ ========= ===================== ====== ========= ======
</TABLE>
F-19
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(8) Stock Option Plan -- (Continued)
At December 31, 1999, there were 13,900 additional shares available for
grant under the 1997 Plan and 1,472,150 additional shares available for grant
under the 1999 Plan.
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." Under APB 25, the Company recognizes no compensation
expense related to employee stock options, as no options are granted at a price
below market price on the day of grant. In October 1995, Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" 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 hypothetical fair value method application. Had compensation
expense for the Company's stock options been recognized based on the fair value
on the grant date under SFAS 123, the Company's net loss and net loss per share
for the years ended December 31, 1998 and 1999 would have been $9,290 and
$1.50, and $12,508 and $1.52, respectively.
(9) Warrants and Non-Plan Options
In addition to the 431,607 warrants granted in connection with the various
1999 financings described in note (6) above, during the year ended December 31,
1999, the Company granted non-plan options and warrants to purchase a total of
228,000 shares of the Company's common stock to officers and consultants. The
options and warrants vest at various times and have exercise periods of five
years. Exercise prices range from $9.75 to $11.00 per share, except for 8,000
shares which have an exercise price of $.10. Of the 228,000 options and
warrants granted, 158,000 options were issued to employees at market price on
the date of grant. No compensation cost has been recognized in connection
therewith. The remaining 70,000 warrants were issued to advisors and to a law
firm, and the fair values have been included in contributed capital and the
cost of acquisitions, respectively.
In October 1999, non-plan options for 21,600 shares of our common stock,
which had been granted in 1998, were exercised and the Company received $95 as
payment of the exercise price.
(10) Equity
In March 1999, the Company's stockholders approved an amendment to the
Company's Articles of Incorporation to increase the Company's authorized common
stock to 75,000,000 shares.
From April through August 1999, the Company sold 2,040,000 shares of
common stock to qualified institutional investors for gross proceeds of $24.9
million. Fees paid to an unaffiliated third party were $295.
(11) Income Taxes
Income tax benefit for the years ended December 31, 1998 and 1999 differed
from the amount computed by applying the U.S. Federal income tax rate of 34%
and the state income tax rate of 5.39% in 1998 and 7% in 1999 to the pre-tax
loss as a result of the following:
<TABLE>
<CAPTION>
1998 1999
------------- ------------
<S> <C> <C>
Computed tax benefit ................................................. $ (2,751) $ (2,991)
Valuation allowance for Federal and State deferred tax assets ........ 2,751 2,991
--------- --------
Income tax expense ................................................... $ -- $ --
========= ========
</TABLE>
F-20
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(11) Income Taxes -- (Continued)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
Deferred tax assets:
<TABLE>
<CAPTION>
1998 1999
------------- -----------
<S> <C> <C>
Federal and state net operating loss carry-forwards .......... $ 3,099 $ 7,340
Accounts receivable, principally due to allowance for doubtful
accounts and reserve for returns ........................... 547 1,769
Fixed assets ................................................. (9) (2,481)
------- --------
Total gross deferred tax assets .............................. 3,637 6,628
Less valuation allowance ..................................... (3,637) (6,628)
------- --------
Net deferred tax assets ...................................... $ -- $ --
======= ========
</TABLE>
The Company has provided a valuation allowance of $3,637 and $6,628 for
deferred tax assets as of December 31, 1998 and 1999, respectively. In
assessing the realizability of deferred tax assets, management has determined
that the Company does not have a history of earnings on which to base its
determination. The ultimate realization of deferred tax assets is dependent on
the generation of future taxable income during the periods in which those
temporary timing differences become deductible. The Company's limited operating
history does not allow management to make a judgment regarding future taxable
income over those periods.
The Company has approximately $7,340 of net operating loss carry-forwards
which may be used to offset possible future earnings, if any, in computing
future income tax liabilities. The net operating losses will expire between
December 31, 2018 and December 31, 2019 for federal income tax purposes. For
state purposes, the net operating losses will expire at varying times, as the
Company is subject to corporate income tax in several states.
(12) Net Loss Per Share of Common Stock
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the applicable reporting
periods. The computation of diluted net loss per share is similar to the
computation of basic net loss per share except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued.
However, the Company's computation of dilutive net loss per share does not
assume any conversion or exercise of securities as their effect is antidilutive
for all periods presented.
The weighted average number of shares outstanding used in the net loss per
share computations for the years ended December 31, 1998 and 1999 were
6,187,687 and 8,204,543, respectively.
Common equivalent shares that could potentially dilute basic earnings per
share in the future and that were not included in the computation of diluted
loss per share because of antidilution were 4,670,927 for the year ended
December 31, 1998 and 6,274,398 for the year ended December 31, 1999. Included
in the December 31, 1999 common share equivalents are 1,040,560 shares assuming
the conversion of $12,800 in convertible senior subordinated promissory notes.
(13) Supplemental Cash Flow Information
No cash has been expended for income taxes for the years ended December
31, 1998 and 1999. Cash expended for interest was $0 and $3,937 for the years
ended December 31, 1998 and 1999, respectively.
F-21
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(13) Supplemental Cash Flow Information -- (Continued)
In connection with its acquisitions in 1998 and 1999, the Company provided
a total of 925,000 shares of its common stock and 380,000 options and warrants
to the former owners of the acquired companies, and attorneys and advisors to
the transactions. The total value of the stock of $11,503 and warrants of
$1,002 has been recorded as part of the acquisition prices to be amortized over
periods not to exceed 20 years. The Company also provided 35,000 warrants to
advisors to the transactions. The value of these warrants of $76 has been
included in the cost of the acquisitions and recorded as goodwill. The Company
also provided 317,388 warrants to the banks providing financing for the
acquisitions. The value of the warrants of $896 has been included in deferred
financing fees.
In May 1998, the Company, in addition to a cash payment of $20,000,
granted warrants to a third party to purchase 20,000 shares of the Company's
common stock at $4.81 per share to acquire the Universal Resource Locators
("URL"), audiobook.com and audiobook.net. The Company has included the fair
value of the warrants of $50 in the asset value of $70, the negotiated price,
and is amortizing the asset over six years.
In March 1998, the Company granted non-plan options to purchase 21,600
shares of the Company's common stock at $4.40 per share to a company in
compensation for the costs incurred in transferring to the Company the toll
free phone numbers, (800) AUDIOBOOK and (888) AUDIOBOOK. The Company has
recorded an asset in the amount of $54, the fair value, as evidenced by the
negotiated cost of transferring the phone numbers, and is amortizing the asset
over six years. In October 1999, the options were exercised and the Company
received $95 as payment of the exercise price.
In February 1999, 8,000 options were granted to an officer of the Company
below the current market price at the date of grant. These options have been
valued at $7.16 each using the Black-Scholes valuation model and have been
included in prepaid expenses and are being amortized over two years, the term
of the related employment agreement.
In April 1999, the Company formed a Technology Advisory Board ("Advisory
Board") to further enhance its Internet strategy. The Advisory Board consists
of five members. The Advisory Board will work with the Company to increase its
online business and its strategic alliances on the Internet. Included in the
total options and warrants granted during the year ended September 30, 1999
were warrants granted to the Internet Advisory Board members. These warrants
were valued at $113 using the Black-Scholes valuation model and have been
included in prepaid expenses and are being amortized over the period of
service.
The Company granted 96,000 warrants to advisors in connection with its
equity financings described in Note 10 above. The total value of these warrants
using the Black-Scholes method has been recorded at $380 and included in
contributed capital.
Included in the total options and warrants granted during the year ended
December 31, 1999 were warrants granted to a law firm as partial payment for
legal services provided in connection with the Company's various acquisitions.
The warrants have been valued at $50 using the Black-Scholes valuation model
and have been included in the cost of the acquisitions.
In August 1999, ABC Investment L.L.C., the holder of a $5,000 9%
convertible senior subordinated promissory note due December 31, 2004 converted
$200 of the note into 17,977 shares of the Company's common stock.
In December 1999, the unaffiliated third party, which had purchased a
portion of the Company's subordinated note, converted the note into 179,775
shares of the Company's common stock.
(14) Related Party Transactions
Companies wholly-owned by Norton Herrick provided certain accounting,
administrative and general office services to, and obtained insurance coverage
for, the Company. In connection with such services, the
F-22
<PAGE>
MEDIABAY, INC.
Notes to Consolidated Financial Statements
Years ended December 31, 1998 and 1999
(Dollars in thousands, except per share data)
(14) Related Party Transactions -- (Continued)
Company paid to such entities the aggregate of $73 and $90 during the years
ended December 31, 1998 and 1999, respectively. In addition, a company
wholly-owned by Norton Herrick provides us access to a corporate airplane. We
generally pay the fuel, fees and other costs related to our use of the airplane
directly to the service providers. For the use of this airplane, we paid rental
fees of less than $25 in each of 1998 and 1999 to Mr. Herrick's affiliate. The
Company anticipates obtaining similar services from time to time from companies
affiliated with Norton Herrick for which it will reimburse such companies' cost
to provide such services to the Company.
(15) Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 provides a comprehensive standard for the recognition and
measurement of derivatives and hedging activities in fiscal 2000 as the
Statement is currently written. However, the FASB has issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of
Effective Date of SFAS No. 133," which will defer adoption to fiscal 2001. The
statement will require all derivatives to be recorded on the balance sheet at
fair value and also prescribes special accounting for certain types of hedges.
The Company has not entered into any derivative or hedge transactions, and,
therefore, does not believe that SFAS No. 133 will have a material effect on
its financial condition or results of operations.
(16) Subsequent Events
Subordinated Debt
In January and February 2000, Norton Herrick sold an additional $4,224
principal amount of the note issued to him in December 1998 to two unaffiliated
third parties which was converted into 379,662 shares of the Company's common
stock. Under the December 1998 letter agreement, the Company issued to Norton
Herrick warrants to purchase an additional 98,554 shares of its common stock at
an exercise price of $8.41 per share. No compensation has been recognized in
relation to this transaction. The Company issued warrants to purchase 340,000
shares of its common stock at $12.50 per share to one of the unaffiliated third
parties as an inducement to convert the note resulting in a reduction in long
term debt.
In January and February 2000, Evan Herrick loaned the Company an
additional $2,000 for which he received a $2,000 principal amount 9%
convertible promissory note due December 31, 2004. The note is convertible into
shares of the Company's common stock at $11.125 per share, which was the market
value on the date the note was issued.
In February 2000, the unaffiliated third party holder of the $4.800 9%
promissory note converted an additional $600 of the note into 53,932 shares of
the Company's common stock.
Warrants and Options
Subsequent to December 31, 1999, in addition to the 438,554 warrants
granted above, the Company granted plan options and warrants to purchase a
total of 1,211,000 shares of the Company's common stock to officers and
consultants. The options and warrants vest at various times and have exercise
periods of five and ten years. Exercise prices range from $10.375 to $21.50 per
share. In addition, the Company canceled five-year plan options to purchase a
total of 2,700 shares of the Company's common stock.
Termination of Contingent Put Rights
In January 2000, rights to sell back to the Company 50,000 shares, valued
at $644, issued to one of the sellers in connection with the acquisitions,
terminated due to the Company's common stock exceeding the price agreed to in
the acquisition agreement for the period specified in the acquisition
agreement.
F-23
<PAGE>
Independent Auditors' Report
The Board of Directors
Doubleday Direct, Inc.:
We have audited the accompanying balance sheets of Audio Books Direct (the
"Club"), a wholly-owned operation of Doubleday Direct, Inc., as of June 30,
1998 and 1997, and the related statements of operations, divisional deficit,
and cash flows for the years then ended. These financial statements are the
responsibility of the Club's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
Audio Books Direct has been operated as an integral part of Doubleday Direct,
Inc., and has no separate legal existence. The basis of presentation of the
accompanying financial statements is described in note 2 to the financial
statements.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Audio Books Direct, a
wholly-owned operation of Doubleday Direct, Inc., as of June 30, 1998 and 1997,
and the results of its operations and its cash flows for the years then ended
on the basis described in the preceding paragraph and in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
March 12, 1999
F-24
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Balance Sheets
(Dollars in Thousands)
June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, net ............................ $ 1,887 1,404
Inventory, net ...................................... 1,878 2,276
--------- -----
Total current assets ............................. 3,765 3,680
Royalty advances, net .................................. 954 231
--------- -----
Total assets ..................................... 4,719 3,911
========= =====
Liabilities and Divisional Deficit
Current liabilities:
Accrued royalties payable ........................... 62 59
Accrued promotional expenses, net ................... 840 13
--------- -----
Total current liabilities ........................ 902 72
Due to DDI and affiliates .............................. 15,567 13,332
Commitments
Divisional deficit ..................................... (11,750) (9,493)
--------- ------
Total liabilities and divisional deficit ......... $ 4,719 3,911
========= ======
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Statements of Operations
(Dollars in Thousands)
Years ended June 30, 1998 and 1997
1998 1997
------------ -----------
Net revenues ................................. $ 15,001 9,693
Cost of revenues ............................. 5,440 4,023
-------- -----
Gross profit ........................... 9,561 5,670
-------- -----
Operating expenses:
Selling and new member promotion .......... 8,971 10,126
General and administrative ................ 2,847 1,878
-------- ------
11,818 12,004
-------- ------
Net loss ............................... $ (2,257) (6,334)
======== ======
See accompanying notes to financial statements.
F-26
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Statements of Divisional Deficit
(Dollars in Thousands)
Years ended June 30, 1998 and 1997
Balance at July 1, 1996 .......... $ (3,159)
Net loss ....................... (6,334)
---------
Balance at June 30, 1997 ......... (9,493)
Net loss ....................... (2,257)
---------
Balance at June 30, 1998 ......... $ (11,750)
=========
See accompanying notes to financial statements.
F-27
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Statements of Cash Flows
(Dollars in Thousands)
Years ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................ $ (2,257) (6,334)
Adjustments to reconcile net loss to net cash used in
operating activities:
Change in net accounts receivable .................... (483) (841)
Change in net inventory .............................. 398 (610)
Change in royalty advances ........................... (723) (191)
Change in accrued royalties payable .................. 3 42
Change in net accrued promotional expenses ........... 827 (372)
-------- ------
Net cash used in operating activities ............. (2,235) (8,306)
-------- ------
Cash flows from financing activities:
Net advances from DDI and affiliates .................... 2,235 8,306
-------- ------
Net cash provided by financing activities ......... 2,235 8,306
-------- ------
Net change in cash ......................................... -- --
Cash at beginning of year .................................. -- --
-------- ------
Cash at end of year ........................................ $ -- --
======== ======
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in Thousands)
(1) The Company and Nature of Operations
Audio Books Direct (the "Club") is a direct marketer of audio books
primarily through negative option direct mail campaigns to members located
predominately in the United States. Audio books are literary works that are
narrated on audiocassette. The Club represents the audio book operations of
Doubleday Direct, Inc., ("DDI", an indirect wholly-owned subsidiary of
Bertelsmann AG, a privately-owned German corporation). The Club has never been
operated as a separate legal entity, but rather an integral part of DDI.
In February 1999, DDI signed a letter of intent with Audio Book Club, Inc.
("ABC") to sell substantially all of the assets of the Club to ABC for
approximately $21,000, plus the assumption of all unpaid publisher royalty
commitments.
(2) Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles which are consistent with those
employed by DDI. Included in the accompanying statements of operations are net
revenues and costs of revenues that substantially relate directly to the Club.
Selling, general and administrative expenses include those accounts that relate
directly to the Club as well as allocations from DDI (see note 6). These
allocations are considered by management to be reasonable under the
circumstances. However, there can be no assurances that such allocations will
be indicative of future results.
The accompanying financial statements have been prepared on a
going-concern basis and do not reflect the pending sale of the Club to ABC or
any purchase accounting adjustments that may be made by ABC. These financial
statements are not necessarily indicative of results that would have occurred
if the Club had been a separate stand-alone entity during the periods presented
or of future results of the Club.
Supplemental Cash Flow Information
The Club does not maintain any cash balances. All cash transactions are
handled through DDI inter-company accounts and are therefore reflected as
adjustments to the amounts due to DDI. An analysis of the inter-company balance
with DDI as of and for the years ended June 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Balance as of the beginning of the year .......... $ 13,332 $ 5,027
Net cash collections by DDI ...................... (13,694) (10,109)
Charges and allocations from DDI ................. 15,929 18,414
--------- ---------
Balance as of the end of the year ................ $ 15,567 $ 13,332
========= =========
</TABLE>
The Club did not expend any amounts relative to income taxes or third party
interest expense during the years ended June 30, 1998 or 1997.
Revenue Recognition
Current member sales, including shipping and handling charges, are
recorded and club members are billed upon shipment of merchandise. Net sales
represent sales less actual returns and allowances (i.e., claims) for the
period and an estimated provision for future returns and allowances on sales
made during the period.
F-29
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in Thousands) -- (Continued)
(2) Significant Accounting Policies -- (Continued)
The provision for future returns is based upon historical experience and an
evaluation of current trends. A provision for estimated bad debts is also
recognized based upon historical experience and an evaluation of current trends
at the time of sale and is included in general and administrative expenses.
Cost of Sales
The Club charges inventory, shipping and postage and all royalty expenses
for current members to cost of sales.
Inventory
Inventory, consisting primarily of pre-recorded audio books held for
resale, is valued at the lower of cost (weighted average first-in-first-out
method) or market.
Promotional Expenses
The Club expenses the capitalized production costs of advertising the
first time the advertising takes place or when the advertising is initially
mailed. Direct-response advertising consists primarily of direct mailings to
both prospective and current members that include order forms for the Club's
products, and to a lesser extent print advertisements to prospective members.
Promotional costs for prospective and current members are expensed on the date
the promotional materials are mailed. Accrued promotional expenses represent
amounts due for promotional campaigns which have not yet been paid. Such
amounts are paid by DDI.
Royalties
The Club is liable for royalties to licensors based upon revenue earned
from the respective licensed product. Advances made for the right to distribute
audio book products are recorded as advances and expensed as the related sales
are made. An allowance is established for advances not considered recoverable
based upon projected sales. Such allowance was approximately $480 and $316 as
of June 30, 1998 and 1997, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
The Club is not subject to income taxes directly. However the accompanying
financial statements reflect the accounting for income taxes as if the Club
were to have been a separate tax filer in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. 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 income in the period that
includes the enactment date. If the Club were to have been a separate tax filer
hypothetical deferred tax assets, primarily representing the tax effected net
operating loss carryforwards in various jurisdictions, amounted to
approximately $3,000 at June
F-30
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in Thousands) -- (Continued)
(2) Significant Accounting Policies -- (Continued)
30, 1998. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during
future periods. Management has determined that a valuation allowance for the
entire amount is necessary.
Fair Value of Financial Instruments
In estimating the fair value for financial instruments, the Club has
assumed that the carrying amount of accounts receivable and royalties payable
approximates fair value because of the short maturity of those instruments. It
is not practical to estimate the fair market value of the amount due to DDI and
affiliates due to the related party nature of the underlying transactions.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders, which is not currently required. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. Adoption of this statement will not
impact the Club's financial position, results of operations, or cash flows, and
any effect will be limited to the form and content of its disclosure. This
statement is effective for fiscal years beginning after December 15, 1997.
(3) Liquidity
The Club is dependent on DDI to fund working capital and operational cash
requirements. If the Club was operated as a stand-alone entity, it would
require alternative sources of financing. DDI has committed to provide
continued funding through June of 1999 if the Club remains as a wholly-owned
operation.
(4) Accounts Receivable
Accounts receivable as of June 30, 1998 and 1997, consists of the
following:
1998 1997
---------- ---------
Accounts receivable, trade ................... $ 2,799 2,391
Less: Allowance for sales returns ............ (418) (377)
Allowance for doubtful accounts .......... (494) (610)
------- -----
$ 1,887 1,404
======= =====
(5) Inventory
Inventory as of June 30, 1998 and 1997, consists of the following:
1998 1997
---------- ---------
Audio books .................... $ 2,215 2,408
Promotional and other .......... 187 99
Allowances ..................... (524) (231)
------- -----
$ 1,878 2,276
======= =====
F-31
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in Thousands) -- (Continued)
(6) Transactions with Related Parties
DDI, as owner of the Club, is responsible for fulfillment and warehousing
activities related to the Club's operations. Amounts allocated to the Club for
these services were approximately $960 and $734 for the years ended June 30,
1998 and 1997, respectively and are included in general and administrative
expenses in the accompanying statements of operations.
DDI, as owner of the Club, also provides certain administrative and
support services to the Club including: personnel and related employee benefits
and other overhead such as rent, utilities, finance, human resource and
information technology support, and interest. Amounts allocated to the Club for
these services were approximately $1,942 and $1,137 for the years ended June
30, 1998 and 1997, respectively and are included in general and administrative
expenses in the accompanying statements of operations.
Certain Bertelsmann publishing affiliates received royalty payments of
$143 and $218 for the years ended June 30, 1998 and 1997.
Inventory of approximately $526 and $802 for the years ended June 30, 1998
and 1997 was purchased from a Bertelsmann affiliate.
(7) Commitments
Future advance payments to publishers required under existing royalty
agreements, upon the availability of the underlying titles, as of June 30, 1998
are as follows:
Affiliated publisher agreement for multiple titles .......... $125
Third party publisher agreement for multiple titles ......... 500
Agreements for individual titles ............................ 289
----
$914
====
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Representatives of
The Columbia House Company
New York, New York
We have audited the accompanying balance sheet of The Columbia House Audiobook
Club, a division of The Columbia House Company, as of December 18, 1998 and the
related statements of operations and cash flows for the fiscal year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
The accompanying financial statements have been prepared from the separate
records maintained by The Columbia House Company and may not necessarily be
indicative of the conditions that would have existed or the results of
operations if The Columbia House Audiobook Club had been operated as an
unaffiliated company. Portions of certain assets, liabilities, income and
expenses represent allocations made from the home-office items applicable to
the company as a whole.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The Columbia House Audiobook Club as of
December 18, 1998, and the results of its operations and its cash flows for the
fiscal year then ended in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 18, 1999
F-33
<PAGE>
THE COLUMBIA HOUSE AUDIOBOOK CLUB
(A Division of The Columbia House Company)
BALANCE SHEET
DECEMBER 18, 1998
(Amounts in Thousands, except share and per-share data)
CURRENT ASSETS:
Cash ........................................................ $ --
Accounts receivable, net (Note 3) ........................... 1,881
Inventory, net (Note 4) ..................................... 581
Royalty advances ............................................ 867
Prepaid expense and other current assets .................... 42
------
Total current assets ..................................... 3,371
LONG-TERM ASSETS
Deferred member acquisition costs (Note 5) .................. 2,420
------
TOTAL ASSETS ................................................... $5,791
======
CURRENT LIABILITIES:
Accounts payable ............................................ $ 708
Accrued royalties ........................................... 1,017
Accrued advertising ......................................... 355
Other current liabilities ................................... 191
------
Total current liabilities ................................ 2,271
COMMITMENTS AND CONTINGENCIES (Note 8)
COLUMBIA HOUSE EQUITY INVESTMENT (Note 6) ...................... 3,520
------
TOTAL LIABILITIES AND COLUMBIA HOUSE EQUITY INVESTMENT ......... $5,791
======
See notes to financial statements.
F-34
<PAGE>
THE COLUMBIA HOUSE AUDIOBOOK CLUB
(A Division of The Columbia House Company)
STATEMENT OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 18, 1998
(Amounts in Thousands, except share and per-share data)
NET SALES ............................................... $ 14,387
--------
EXPENSES:
Cost of sales ........................................ 6,118
Selling, general and administrative expenses ......... 10,164
--------
Total expenses .................................... 16,282
--------
NET LOSS ................................................ $ (1,895)
========
See notes to financial statements.
F-35
<PAGE>
THE COLUMBIA HOUSE AUDIOBOOK CLUB
(A Division of The Columbia House Company)
STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED DECEMBER 18, 1998
(Amounts in Thousands, except share and per-share data)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (1,895)
--------
Adjustments to reconcile net loss to net cash used in operating activities:
Changes in assets and liabilities:
Decrease in accounts receivable ........................................ 28
Decrease in inventory .................................................. 215
Decrease in deferred member acquisition costs .......................... 561
Increase in royalty advances ........................................... (380)
Increase in other assets ............................................... (42)
Increase in accounts payable ........................................... 352
Increase in accrued royalties .......................................... 128
Decrease in accrued advertising ........................................ (496)
Increase in other current liabilities .................................. 191
--------
Total adjustments ................................................... 557
--------
Net cash used in operating activities ............................... (1,338)
--------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net distributions to Columbia House ....................................... (1,314)
Amounts paid by Columbia House ............................................ 2,652
--------
Net cash provided by financial activities .............................. 1,338
--------
NET CHANGE IN CASH ........................................................... --
CASH, BEGINNING OF YEAR ...................................................... --
--------
CASH, END OF YEAR ............................................................ $ --
========
</TABLE>
See notes to financial statements.
F-36
<PAGE>
THE COLUMBIA HOUSE AUDIOBOOK CLUB
(A Division of The Columbia House Company)
NOTES TO FINANCIAL STATEMENTS
FISCAL YEAR ENDED DECEMBER 18, 1998
(Amounts in Thousands, except share and per-share data)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The Columbia House Audiobook Club (The "Club"), a division of The Columbia
House Company ("Columbia House"), is a membership club which markets and sells
audio books by mail order in the United States. The Club commenced operations
during July 1994 and acquires members primarily through direct mailings of
member solicitation materials and advertisements in magazines, newspapers and
other publications. The Club does not maintain any full or part-time employees
as all operations of The Club are performed by employees of Columbia House. As
described in Note 7, Columbia House charges The Club for all services rendered
on behalf of The Club.
As described in Note 9 Columbia House sold The Club effective December 31,
1998.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year and Reporting Period -- The Club's fiscal year consists of 52
or 53 weeks ending on the third Friday of December in each year. The fiscal
year ended December 18, 1998 included 52 weeks.
Basis of Presentation -- The carve-out financial statements include the
accounts of The Club and reflect the carve-out historical results of
operations, financial position and cash flows of The Club.
As described in Note 7, because The Club operates as a division within
Columbia House, only those assets, liabilities, revenues and expenses of
Columbia House directly related to or allocated to The Club are in the
accompanying financial statements. Certain expenses of The Club reflected in
the accompanying financial statements included allocations of costs from
Columbia House for certain executive and administrative functions. Allocations
of certain assets, liabilities, and costs among Columbia House divisions are
based on revenues, personnel, space, estimates of usage or time spent to
provide services, or other appropriate bases. The accompanying financial
statements may not necessarily be indicative of the financial position or
results of operations if The Club had operated as an unaffiliated company.
Columbia House funds the working capital requirements of its Club
businesses based upon a centralized cash management system. The Columbia House
Equity Investment (Note 6) includes an accumulated deficit as well as payables
and receivables due from Columbia House resulting from cash transfers.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could subsequently differ from
those estimates. The significant estimates that affect the financial statements
include, but are not limited to, audiobook returns, doubtful accounts,
inventory obsolescence, related party charges and the recoverability of royalty
advances to publishers and deferred member acquisition costs.
Revenue Recognition -- The Club recognizes sales, which include amounts
charged to Club members for shipping and handling, upon shipment of merchandise
and simultaneous billing. Allowance for doubtful accounts and future returns
are based upon historical experience and evaluation of current trends.
Inventory -- Inventory, consisting primarily of audiobooks held for
resale, is valued at the lower of cost (weighted average cost method) or
market.
Deferred Member Acquisition Costs -- Member acquisition costs include
direct response advertising costs, consisting primarily of the cost of direct
mailings, magazine and newspaper advertising that include enrollment forms for
The Club's members.
F-37
<PAGE>
THE COLUMBIA HOUSE AUDIOBOOK CLUB
(A Division of The Columbia House Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
FISCAL YEAR ENDED DECEMBER 18, 1998
(Amounts in Thousands, except share and per-share data)
2. SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Member's acquisition costs are deferred and amortized in relation to the
revenue stream estimated from the new Club members. The Club's estimate of
future revenues is based on historical experience and is limited to revenues
expected within two years of members joining The Club which corresponds to the
membership commitment period.
Royalties -- The Club is liable for royalties to licensors based upon
revenue earned from the respective licensed product. Advances made for the
right to distribute audiobook products are recorded as prepayments and
reflected in the cost of sales as royalty expense as the related sales are
made. An allowance is established for amounts considered recoupable. For the
fiscal year ended December 18, 1998, no writedown of royalty advances were
recorded.
Income Taxes -- Columbia House is a United States partnership and,
therefore, not subject to federal or state income taxes. Accordingly, no
provision has been reflected in The Club's financial statements for federal or
state income taxes since The Columbia House partners are taxed thereon
directly.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
Accounts receivable, trade .................. $ 2,764
Less:
Allowance for sales returns ............... 301
Allowance for doubtful accounts ........... 582
-------
$ 1,881
=======
The provision for doubtful accounts charged to expense was $869 for the
fiscal year ended December 18, 1998.
4. INVENTORIES
Inventories consist of the following:
Raw materials .............................. $ 163
Finished goods ............................. 958
------
1,121
Less: allowance for obsolescence ........... 540
------
$ 581
======
5. DEFERRED MEMBER ACQUISITION COSTS
Deferred member acquisition costs were $2,420 at December 18, 1998.
Advertising expense was $5,498 for the same period. Included in advertising
expense is $1,534 of deferred member acquisition costs that were written down
to net realizable value.
F-38
<PAGE>
THE COLUMBIA HOUSE AUDIOBOOK CLUB
(A Division of The Columbia House Company)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
FISCAL YEAR ENDED DECEMBER 18, 1998
(Amounts in Thousands, except share and per-share data)
6. COLUMBIA HOUSE EQUITY INVESTMENT
An analysis of The Columbia House equity investment activity is as
follows:
Balance at December 19, 1997 ............... $ 4,077
Net loss ................................. (1,895)
Net cash distributions to Columbia House.. (1,314)
Allocated charges from Columbia House .... 2,652
--------
Balance at December 18, 1998 ............... $ 3,520
========
7. RELATED PARTY TRANSACTIONS
Columbia House provides The Club with warehousing, fulfillment, marketing
and customer service functions. For the fiscal year ended December 18, 1998,
$1,164 of warehouse expenses is included as a component of costs of sales and
$402 represent allocated charges. Allocated charges during 1998 for
fulfillment, marketing and customer service functioning which are included as a
component of selling, general and administrative were as follows:
Fulfillment ............................ $ 1,123
Marketing and customer service ......... 689
-------
$ 1,812
=======
Columbia House also provides The Club with all general and administrative
services, including insurance, legal, financial and other corporate functions,
including purchasing, accounting and systems technology support. Such charges
amounted to $438 for the fiscal year ended December 18, 1998.
8. COMMITMENTS AND CONTINGENCIES
The Club provides advances to publishers for the right to distribute
audiobook products. Such advances are recoupable against royalties earned by
publishers. Future advance payments required under existing contracts are as
follows as of December 18, 1998:
Year Ended Amount
- --------------------------------- -------
1999 .......................... $ 325
Thereafter .................... --
-----
$ 325
=====
9. SUBSEQUENT EVENT
On December 31, 1998, Columbia House entered into an agreement (the "Sales
Agreement") to sell The Club to The Audio Book Club, Inc. for (i) $30,750 in
cash plus the first $2,000 in collection of accounts receivable; (ii) 325,000
shares of common stock of The Audio Book Club Inc.; and (iii) a warrant to
purchase 100,000 common shares of The Audio Book Club, Inc. at an exercise
price equal to $11.125 per share, exercisable during the period from the
closing date of the Sales Agreement to the fifth anniversary of such date.
Under the Sales Agreement, effective December 31, 1998 Columbia House
agreed to provide certain warehousing, fulfillment, marketing and customer
service operations for The Audiobook Club, Inc. through June 30, 1999.
F-39
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Radio Spirits, Inc.
Schaumburg, Illinois
We have audited the accompanying balance sheet of Radio Spirits, Inc. as of
December 31, 1997 and the related statements of income and retained earnings
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Radio Spirits, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplementary information presented on pages
10 and 11 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ B D & A Certified Public Accountants, Ltd.
November 24, 1998
F-40
<PAGE>
RADIO SPIRITS, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ..................................................... $ 77,175
Accounts receivable, net of allowance of $140,000......... 1,273,317
Other receivables ........................................ 25,200
Inventory (Note 1) ....................................... 1,103,274
Loans to shareholder (Note 6) ............................ 1,667
Prepaid expenses ......................................... 49,098
----------
Total Current Assets ................................... 2,529,731
PROPERTY AND EQUIPMENT (Note 2)
Leasehold improvements ................................... $ 533,989
Equipment ................................................ 567,259
Furniture and fixtures ................................... 81,193
Vehicles ................................................. 23,226
Old time radio collection ................................ 113,375
----------
Total Property and Equipment ............................. 1,319,042
Less: accumulated depreciation ........................... (426,610)
----------
Property and Equipment-- net ........................... 892,432
OTHER ASSETS
Due from affiliates (Note 6) ............................. $ 75,587
Deposits ................................................. 40
Goodwill, net of amortization of $52,367 (Note 3)......... 396,494
----------
Total Other Assets ..................................... 472,121
----------
$3,894,284
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Line of credit (Note 4) .................................. $ 781,833
Current portion of long term debt (Note 5) ............... 201,411
Accounts payable ......................................... 1,010,604
Accrued expenses ......................................... 184,261
Accrued profit sharing (Note 8) .......................... 89,343
Accrued payroll taxes .................................... 5,416
Income taxes payable (Note 9) ............................ 18,720
Deferred income taxes payable (Note 1) ................... 185,000
----------
Total Current Liabilities .............................. 2,476,588
LONG TERM DEBT (Note 5) ................................... 876,417
STOCKHOLDER'S EQUITY
Common stock, No par value
Authorized 1,000 shares
Issued 1000 shares ..................................... $ 1,000
Retained earnings ........................................ 540,279
----------
Total Stockholder's Equity ............................. 541,279
----------
$3,894,284
==========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-41
<PAGE>
RADIO SPIRITS, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Amount %
------------- -------
<S> <C> <C>
SALES ......................................... $5,184,906 100.00
DIRECT COST OF GOODS SOLD ..................... 2,409,119 46.46
---------- ------
GROSS PROFIT .................................. 2,775,787 53.54
INDIRECT COST OF GOODS SOLD ................... 763,395 14.72
---------- ------
NET INCOME BEFORE OPERATING EXPENSES .......... 2,012,392 38.81
---------- ------
OPERATING EXPENSES
Selling ...................................... 199,947 3.86
Administrative ............................... 1,452,023 28.00
---------- ------
Total Operating Expenses ..................... 1,651,970 31.86
---------- ------
INCOME FROM OPERATIONS ........................ 360,422 6.95
---------- ------
OTHER INCOME (EXPENSE)
Penalties .................................... (3,386) (0.07)
Interest expense ............................. (153,188) (2.95)
Miscellaneous income ......................... 1,000 0.02
Loss on sale of assets ....................... (31,790) (0.61)
---------- -------
Total Other Expense ........................ (187,364) (3.61)
---------- -------
INCOME BEFORE INCOME TAX ...................... 173,058 3.34
INCOME TAXES (Note 9) ......................... 64,139 1.24
---------- -------
NET INCOME .................................... $ 108,919 2.10
========== =======
</TABLE>
The accompanying notes are an integral part of the financial statements
F-42
<PAGE>
RADIO SPIRITS, INC.
STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
BALANCE -- BEGINNING OF PERIOD ......... $431,360
NET INCOME ............................. 108,919
--------
BALANCE -- END OF PERIOD ............... $540,279
========
The accompanying notes are an integral part of the financial statements
F-43
<PAGE>
RADIO SPIRITS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................................... 108,919
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................. 137,506
Loss on sale of fixed assets .................................................. 31,790
Deferred income taxes ......................................................... 47,000
(Increase) decrease in:
Accounts receivable .......................................................... (716,429)
Other receivables ............................................................ (25,200)
Inventory .................................................................... (151,031)
Prepaid expenses ............................................................. (33,323)
Deposits ..................................................................... 1,639
Increase (decrease) in:
Accounts payable ............................................................. 519,595
Accrued expenses ............................................................. 59,828
Accrued profit sharing ....................................................... 30,000
Accrued payroll taxes ........................................................ 3,556
Income taxes payable ......................................................... (18,692)
--------
NET CASH USED IN OPERATING ACTIVITIES ........................................... (4,842)
--------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets .................................................... 20,000
Purchase of fixed assets ........................................................ (771,255)
--------
NET CASH USED INVESTING ACTIVITIES .............................................. (751,255)
--------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in shareholder loan .................................................... 5,333
Increase in due from affiliates ................................................. (45,885)
Increase in line of credit ...................................................... 416,833
Proceeds from long-term debt .................................................... 583,226
Payments on long-term debt ...................................................... (152,106)
--------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........................................ 807,401
--------
NET INCREASE IN CASH ............................................................. 51,304
CASH AT BEGINNING OF YEAR ........................................................ 25,871
--------
CASH AT END OF YEAR .............................................................. $ 77,175
==========
SUPPLEMENTAL DISCLOSURES
Interest paid ................................................................... 150,234
Income taxes paid ............................................................... 37,412
</TABLE>
The accompanying notes are an integral part of the financial statements
F-44
<PAGE>
RADIO SPIRITS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Radio Spirits, Inc.
(the Company) is presented to assist in understanding the Company's financial
statements. The financial statements and notes are representations of the
Company's management who is responsible for their integrity and objectivity.
These accounting policies conform to generally accepted accounting principles
and have been consistently applied in the preparation of the financial
statements.
Nature of Business
The Company specializes in the syndication, sales and licensing of popular
radio programs originally aired from the early 1930s through the late 1950s.
The Company has an in-house mail order service in which it distributes audio
cassettes and compact discs of vintage comedy, mystery, detective, adventure
and suspense programs to customers worldwide.
Inventory
Inventory consists of packaging materials for the cassettes and compact
discs, and cassettes and compact discs ready for sale. Inventory is carried at
cost and is reviewed at year end for slow moving items, which are written off
as obsolete.
Deferred Income Taxes
For income tax reporting, the Company uses accounting methods that
recognize expenses sooner than for financial statement reporting. As a result,
the basis of inventory and property and equipment for financial reporting
exceeds its tax basis. Deferred income taxes have been recorded for the excess,
which will be taxable in future periods.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of equipment is
computed using accelerated methods and amortization of leasehold improvements
is computed using the straight-line method. Depreciation and amortization
amounted to $107,582 for the year ended December 31, 1997.
3. GOODWILL
Goodwill resulted from the purchase of stock from a former shareholder and
is being amortized using the straight-line method over 15 years. Amortization
expense amounted to $29,924 for the year ended December 31, 1997.
4. LINE OF CREDIT
The Company has a line of credit with a bank in the amount of $850,000
expiring September 4, 1998. The line was subsequently renewed until September
4, 1999. The line of credit is collateralized by substantially all of the
assets of the Company and the personal guarantee of the shareholder of the
Company. Interest only is payable monthly at 1% over the prime rate. The
outstanding balance was $781,833 at December 31, 1997.
F-45
<PAGE>
RADIO SPIRITS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<S> <C>
Note payable dated March 7, 1996 to former shareholder for purchase of
stock, payable $6,747 per month including interest at 6.5%, due March 2006.
Secured by a second position of substantially all assets and the guarantee of
the shareholder of the Company. ............................................... $ 512,012
Note payable to West Suburban Bank, payable in monthly installments of
$1,136 including interest at 8%, due October 1998, secured by equipment. ...... 10,943
Note payable to Beverly Bank, payable in monthly installments of $1,300
including interest at 7.5%, due July 1999, secured by a vehicle. .............. 23,214
Note payable to West Suburban Bank, payable in monthly installments of
$1,365 including interest at 9.5%, due September 2002, secured by
equipment. .................................................................... 61,557
Note payable to West Suburban Bank, payable in monthly installments of
$9,509 including interest at 9.75%, due May 2002, secured by substantially all
assets. ....................................................................... 408,018
Note payable to Honda, payable in monthly installments of $444 including
interest at 7.75%, due June 2001, secured by a vehicle. ....................... 16,295
Note payable to Peter Tararo, interest only is payable monthly at 8.5%,
principal and unpaid interest due January 1998. ............................... 25,000
Note payable to West Suburban Bank, payable in monthly installments of
$892 including interest at 8%, due February 2000, secured by equipment ........ 20,789
---------
1,077,828
Less current portion .......................................................... (201,411)
--------
$876,417
========
</TABLE>
Maturities of long-term debt are as follows:
Year Ending,
December 31,
- --------------
1998 $ 201,411
1999 173,596
2000 170,329
2001 180,935
2002 120,391
Thereafter 231,166
----------
$1,077,828
==========
6. RELATED PARTY TRANSACTIONS
The Company is owed $1,666 from the shareholder at December 31, 1997. The
amount is a short-term loan and no interest is being accrued.
The Company is also owed $75,587 from affiliated companies owned by the
shareholder. The amounts are short-term loans and no interest is being accrued.
F-46
<PAGE>
RADIO SPIRITS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
6. RELATED PARTY TRANSACTIONS -- (Continued)
On December 1, 1996 the Company entered into a lease agreement for its
current facilities with its shareholder. Monthly base rent is $3,667 plus
insurance and real estate taxes, and the lease expires November 30, 2001. Rent
expense amounted to $58,422 for the year ended December 31, 1997. Future
minimum rental payments are as follows:
Year ending,
December 31,
- -------------
1998 $ 44,004
1999 44,004
2000 44,004
2001 40,337
--------
$172,349
========
7. COMMITMENTS
Licensing Agreements
The Company has entered into various agreements for the use of the
original programs it broadcasts and sells. Rights expense under these
agreements amounted to $180,455 for the year ended December 31, 1997.
Consulting Agreement
The Company has a consulting agreement with Dennis Levin & Associates. The
agreement expires December 31, 1997. The Company pays a monthly fee of $5,630
plus a year end amount based on net income before taxes as adjusted for items
in the agreement. Consulting expense amounted to $95,965 for the year ended
December 31, 1997.
Sales Agreement
The Company has agreements with various independent sales representatives
for the Company's products, to certain customers and markets per the agreement.
The agreement may be terminated at any time by either party with 60 days
written notice. Commissions of 7% or 10%, depending on the customer, are paid
monthly in the following month based on net cash receipts from the customers.
Commissions expense amounted to $104,650 for the year ended December 31, 1997.
8. PROFIT SHARING PLAN
The Company has a profit sharing plan covering all employees who have met
the eligibility requirements. The plan is noncontributory for the employees and
discretionary for the employer. A contribution of $30,000 was made for the year
ended December 31, 1997.
9. INCOME TAXES
The provisions for income tax consist of the following components:
Current .......... $17,139
Deferred ......... 47,000
-------
$64,139
=======
F-47
<PAGE>
RADIO SPIRITS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
10. SUBSEQUENT EVENTS
Sale of Business
During July, 1998, the Company's shareholder agreed to a letter of intent
to sell the stock of the Company to a publicly traded company. The letter of
intent is subject to acceptable results of due diligence by both parties.
F-48
<PAGE>
RADIO SPIRITS, INC.
SCHEDULES OF DIRECT AND INDIRECT
COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 1997
Amount %
------------ ---------
Direct Cost of Goods Sold
Tapes ....................................... $ 21,768 0.42
Production materials ........................ 523 0.01
Finished product ............................ 1,479,074 28.53
Printing .................................... 4,399 0.08
Outside services ............................ 110,659 2.13
Rights ...................................... 180,455 3.48
Shipping supplies ........................... 16,603 0.32
Purchases ................................... 22,614 0.44
Artwork and design .......................... 7,780 0.15
Artwork and design-product .................. 45,784 0.88
Printing-product ............................ 311,157 6.00
Warehouse labor ............................. 64,070 1.24
Engineering ................................. 144,233 2.78
---------- -----
Total Direct Cost of Goods Sold ........... $2,409,119 46.46
========== =====
Indirect Cost of Goods Sold
Artwork and design-catalog .................. $ 38,297 0.74
Printing-catalog ............................ 111,697 2.15
Printing-promo mailings ..................... 8,290 0.16
Freight and delivery ........................ 64,166 1.24
Postage-catalog mailings .................... 282,313 5.44
Postage-promo mailings ...................... 22,610 0.44
Postage-orders delivery ..................... 236,022 4.55
---------- -----
Total Indirect Cost of Goods Sold ......... $ 763,395 14.72
========== =====
F-49
<PAGE>
RADIO SPIRITS, INC.
SCHEDULES OF SELLING AND
ADMINISTRATIVE EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
Amount %
------------- ---------
Selling Expenses
Commissions ............................. $ 104,650 2.02
Advertising ............................. 58,891 1.14
Mailing lists-names ..................... 23,978 0.46
Mailing services ........................ 12,428 0.24
---------- -----
Total Selling Expenses ................ $ 199,947 3.86
========== =====
Administrative Expenses
Salaries and wages ...................... $ 192,890 3.72
Officer's salaries ...................... 293,428 5.66
Consulting .............................. 95,965 1.85
Computer consulting ..................... 16,941 0.33
Auto expense ............................ 5,175 0.10
Auto lease .............................. 19,146 0.37
Bank service charges .................... 53,849 1.04
Contributions ........................... 25 0.00
Depreciation expense .................... 107,582 2.07
Amortization ............................ 29,924 0.58
Dues and subscriptions .................. 2,496 0.05
Equipment rental ........................ 5,576 0.11
Utilities ............................... 20,012 0.39
Insurance-group ......................... 16,629 0.32
Insurance-general ....................... 11,721 0.23
Insurance-officer's life ................ 7,560 0.15
Legal and accounting .................... 76,095 1.47
Office expense .......................... 17,127 0.33
Office supplies ......................... 10,989 0.21
Outside services ........................ 10,260 0.20
Postage expense ......................... 18,861 0.36
Profit sharing expense .................. 30,000 0.58
Rent expense ............................ 58,422 1.13
Repairs and maintenance ................. 37,287 0.72
Supplies expense ........................ 7,738 0.15
Taxes-payroll ........................... 46,473 0.90
Taxes-other ............................. 10,501 0.20
Telephone ............................... 61,330 1.18
Answering service ....................... 79,234 1.53
Travel and entertainment ................ 26,360 0.51
Bad debts ............................... 81,719 1.58
Moving expense .......................... 708 0.01
---------- -----
Total Administrative Expenses ......... $1,452,023 28.00
========== =====
F-50
<PAGE>
INSIDE BACK COVER
[GRAPHICS OMITTED: Images of various old time radio web pages from our
MediaBay.com site, offline marketing materials and our products. Images of
classic video marketing materials, products and images of film actors.]
<PAGE>
================================================================================
[GRAPHIC OMITTED]
[GRAPHIC OMITTED]
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
The Florida Business Corporation Act (the "Florida Act") contain
provisions entitling the Registrant's directors and officers to indemnification
from judgments, settlements, penalties, fines, and reasonable expenses
(including attorney's fees) as the result of an action or proceeding in which
they may be involved by reason of having been a director or officer of the
Registrant. In its Articles of Incorporation, the Registrant has included a
provision that limits, to the fullest extent now or hereafter permitted by the
Florida Act, the personal liability of its directors to the Registrant or its
shareholders for monetary damages arising from a breach of their fiduciary
duties as directors. Under the Florida Act as currently in effect, this
provision limits a director's liability except where such director breaches a
duty. The Registrant's Articles of Incorporation and By-Laws provide that the
Registrant shall indemnify, and upon request shall advance expenses to, its
directors and officers to the fullest extent permitted by the Florida Act. The
Florida Act provides that no director or officer of the Registrant shall be
personally liable to the Registrant or its shareholders for damages for breach
of any duty owed to the Registrant or its shareholders, except for liability
for (i) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (ii) any unlawful payment of a
dividend or unlawful stock repurchase or redemption in violation of the Florida
Act, (iii) any transaction from which the director received an improper
personal benefit or (iv) a violation of a criminal law. This provision does not
prevent the Registrant or its shareholders from seeking equitable remedies,
such as injunctive relief or rescission. If equitable remedies are found not to
be available to shareholders in any particular case, shareholders may not have
any effective remedy against actions taken by directors that constitute
negligence or gross negligence.
The Registrant has entered into indemnification agreements with certain
employees, officers and consultants. Pursuant to the terms of the indemnity
agreements, the Registrant has agreed to indemnify, to the fullest extent
permitted under applicable law, against any amounts which the employee, officer
or consultant may become legally obligated to pay in connection with any claim
arising from or out of the actions of the employee, officer or consultant, in
connection with any services performed by or on behalf of our company and
certain expenses related thereto; provided, however, that the employee, officer
or consultant shall reimburse the Registrant for such amounts if the such
individual is found, as finally judicially determined by a court of competent
jurisdiction, not to have been entitled to such indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1993, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to any charter
provision, by-law, contract, arrangement, statute or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
(the "Commission") such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
Reference is made to the Underwriting Agreement, the proposed form of
which is filed as Exhibit 1.1, pursuant to which the underwriter agrees to
indemnify the directors and certain officers of the Registrant and certain
other persons against certain civil liabilities.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses (other than the underwriting
discounts and commissions and the Underwriter's Non-Accountable Expense
Allowance) expected to be incurred in connection with the issuance and
distribution of the securities being reistered.
<TABLE>
<S> <C>
SEC Registration ................................................... $ 14,573
NASD Filing Fee .................................................... $ 6,020
Legal Fees and Expenses* ........................................... $ **
Printing and Engraving Costs* ...................................... $ **
Accounting Fees* ................................................... $ **
American Stock Exchange Listing Fees and Related Expenses* ......... $ **
Transfer Agent Fees ................................................ $ **
Miscellaneous* ..................................................... $ **
--------
Total ............................................................
========
</TABLE>
- ------------
* Estimated
** To be provided by amendment.
Item 26. Recent Sales of Unregistered Securities.
The Registrant has made the following sales of unregistered securities in
the past three years:
(i) On March 18, 1998, the Registrant sold to Carl Wolf an option to
purchase 50,000 shares of common stock. The Registrant granted to Mr. Wolf the
right to purchase a second option to purchase an additional 25,000 shares. The
price to purchase the second option was $25,000. The Registrant relied on the
exemption offered by Section 4(2) under the Securities Act of 1993 for a
transaction by an issuer not involving a public offering.
(ii) In September 1998, Mr. Wolf exercised his right to purchase the
second option referred to in (i) above. The Registrant relied on the exemption
offered by Section 4(2) under the Securities Act for a transaction by an issuer
not involving a public offering.
(iii) On April 17, 1998, the Registrant issued to 800 Long Distance, Inc.
an option to purchase 21,600 shares of common stock as consideration for costs
incurred in transferring certain toll-free telephone numbers to the Registrant.
The option was valued at $2.50 per share. The Registrant relied on the
exemption from registration offered by Section 4(2) under the Securities Act
for a transaction by an issuer not involving a public offering.
(iv) On May 30, 1998, the Registrant issued to an individual an option to
purchase 20,000 shares of common stock as consideration for the acquisition of
the URLs www.audiobook.com and www.audiobook.net. The option was valued at
$2.50 per share. The Registrant relied on the exemption from registration
offered by Section 4(2) of the Securities Act for a transaction by an issuer
not involving a public offering.
(v) In November 1998, the Registrant issued a warrant to purchase 25,000
shares of common stock pursuant to a consulting agreement under which the
consultant provided services and advice relating to acquisitions proposed at
that time. The Registrant valued the consultant's services at $48,750. The
Registrant relied on the exemption from registration offered by Section 4(2)
under the Securities Act for a transaction by an issuer not involving a public
offering.
(vi) In December 1998, the Registrant issued 425,000 shares of common
stock valued at $12.875 per share and options to purchase an additional 175,000
shares of common stock in connection with its acquisition of Radio Spirits,
Inc. The Registrant granted the holders of these shares the right to require it
to repurchase up to 175,000 of these shares under certain circumstances,
commencing December 2001 at prices ranging from $4.00 to $12.00 per share. The
Registrant relied on the exemption from registration offered by Section 4(2)
under the Securities Act for a transaction by an issuer not involving a public
offering.
II-2
<PAGE>
(vii) In December 1998, the Registrant issued options to purchase 25,000
shares to two individuals as consideration for entering into consulting
agreements. The Registrant relied on the exemption from registration offered by
Section 4(2) under the Securities Act for a transaction by an issuer not
involving a public offering.
(viii) In December 1998, the Registrant issued 50,000 shares of common
stock valued at $12.875 per share and options to purchase an additional 50,000
shares of common stock as partial consideration for its acquisition of the
assets used by Metacom, Inc. in connection with its "Adventures in Cassettes"
business of licensing, producing, marketing and selling old time radio
programs. The Registrant granted the holders of the 50,000 shares the right,
under certain circumstances, to require it to repurchase the 50,000 shares
between the December 2001 and December 2008 at a price of $10.00 per share. The
Registrant relied on the exemption from registration offered by Section 4(2)
under the Securities Act for a transaction by an issuer not involving a public
offering.
(ix) In December 1998, the Registrant issued 125,000 shares of common
stock valued at $12.875 per share as partial consideration for its acquisition
of the assets used by Premier Electronic Laboratories, Inc. in connection with
its business of producing, marketing and selling old time radio and classic
video programs. The Registrant granted the holders of these shares the right,
under certain circumstances, to require it to repurchase the shares between
December 2000 and December 2008 at a price of $15.00 per share. The Registrant
relied on the exemption from registration offered by Section 4(2) of the
Securities Act for a transaction by an issuer not involving a public offering.
(x) In December 1998, the Registrant issued to The Columbia House Company,
Sony Music Entertainment Inc. and WCI Record Club Inc. an aggregate of 325,000
shares of common stock valued at $11.625 per share and warrants to purchase an
additional 100,000 shares of common stock in connection with its acquisition of
Columbia House's Audiobook Club. The Registrant granted the holders of the
325,000 shares the right to require it to repurchase these shares, under
certain circumstances, commencing December 2004 at a price of $15.00 per share.
The Registrant relied on the exemption from registration offered by Section
4(2) of the Securities Act for a transaction by an issuer not involving a
public offering.
(xi) In December 1998, the Registrant issued three-year warrants to
purchase an aggregate of 196,800 shares of common stock per share as partial
consideration to the lenders for providing a credit facility which warrants
have been subsequently adjusted pursuant to their anti-dilution provisions. The
Registrant relied on the exemption from registration offered by Section 4(2) of
the Securities Act for a transaction by an issuer not involving a public
offering.
(xii) In December 1998, the Registrant issued to its Chairman a
$15,000,000 principal amount convertible note due December 31, 2004 and
five-year warrants to purchase 500,000 shares of common stock. The Registrant
also agreed that if the note is refinanced, repaid or replaced, it will issue
to its Chairman, warrants to purchase an additional 350,000 shares. The
Registrant relied on the exemption from registration offered by Section 4(2) of
the Securities Act for a transaction by an issuer not involving a public
offering.
(xiii) In February 1999, the Registrant granted to an employee five year
options to purchase 158,000 shares of common stock as consideration for
entering into an agreement employment. The Registrant relied on the exemption
from registration offered by Section 4(2) of the Securities Act for a
transaction by an issuer not involving a public offering.
(xiv) In March 1999, the Registrant granted to a law firm five year
warrants to purchase 20,000 shares of common stock as partial payment for legal
services provided in the acquisitions. The warrants were valued at $2.46 using
the Black-Scholes valuation model. The Registrant relied on the exemption from
registration offered by Section 4(2) of the Securities Act for a transaction by
an issuer not involving a public offering.
(xv) In April 1999, the Registrant completed the sale of 750,000 shares of
common stock to a qualified institutional buyer, as that term is defined under
Rule 144A under the Securities Act, for $8,250,000 and issued warrants to
purchase 50,000 shares in connection with a consulting agreement. The
Registrant relied on the exemption from registration offered by Section 4(2) of
the Securities Act for a transaction by an issuer not involving a public
offering.
II-3
<PAGE>
(xvi) In June 1999, the Registrant sold 50,000 shares of common stock for
gross proceeds of $550,000 to three qualified institutional buyers. The
Registrant relied on the exemption from registration offered by Section 4(2) of
the Securities Act for a transaction by an issuer not involving a public
offering.
(xvii) In June 1999, in connection with an additional bank loan to partly
finance an acquisition, the Registrant granted the lenders three-year warrants
to purchase up to 119,546 shares of common stock which warrants have been
subsequently adjusted pursuant to their anti-dilution provisions. The
Registrant relied on the exemption from registration offered by Section 4(2) of
the Securities Act for a transaction by an issuer not involving a public
offering.
(xviii) In June 1999, the Registrant issued a $4,350,000 principal amount
convertible promissory note to its Chairman for $4,350,000. The Registrant also
agreed that if the note is refinanced, repaid or replaced, it will issue to its
Chairman warrants to purchase 125,000 shares of common stock as partial
consideration for the financing. The Registrant relied on the exemption from
registration offered by Section 4(2) under the Securities Act for a transaction
by an issuer not involving a public offering.
(xix) In July 1999, the Registrant sold 540,000 shares of common stock to
three qualified institutional buyers for $7,020,000. The Registrant relied on
the exemption from registration offered by Section 4(2) under the Securities
Act for a transaction by an issuer not involving a public offering.
(xx) In August 1999, the Registrant sold 700,000 shares of common stock to
a qualified institutional buyer for $9,100,000. The Registrant relied on the
exemption from registration offered by Section 4(2) under the Securities Act
for a transaction by an issuer not involving a public offering.
(xxi) In August 1999, the Registrant issued 17,977 shares of common stock
upon conversion of $200,000 principal amount of a convertible note. The
Registrant relied on the exemption from registration offered by Section 4(2) of
the Securities Act for a transaction by an issuer not involving a public
offering.
(xxii) In September 1999, the Registrant issued to its Chairman warrants
to purchase 265,000 shares of common stock as described in (xii). The
Registrant relied on the exemption from registration offered by Section 4(2) of
the Securities Act for a transaction by an issuer not involving a public
offering.
(xxiii) In October 1999, the Registrant issued 21,600 shares of common
stock upon exercise of an outstanding option. The Registrant relied on the
exemption from registration offered by Section 4(2) of the Securities Act for a
transaction by an issuer not involving a public offering.
(xxiv) In December 1999 and January 2000, the Registrant issued $2,000,000
principal amount convertible promissory notes to its Chairman's son for
$2,000,000. The Registrant relied on the exemption from registration offered by
Section 4(2) of the Securities Act for a transaction by an issuer not involving
a public offering.
(xxv) In December 1999 and January 2000, the Registrant issued 379,662
shares of common stock upon conversion of convertible notes. The Registrant
relied on the exemption from registration offered by Section 4(2) of the
Securities Act for a transaction by an issuer not involving a public offering.
(xxvi) in January 2000, the Registrant issued warrants to purchase 340,000
shares to an accredited investor.
(xxvii) From October 1997 through the date of this prospectus, the
Registrant issued options to purchase 3,863,450 shares of common stock under
its 1997 Stock Option Plan and 1999 Stock Incentive Plan. The Registrant relied
on the exemption from registration offered by Section 4(2) of the Securities
Act for a transaction by an issuer not involving a public offering. The
Registrant relied on the exemption from registration offered by Section 4(2) of
the Securities Act for a transaction by an issuer not involving a public
offering.
(xxviii) In January 2000, the Registrant issued warrants to purchase
300,000 shares of common stock as consideration for public relations consulting
services. The Registrant relied on the exemption from registration offered by
Section 4(2) of the Securities Act for a transaction by an issuer not involving
a public offering.
(xxix) In February 2000, the Registrant issued 53,932 shares of common
stock upon conversion of $600,000 principal amount of a convertible note. The
Registrant relied on the exemption from registration offered by Section 4(2) of
the Securities Act for a transaction by an issuer not involving a public
offering.
II-4
<PAGE>
Item 27. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- ------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement between the Registrant and the Underwriters.**
3.1 Restated Articles of Incorporation of the Registrant.+
3.2 Articles of Amendment to Articles of Incorporation.++++++++
3.3 Articles of Amendment to Articles of Incorporation.*
3.4 Amended and Restated By-Laws of the Registrant.
5.1 Opinion of Blank Rome Tenzer Greenblatt LLP**
10.1 Employment Agreement between the Registrant and Norton Herrick.
10.2 Employment Agreement between the Registrant and Michael Herrick.+
10.3 Employment Agreement between the Registrant and Jesse Faber.*
10.4 Employment Agreement between the Registrant and Stephen McLaughlin.+++++
10.5 Employment Agreement between the Registrant and Howard Herrick.+
10.6 Employment Agreement between the Registrant and John Levy.*
10.7 Employment Agreement between our subsidiary and Carl Amari.+++++
10.8 Supplemental Agreement, dated as of December 11, 1998, by and among the Registrant,
Classic Radio Holding Corp. (now Radio Spirits, Inc.), Radio Spirits, Inc. and Carl
Amari.+++
10.9 Put Agreement, dated as of December 11, 1998, by and between the Registrant and Premier
Electronic Laboratories, Inc.+++++
10.10 Registration and Shareholder Rights Agreement, dated as of December 30, 1998, by and
among the Registrant and The Columbia House Company, WCI Record Club Inc. and Sony
Music Entertainment Inc.+++++
10.11 $2,776,250 Principal Amount 9% Convertible Senior Subordinated Promissory Note of the
Registrant to Norton Herrick due December 31, 2004.
10.12 $4,800,000 Principal Amount 9% Convertible Senior Subordinated Promissory Note of the
Registrant to ABC Investment, L.L.C. due December 31, 2004.*
10.13 Modification Letter, dated December 31, 1998, among Norton Herrick, the Registrant and
Fleet National Bank+++++
10.14 Security Agreement, dated as of December 31, 1998, by and among the Registrant, Classic
Radio Holding Corp. and Classic Radio Acquisition Corp. and Norton Herrick.+++++
10.15 Credit Agreement, dated as of December 31, 1998, among the Registrant and Fleet National
Bank.+++++
10.16 Amendment and Supplement No. 1 to Credit Agreement dated June 14, 1999 by and among
the Registrant, Fleet National Bank, as administrative agent, and ING (U.S.) Capital
Corporation.+++++++
10.17 Security Agreement, dated as of December 31, 1998, from the Registrant, ABC Internet
Services, Inc., Classic Radio Holding Corp., Classic Radio Acquisition Corp., ABC
Investment Corp., and CH Acquisitions Corp. as grantors to Fleet National Bank as
administrative agent.+++++
10.18 1997 Stock Option Plan+
10.19 1999 Stock Incentive Plan++++++
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP
23.2 (a) Consent of KPMG LLP*
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- ---------------------------------------------------------------------------------------
<S> <C>
23.2(b) Consent of KPMG LLP
23.3 Consent of BD&A Certified Public Accountants, Ltd.
23.4 Consent of PricewaterhouseCoopers LLP.*
23.5 Consent of Blank Rome Tenzer Greenblatt LLP (included in opinion filed as Exhibit 5)**
24.1 Power of Attorney (included in the signature page of this Registration Statement).*
27.1 Financial Data Schedule (SEC use only).
</TABLE>
- ------------
* Previously filed
** To be filed by amendment.
+ Incorporated by reference to the applicable exhibit contained in our
Registration Statement on Form SB-2 (file no. 333-30665) effective
October 22, 1997.
++ Incorporated by reference to the applicable exhibit contained in our
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1997.
+++ Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K for reportable event dated December 14,
1998.
++++ Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K dated January 13, 1999.
+++++ Incorporated by reference to the applicable exhibit contained in our
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1998.
++++++ Incorporated by reference to the applicable exhibit contained in our
Proxy Statement dated February 23, 1999.
+++++++ Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K dated June 29, 1999.
++++++++ Incorporated by reference to the applicable exhibit contained in our
Quarterly Report on Form 10-QSB for the quarterly period ended June
30, 1999.
Item 28. Undertakings.
(a) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(b) The undersigned Registrant hereby undertakes for the purpose of determining
any liability under the Securities Act, to treat the information omitted
from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by
the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act as part of this Registration Statement as of the time the
Securities and Exchange Commission declares it effective; and for the
purpose of determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and treat that offering of the securities at that time as the
initial bonafide offering of those securities.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of
Morristown, State of New Jersey, on February 15, 2000.
MEDIABAY, INC.
By: /s/ Michael Herrick
-------------------------------------------
Michael Herrick
Chief Executive Officer and Director
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------- ---------------------------------------------- ------------------
<S> <C> <C>
* Director and Chairman (Principal Executive February 15, 2000
- ------------------------- Officer)
Norton Herrick
/s/ Michael Herrick Director, Chief Executive Officer and February 15, 2000
- ------------------------- President (Principal Executive Officer)
Michael Herrick
* Director and President of Audio Book Club, February 15, 2000
- ------------------------- Inc.
Jesse Faber
* Director and Executive Vice President February 15, 2000
- -------------------------
Howard Herrick
* Executive Vice President and Chief Financial February 15, 2000
- ------------------------- Officer (Principal Financial and Accounting
John F. Levy Officer)
* Director and President of Radio Operations February 15, 2000
- -------------------------
Carl P. Amari
* Director February 15, 2000
- -------------------------
Carl T. Wolf
* Director February 15, 2000
- -------------------------
Roy Abrams
/s/ Michael Herrick
- -------------------------
Michael Herrick
(Attorney-in-fact)
</TABLE>
* By Attorney
II-7
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
for the years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Balance Amounts Write-Offs Balance
Beginning of Charged to Amounts Against End of
Period Net Income Acquired Reserves Period
-------------- ------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Allowances for sales returns and doubtful accounts:
Year Ended December 31, 1999 $1,840 $18,848 $1,264 $16,041 $5,911
Year Ended December 31, 1998 $1,449 $ 8,257 $ 422 $ 8,288 $1,840
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- ------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement between the Registrant and the Underwriters.**
3.1 Restated Articles of Incorporation of the Registrant.+
3.2 Articles of Amendment to Articles of Incorporation.++++++++
3.3 Articles of Amendment to Articles of Incorporation.*
3.4 Amended and Restated By-Laws of the Registrant.
5.1 Opinion of Blank Rome Tenzer Greenblatt LLP**
10.1 Employment Agreement between the Registrant and Norton Herrick.
10.2 Employment Agreement between the Registrant and Michael Herrick.+
10.3 Employment Agreement between the Registrant and Jesse Faber.*
10.4 Employment Agreement between the Registrant and Stephen McLaughlin.+++++
10.5 Employment Agreement between the Registrant and Howard Herrick.+
10.6 Employment Agreement between the Registrant and John Levy.*
10.7 Employment Agreement between our subsidiary and Carl Amari.+++++
10.8 Supplemental Agreement, dated as of December 11, 1998, by and among the Registrant,
Classic Radio Holding Corp. (now Radio Spirits, Inc.), Radio Spirits, Inc. and Carl
Amari.+++
10.9 Put Agreement, dated as of December 11, 1998, by and between the Registrant and Premier
Electronic Laboratories, Inc.+++++
10.10 Registration and Shareholder Rights Agreement, dated as of December 30, 1998, by and
among the Registrant and The Columbia House Company, WCI Record Club Inc. and Sony
Music Entertainment Inc.+++++
10.11 $2,776,250 Principal Amount 9% Convertible Senior Subordinated Promissory Note of the
Registrant to Norton Herrick due December 31, 2004.
10.12 $4,800,000 Principal Amount 9% Convertible Senior Subordinated Promissory Note of the
Registrant to ABC Investment, L.L.C. due December 31, 2004.*
10.13 Modification Letter, dated December 31, 1998, among Norton Herrick, the Registrant and
Fleet National Bank+++++
10.14 Security Agreement, dated as of December 31, 1998, by and among the Registrant, Classic
Radio Holding Corp. and Classic Radio Acquisition Corp. and Norton Herrick.+++++
10.15 Credit Agreement, dated as of December 31, 1998, among the Registrant and Fleet National
Bank.+++++
10.16 Amendment and Supplement No. 1 to Credit Agreement dated June 14, 1999 by and among
the Registrant, Fleet National Bank, as administrative agent, and ING (U.S.) Capital
Corporation.+++++++
10.17 Security Agreement, dated as of December 31, 1998, from the Registrant, ABC Internet
Services, Inc., Classic Radio Holding Corp., Classic Radio Acquisition Corp., ABC
Investment Corp., and CH Acquisitions Corp. as grantors to Fleet National Bank as
administrative agent.+++++
10.18 1997 Stock Option Plan+
10.19 1999 Stock Incentive Plan++++++
21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP
23.2 (a) Consent of KPMG LLP*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- ---------------------------------------------------------------------------------------
<S> <C>
23.2(b) Consent of KPMG LLP
23.3 Consent of BD&A Certified Public Accountants, Ltd.
23.4 Consent of PricewaterhouseCoopers LLP.*
23.5 Consent of Blank Rome Tenzer Greenblatt LLP (included in opinion filed as Exhibit 5)**
24.1 Power of Attorney (included in the signature page of this Registration Statement).*
27.1 Financial Data Schedule (SEC use only).
</TABLE>
- ------------
* Previously filed
** To be filed by amendment.
+ Incorporated by reference to the applicable exhibit contained in our
Registration Statement on Form SB-2 (file no. 333-30665) effective
October 22, 1997.
++ Incorporated by reference to the applicable exhibit contained in our
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1997.
+++ Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K for reportable event dated December 14,
1998.
++++ Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K dated January 13, 1999.
+++++ Incorporated by reference to the applicable exhibit contained in our
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1998.
++++++ Incorporated by reference to the applicable exhibit contained in our
Proxy Statement dated February 23, 1999.
+++++++ Incorporated by reference to the applicable exhibit contained in our
Current Report on Form 8-K dated June 29, 1999.
++++++++ Incorporated by reference to the applicable exhibit contained in our
Quarterly Report on Form 10-QSB for the quarterly period ended June
30, 1999.
<PAGE>
AMENDED AND RESTATED AS OF JANUARY 3, 2000
MEDIABAY, INC.
BY-LAWS
ARTICLE I
OFFICES
1. The location of the registered office of the Corporation in the
State of Florida is 2295 Corporate Boulevard, N.W., Suite 222, P.O. Box 5010,
Boca Raton, Florida 33431, and the name of its registered agent at such address
is Norton Herrick.
2. The Corporation shall in addition to its registered office in the
State of Florida establish and maintain an office or offices at such place or
places as the Board of Directors may from time to time find necessary or
desirable.
ARTICLE II
CORPORATE SEAL
The corporate seal of the Corporation shall have inscribed thereon the
name of the Corporation and may be in such form as the Board of Directors may
determine. Such seal may be used by causing it or a facsimile thereof to be
impressed, affixed or otherwise reproduced.
<PAGE>
ARTICLE III
MEETINGS OF SHAREHOLDERS
1. All meetings of the shareholders shall be held at the registered
office of the Corporation in the State of Florida or at such other place as
shall be determined from time to time by the Board of Directors.
2. The annual meeting of shareholders shall be held on such day and at
such time as may be determined from time to time by resolution of the Board of
Directors. The election of Directors and any other proper business, as provided
by Section 7 of Article III of these By-laws, may be transacted at the annual
meeting.
3. The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the shareholders for the transaction of
business, except as otherwise expressly provided by statute, by the Articles of
Incorporation of the Corporation or by these By-laws, except that when specified
business is to be voted on by a class or series voting as a class, the holders
of a majority of the stock of such class or series shall constitute a quorum for
the transaction of such business. If, however, such majority shall not be
present or represented at any meeting of the shareholders, the shareholders
entitled to vote thereat, present in person or by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting (except as otherwise provided by statute), and in addition, the
Chairman of the meeting shall have the power to adjourn the meeting from time to
time whether or not such majority is present. At such adjourned meeting at which
the requisite amount of voting stock shall be represented any business may be
transacted which might have been transacted at the previously adjourned meeting.
2
<PAGE>
4. At all meetings of the shareholders, each shareholder having the
right to vote shall be entitled to vote in person, or by proxy appointed by an
instrument in writing subscribed by such shareholder and bearing a date not more
than eleven months prior to said meeting, unless such instrument provides for a
longer period. All proxies must be filed, at or before the time of the meeting
of stockholders, with the Secretary of the Corporation or such other person
designated by the Board of Directors to tabulate votes at the meeting.
5. At each meeting of the shareholders each shareholder shall have one
vote for each share of capital stock having voting power, registered in his name
on the books of the Corporation at the record date fixed in accordance with
these By-laws, or otherwise determined, with respect to such meeting. Except as
otherwise expressly provided by statute, by the Articles of Incorporation of the
Corporation or by these By-laws, all matters coming before any meeting of the
shareholders shall be decided by the vote of a majority of the number of shares
of stock present in person or represented by proxy at such meeting and entitled
to vote thereat, a quorum being present.
6. Except as otherwise provided by law, written or printed notice of
each meeting of the shareholders, whether annual or special, shall be given not
less than 10 nor more than 60 days before the date of the meeting to each
shareholder entitled to vote at such meeting. Such notice shall be delivered
either personally or by mail or at the direction of the Chairman, the Chief
Executive Officer or the Secretary. Each notice of meeting shall state the
place, date and hour of the meeting.
7. At any meeting of the shareholders, only such business shall be
conducted as shall have been brought before the meeting (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors, or (iii) by any shareholder who complies with the procedures set
forth in this Section 7.
3
<PAGE>
The only business which shall be conducted at any meeting of the
shareholders shall (i) have been specified in the written notice of the meeting
(or any supplement thereto) given as provided in the preceding Section, (ii) be
brought before the meeting at the direction of the Board of Directors or the
Chairman of the meeting or (iii) have specified in a written notice (a
"Shareholder Meeting Notice") given to the Corporation, in accordance with all
of the following requirements, by or on behalf of any shareholder who shall have
been a shareholder of record on the record date for such meeting and who shall
continue to be entitled to vote thereat. Each Shareholder Meeting Notice must be
delivered personally to, or be mailed to and received by, the Secretary of the
Corporation, at the principal executive offices of the Corporation, not less
than 50 days nor more than 75 days prior to the meeting; provided, however, that
in the event that less than 65 days' notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the shareholder
to be timely must be received not later than the close of business on the tenth
day following the day on which such notice of the date of the meeting was mailed
or such public disclosure was made. Each Shareholder Meeting Notice to the
Secretary shall set forth as to each matter the shareholder proposes to bring
before the meeting: (i) a description of each item of business proposed to be
brought before the meeting and the reasons for conducting such business at the
meeting; (ii) the name and address, as they appear on the Corporation's books,
of the shareholder proposing to bring such item of business before the meeting;
(iii) the class and number of shares of stock held of record, owned beneficially
and represented by proxy by such shareholder as of the record date for the
meeting (if such date then shall have been made publicly available) and as of
the date of such Shareholder Meeting Notice; and (iv) all other information
which would be required to be included in a proxy statement filed with the
Securities and Exchange Commission (the "Commission") if, with respect to any
such item of business, such shareholder were a participant in a solicitation
subject to Section 14 of the Securities Exchange Act of 1934.
4
<PAGE>
Notwithstanding anything in these By-laws to the contrary, no business
shall be conducted at any meeting of the shareholders except in accordance with
the procedures set forth in these By-laws. The Chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the procedures
prescribed by these By-laws, and if he should so determine, he shall so declare
to the meeting and any such business not properly brought before the meeting
shall not be transacted.
When a meeting is adjourned to another time or place, notice of the
adjourned meeting need not be given if the time and place thereof are announced
at the meeting at which the adjournment is taken, unless the adjournment is for
more than 120 days, or unless after the adjournment a new record date is fixed
for the adjourned meeting, in which case notice of the adjourned meeting shall
be given to each shareholder of record entitled to vote at the meeting. At the
adjourned meeting, any business may be transacted that might have been
transacted at the original meeting.
8. Special meetings of the shareholders, for any purpose or purposes,
unless otherwise prescribed by statute, may be called by the Chairman, the Chief
Executive Officer or by a majority of the Board of Directors and must be called
on the written request of the holders representing not less than 25% of the
total voting power of the stock of the Corporation unless the Corporation's
Articles of Incorporation provide for a greater or lesser percentage.
9. The order of business at each meeting of shareholders shall be
determined by the presiding officer.
5
<PAGE>
ARTICLE IV
DIRECTORS
1. The business and affairs of the Corporation shall be managed under
the direction of a Board of Directors, which may exercise all such powers and
authority for and on behalf of the Corporation as shall be permitted by law, the
Articles of Incorporation of the Corporation or these By-laws.
2. The Board of Directors may hold their meetings within or outside of
the State of Florida, at such place or places as it may from time to time
determine.
3. The number of directors comprising the Board of Directors shall be
such number as may be from time to time fixed by resolution of the Board of
Directors. The directors shall be classified in respect to the time for which
they shall severally hold office, by dividing them into three classes. The
number of directors in each class shall be as nearly equal as possible. At each
annual election, any vacancy in any class may be filled and the successors to
the directors of the class whose terms shall expire in that year shall be
elected to hold office for the term of three years, and the term of office of
one class of directors shall expire in each year. In the event the number of
directors is increased, election may be made to a class of directors with terms
expiring in three years or less in order to maintain proportionate equality
between the classes.
6
<PAGE>
4. Subject to the rights of the holders of any class or series of stock
having a preference over the Common Stock of the Corporation as to dividends or
upon liquidation (if any), nominations for the election of directors may be made
by the Board of Directors or a committee appointed by the Board of Directors or
by any shareholder entitled to vote in the election of directors generally.
However, any shareholder entitled to vote in the election of directors generally
may nominate one or more persons for election as directors at a meeting only if
written notice of such shareholder's intent to make such nomination or
nominations has been delivered personally to, or been mailed to and received by
the Secretary of the Corporation at, the principal executive offices of the
Corporation, not less than 50 days nor more than 75 days prior to the meeting;
provided, however, that, in the event that less than 65 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must be so received not later than the
close of business on the tenth day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made. Each such
notice shall set forth: (i) the name and address of the shareholder, as they
appear on the Corporation's books, who intends to make the nomination and of the
person or persons to be nominated; (ii) the class and number of shares of stock
held of record, owned beneficially and represented by proxy by such shareholder
as of the record date for the meeting (if such date shall then have been made
publicly available) and of the date of such notice; (iii) a representation that
the shareholder intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (iv) a description of
all arrangements or understandings between such shareholder and each nominee and
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by such shareholder; (v) such other
information regarding each nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Commission, had each nominee been nominated, or intended to be nominated
by the Board of Directors; and (vi) the consent of each nominee to serve as a
director of the Corporation if so elected.
7
<PAGE>
No person shall be eligible to serve as a director of the Corporation
unless nominated in accordance with the procedures set forth in these By-laws.
The Chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the procedures
prescribed by these By-laws, and if he should so determine, he shall so declare
to the meeting and the defective nomination shall be disregarded.
5. The directors shall be elected by the holders of shares of stock of
the Corporation entitled to vote on the election of directors, and directors
shall be elected by a plurality vote. The initial directors shall be divided
into three classes, designated as Class I, Class II and Class III as set forth
in Section 3 of this Article IV. The Class I initial director or directors shall
serve until the annual meeting of shareholders held in 1998, the Class II
initial director or directors shall serve until the annual meeting of
shareholders held in 1999, and the Class III initial director or directors shall
serve until the annual meeting of shareholders held in 2000 and, in each case,
until their successor(s) are duly elected and qualified. At each annual meeting
of shareholders, commencing with the annual meeting to be held during the
calendar year 1998, each of the successors to the Directors of the class whose
term shall have expired that year shall be elected for a three-year term. If the
number of directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each class as
nearly equal as possible, and any additional director of any class elected to
fill a vacancy resulting from an increase in such class shall hold office for a
term that shall coincide with the remaining term of that class, but in no case
will a decrease in the number of directors shorten the term of any incumbent
director. A director shall hold office until the annual meeting for the year in
which his term expires and until the successor shall be elected and shall
qualify, subject, however to prior death, resignation, retirement,
disqualification or removal from office.
8
<PAGE>
6. Any vacancy occurring in the Board of Directors, including any
vacancy created by reason of an increase in the number of directors, shall be
filled for the unexpired term by the concurring vote of a majority of the
directors then in office, whether or not a quorum, and any director so chosen
shall hold office for the remainder of the full term of the class of directors
in which the new directorship was created or the vacancy occurred and until such
director's successor shall have been elected and qualified.
7. Any director may resign at any time by giving written notice of his
resignation to the Board of Directors. Any such resignation shall take effect
upon receipt thereof by the Board, or at such later date as may be specified
therein. Any such notice to the Board shall be addressed to it in care of the
Secretary of the Corporation.
ARTICLE V
COMMITTEES OF DIRECTORS
1. By resolutions adopted by a majority of the whole Board of
Directors, the Board may designate an Executive Committee and one or more other
committees, each such committee to consist of two or more directors of the
Corporation. The Executive Committee shall have and may exercise all the powers
and authority of the Board in the management of the business and affairs of the
Corporation (except as otherwise expressly limited by statute), including the
power and authority to declare dividends and to authorize the issuance of stock,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it. Each such committee shall have such of the powers and authority
of the Board as may be provided from time to time in resolutions adopted by a
majority of the whole Board.
2. The requirements with respect to the manner in which the Executive
Committee and each such other committee shall hold meetings and take actions
shall be set forth in the resolutions of the Board of Directors designating the
Executive Committee or such other committee.
9
<PAGE>
ARTICLE VI
COMPENSATION OF DIRECTORS
The directors shall receive such compensation for their services as may
be authorized by resolution of the Board of Directors, which compensation may
include, among other things, an annual fee and a fixed sum for expense of
attendance at regular or special meetings of the Board or any committee thereof
and the grant of stock options. Nothing herein contained shall be construed to
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.
ARTICLE VII
MEETINGS OF DIRECTORS; ACTION WITHOUT A MEETING
1. Regular meetings of the Board of Directors may be held without
notice at such time and place, either within or without the State of Florida, as
may be determined from time to time by resolution of the Board.
2. Special meetings of the Board of Directors shall be held whenever
called by the Chairman, the Chief Executive Officer or a majority of the Board
of Directors on at least 2 days' notice to each director. Except as may be
otherwise specifically provided by statute, by the Articles of Incorporation of
the Corporation or by these By-laws, the purpose or purposes of any such special
meeting need not be stated in such notice, although the time and place of the
meeting shall be stated.
3. At all meetings of the Board of Directors, the presence in person of
a majority of the members of the Board of Directors shall be necessary and
sufficient to constitute a quorum for the transaction of business, and, except
as otherwise provided by statute, by the Articles of Incorporation of the
Corporation or by these By-laws, if a quorum shall be present the act of a
majority of the directors present shall be the act of the Board.
10
<PAGE>
4. Any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee thereof may be taken without a meeting if
all the members of the Board or such committee, as the case may be, consent
thereto in writing and the writing or writings are filed with the minutes of
proceedings of the Board of committee. Any director may participate in a meeting
of the Board, or any committee designated by the Board, by means of a conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
pursuant to this sentence shall constitute presence in person at such meeting.
ARTICLE VIII
OFFICERS
1. The officers of the Corporation shall be chosen by the Board of
Directors and shall be a Chairman, a Chief Executive Officer, a President, one
or more Executive Vice Presidents, one or more Senior Vice Presidents, one or
more Vice Presidents, a Secretary and a Chief Financial Officer. The Board may
also choose one or more Assistant Secretaries and a Treasurer, and such other
officers as it shall deem necessary. Any number of offices may be held by the
same person.
2. The salaries of all officers of the Corporation shall be fixed by
the Board of Directors, or in such manner as the Board may prescribe.
3. The officers of the Corporation shall hold office until their
successors are elected and qualified, or until their earlier resignation or
removal. Any officer may be at any time removed from office by the Board of
Directors, with or without cause. If the office of any officer becomes vacant
for any reason, the vacancy may be filled by the Board of Directors.
4. Any officer may resign at any time by giving written notice of his
resignation to the Board of Directors. Any such resignation shall take effect
upon receipt thereof by the Board or at such later date as may be specified
therein. Any such notice to the Board shall be addressed to it in care of the
Secretary of the Corporation.
11
<PAGE>
ARTICLE IX
CHAIRMAN
The Chairman shall have general strategic oversight and control of the
business and affairs of the Corporation subject, however, to the direction and
control of the Board. The Chairman may sign and execute in the name of the
Corporation deeds, mortgages, bond, contracts or other instruments. He shall
perform all duties incident to the office of the Chairman and shall, when
requested, counsel with and advise the other officers of the Corporation and
shall perform such other duties as the Board may from time to time determine.
The Chairman shall preside at meetings of the shareholders and of the Board of
Directors.
ARTICLE X
CHIEF EXECUTIVE OFFICER
The Chief Executive Officer shall be the chief operating officer of the
Corporation. Subject to the supervision and direction of the Board of Directors
and the Chairman, he shall be responsible for overseeing the business and
affairs of the Corporation. The Chief Executive Officer may sign and execute in
the name of the Corporation deeds, mortgages, bond, contracts or other
instruments. He shall perform all duties incident to the office of the Chief
Executive Officer and shall, when requested, counsel with and advise the other
officers of the Corporation and shall perform such other duties as the Board or
the Chairman may from time to time determine. In the absence of the Chairman he
shall preside at meetings of the shareholders and of the Board of Directors.
ARTICLE XI
PRESIDENT
The President shall have such powers and perform such duties as may be
delegated to him by the Board of Directors, the Chairman and the Chief Executive
Officer of the Corporation.
12
<PAGE>
ARTICLE XII
EXECUTIVE VICE PRESIDENTS
Each Executive Vice President shall have such powers and perform such
duties as may be delegated to him by the Board of Directors, the Chairman and
the Chief Executive Officer or any other senior officer of the Corporation to
whom he reports.
ARTICLE XIII
SENIOR VICE PRESIDENTS
Each Senior Vice President shall have such powers and perform
such duties as may be delegated to him by the Board of Directors, the Chairman
and the Chief Executive Officer or any other senior officer of the Corporation
to whom he reports.
ARTICLE XIV
VICE PRESIDENTS
Each Vice President shall have such powers and duties as may
be delegated to him by the Chairman and the Chief Executive Officer or any other
senior officer of the Corporation to whom he reports.
ARTICLE XV
SECRETARY AND ASSISTANT SECRETARY
1. The Secretary shall attend all meetings of the Board of Directors
and of the shareholders, and shall record the minutes of all proceedings in a
book to be kept for that purpose. He shall perform like duties for the
committees of the Board when required.
13
<PAGE>
2. The Secretary shall give, or cause to be given, notice of meetings
of the shareholders, of the Board of Directors and of the committees of the
Board. He shall keep in safe custody the seal of the Corporation, and when
authorized by the Chairman, the Chief Executive Officer, the President, an
Executive Vice President or a Vice President, shall affix the same to any
instrument requiring it, and when so affixed it shall be attested by his
signature or by the signature of an Assistant Secretary. He shall have such
other powers and duties as may be delegated to him by the Chairman or the Chief
Executive Officer.
3. The Assistant Secretary shall, in case of the absence of the
Secretary, perform the duties and exercise the powers of the Secretary, and
shall have such other powers and duties as may be delegated to them by the
Chairman or the Chief Executive Officer.
ARTICLE XVI
CHIEF FINANCIAL OFFICER AND TREASURER
1. The Chief Financial Officer shall have the custody of the corporate
funds and securities, and shall deposit or cause to be deposited under his
direction all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors or pursuant to authority granted by it. He shall render to the
Chairman, the Chief Executive Officer and the Board whenever they may require it
an account of all his transactions as Chief Financial Officer. He shall have
such other powers and duties as may be delegated to him by the Chairman or the
Chief Executive Officer.
2. The Treasurer shall, in case of the absence of the Chief Financial
Officer, perform the duties and exercise the powers of the Chief Financial
Officer, and shall have such other powers and duties as may be delegated to them
by the Chairman or the Chief Executive Officer.
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ARTICLE XVII
CERTIFICATES OF STOCK
The certificates of stock of the Corporation shall be numbered and
shall be entered in the books of the Corporation as they are issued. They shall
exhibit the holder's name and number of shares and shall be signed by either the
Chairman, the Chief Executive Officer, the President or an Executive Vice
President, and by the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary.
ARTICLE XVIII
CHECKS
All checks, drafts and other orders for the payment of money and all
promissory notes and other evidences of indebtedness of the Corporation shall be
signed by such officer or officers or such other person as may be designated by
the Board of Directors or pursuant to authority granted by it.
ARTICLE XIX
FISCAL YEAR
The fiscal year of the Corporation shall be as determined from time to
time by resolution duly adopted by the Board of Directors.
ARTICLE XX
NOTICES AND WAIVERS
1. Whenever by statute, by the Articles of Incorporation of the
Corporation or by these By-laws it is provided that notice shall be given to any
director or shareholder, such provision shall not be construed to require
personal notice, but such notice may be given in writing, by mail, by depositing
the same in the United States mail, postage prepaid, directed to such
shareholder or director at his address as it appears on the records of the
Corporation, and such notice shall be deemed to be given at the time when the
same shall be thus deposited. Notice of regular or special meetings of the Board
of Directors may also be given to any director by telephone or by telex,
telegraph or cable, and in the latter event the notice shall be deemed to be
given at the time such notice, addressed to such director at the address
hereinabove provided, is transmitted by telex (with confirmed answerback), or
delivered to and accepted by an authorized telegraph or cable office.
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2. Whenever by statute, by the Articles of Incorporation of the
Corporation or by these By-laws a notice is required to be given, a written
waiver thereof, signed by the person entitled to notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Attendance of any
shareholder or director at any meeting thereof shall constitute a waiver of
notice of such meeting by such shareholder or director, as the case may be,
except as otherwise provided by statute.
ARTICLE XXI
INDEMNIFICATION
The Corporation shall, to the fullest extent permitted by the
provisions of the Florida Business Corporation Act or any successor act, as the
same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said provisions from and against any and all
of the expenses, liabilities, or other matters referred to in or covered by said
provisions, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By-law, vote of shareholders or disinterested directors, or otherwise, both
as to action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, officer, employee, or agent and shall inure to the benefit of the
heirs, executors, and administrators of such person. If the Florida Business
Corporation Act is amended hereafter to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director shall be eliminated or limited to the fullest extent permitted by
the Florida Business Corporation Act, as so amended.
ARTICLE XXII
ALTERATION OF BY-LAWS
The By-laws of the Corporation may be altered, amended or repealed, and
new By-laws may be adopted, by the majority vote of the shareholders or by the
Board of Directors; provided, however, that the provisions of Sections 3 and 5
of Article IV of these By-Laws may be altered, amended or repealed only by the
affirmative vote of the holders of 66 2/3% of the total voting power of the
Corporation's stock outstanding and entitled to vote thereon; provided, further,
that this supermajority requirement may be altered, amended or repealed only by
the affirmative vote of the holders of 66 2/3% of the total voting power of the
Corporation's stock outstanding and entitled to vote thereon.
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EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of the 4th day of January 2000 by and between
MediaBay, Inc., a Florida corporation, with offices at 20 Community Place,
Morristown New Jersey 07960 (the "Company"), and Norton Herrick (the
"Executive").
W I T N E S S E T H:
WHEREAS, the Company is engaged in the audio book club business; and
WHEREAS, the Company recognizes the Executive's substantial
contribution to the growth and success of the Company and desires to provide for
his continued employment by reinforcing and encouraging his continued attention
and dedication to the Company; and
WHEREAS, the Executive is willing to commit himself to continue to
serve and to establish a minimum period during which he will serve the Company
on the terms and conditions herein provided.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, in consideration of
the Executive's services and value to the Company over and beyond his
obligations as an employee, and intending to be legally bound hereby, the
parties agree as follows:
1. Recitals. The Whereas clauses recited above are hereby incorporated
by reference as though they were fully set forth herein.
2. Employment. The Company shall employ the Executive and the Executive
shall serve the Company, on the terms and conditions set forth herein.
3. Term. The commencement of term of the Executive's employment by the
Company as provided in paragraph 2 is retroactive to October 22, 1999 (the
expiration of the October 22, 1997 employment agreement between the Company and
the Executive) and ends on October 22, 2000, subject, however, to the other
termination provisions contained herein.
4. Position and Duties. (a) The Executive shall be employed by the
Company as its Chairman and may also serve, at his option, as the Company's
Chairman of the Board of Directors. His power and authority shall be and remain
superior to those of any other officer or employee of the Company. Subject to
the direction and control of the Board of Directors, the Executive shall have
general strategic oversight and control of the business and affairs of the
Company consistent with his current position as Chairman of the Company. The
scope of his duties and the extent of his responsibilities shall be
substantially the same as the duties and responsibilities that the Executive
currently performs. In addition, the Executive shall not be required to spend
any fixed amount of time in connection with his performance of his duties.
<PAGE>
5. Compensation and Related Matters.
(a) Salary. During the term of this Agreement, the Company shall pay
to the Executive, as basic compensation for his services, an initial annual
salary of $100,000 in equal monthly installments during the term of this
Agreement; thereafter at any time during the term of this Agreement the Board of
Directors may increase, but not decrease such amount. In addition the Executive
shall be entitled to participate in the Company's incentive stock option plans
and may receive a performance-based bonus, to be determined by the Board of
Directors. The Executive's salary and bonus shall be reconsidered at least once
each fiscal year of the Company and shall not necessarily be limited to such
increases granted other officers.
(b) Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable travel and business expenses in connection with
services performed hereunder in accordance with normal Company policy, as the
same may be determined from time to time.
(c) Insurance and Employee Benefits. The Executive shall be entitled
to receive insurance and employee benefits applicable to all officers of the
Company.
6. Termination by the Company. The Executive's employment hereunder may
be terminated by the Company without any breach of this Agreement only under the
circumstances described below.
(a) Death. The Executive's employment hereunder shall terminate upon
his death.
(b) Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, as determined by a physician mutually chosen by the
Executive and the Company, the Executive shall have been absent from his duties
hereunder for a consecutive period of one hundred eighty (180) days and after
notice of termination is given (which may be given before or after the end of
such 180 day period but which will in no event be effective until, at the
earliest, the day following the one hundred eightieth (180th) day of the period)
shall not have returned to the performance of his duties hereunder, as that
concept is contemplated in this Agreement, within thirty (30) days after the
notice of termination is given, the Company may terminate the Executive's
employment hereunder.
(c) Cause. The Company may terminate the Executive's employment
under this Agreement at any time for cause. For purposes of this Agreement, the
term "cause" shall include one or more of the following: (i) willful misconduct
and continued failure by the Executive in the performance of his duties, as
contemplated in this Agreement, as Chief Executive Officer (other than through
disability as defined in paragraph 6(b), above), or (ii) conviction of a crime
involving moral turpitude, theft, embezzlement or continuing alcohol or drug
abuse to the extent that he is unable to perform the duties of his office. The
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termination shall be evidenced by written notice thereof to the Executive, which
shall specify the cause for termination.
(d) Without Cause. In addition to any other rights the Company has
to terminate the Executive's employment under this Agreement, the Company may,
at any time, by a vote of not less than seventy percent (70%) of the directors
then in office (excluding the vote of the Executive if he is also a director),
terminate the Executive without cause upon ninety (90) days' prior written
notice to the Executive setting forth the reasons, if any, for the termination.
For purposes of this Agreement, the term "without cause" shall mean termination
by the Company on any grounds other than those set forth in paragraphs 6(a), (b)
or (c) hereof.
(e) Severance Pay. In the event that the Company has terminated the
Executive's employment under this Agreement "without cause" or in the event
there is a "Change of Control" (as defined below), then the Executive will be
entitled to receive severance pay equal to the greater of Six Hundred Thousand
and 00/100 U.S. Dollars ($600,000.00) or six(6) times the total compensation
received by the Executive from the Company during the twelve (12) months prior
to the date of termination. In the event there is a "Change of Control" (as
defined below), the Executive will have six (6) months following the event which
constituted the "Change of Control" to elect to resign (unless in connection
with such event the Executive was terminated) at which time the Executive will
then receive the aforementioned severance pay.
(f) Change of Control. For purposes of this Agreement, a "Change of
Control" shall be deemed to occur, unless previously consented to in writing by
the Executive, upon (i) the actual acquisition or the execution of an agreement
to acquire twenty percent (20%) or more of the voting securities of the Company
by any person or entity not affiliated with the Executive (other than pursuant
to a bona fide underwriting agreement relating to a public distribution of
securities of the Company), (ii) the commencement of a tender or exchange offer
for more than twenty percent (20%) of the voting securities of the Company by
any person or entity not affiliated with the Executive, (iii) the commencement
of a proxy contest against the management for the election of a majority of the
Board of Directors of the Company if the group conducting the proxy contest
owns, has or gains the power to vote at least twenty percent (20%) of the voting
securities of the Company, (iv) a vote by the Board of Directors to merge,
consolidate, sell all or substantially all of the assets of the Company to any
person or entity not affiliated with the Executive, or (v) the election of
directors constituting a majority of the Board of Directors who have not been
nominated or approved by the Executive.
(g) The Executive shall not be required to mitigate the amount of
any payment provided for in this paragraph 6 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this paragraph 6
be reduced by any compensation earned by the Executive as the result of
employment by another employer or business or by profits earned by the Executive
from any other source at any time before and after the date of termination. The
amounts payable to the Executive under this Agreement shall not be treated as
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damages, but as severance pay to which the Executive is entitled by reason of
his employment and the circumstances contemplated by this Agreement.
(h) The severance pay which the Executive will be entitled to
receive as a result of the termination of his employment under this Agreement,
shall not be the Executive's exclusive remedy in the event of such termination,
and the Executive will continue to be entitled to all other damages to which the
Executive may be entitled as a result to the termination of his employment under
this Agreement, including all legal fees and expenses incurred by him in
contesting or disputing any such termination or in seeking to obtain or enforce
any right or benefit provided by this Agreement.
7. Non-Competition Covenant. The Executive hereby covenants and agrees
that he will not serve as an officer of or perform any equivalent functions for
any other audio book company during the term of his employment under this
Agreement. Nothing in the immediately preceding sentence is intended to be
construed as otherwise preventing the Executive from (i) engaging in other
business activities, (ii) holding positions in charitable organizations, (iii)
purchasing, holding or owning interests in other entities and/or serving as a
director and/or officer of other corporations, or serving as a manager of
limited liability companies or a general partner of partnerships, or (iv) having
any other interest in other businesses. In addition, during the term of this
Agreement and for a period of two (2) years immediately following the
termination of his employment, whether said termination is occasioned by the
Company, the Executive or a mutual agreement of the parties, the Executive shall
not, for himself or on behalf of any other person, persons, firm, partnership,
corporation or company, engage or participate in any activities which are in
direct conflict with the interests of the Company or solicit or attempt to
solicit the business or patronage of any person, firm, corporation, company or
partnership, which had previously been a customer of the Company, for the
purpose of selling products and services similar to those provided by the
Company.
8. Indemnification. To the maximum extent permitted under the corporate
laws of the State of Florida or, if more favorable, the Articles of
Incorporation and/or By-Laws of the Company as in effect on the date of this
Agreement, (a) the Executive shall be indemnified and held harmless by the
Company, as provided under such corporate laws or such Articles of Incorporation
and/or By-Laws, as applicable, for any and all actions taken or matters
undertaken, directly or indirectly, in the performance of his duties and
responsibilities under this Agreement or otherwise on behalf of the Company, and
(b) without limiting clause (a), the Company shall indemnify and hold harmless
the Executive from and against (i) any claim, loss, liability, obligation,
damage, cost, expense, action, suit, proceeding or cause of action
(collectively, "Claims") arising from or out of or relating to the Executive's
acting as an officer, director, employee or agent of the Company or any of its
affiliates or in any other capacity, including, without limitation, any
fiduciary capacity, in which the Executive serves at the request of the Company,
and (ii) any cost or expense (including, without limitation, fees and
disbursements of counsel) (collectively, "Expenses") incurred by the Executive
in connection with the defense or investigation thereof. If any Claim is
asserted or other matter arises with respect to which the Executive believes in
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good faith the Executive is entitled to indemnification as contemplated hereby,
the Company shall pay the Expenses incurred by the Executive in connection with
the defense or investigation of such Claim or matter (or cause such Expenses to
be paid) on a monthly basis.
9. Binding Agreement. This Agreement and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, divisees and legatees. In addition, this Agreement and the
obligations and rights of the Company hereunder shall be binding on any person,
firm or corporation which is a successor-in-interest to the Company.
10. Notice. For the purpose of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered personally, or by private
overnight courier or mail service, postage prepaid or (unless otherwise
specified) mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive: Norton Herrick
2295 Corporate Boulevard, N.W., Suite 222
P.O. Box 5010
Boca Raton, Florida 33431-0810
(561) 241-9880
If to the Company: MediaBay, Inc.
20 Community Place
Morristown, New Jersey 07960
(973) 539-9528
or to such other address as the parties may furnish to each other in writing.
Copies of all notices, demands and communications shall be sent to the home
addresses of all members of the Board of Directors of the Company.
11. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the parties hereto, provided, however, that this Agreement may be
modified, waived or discharged by mutual agreement in writing.
(b) No delay, waiver, omission or forbearance (whether by conduct
or otherwise) by any party hereto at any time to exercise any right, option,
duty or power arising out of breach or default by the other party of any of the
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terms, conditions or provisions of this Agreement to be performed by such other
party shall constitute a waiver by such party or a waiver of such party's rights
to enforce any right, option or power as against the other party or as to
subsequent breach or default by such other party, and no explicit waiver shall
constitute a waiver of similar or dissimilar terms, provisions or conditions at
the same time or at any prior or subsequent time.
(c) In the event of a dispute between the Executive and the Company
concerning any of the provisions of this Agreement or the enforcement of the
terms hereof, should the Executive prevail in any settlement or final,
unappealable judgment of a court of competent jurisdiction, the Company shall
pay the Executive's costs incurred therein, including reasonable attorneys'
fees.
12. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Florida and any action brought by either party shall be
commenced in the courts of the State of Florida. The Executive and the Company
hereby irrevocably and unconditionally consent to submit to the exclusive
jurisdiction of the courts of the State of Florida and the United States of
America located in Palm Beach County, Florida for any and all actions, suits or
proceedings arising out of or resulting from or relating to this Agreement and
the transactions contemplated hereby and the parties agree not to commence any
action, suit or proceeding relating thereto except in such courts. The parties
hereby irrevocably and unconditionally waive any objection to the laying of
venue of any such action, suit or proceeding arising out of, resulting from or
relating to this Agreement or the transactions contemplated hereby in such
courts and hereby further irrevocably and unconditionally waive and agree not to
plead or claim in any such court that such action, suit or proceeding brought in
any such court has been brought in an inconvenient forum.
13. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. Entire Agreement. This Agreement contains the entire understanding
of the Company and the Executive with respect to his employment by the Company.
This Agreement supersedes all prior agreements and understandings whether
written or oral between the Executive and the Company, and there are no
restrictions, agreements, promises, warranties or covenants other than those
stated in this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the
date shown below effective as of the date first written above.
"COMPANY"
Date Signed:_________________, 19__ MediaBay, Inc., a Florida
corporation
By:_______________________________________
Printed Name:_____________________________
Title:____________________________________
"EXECUTIVE"
Date Signed:_________________, 19__ __________________________________________
Printed Name:_____________________________
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NEITHER THIS NOTE, NOR ANY SECURITY ISSUABLE UPON CONVERSION HEREOF, HAS BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
APPLICABLE STATE SECURITIES LAWS. NO INTEREST IN THIS NOTE MAY BE OFFERED OR
SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT,
OR (ii) AN EXEMPTION FROM REGISTRATION UNDER THE ACT WHERE THE HOLDER HAS
FURNISHED TO THE COMPANY AN OPINION OF ITS COUNSEL REASONABLY SATISFACTORY TO
THE COMPANY THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE.
MEDIABAY, INC.
9% CONVERTIBLE SENIOR SUBORDINATED PROMISSORY NOTE
DUE DECEMBER 31, 2004
$2,776,250.00 February 7, 2000
MEDIABAY, INC. (together with its successors, the "Company"),
a Florida corporation, for value received, hereby promises to pay to Norton
Herrick or registered assigns (the "Holder"), the principal sum of TWO MILLION
SEVEN HUNDRED SEVENTY SIX THOUSAND TWO HUNDRED FIFTY DOLLARS ($2,776,250) on
December 31, 2004 (the "Maturity Date"), and to pay interest on the unpaid
principal balance hereof from the date hereof to the Maturity Date at the rate
of nine percent (9.0%) per annum, in arrears, quarterly on March 31, June 30,
September 30 and December 31 in each year, commencing on March 31, 2000, until
the principal amount hereof shall become due and payable; and to pay on demand
interest on any overdue principal (including any overdue partial payment of
principal and principal payable at the maturity hereof), and (to the extent
permitted by applicable law) on any overdue installment of interest (the due
date of such payments to be determined without giving effect to any grace
period) at the rate of eleven percent (11.0%) per annum.
<PAGE>
1. Interest and Payment
1.1 Interest shall be computed on the basis of a 360 day year of twelve 30
day months for the actual time elapsed.
1.2 At the option of the Holder, the Company may pay a scheduled interest
payment in a number of whole shares of common stock, without par value ("Common
Stock"), of the Company, in lieu of paying such interest in cash, equal to the
quotient of dividing the amount of accrued and unpaid interest payable on such
interest payment date by an amount equal to the then current Conversion Price
(as hereinafter defined). No fractional shares of Common Stock will be issued to
the Holder in lieu of cash interest. Instead of any fractional share which would
otherwise be issuable in lieu of cash interest, the Company will calculate and
pay a cash adjustment in respect of such fraction (calculated to the nearest
1/100th of a share) in an amount equal to the same fraction of the Conversion
Price at the close of business on the fifth business day immediately preceding
such interest payment date. The Holder may exercise its option to cause the
Company to issue shares of Common Stock, in lieu of cash interest payable on an
interest payment date, by giving the Company written notice of its exercise of
<PAGE>
such option at least five business days prior to such interest payment date and
the Company will deliver or cause its transfer agent to deliver, to the Holder
or its designee on such interest payment date, duly executed certificates for
the number of whole shares of Common Stock so issuable to the Holder registered
in the Holder's name or such other name or names and in such denominations as
the Holder shall have designated in its notice of exercise, and, if applicable,
a check payable to the Holder for any cash adjustment in lieu of a fractional
share.
1.3 Except as provided in Section 1.2 hereof, payments of principal, Change
in Control Purchase Price (as hereinafter defined), if any, and accrued interest
shall be made in such coin or currency of the United States of America as at the
time of payment is legal tender for the payment of public and private Debts to
the Holder hereof at its address shown in the register maintained by the Company
for such purpose.
1.4 (a) The Company shall pay all amounts payable with respect to this Note
(without any presentment of this Note) by crediting, by federal funds bank wire
transfer, the account of the Holder in any bank in the United States of America
as may be designated in writing by the Holder or in such other manner or to such
other address in the United States of America as may be designated in writing by
the Holder (and as to which, absent subsequent notice from the Holder, the
Company may conclusively rely). Annex 1 shall be deemed to constitute notice,
direction or designation (as appropriate) by the payee of this Note to the
Company with respect to payments to be made to such payee as above provided. In
the absence of such written direction, all amounts payable with respect to this
Note shall be paid by check mailed and addressed to the Holder at its address
shown in the register maintained by the Company pursuant to Section 2.1.
(b) All payments received on account of this Note shall be applied first
to the payment of accrued and unpaid interest on this Note and then to the
reduction of the unpaid principal amount of this Note. In case the entire
principal amount of this Note is paid or this Note is purchased by the Company,
this Note shall be surrendered to the Company for cancellation and shall not be
reissued, and no Note shall be issued in lieu of the paid principal amount of
any Note.
1.5 (a) If any payment due on account of this Note shall fall due on a day
other than a business day, then such payment shall be made on the first business
day following the day on which such payment shall have so fallen due; provided
that if all or any portion of such payment shall consist of a payment of
interest, for purposes of calculating such interest, such payment shall be
deemed to have been originally due on such first following Business Day, such
interest shall accrue and be payable to (but not including) the actual date of
payment, and the amount of the next succeeding interest payment shall be
adjusted accordingly.
(b) Any payment to be made to the Holder on account of this Note shall be
deemed to have been made on the business day such payment actually becomes
available at such Holder's bank prior to the close of business of such bank,
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provided that interest for one day at the non-default interest rate of this Note
shall be due on the amount of any such payment that actually becomes available
to the Holder at the Holder's bank after 1:00 p.m. (local time of such bank).
1.6 The Company may, upon at least three business days prior written notice
to the Holder specifying the date of the prepayment (the "Prepayment Date") and
the principal amount to be prepaid, prepay the unpaid principal balance of this
Note in whole at any time or in part from time to time, without penalty or
premium, in multiples of $100,000 (or if the outstanding principal amount is
less than $100,000 at such time, then such principal amount) together with
interest on the principal amount being prepaid accrued to the designated
Prepayment Date.
1.7 In the event of a Change in Control, the Company will, within 15 business
days after the occurrence of such event, give notice of such Change in Control
to the Holder. Such notice shall contain an irrevocable offer to the Holder to
repurchase this Note on a date (the "Change in Control Payment Date") specified
in such notice that is not less than thirty (30) days and not more than ninety
(90) days after the date of such notice, at a purchase price equal to 100% of
the aggregate principal amount thereof and all interest accrued and unpaid on
such principal amount to the Change in Control Payment Date (the "Change in
Control Purchase Price"). Each such notice shall: (i) be dated the date of the
sending of such notice; (ii) be executed by an executive officer of the Company;
(ii) specify, in reasonable detail, the nature and date of the Change in
Control; (iv) specify the Change in Control Payment Date; (v) specify the
principal amount of this Note outstanding; (vi) specify the interest that would
be due on this Note, accrued to the Change in Control Payment Date; and (vii)
specify that this Note shall be purchased at the Change in Control Purchase
Price. The Holder shall have the option to accept or reject such offered
payment. In order to accept such offered payment, the Holder shall cause a
notice of such acceptance to be delivered to the Company at least five days
prior to the Change in Control Payment Date. A failure to accept in writing such
written offer of payment as provided in this Section 1.7, or a written rejection
of such offered prepayment, shall be deemed to constitute a rejection of such
offer. The offered payment shall be made at the Change in Control Purchase Price
determined as of the Change in Control Payment Date.
1.8 Upon any partial payment of the outstanding principal amount of this
Note, the Holder shall mark this Note with a notation of the principal amount so
paid and the date of such payment.
2. Registration; Exercise; Substitution
2.1 The Company will keep at its principal executive office a register for
the registration and transfer of this Note. The name and address of the Holder
of this Note, each transfer hereof made in accordance with Section 2.2(a) and
the name and address of each transferee of this Note shall be registered in such
register. The person in whose name this Note shall be registered shall be deemed
and treated as the owner and holder thereof, and the Company shall not be
affected by any notice or knowledge to the contrary, other than in accordance
with Section 2.2(a)
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2.2 (a) Upon surrender of this Note at the principal executive office of the
Company, duly endorsed or accompanied by a written instrument of transfer duly
executed by the Holder or the Holder's attorney duly authorized in writing, the
Company will execute and deliver, at the Company's expense (except as provided
in Section 2.2(c)), a new Note (or Notes) in exchange therefor, in an aggregate
principal amount equal to the unpaid principal amount of the surrendered Note.
Subject to Section 2.2(b), the new Note(s) shall be registered in such name(s)
as the Holder may request. Each such new Note shall be dated and bear interest
from the date to which interest shall have been paid on the surrendered Note or
dated the date of the surrendered Note, if no interest shall have been paid
thereon. Each such new Note shall carry the same rights to unpaid interest and
interest to accrue on the unpaid principal amount thereof as were carried by the
Note so exchanged or transferred.
(b) This Note has been acquired for investment and has not been
registered under the securities laws of the United States of America or any
state thereof. Accordingly, notwithstanding Section 2.2(a), neither this Note
nor any interest thereon may be offered for sale, sold or transferred in the
absence of registration and qualification of this Note under applicable federal
and state securities laws or an opinion of counsel of the Holder reasonably
satisfactory to the Company that such registration and qualification are not
required. This Note shall not be transferred in denominations of less than
$100,000 and integral multiples thereof, provided that the Holder may transfer
this Note as an entirety regardless of the principal amount thereof.
(c) The Company may require payment of a sum sufficient to cover any
stamp tax or governmental change imposed in respect of any such transfer of this
Note.
2.3 Upon receipt by the Company from the Holder of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Note (which evidence shall be, if the Holder is the payee or an
institutional investor, notice from the payee or such institutional investor of
such loss, theft, destruction or mutilation), and (a) in the case of loss, theft
or destruction, of indemnity reasonably satisfactory to the Company; provided,
however, that if the Holder is the payee or an institutional investor, the
unsecured agreement of indemnity of the payee or such institutional investor
shall be deemed to be satisfactory; or (b) in the case of mutilation, upon
surrender and cancellation thereof; the Company at its own expense will execute
and deliver, in lieu thereof, a replacement Note, dated and bearing interest
from the date to which interest shall have been paid on such lost, stolen,
destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or
mutilated Note, if no interest shall have been paid thereon.
2.4 The Company will pay taxes (if any) due (but not, in any event, income
taxes of the Holder) in connection with and as the result of the initial
issuance of this Note and in connection with any modification, waiver or
amendment of this Note and shall save the Holder harmless, without limitation as
to time, against any and all liabilities with respect to all such taxes.
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3. Subordination
3.1 Notwithstanding any other provision contained in this Agreement, the
Subordinated Debt is subordinate and junior in right of payment to all Senior
Debt to the extent provided in this Section 3.
3.2 In the event of: (a) any insolvency, bankruptcy, receivership,
liquidation, reorganization, readjustment, composition or other similar
proceeding relating to the Company; (b) any proceeding for the liquidation,
dissolution or other winding-up of the Company, voluntary or involuntary,
whether or not involving insolvency or bankruptcy proceedings; (c) any general
assignment by the Company for the benefit of creditors; or (d) any other
marshaling of the assets of the Company; all Senior Debt shall first be paid in
full, in cash or Cash Equivalents (as defined in Section 8 hereof and, for all
purposes of this Section 3, as so defined), before any payment or distribution,
whether in cash, securities or other property, shall be made to any holder of
any Subordinated Debt on account of any Subordinated Debt. Any payment or
distribution, whether in cash, securities or other property (other than
securities of the Company or any other corporation provided for by a plan of
reorganization or readjustment, the payment of which is subordinated, at least
to the extent provided in this Section 3 with respect to Subordinated Debt, to
the payment of all Senior Debt at the time outstanding and to any securities
issued in respect thereof under any such plan of reorganization or readjustment,
but only if the rights of the holders of the Senior Debt are not impaired by
such plan without their consent), which would otherwise (but for this Section 3)
be payable or deliverable in respect of Subordinated Debt, shall be paid or
delivered directly to the holders of Senior Debt in accordance with the
priorities then existing among such holders, until all Senior Debt shall have
been paid in full, in cash or Cash Equivalents.
3.3 If any holder of Subordinated Debt does not file a proper claim or proof
of Debt therefor prior to 20 days before the expiration of the time to file such
claim or proof, then the Senior Agent is hereby authorized and empowered (but
not obligated) as the agent and attorney-in-fact for such holder for the
specific and limited purpose set forth in this Section 3.3 to file such claim or
proof for or on behalf of such holder; provided, however, that the Senior Agent
shall have, prior to taking any such action, given 15 days prior written notice
(which notice may be given up to 60 days prior to the expiration of the time to
file such claim or proof) to such holder of Subordinated Debt that it intends to
file such claim or proof of Debt. In no event may the Senior Agent or any holder
of the Senior Debt vote any claim on behalf of any holder of the Subordinated
Debt, and such agency and appointment of attorney-in-fact shall not extend to
any such right to vote any such claim.
3.4 If (a) the Company shall default in the payment or prepayment of any
principal of, premium, if any, or interest on, or commitment fee or letter of
credit fee or Administrative Agent fee or indemnity under Section 2.10 or 2.12
or 11.4(c) (or comparable sections under any replacement Senior Debt) in respect
of, any Senior Debt (a "Senior Payment Default") when the same becomes due and
payable, whether at maturity, at a date fixed for prepayment, by declaration of
acceleration or otherwise, or shall fail to comply with any covenant or
agreement in respect of Senior Debt which covenant or agreement default results
in actual acceleration of the maturity of such Senior Debt ("Covenant
Acceleration"); and (b) the Company receives from the Senior Agent written
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notice of the happening of such Senior Payment Default or Covenant Acceleration,
stating that such notice is a payment blockage notice pursuant to this Section
3.4; no direct or indirect payment (in cash, property or securities or by
set-off or otherwise) shall be made or agreed to be made on account of any
Subordinated Debt, or as a sinking fund for any Subordinated Debt, or in respect
of any redemption, retirement, purchase, prepayment or other acquisition or
payment of any Subordinated Debt, unless and until such Senior Payment Default
shall have been cured or waived or otherwise shall have ceased to exist or such
Covenant Acceleration shall have been rescinded and the underlying covenant
default shall have been cured or waived or shall have otherwise ceased to exist.
The Company shall give prompt written notice to each holder of
Subordinated Debt of its receipt of any such notice from the Senior Agent under
this Section 3.4.
3.5 If (a) any Significant Nonpayment Default shall have occurred; and (b)
the Company and the Holder receive from the Senior Agent written notice (a "Stop
Payment Notice") of the happening of such Significant Nonpayment Default,
stating that such notice is a payment blockage notice pursuant to this Section
3.5; no direct or indirect payment (in cash, property or securities or by
set-off or otherwise) shall be made or agreed to be made for or on account of
any Subordinated Debt, or as a sinking fund for any Subordinated Debt, or in
respect of any redemption, retirement, repurchase, prepayment, purchase or other
acquisition or payment of any Subordinated Debt, for a period (each, a "Payment
Blockage Period") commencing on the date such Stop Payment Notice is delivered
to the Company and ending on the earliest to occur of the following: (a) the
time as of which each Significant Nonpayment Default which is the subject of
such Stop Payment Notice shall have been waived or cured (whether by amendment
of any provisions of the Senior Credit Agreement or otherwise), (b) a number of
days shall have elapsed as is necessary to prevent the total number of days that
a Stop Payment Notice (or Stop Payment Notices in the event that more than one
Stop Payment Notice has been given) is in effect during any consecutive 365 day
period from exceeding 180 days in the aggregate, and (c) the date of the
repayment in full in cash or Cash Equivalents of the Senior Debt and the
termination of any commitment to make further loans or advances in respect of
the Senior Debt; provided, however, that (i) the Senior Agent shall not be
permitted to issue a Stop Payment Notice more than six times in the aggregate;
(ii) only two Stop Payment Notices may be issued in any period of 365
consecutive days; (iii) Payment Blockage Periods may not be in effect for more
than 180 days (whether or not such days are consecutive) during any period of
365 consecutive days, and if any Payment Blockage Period is in effect on the
181st day in any period of 365 consecutive days, such Payment Blockage Period
will terminate immediately; and (iv) no Payment Blockage Period may be imposed
as a result of a Significant Nonpayment Default which served as the basis for or
was continuing during any previous Payment Blockage Period, unless any such
Significant Nonpayment Default shall have been cured or waived or otherwise
ceased to exist for a period of not less than 60 consecutive days after the date
that the previous Stop Payment Notice was given.
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3.6 If, at any time during which the Senior Credit Facility is in effect, the
Holder elects to exercise any Remedies in respect of any Event of Default, the
Holder shall deliver to the Company and to the Senior Agent written notice (an
"Enforcement Notice") specifying the Event or Events of Default which are the
basis for the exercise of such Remedies and stating that the Holder intends to
exercise Remedies; provided, however, that the failure to deliver such
Enforcement Notice to the Senior Agent shall not affect the validity of the
Enforcement Notice as between such holder or holders and the Company.
3.7 Notwithstanding anything contained in this Note to the contrary, for so
long as any amount is outstanding under the Senior Credit Facility including any
letter of credit reimbursement obligations or commitments, the Holder shall not
exercise any Remedies in respect thereof during any period (a "Standstill
Period") commencing on the first date the Holder, but for the provisions of this
Section 3, would have been entitled to exercise any Remedies and ending upon the
earliest of:
(a) the date which is 10 business days after the Enforcement Notice is
delivered to the Company and the Senior Agent pursuant to Section 3.6; provided,
however, that if any Payment Blockage Period arising from the giving of a Stop
Payment Notice is in effect on such 10th business day after the Enforcement
Notice is so delivered, this clause (a) shall be ineffective to terminate such
Standstill Period;
(b) in the event that a Payment Blockage Period arising from the giving
of a Stop Payment Notice is in effect on the date which is 10 business days
after an Enforcement Notice is delivered to the Company and the Senior Agent
pursuant to Section 3.6, the expiration of such Payment Blockage Period;
(c) the date that any holder of any Senior Debt commences the exercise of
any Remedies in respect of such Senior Debt; and
(d) the first date upon which any of the Events of Default described in
Section 7.1(f) and (g) shall have occurred and be continuing beyond any period
of grace specified therein; and, in such event, the automatic acceleration of
this Note contemplated in respect of such Event of Default pursuant to Section
7.2(a) shall occur immediately upon the termination of the Standstill Period.
3.8 If (a) any payment or distribution shall be paid to or collected or
received by any holders of Subordinated Debt in contravention of any of the
terms of this Section 3 but whether or not any Stop Payment Notice or (pursuant
to Section 3.4) payment blockage notice shall theretofore have been given (i.e.,
if paid, collected or received at a time when either such notice could have been
given had the Senior Agent been aware of circumstances giving rise to the right
to deliver any such notice); and (b) the Senior Agent shall have notified the
holders of Subordinated Debt in writing, within 30 days after the date such
payment or distribution is made, of the facts by reason of which such payment or
collection or receipt so contravenes this Section 3 or constituted a Significant
Nonpayment Default; then such holders of Subordinated Debt will deliver such
payment or distribution, to the extent necessary to pay all such Senior Debt in
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full, in cash or Cash Equivalents, to the Senior Agent, on behalf of the holders
of the Senior Debt, and, until so delivered, the same shall be held in trust by
such holders of Subordinated Debt as the property of the holders of such Senior
Debt. If any amount is delivered to the Senior Agent pursuant to this Section
3.8, whether or not such amounts have been applied to the payment of Senior
Debt, and the outstanding Senior Debt shall thereafter be paid in full, in cash
or Cash Equivalents, by the Company or otherwise other than pursuant to this
Section 3.8, the holders of Senior Debt shall return to such holders of
Subordinated Debt an amount equal to the amount delivered to such holders of
Senior Debt pursuant to this Section 3.8, so long as after the return of such
amounts the Senior Debt shall remain indefeasibly paid in full, in cash or Cash
Equivalents.
3.9 Except as provided in this Section 3, the rights set forth in this
Section 3 of the holders of the Senior Debt as against each holder of
Subordinated Debt shall remain in full force and effect without regard to, and
shall not be impaired by:
(a) any act or failure to act on the part of the Company;
(b) any extension or indulgence in respect of or change in the time,
manner or place of any payment or prepayment of the Senior Debt or any part
thereof or in respect of any other amount payable to any holder of Senior Debt,
including, without limitation, any increase in the Senior Debt resulting from
extension of additional credit to the Company or any subsidiary or otherwise and
permitted by Section 6.3(iii) or (iv) hereof;
(c) any amendment, modification, restatement, refinancing or waiver of,
or addition or supplement to, or deletion from, or compromise, release, consent
or other action in respect of, any of the terms of any Senior Debt or any other
agreement which may be relating to any Senior Debt, other than such as would
cause all or any portion of such Debt to fail to meet the definition of "Senior
Debt;"
(d) any exercise or non-exercise by any holder of Senior Debt of any
right, power, privilege or remedy under or in respect of any Senior Debt or
Subordinated Debt or any waiver of any such right, power, privilege or remedy or
any default in respect of any Senior Debt or the Subordinated Debt, any dealing
with or action against or application of proceeds from any collateral security
therefor or any receipt by any holder of Senior Debt of any security, or any
failure by any holder of Senior Debt to perfect a security interest in, or any
release by any such Senior Debt of, any security for or guaranty of the payment
of any Senior Debt or any manner of sale or other disposition of any assets of
the Company or any subsidiary;
(e) any merger or consolidation of the Company or any of its subsidiaries
into or with any other subsidiaries of the Company or into or with any person,
or any transfer of any or all of the property of the Company or any of its
subsidiaries to any other person or any change, restructuring or termination of
the corporate structure or existence of the Company or any of its subsidiaries;
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(f) the absence of any notice to, or knowledge by, any holder of
Subordinated Debt of the existence or occurrence of any of the matters or events
set forth in the foregoing clauses (a) through (e).
(g) any lack of validity or enforceability of any instrument or agreement
evidencing or securing any Senior Debt or any other agreement or instrument
relating thereto; or
(h) any other circumstance which might otherwise constitute a defense
available to, or a discharge of, the Company or any holder of Subordinated Debt.
3.10 Each holder of Subordinated Debt and the Company hereby waives
promptness, diligence, notice of appearance and any other notice with respect to
any of the Senior Debt and these provisions and any requirement that any holder
of the Senior Debt protect, secure, perfect or insure any security interest or
lien or any property subject thereto or exhaust any right to take any action
against the Company or any other person or entity or any collateral.
3.11 The Company will, and will use its reasonable efforts to cause each
holder of Subordinated Debt to, at the Company's expense and at any time and
from time to time, promptly execute and deliver all further instruments and
documents, and take all further actions, that may be necessary or desirable, or
that any holder of any Senior Debt may reasonably request, in order to protect
any right or interest granted or purported to be granted under this Section 3 or
enable the holders of the Senior Debt to exercise and enforce their rights and
remedies under these provisions.
3.12 Each holder of Subordinated Debt waives any and all notices of the
acceptance of the provisions of this Section 3 or of the creation, renewal,
extension or accrual, now or at any time in the future, of any Senior Debt.
3.13 The obligations of each holder of Subordinated Debt under the provisions
set forth in this Section 3 shall continue to be effective, or be reinstated, as
the case may be, as to any payment in respect of any Senior Debt that is
rescinded or must otherwise be returned by the holder of such Senior Debt upon
the occurrence or as a result of any bankruptcy or judicial proceeding, all as
though such payment had not been made.
3.14 Nothing contained in this Section 3 shall impair, as between the Company
and any holder of Subordinated Debt, the obligation of the Company to pay to
such holder the principal thereof and interest thereon as and when the same
shall become due and payable in accordance with the terms thereof and to comply
with each and every provision of this Note or prevent any holder of any
Subordinated Debt from exercising all rights, powers and remedies otherwise
permitted by applicable law or under this Note, all subject to the rights of the
holders of the Senior Debt hereunder including rights to receive cash,
securities or other property otherwise payable or deliverable to the holders of
Subordinated Debt.
3.15 Upon the payment in full of all Senior Debt, the holders of Subordinated
Debt shall be subrogated to all rights of any holder of Senior Debt to receive
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any further payments or distributions applicable to the Senior Debt until the
Subordinated Debt shall have been paid in full, and such payments or
distributions received by the holders of Subordinated Debt by reason of such
subrogation, of cash, securities or other property which otherwise would be paid
or distributed to the holders of Senior Debt, shall, as between the Company and
its creditors other than the holders of Senior Debt, on the one hand, and the
holders of Subordinated Debt, on the other hand, be deemed to be a payment by
the Company on account of Senior Debt and not on account of Subordinated Debt.
Notwithstanding the foregoing provisions of this Section 3.15 or any other
provision of this Note each holder of Subordinated Debt hereby waives any and
all exoneration and impairment defenses that it may at any time have by law or
otherwise in respect of subrogation rights.
3.16 Each holder of Subordinated Debt, by its acceptance thereof, shall be
deemed to acknowledge and agree that the foregoing subordination provisions are,
and are intended to be, an inducement to and a consideration of each holder of
any Senior Debt, whether such Senior Debt was created or acquired before or
after the creation of Subordinated Debt, to acquire and hold, or to continue to
hold, such Senior Debt, and such holder of Senior Debt shall be deemed
conclusively to have relied on such subordination provisions in acquiring and
holding, or in continuing to hold, such Senior Debt. Each such holder of Senior
Debt is intended to be, and is, a third party beneficiary of this Section 3.
Each holder of Subordinated Debt acknowledges and agrees that the provisions set
forth in this Section 3 shall be enforceable against such holder of Subordinated
Debt by the holders of the Senior Debt. Notwithstanding anything contained in
this Note to the contrary, none of the provisions of this Section 3 (including,
without limitation, this Section 3.16 and defined terms used herein) may,
directly or indirectly, be amended, modified, supplemented or waived without the
prior written consent of the Senior Agent, on behalf of the holders of the
Senior Debt.
3.17 Notwithstanding the other provisions of this Section 3.17, no amendment
to or refinancing of the Senior Debt or any agreement or instrument related
thereto shall be entitled to the benefits of this Section 3 without the consent
of the Holder to the extent that such amendment would prohibit directly and
expressly the Company or any subsidiary from making scheduled payments in
respect of the Subordinated Debt in accordance with the terms of this Agreement
as in effect on the date hereof or as may be amended to the extent permitted by
the Senior Credit Agreement; provided that no change of financial covenants or
increase in the restrictiveness of negative covenants or events of default under
the Senior Debt documents (that do not by their terms refer to this Note) shall
be deemed to constitute a prohibition from making scheduled payments, even if
the ultimate effect of any such change would cause the Company to be in default
under the Senior Debt if such a scheduled payment were made.
3.18 As used in this Section 3 and elsewhere in this Agreement, the following
terms have the respective meanings set forth below:
"Credit Facility" means and includes a credit agreement or similar
agreement pursuant to which the lender or lenders commit(s) to permit the
Company, subject to the conditions therein, to obtain from time to time
thereunder term or revolving loans and/or letters of credit and periodically
repay the same.
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"Junior Subordinated Debt" means any Debt of the Company or any
subsidiary which is (a) issued on or after the Issue Date of this Note and which
is expressly subordinated in right of payment to any Debt of the Company, or (b)
owing to any subsidiary or affiliate of the Company.
"Remedies" means and includes, with respect to any Debt (including,
without limitation, the Senior Debt and the Subordinated Debt):
(a) the acceleration of the maturity of any of such Debt;
(b) the exercise of any put right or other similar right to require the
Company or any subsidiary to repurchase any of such Debt prior to the stated
maturity thereof;
(c) the collection or commencement of proceedings against the Company,
any subsidiary thereof or any other person obligated on such Debt or any of
their respective property, to enforce or collect any of such Debt;
(d) taking possession of or foreclosing upon (whether by judicial
proceedings or otherwise) any Liens or other collateral security for such Debt;
or causing a marshaling of any property of the Company or any subsidiary;
(e) the making of a demand in respect of any Guaranty given by the
Company or any subsidiary of the Company of such Debt;
(f) commencing or joining in or causing the Company to commence or join
in or assist the Company in commencing, any proceeding of the nature referred to
in Section 7.1(f) or 7.1(g); or
(g) exercising any other remedies with respect to such Debt or any claim
with respect thereto.
"Senior Agent" means, for so long as the Senior Credit Agreement remains
outstanding, Fleet National Bank, as administrative agent in respect of the
Senior Credit Agreement, and thereafter, any one agent or lender in respect of
the Senior Credit Facility, or a representative of either, designated in writing
to the Holder by the Company as being the "Senior Agent".
"Senior Credit Agreement" means the Credit Agreement dated as of the date
hereof among the Company, Fleet National Bank as administrative agent (together
with its successors in such capacity) and the banks, financial institutions and
other institutional lenders from time to time named therein, as it may be
amended, supplemented, extended, renewed, refinanced, restated or replaced in
whole or in part.
"Senior Credit Facility" means and includes:
(a) the Senior Credit Agreement; and
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(b) any Credit Facility (whether or not secured), which Credit Facility
has refinanced in whole or in part the Senior Debt governed by the terms of a
Senior Credit Facility which the Company has designated in writing to the Holder
as being the "Senior Credit Facility;" provided, however, that, by making such
designation, the predecessor Senior Credit Facility shall cease to be the Senior
Credit Facility (but any Debt outstanding or incurred thereunder shall continue
to be Senior Debt for so long as such Debt meets the definition thereof).
"Senior Debt" means and includes all obligations, liabilities and
indebtedness of the Company now or hereafter existing, whether fixed or
contingent, and whether for principal or interest (including interest (at the
rate specified in the applicable Senior Credit Facility) accruing after the
filing of a petition under the Bankruptcy Code, whether or not allowed), fees,
expenses, indemnification or otherwise (including letter of credit reimbursement
obligations whether or not any draw has occurred), in respect of:
(a) the Senior Credit Facility; and
(b) any other Debt of the Company owing to the Senior Agent or any lender
under the Senior Credit Facility (whether or not such lender continues to be a
lender thereunder) with respect to any obligations under Bank Hedge Agreements
(as defined in the Senior Credit Agreement) related to the Senior Credit
Agreement that are or may become owed by the Company directly or indirectly,
other than Debt incurred pursuant to a Senior Credit Facility.
Notwithstanding the foregoing, in no event shall "Senior Debt" include
any Junior Subordinated Debt.
"Significant Nonpayment Default" means and includes:
(a) an event of default under the Senior Credit Facility in respect of
the failure of the Company to comply with any material covenant or agreement in
respect of the Senior Credit Facility or documents executed or delivered in
connection therewith (it being understood that the provisions of Sections 2.14,
5.2, 5.5, 5.6, 5.7, 5.13 and 5.14, Article 6 and Article 8 of the Senior Credit
Agreement, as in effect on the date hereof and any comparable provisions in
effect after the date hereof, are "material covenants" for such purpose); and
any event of default under Sections 9.2, 9.5, 9.7 through 9.14 (inclusively)
under the Senior Credit Agreement (or any comparable provision in effect after
the date hereof); and
(b) an event of default in respect of the Senior Credit Facility arising
out of any Event of Default in respect of this Note.
"Subordinated Debt" means and includes all obligations, liabilities and
indebtedness of the Company now or hereafter existing, whether fixed or
contingent, and whether for principal, interest (including interest accruing
after the filing of a petition under the Federal Bankruptcy Code, to the extent
allowed), fees, expenses, indemnification or otherwise, in respect of this Note.
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4. Conversion
4.1 The Holder may convert the outstanding principal amount of this Note, and
accrued and unpaid interest thereon (or a portion of such outstanding principal
amount as provided in Section 4.3) into fully paid and nonassessable shares of
Common Stock of the Company ("Conversion Shares") at any time prior to the time
the outstanding principal amount of this Note, and accrued and unpaid interest
thereon is paid in full, at the Conversion Price then in effect, except that if
this Note is to be prepaid in full or repurchased pursuant to the provisions
hereof, such conversion right shall terminate at the close of business on the
Prepayment Date or the Change in Control Purchase Date, as the case may be. The
number of shares of Common Stock issuable upon conversion of this Note shall be
determined by dividing the principal amount (and accrued and unpaid interest, if
any) to be converted by the conversion price in effect on the Conversion Date
(the "Conversion Price"). The initial Conversion Price is $11.125 and is subject
to adjustment as provided in this Section 4.
The provisions of this Note that apply to conversion of the outstanding
principal amount of this Note and accrued and unpaid interest thereon also apply
to a partial conversion of this Note. The Holder is not entitled to any rights
of a holder of Conversion Shares until the Holder has converted this Note (or a
portion thereof) into Conversion Shares, and only to the extent that this Note
is deemed to have been converted into Conversion Shares under this Section 4.
4.2 To convert all or a portion of this Note, the Holder must (a) complete
and sign a notice of election to convert substantially in the form annexed
hereto (each, a "Conversion Notice"), (b) surrender the Note to the Company, (c)
furnish appropriate endorsements or transfer documents if required by the
Company and (d) pay any transfer or similar tax, if required. The date on which
the Holder satisfies all of such requirements is the conversion date (the
"Conversion Date"). As soon as practicable, and in any event within three (3)
business days, after the Conversion Date, the Company will deliver, or cause to
be delivered, to the Holder a certificate for the number of whole Conversion
Shares issuable upon such conversion and a check for any fractional Conversion
Share determined pursuant to Section 4.4 and for interest on this Note accrued
and unpaid through the Conversion Date (unless such interest has also been
converted as permitted by this Section 4). The person in whose name the
certificate for Conversion Shares is to be registered shall become the
shareholder of record on the Conversion Date and, as of the Conversion Date, the
rights of the Holder shall cease as to the portion thereof so converted;
provided, however, that no surrender of a Note on any date when the stock
transfer books of the Company shall be closed shall be effective to constitute
the person entitled to receive the Conversion Shares upon such conversion as the
shareholder of record of such Conversion Shares on such date, but such surrender
shall be effective to constitute the person entitled to receive such Conversion
Shares as the shareholder of record thereof for all purposes at the close of
business on the next succeeding day on which such stock transfer books are open;
provided further that such conversion shall be at the Conversion Price in effect
on the date that this Note shall have been surrendered for conversion, as if the
stock transfer books of the Company had not been closed.
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4.3 In the case of a partial conversion of this Note, upon such conversion,
the Company shall execute and deliver to the Holder, at the expense of the
Company, a new Note in an aggregate principal amount equal to the unconverted
portion of the principal amount. This Note may be converted in part in a
principal amount equal $100,000 or an integral multiple thereof, unless the
outstanding principal amount of this Note is less than $100,000, in which case,
only such outstanding principal amount and accrued and unpaid interest thereon
is convertible into Conversion Shares.
4.4 No fractional Conversion Shares shall be issued upon conversion of this
Note. Instead of any fractional Conversion Share which would otherwise be
issuable upon conversion of this Note, the Company shall calculate and pay a
cash adjustment in respect of such fraction (calculated to the nearest 1/100th
of a share) in an amount equal to the same fraction of the Conversion Price at
the close of business on the Conversion Date.
4.5 The issuance of certificates for Conversion Shares upon the conversion of
any Security shall be made without charge to the Holder for such certificates or
for any tax in respect of the issuance of such certificates, and such
certificates shall be issued in the name of, or in such names as may be directed
by, the Holder; provided, however, that in the event that certificates for
Conversion Shares are to be issued in a name or names other than the name of the
Holder, such Note, when surrendered for conversion, shall be accompanied by an
instrument of transfer, in form satisfactory to the Company, duly executed by
the Holder or his duly authorized attorney; and provided further, moreover, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificates
in a name or names other than that of the Holder, and the Company shall not be
required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid or is not applicable.
4.6 (a) In case the Company shall at any time after the date hereof issue,
grant or sell any Additional Stock (as hereinafter defined) for a consideration,
exercise or conversion price per share less than the Conversion Price in effect
immediately prior to the issuance or sale of such Additional Stock, or without
consideration, then forthwith upon such issuance or sale, the Conversion Price
shall (upon such issuance or sale) be reduced to a price determined by dividing
(i) an amount equal to the sum of (a) the total number of shares of Common Stock
outstanding immediately prior to such issuance or sale multiplied by the
Conversion Price then in effect, plus (b) the consideration, if any, received by
the Company upon such issuance or sale, by (ii) the total number of shares of
Common Stock outstanding immediately after such issuance or sale; provided,
however, that in no event shall the Conversion Price be adjusted pursuant to
this computation to an amount in excess of the Conversion Price in effect
immediately prior to such computation, except as provided in 4.6(d) hereof.
"Additional Stock" shall mean Common Stock or options, warrants or other rights
to acquire or securities convertible into or exchangeable for shares of Common
Stock, including shares held in the Company's treasury, and shares of Common
Stock issued upon the exercise of any options, rights or warrants to subscribe
for shares of Common Stock and shares of Common Stock issued upon the direct or
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indirect conversion or exchange of securities for shares of Common Stock, other
than:
(A) This Note.
(B) Common Stock issued or issuable upon conversion of this Note.
(C) Common Stock issued or issuable upon the conversion or exercise
of options, warrants, rights and other securities or debt convertible into or
exercisable or exchangeable for Common Stock outstanding on the date hereof;
(D) The grant of options, warrants, stock appreciation rights or
other rights available for future grant under the Company's stock option plan or
any future stock option or incentive plan approved by the Company's
shareholders;
(E) Common Stock issuable upon exercise of options, warrants, stock
appreciation rights or other rights outstanding or available for future grant
under the Company's stock option plan or any future stock option or incentive
plan approved by the Company's shareholders; provided, that, any such options,
warrants, stock appreciation rights or other rights provide for an exercise
price or conversion price at least equal to the lesser of the Market Price (as
hereinafter defined) or the last sale price of the Common Stock on the day of or
day prior to (i) the date of approval of such grant by the Board of Directors or
(ii) the date of execution of an agreement relating to such grant;
(F) Warrants to be issued in connection with the Senior Credit
Agreement and shares of Common Stock issuable upon the exercise thereof, and
(G) Common Stock or options, warrants, rights or other securities or
debt convertible into, or exercisable or exchangeable for, Common Stock (or
shares of Common Stock issuable upon the conversion or exercise thereof) in
connection with future acquisitions.
The term "Market Price" shall mean the average of the daily closing prices of a
share of Common Stock for the 10 consecutive trading days immediately prior to
the day in question. The closing price for each day shall be (a) the last
reported sales price or, in the case no such reported sale takes place on such
day, the average of the reported closing bid and asked prices, in either case on
the principal national securities exchange on which the Common stock is listed
or admitted to trading or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, on The Nasdaq Stock Market, Inc.
("Nasdaq"), (b) if the Common Stock is not listed or admitted to trading on any
national securities exchange or quoted on Nasdaq, the average of the closing bid
and asked prices in the over-the-counter market as furnished by any New York
Stock Exchange member firm reasonably selected from time to time by the Company
for that purpose, or (c) if the Common Stock is not listed or admitted to
trading on any national securities exchange or quoted on Nasdaq and the average
price cannot be determined as contemplated by clause (b), the fair market value
of the Common Stock as determined in good faith by resolution of the independent
directors of the Company. For the purposes of the preceding sentence, the term
"trading day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday,
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other than any day on which securities are not traded on such exchange or in
such market.
(b) For the purpose of any computation to be made in accordance with
Section 4.6(a), the following provisions shall apply:
(i) In case of the issuance or sale of shares of Common Stock for a
consideration part or all of which shall be cash, the amount of the cash
consideration therefor shall be deemed to be the amount of cash received by the
Company for such shares (or, if shares of Common Stock are offered by the
Company for subscription, the subscription price, or, if such securities shall
be sold to underwriters or dealers for public offering without a subscription
offering, the initial public offering price) before deducting therefrom any
compensation paid or discount allowed in the sale, underwriting or purchase
thereof by underwriters or dealers or others performing similar services, or any
expenses incurred in connection therewith.
(ii) In the case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company) of shares of Common
Stock for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash shall be deemed to be the
fair market value of such consideration as determined in good faith by the Board
of Directors.
(iii) The reclassification of securities of the Company other than
shares of Common Stock into securities including shares of Common Stock shall be
deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in Section 4.6(b)(ii).
(iv) In the case of the issuance of options, rights, or warrants to
purchase or subscribe for shares of Common Stock, securities convertible into or
exchangeable for shares of Common Stock, or options, rights or warrants to
purchase or subscribe for any such convertible or exchangeable securities, the
following provisions shall apply:
(A) The aggregate maximum number of shares of Common Stock issuable
under such options, rights or warrants shall be deemed to be issued and
outstanding at the time such options, rights or warrants were issued, and shall
be deemed to be issued for a consideration equal to the minimum purchase price
per share provided for in such options, rights or warrants at the time of
issuance plus the consideration, if any, received by the Company in connection
with sale or issuance of such options, rights or warrants; provided, however,
that upon the expiration or other termination of such options, rights or
warrants, if any thereof shall not have been exercised, the number of shares of
Common Stock deemed to be issued and outstanding pursuant to this subsection (A)
shall be reduced by such number of shares as to which options, warrants and/or
rights shall have expired or terminated unexercised, and such number of shares
of Common Stock shall no longer be deemed to be issued and outstanding, and the
Conversion Price then in effect shall forthwith be readjusted and thereafter be
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the price which it would have been had such adjustment been made on the basis of
the issuance only of shares of Common Stock actually issued or issuable upon the
exercise of those options, rights or warrants as to which the exercise of rights
shall not have expired or terminated unexercised.
(B) The aggregate maximum number of shares of Common Stock issuable
upon conversion or exchange of any convertible or exchangeable securities shall
be deemed to be issued and outstanding at the time of issuance of such
securities, and shall be deemed to be issued for a consideration equal to the
consideration received by the Company in connection with the sale of such
securities plus the consideration, if any, receivable by the Company upon the
conversion or exchange thereof; provided, however, that upon the termination of
the right to convert or exchange such convertible or exchangeable securities
(whether by reason of redemption or otherwise), the number of shares deemed to
be issued and outstanding pursuant to this subsection (B) shall be reduced by
such number of shares as to which the conversion or exchange rights shall have
expired or terminated unexercised, and such number of shares shall no longer be
deemed to be issued and outstanding and the Conversion Price then in effect
shall forthwith be readjusted and thereafter be the price which it would have
been had such adjustment been made on the basis of the issuance only of shares
actually issued or issuable upon the conversion or exchange of those convertible
or exchangeable securities as to which the conversion or exchange rights shall
not have expired or terminated unexercised.
(C) If any change shall occur in the price per share provided for in
any of the options, rights or warrants referred to in Section 4.6(b)(iv)(A), or
in the price per share at which the securities referred to in Section
4.6(b)(iv)(B) are convertible or exchangeable, such options, rights or warrants
or conversion or exchange rights, as the case may be, shall be deemed to have
expired or terminated on the date when such price change became effective in
respect of shares not theretofore issued pursuant to the exercise or conversion
or exchange thereof, and the Company shall be deemed to have issued upon such
date new options, rights or warrants or convertible or exchangeable securities
at the new price in respect of the number of shares issuable upon the exercise
of such options, rights or warrants or the conversion or exchange of such
convertible or exchangeable securities.
(D) Except as otherwise provided in this Section 4.6(b), no
adjustment of the Conversion Price shall be made upon the actual issuance of
such Common Stock upon exercise of options, rights or warrants or upon the
actual issuance of such Common Stock upon conversion or exchange of any
convertible or exchangeable securities.
(c) In case the Company shall pay or make a dividend or other
distribution to all holders of its Common Stock in shares of Common Stock, the
Conversion Price in effect at the opening of business on the day next following
the date fixed for the determination of shareholders entitled to receive such
dividend or other distribution shall be reduced by multiplying such Conversion
Price by a fraction, of which the numerator shall be the number of shares of
Common Stock outstanding at the close of business on the date fixed for such
determination, and the denominator shall be the sum of the numerator and the
total number of shares constituting such dividend or other distribution, such
reduction to become effective immediately after the opening of business on the
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day next following the date fixed for such determination. For the purposes of
this Section 4.6(c), the number of shares of Common Stock at any time
outstanding shall not include shares of Common Stock held in the treasury of the
Company. The Company will not pay any dividend or make any distribution on
shares of Common Stock held in the treasury of the Company.
(d) In the event that the Company shall at any time prior to the
conversion in full of the Note declare a dividend (other than a dividend
consisting solely of shares of Common Stock or a cash dividend or distribution
payable out of current or retained earnings) or otherwise distribute to its
shareholders any monies, assets, property, rights, evidences of indebtedness,
securities (other than shares of Common Stock), whether issued by the Company or
by another person or entity, or any other thing of value, the Holder or Holders
of the Note to the extent of the unconverted portion thereof shall thereafter be
entitled, in addition to the shares of Common Stock or other securities
receivable upon the conversion thereof, to receive, upon conversion of such
unconverted portion of the Note, the same monies, property, assets, rights,
evidences of indebtedness, securities or any other thing of value that they
would have been entitled to receive at the time of such dividend or
distribution. At the time of any such dividend or distribution, the Company
shall make appropriate reserves to ensure the timely performance of the
provisions of this Subsection.
(e) In case the outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the Conversion Price in effect
at the opening of business on the day following the day upon which such
subdivision becomes effective shall be proportionately reduced, and, conversely,
in case the outstanding shares of Common Stock shall each be combined into a
smaller number of shares of Common Stock, the Conversion Price in effect at the
opening of business on the day following the day upon which such combination
becomes effective shall be proportionately increased, such reduction or
increase, as the case may be, to become effective immediately after the opening
of business on the day following the day upon which such subdivision or
combination becomes effective.
(f) In case the Company shall fail to take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a dividend
or other distribution payable in shares of Common Stock, then such record date
shall be deemed to be the date of the issue of the shares of Common Stock deemed
to have been issued as a result of the declaration of such dividend or other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
4.7 No adjustment in the Conversion Price shall be required unless such
adjustment would require an increase or decrease of at least one cent ($.01) in
the Conversion Price; provided, however, that any adjustments which by reason of
this Section 4.7 are not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
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4.8 Notice of Certain Events.
(a) In the event that: (i) the Company takes any action which would
require an adjustment in the Conversion Price; (ii) the Company takes any action
described in Section 4.9(a), (b) or (c); or (iii) there is a dissolution or
liquidation of the Company; the Holder may wish to convert this Note into shares
of Conversion Shares prior to the record date for or the effective date of the
transaction so that such Holder may receive the securities or assets which a
holder of shares of Common Stock on that date may receive. Therefore, the
Company shall give notice to the Holder in accordance with the provisions of
this Section 4.8 stating the proposed record or effective date, as the case may
be, which notice shall be given prior to the proposed record or effective date
and, in any case, no later than notice of such transaction is given to holders
of Common Stock. Failure to give such notice or any defect therein shall not
affect the validity of any transaction referred to in clause (i), (ii) or (iii)
of this Section.
(b) Upon the occurrence of each adjustment or readjustment of the
Conversion Price pursuant to this Section 4, the Company, at its expense, shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each Holder a statement, signed by its chief
financial officer, setting forth such adjustment or readjustment and showing in
reasonable detail the facts upon which such adjustment or readjustment is based.
The Company shall, upon the written request at any time of any Holder, furnish
or cause to be furnished to such Holder a like certificate setting forth (i)
such adjustment and readjustment, (ii) the Conversion Price at the time in
effect, and (iii) the number of shares of Common Stock and the amount, if any,
of other property which at the time would be received upon the Conversion of the
portion of this Note specified in such request.
4.9 If any of the following shall occur, namely:
(a) any reclassification or change of outstanding shares of Common Stock
issuable upon conversion of this Note (other than a change in par value, or from
par value to no par value, or from no par value to par value, or as a result of
a subdivision or combination);
(b) any consolidation or merger to which the Company is a party, other
than a merger in which the Company is the continuing corporation and which does
not result in any reclassification of, or change (other than a change in name,
or par value, or from par value to no par value, or from no par value to par
value or as a result of a subdivision or combination) in, outstanding shares of
Common Stock; or
(c) any sale or conveyance of all or substantially all of the property or
business of the Company and its subsidiaries as an entirety;
then the Company, or such successor or purchasing corporation, as the case may
be, shall, as a condition precedent to such reclassification, change,
consolidation, merger, sale or conveyance, execute and deliver to the Holder, an
agreement in form satisfactory to the Holder providing that the Holder shall
have the right to convert this Note into the kind and amount of shares of stock
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and other securities and property (including cash) receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of shares of Common Stock deliverable upon conversion of this Note
immediately prior to such reclassification, change, consolidation, merger, sale
or conveyance. Such agreement shall provide for adjustments of the Conversion
Price which shall be as nearly equivalent as may be practicable to the
adjustments of the Conversion Price provided for in this Section 4. If, in the
case of any such consolidation, merger, sale or conveyance, the stock or other
securities and property (including cash) receivable thereupon by a holder of
Common Stock includes shares of stock or other securities and property of a
corporation other than the successor or purchasing corporation, as the case may
be, in such consolidation, merger, sale or conveyance, then such agreement shall
also be executed by such other corporation and shall contain such additional
provisions to protect the interests of the Holder as the Board of Directors
shall reasonably consider necessary by reason of the foregoing. The provisions
of this Section 4.9 shall similarly apply to successive reclassifications,
changes, consolidations, mergers, sales or conveyances.
4.10 The Company shall at all times reserve and keep available, free from
preemptive rights, out of its authorized and unissued Common Stock, solely for
the purpose of effecting the conversion of this Note, the full number of
Conversion Shares then issuable upon the conversion in full of this Note.
4.11 If the Company or an affiliate of the Company shall at any time after
the date hereof and prior to the conversion of the Note in full issue any rights
to subscribe for shares of Common Stock or any other securities of the Company
or of such affiliate to all the shareholders of the Company, the Holder of the
unconverted portion of the Note shall be entitled, in addition to the shares of
Common Stock or other securities receivable upon the Conversion thereof, to
receive such rights at the time such rights are distributed to the other
shareholders of the Company.
5. Affirmative Covenants
The Company covenants that on and after the Issue Date and so long as any
portion of the Note shall be outstanding:
5.1 The Company will, and will cause each of its Subsidiaries to, pay before
they become delinquent: (a) all taxes, assessments and governmental charges or
levies imposed upon it or its property; and (b) all claims or demands of
materialmen, mechanics, carriers, warehousemen, vendors, landlords and other
like persons that, if unpaid, might by law become a Lien upon its property;
provided, that items of the foregoing description need not be paid so long as
such items are being contested in good faith and by appropriate proceedings and
as to which appropriate reserves in accordance with GAAP have been established
and maintained with respect thereto, unless and until any Lien resulting
therefrom attaches to its property and becomes enforceable, unless such Lien is
effectively stayed or fully bonded pending the disposition of such proceedings.
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5.2 The Company will, and will cause each of its subsidiaries to:
(a) maintain its property that is reasonably necessary in the conduct of
its business in good working order and condition, ordinary wear and tear,
obsolescence and insured casualty losses excepted;
(b) maintain, with insurers reasonably believed to be financially sound
and reputable, insurance with respect to its property and business against such
casualties and contingencies, of such types and in such amounts as is customary
in the case of corporations engaged in the same or a similar business and
similarly situated;
(c) keep proper books of record and account, in which full and correct
entries shall be made of all dealings and transactions of or in relation to the
properties and business thereof;
(d) do or cause to be done all things reasonably necessary to preserve
and keep in full force and effect its corporate existence, corporate rights
(charter and statutory) and corporate franchises, except as permitted by Section
6.1;
(e) comply, in all material respects, with all applicable laws, rules and
regulations (including, without limitation, ERISA, Environmental Laws and
Environmental Permits) and obtain all licenses, permits, franchises and other
governmental authorizations necessary for the ownership of its properties and
the conduct of its business, except where its obligation to so comply being
contested in good faith and by appropriate proceedings and adequate resources
have been established are being maintained in accordance with GAAP, and except
where failure to comply could not reasonably be expected to have a Material
Adverse Effect; and
(f) conduct its business so as not to become subject to any liability
under any Environmental Law that, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect and except where any
such liability is being contested in good faith by appropriate proceedings and
adequate reserves have been established and are being maintained in accordance
with GAAP.
5.3 The Company will conduct, and cause each of its subsidiaries to conduct,
all transactions otherwise permitted by this Note with any of their Affiliates
on terms that are fair and reasonable and no less favorable to the Company or
any such subsidiary than it could obtain in a comparable arms-length transaction
with a person not an Affiliate; provided, however, that this Section 5.3 shall
not be deemed to prohibit any transactions solely between the Company and its
wholly-owned subsidiaries carried out in the ordinary course of business,
subject, however, to any applicable provisions of Section 6, the transactions
contemplated hereby, the provisions of any agreements or instruments existing as
of the date hereof or payments pursuant to the Acquisition Documents and the
Future Acquisition Puts (as those terms are defined in the Senior Credit
Agreement, collectively, the "Acquisition Obligations" and, individually, an
"Acquisition Obligation").
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5.4 The Company shall deliver to the Holder, except during any period in
which the Holder or an Affiliate thereof is serving as a director or executive
officer of the Company:
(a) as soon as available and in any event within thirty (30) days after
the end of each month which is not a fiscal quarter end, a consolidated balance
sheet, statement of income and cash flows commencing April 1999, of the Company
and its subsidiaries, as of the end of such month and for the period commencing
at the end of the previous month and ending with the end of such month and
consolidated statement of income and a consolidated statement of cash flows of
the Company and its subsidiaries, for the period commencing at the end of the
previous fiscal year of the Company and ending with the end of such month,
setting forth in each case commencing April 2000 in comparative form the
corresponding figures for the corresponding period of the prior fiscal year, all
in reasonable detail and duly certified by the chief financial officer of the
Company.
(b) as soon as practicable after the end of each of the first three
quarterly fiscal periods in each fiscal year of the Company, and in any event
within 55 days thereafter: (i) a consolidated balance sheet as at the end of
such quarter; and (ii) consolidated statements of income and cash flows for such
quarter and (in the case of the second and third quarters) for the portion of
the fiscal year ending with such quarter; for the Company and its subsidiaries,
setting forth in each case, in comparative form, the financial statements for
the corresponding periods in the previous fiscal year, all in reasonable detail,
prepared in accordance with GAAP applicable to quarterly financial statements
generally, and certified as complete and correct by the Chief Financial Officer
of the Company, and accompanied by the certificate required by Section 5.5;
provided, that timely delivery of copies of the Company's Quarterly Report on
Form 10-QSB filed with the Securities and Exchange Commission ("SEC") shall be
deemed to satisfy the requirements of this Section 5.4(b) so long as such
Quarterly Report contains or is accompanied by the information specified in this
Section 5.4(b);
(c) as soon as practicable after the end of each fiscal year of the
Company, and in any event within 110 days thereafter: (i) a consolidated balance
sheet as at the end of such year; and (ii) consolidated statements of income,
stockholders' equity and cash flows for such year; for the Company and its
subsidiaries, setting forth, in comparative form, the financial statement for
the previous fiscal year, all in reasonable detail, prepared in accordance with
GAAP, and accompanied by: (A) an audit report thereon of independent certified
public accountants of recognized national standing, which report shall state
without qualifications related to the scope of the audit, the compliance of the
audit with generally accepted auditing standards or the ability of the Company
or a material subsidiary thereof to continue as a going concern, that such
financial statements have been prepared and are in conformity with GAAP; and (B)
the certificates required by Section 5.5 and Section 5.6; provided, that timely
delivery of the Company's Annual Report on Form 10-KSB for such fiscal year
filed with the SEC shall be deemed to satisfy the requirements of this Section
5.4(c) so long as such Annual Report contains or is accompanied by the reports
and other information otherwise specified in this Section 5.4(c);
(d) promptly upon their becoming available, and in any event within 15
days thereafter: (i) each financial statement, report, notice or proxy statement
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sent by the Company to stockholders generally; (ii) each regular or periodic
report (including, without limitation, each Form 10-KSB, Form 10-QSB and Form
8-K), any registration statement which shall have become effective with respect
to a public offering of securities of the Company for its own account, and all
amendments thereto filed by the Company or any subsidiary thereof with the SEC;
(e) within 15 business days after any executive officer of the Company
becoming aware (i) of the existence of any condition or event which constitutes
a Default or an Event of Default; or (ii) that the holder of any Debt in a
principal amount of $400,000 or more (other than this Note) shall have given
notice or taken any other action with respect to a claimed or default or event
of default; a notice specifying the nature of the claimed Default, Event of
Default or default or event of default and the notice given or action taken (if
any) by such holder of Debt (other than this Note) and what action the Company
is taking or proposes to take with respect thereto;
(f) promptly upon receipt thereof, a copy of each report or management
letter submitted to the Company or any subsidiary thereof by independent
accountants in connection with any annual, interim or special audit made of the
books of the Company or such subsidiary;
(g) promptly after the commencement of any action or proceeding relating
to the Company or any subsidiary thereof in any court or before any court, other
governmental authority or arbitration tribunal as to which there is a reasonable
possibility of an adverse determination and that, if adversely determined, would
have a Material Adverse Effect, a notice specifying the nature and period of
existence thereof and what action the Company or such subsidiary is taking or
proposes to take with respect thereto; and
(h) with reasonable promptness, such other data and information as from
time to time may be reasonably requested by the Holder.
5.5 Each set of financial statements delivered to the Holder pursuant to
Section 5.4(a), Section 5.4(b), or Section 5.4(c) shall be accompanied by a
certificate of the Chief Financial Officer, setting forth a statement that the
signer has reviewed the relevant terms hereof and has made, or caused to be
made, under his supervision or authority, a review of the transactions and
conditions of the Company and its subsidiaries from the beginning of the
accounting period covered by the income statements being delivered therewith to
the date of the certificate and that such review shall not have disclosed the
existence during such period of any condition or event that constitutes a
Default or an Event of Default or, if any such condition or event existed or
exists, specifying the nature and period of existence thereof and what action
the Company shall have taken or proposes to take with respect thereto.
5.6 Each set of annual financial statements delivered pursuant to Section
5.4(c) shall be accompanied by a certificate of the accountants that audited
such financial statements, stating that they have reviewed this Note and stating
further, whether, in making their audit, such accountants have become aware of
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any condition or event that then constitutes a Default or an Event of Default,
and, if such accountants are aware that any such condition or event then exists,
specifying the nature and period of existence thereof.
5.7 The Company will, except during any period in which the Holder or any
Affiliate thereof is serving as a director or executive officer of the Company,
permit the representatives of the Holder to visit and inspect any of the
properties of the Company or any of its Subsidiaries, to examine all their
respective books of account, records, reports and other papers, to make copies
and extracts therefrom, and to discuss their respective affairs, finances and
accounts with their respective executive officers and independent public
accountants (and by this provision the Company authorizes said accountants to
discuss the finances and affairs of the Company and its Subsidiaries) all at
such reasonable times and as often as may be reasonably requested. At all times
during which there exists a Default or Event of Default, except during any
period in which the Holder or any Affiliate thereof is serving as a director or
executive officer of the Company, expenses incurred by the Holder of this Note
in connection with this Section 5.7 shall be reimbursed by the Company to the
Holder.
5.8 The Company will make all payments and otherwise perform, or cause the
relevant subsidiary of the Company to pay or otherwise perform, all obligations
in respect of all leases of real property to which the Company or any of its
subsidiaries is a party, keep such leases in full force and effect and not allow
such leases to lapse or be terminated or any rights to renew such leases to be
forfeited or canceled, notify the Holder of any default by any party with
respect to such leases (except during any period in which the Holder or any
Affiliate thereof is serving as a director or executive officer of the Company)
and cooperate with the Holder in all respects to cure any such default, and
cause each of its subsidiaries to do so except, in any case, where the failure
to do so, either individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect and except where its failure to do so
is being contested in good faith and by proper proceedings.
5.9 The Company will perform and observe, and cause each of its subsidiaries
to perform and observe, all of the material terms and provisions of each
Material Contract (as that term is defined in the Senior Credit Agreement) to
which it is a party to be performed or observed by it, maintain, and cause each
of its subsidiaries to maintain, each such Material Contract to which it is a
party in full force and effect, and enforce, and cause each of its subsidiaries
to enforce, each such Material Contract to which it is a party in accordance
with its terms, except where the failure to do so would not be reasonably likely
to have a Material Adverse Effect and except where its failure to do so is being
contested in good faith and by proper proceedings.
5.10 The Company will perform and observe, or cause the relevant subsidiary
of the Company to perform and observe, all of the material terms and provisions
of each Acquisition Obligation to be performed or observed by it or such
subsidiary, maintain each such Acquisition Obligation in full force and effect,
enforce each such Acquisition Obligation in accordance with its terms, take all
such action to such end as may be from time to time requested by the Holder
required in order to enforce its material rights under the Acquisition
Obligations and, upon request of the Holder, make to each other party to each
such Acquisition Obligation such demands and requests for action or for
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information and reports as the Company or any subsidiary of the Company is
entitled to make under such Acquisition Obligation required in order to enforce
its material rights under the Acquisition Obligations.
5.11 The Company shall promptly, and in any case within 30 days after the
date hereof, cause each of its existing direct and indirect wholly-owned
subsidiaries and any such subsidiaries of the Company hereafter formed and/or
acquired by the Company (or any subsidiary of the Company) to issue to the
Holder a guaranty of the Company's obligations under this Note, which guaranties
shall be substantially similar to the Subsidiary Guaranties issued pursuant to
the Senior Credit Agreement, except that such guaranties will be subordinated to
the obligations of such subsidiaries under the Subsidiary Guaranties issued or
to be issued by such subsidiaries under the Senior Credit Agreement consistent
with the subordination provisions set forth in Section 3 of this Note, will
guaranty the obligations of the Company under this Note and will otherwise be in
form and substance reasonably satisfactory to the Holder and the Senior Agent.
6. Negative Covenants
6.1 The Company will not, and will not permit any subsidiary thereof to, (a)
merge with or into or consolidate with any other person, permit any other person
to merge or consolidate with or into it, or (b) sell all or substantially all of
its property to any other person; provided, however, that the foregoing
restriction does not apply to the merger or consolidation of the Company with
another corporation or transfer of all or substantially all of the property of
the Company to any other person if: (i) the corporation that results from such
merger or consolidation or to which all or substantially all of the property of
the Company is transferred (the "Surviving Corporation") (a) is organized under
the laws of, and conducts substantially all of its business and has
substantially all of its properties within, the United States of America or any
jurisdiction or jurisdictions thereof and (b) has shareholders' equity
immediately after such transaction that is equal to or greater than the
shareholders' equity of the Company immediately prior to such transaction; (ii)
the due and punctual payment of the principal of, and interest on this Note,
according to their tenor, and the due and punctual performance and observance of
all the covenants in this Note, to be performed or observed by the Company, are
expressly assumed pursuant to such assumption agreements and instruments in such
forms as shall be approved reasonably by the Holder, or assumed by operation of
law, by the Surviving Corporation; and (iii) immediately prior to, and
immediately after the consummation of the transaction, and after giving effect
thereto, no Default or Event of Default exists or would exist. Notwithstanding
the foregoing, a subsidiary of the Company may merge into the Company so long as
the Company is the Surviving Corporation, and a subsidiary of the Company, may
merge with or into a wholly-owned subsidiary of the Company, so long as such
wholly-owned subsidiary is the Surviving Corporation. Notwithstanding anything
contained herein to the contrary, the Company may (i) sell all or substantially
all of its property to, or enter into a merger transaction with, any other
person if such sale or merger follows and is the result of an acceleration of
the Senior Debt and the transaction has been approved by the Senior Agent and
the banks which are parties to the Senior Credit Agreement and (ii) in
compliance with Section 6.19 of the Senior Credit Agreement, transfer its assets
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to a wholly-owned subsidiary so long as such subsidiary executes and delivers a
guaranty in favor of the Holder that is reasonably acceptable to the Holder,
subordinated on terms and conditions acceptable to the Senior Agent consistent
with the terms of subordination set forth in Section 3 hereof.
6.2 The Company will not, and will not permit any subsidiary of the Company
to, sell, lease as lessor, transfer or otherwise dispose of its property
(collectively, "Transfers"), except:
(A) Transfers of inventory and of unnecessary, obsolete or worn-out
assets, in each case in the ordinary course of business of the Company or such
subsidiary;
(B) Transfers from a subsidiary of the Company to the Company or a
wholly-owned subsidiary of the Company, or from the Company to a wholly-owned
subsidiary of the Company provided such subsidiary issues a guaranty of the
Company's obligations under this Note consistent with the provisions of Section
5.11;
(C) any other Transfer at any time of any property to a person for
such consideration as determined, in each case by the Board of Directors, in its
good faith opinion, to be in the best interest of the Company and to reflect the
fair market value of such property if the conditions specified in each of the
following clauses (A) and (B) would be satisfied with respect to such Transfer:
(A) the sum of: (1) the book value of such property at the time of Transfer;
plus (2) the aggregate book value of all other property Transferred (other than
in transactions described in clauses (A) and (B) above), after the Issue Date,
would not exceed 25% of consolidated total assets of the Company and its
subsidiaries (determined in accordance with GAAP) measured as of the last day of
the immediately preceding fiscal quarter of the Company; and (B) immediately
before and after the consummation of the Transfer, and after giving effect
thereto, no Default or Event of Default would exist;
(D) any other Transfer of property to the extent that the proceeds of
such Transfer, net of transaction costs and expenses incurred and actually paid
in connection with such Transfer (including sales, transfer or gains taxes),
within 365 days after such Transfer are applied by the Company or such
subsidiary (A) to fund its working capital and capital expenditure or
acquisitions requirements, and/or (B) to pay or prepay a principal amount of
Debt of the Company or any subsidiary thereof (other than Junior Subordinated
Debt) equal to the amount of such net proceeds; and, in connection with any such
payment, the Company shall pay all accrued interest thereon and any premium or
make-whole amount required to be paid in connection therewith; provided,
however, that in the event that any Debt so prepaid is not Senior Debt, then the
Company shall prepay, together with such prepayment of such other Debt, a
proportional and ratable principal amount of this Note pursuant to Section 1.6.;
(E) any Transfers pursuant to the Acquisition Obligations; and
(F) any other Transfer permitted to be made by the Company or any of
its subsidiaries consistent with the terms of the Senior Credit Agreement as in
effect on the Issue Date.
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6.3 The Company will not, and will not permit any subsidiary to, directly or
indirectly, create, incur, assume, guarantee, or otherwise become directly or
indirectly liable with respect to, any Debt, other than:
(A) this Note and any guaranties thereof;
(B) Debt owing by the Company to any wholly-owned subsidiary of the
Company and Debt of a subsidiary of the Company owing to the Company or a
wholly-owned subsidiary of the Company;
(C) Debt existing on the Issue Date and listed on Schedule 6.3
(including Debt under the Senior Credit Agreement, provided that loans
thereunder shall not exceed an aggregate of $34 million plus an additional $6
million to be used solely for working capital and general corporate purposes of
the Company, including, but not limited to, acquisitions);
(D) Debt incurred under the Senior Credit Facility from time to time
following the Issue Date, provided that loans thereunder shall not exceed an
aggregate of $34 million plus an additional $6 million to be used solely for
working capital and general corporate purposes of the Company, including, but
not limited to, acquisitions;
(E) Debt incurred or created to refinance any of the Debt permitted
by clauses (C) and (D) of this Section 6.3, provided that in the case of Debt
listed on Schedule 6.3 (other than Senior Debt and refinancing thereof), the
principal amount does not exceed the principal amount of Debt being refinanced;
(F) Debt (other than Debt incurred under the Senior Credit Facility)
incurred or assumed in connection with "Permitted Acquisitions" and "Permitted
Club Acquisitions" (as those terms are defined in the Senior Credit Agreement);
(G) Debt incurred in connection with conversion of the obligations of
the Company or any subsidiary thereof under the Acquisition Puts (as defined in
the Senior Credit Agreement) pursuant to the terms of the Acquisition Documents
(as defined in the Senior Credit Agreement) or the conversion of obligations
under Future Acquisition Puts (as defined in the Senior Credit Agreement) into
Debt of the Company or its subsidiaries under the terms of the agreements
governing such Future Acquisition Puts;
(H) Debt (other than this Note) owing by the Company or a subsidiary
thereof to Norton Herrick, Michael Herrick and/or Howard Herrick (together, the
"Herricks") and/or any of their respective Affiliates;
(I) Debt incurred by the Company or a subsidiary thereof to finance
the payment of the Change in Control Purchase Price of this Note;
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(J) Debt, in addition to the Debt permitted to be incurred by the
clauses (A) through (I) of this Section 6.3, in the principal amount at any time
outstanding not to exceed $1,000,000;
(K) Any Guaranties made or issued by the Company of Debt permitted to
be incurred by any of its subsidiaries pursuant to clauses (E), (F), (G), (H),
(I), (J) and (L) above and Guaranties made or issued by subsidiaries of the
Company of Debt permitted to be incurred by the Company pursuant to clauses (C),
(D), (E), (F), (G), (H), (I), (J) and (L) above; and
(L) Any other Debt permitted to be incurred by the Company or any of
its subsidiaries consistent with the terms of the Senior Credit Agreement as in
effect on the Issue Date.
6.4 The Company will not, and will not permit any subsidiary thereof to,
incur, assume or Guaranty any Debt which is subordinated in right of payment to
any other Debt of the Company or any subsidiary thereof, unless such Debt is
also subordinated in right of payment to the obligations of the Company in
respect of this Note on terms reasonably acceptable to the Holder. The Company
will not, and will not permit any subsidiary thereof to, incur or create any
Debt in favor of an Affiliate or another subsidiary (other than Debt in favor of
the Company or a wholly-owned subsidiary thereof which is a guarantor of Debt
under the Senior Credit Facility) unless such Debt is also subordinated in right
of payment to the obligations of the Company in respect of this Note on terms
reasonably acceptable to the Holders.
6.5 The Company will not, and will not permit any subsidiary thereof to,
engage in any business if, as a result, the general nature of the business in
which the Company and its subsidiaries, taken as a whole, would then be engaged
would be substantially changed from the general nature of the business in which
the Company and the Subsidiaries, taken as a whole, are engaged on the Issue
Date.
7. Events of Default
7.1 An "Event of Default" exists at any time if any of the following occurs
(whether such occurrence shall be voluntary or come about or be effected by
operation of law or otherwise):
(a) The Company defaults in the payment of the principal of this Note
when due (whether at the Maturity Date or any Prepayment Date) or in the payment
of the Change in Control Purchase Price when due or defaults in the payment of
any accrued interest on this Note when due and such default continues for a
period of 30 business days after the date such interest became due;
(b) The Company or any subsidiary thereof defaults in the performance or
observance of any of the covenants contained in Section 5.2(d) or Section 6
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hereof or defaults in the performance or observance of any of the covenants
contained in Sections 5.2(e), 5.3, 5.4 (e) or 5.10 hereof and such default
remains uncured for more than 30 days;
(c) The Company or any subsidiary thereof defaults in the performance of
any covenants contained in this Note, and such default remains uncured, after
notice and an opportunity to cure, for more than 60 days;
(d) Any warranty, representation or other statement by or on behalf of
the Company contained in this Note or in any certificate, financial statement,
report or notice furnished after the date hereof to Holder pursuant to the terms
of this Note, or in any written amendment, supplement, modification or waiver
with respect to any such document shall be false or misleading in any material
respect when made;
(e) Either (i) the Company or any subsidiary thereof fails to pay when
due and within any applicable period of grace, any principal of, premium, if
any, or interest in respect of any Debt for borrowed money of the Company or
such subsidiary in the aggregate principal amount of $2 million; or (ii) any
event shall occur or any condition shall exist in respect of such Debt, or under
any agreement securing or relating to such Debt, and in either case, as a result
thereof: (A) the maturity of such Debt, or a material portion thereof, is
accelerated, or (B) any one or more of the holders thereof or a trustee therefor
is permitted to require the Company or such subsidiary to repurchase such Debt
from the holders thereof, and any such trustee or holder exercises such option;
or (C) any such one or more of such holders or such trustee declares an
acceleration of the maturity of such Debt;
(f) a receiver, liquidator, custodian or trustee of the Company or any
subsidiary thereof or of all or any substantial part of the property of either
is appointed by court order and such order remains in effect for more than 60
days; or an order for relief is entered with respect to the Company or any such
subsidiary, or the Company or any subsidiary thereof is adjudicated a bankrupt
or insolvent; or all or any substantial part of the property of the Company or
any subsidiary thereof is sequestered by court order and such order remains in
effect for more than 60 days; or an involuntary case or proceeding is commenced
against the Company or any subsidiary thereof under the Federal Bankruptcy Code
or any other bankruptcy reorganization, arrangement, insolvency, readjustment of
debt, dissolution or liquidation law of any jurisdiction, whether now or
hereafter in effect, and is not dismissed within 60 days after such filing;
(g) The Company or any subsidiary thereof: (i) commences a voluntary case
or proceeding or seeks relief under any provision of the Federal Bankruptcy Code
or any other bankruptcy, reorganization, arrangement, insolvency, readjustment
of debt, dissolution or liquidation law of any jurisdiction, whether now or
hereafter in effect, or consents to the filing of any petition against it under
any such law; or (ii) makes an assignment for the benefit of creditors, or
admits in writing its inability or fails, to pay its debts generally as they
become due, or consents to the appointment of a receiver, liquidator or trustee
of the Company or a subsidiary thereof or of all or a substantial part of its
property; or
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(h) A final, non-appealable judgment or final, non-appealable judgments
for the payment of money aggregating in excess of $2.0 million (in excess of any
insurance relating to such judgments or judgments or any claim or claims
underlying such judgment or judgments and the relevant insurer or insurers shall
not have denied liability under such insurance or rejected any claims made with
respect thereto) is or are outstanding against one or more of the Company and
its subsidiaries and any one of such judgments shall have been outstanding for
more than 60 days from the date of its entry and shall not have been discharged
in full or stayed; or
(i) The Note shall cease to be in full force and effect or shall be
declared by a court of competent jurisdiction to be void, voidable or
unenforceable, or the validity or enforceability of the Note shall be contested
by the Company or any Affiliate, or the Company or any Affiliate shall deny that
the Company has any further liability or obligation under the Note.
7.2 Default Remedies
(a) If any Event of Default specified in Section 7.1(f) or (g) shall
exist, the principal amount of this Note at the time outstanding, together with
interest accrued and unpaid thereon, shall automatically immediately become due
and payable, without presentment, demand, protest or notice of any kind, all of
which are hereby expressly waived.
(b) Subject to Section 3.6 and Section 3.7, if any Event of Default,
other than those specified in Section 7.1(a), shall exist, the Holder may
exercise any right, power or Remedy permitted to such Holder by law, and shall
have in particular, without limiting the generality of the foregoing, the right
to declare the entire principal of, and all interest accrued and unpaid on, this
Note then outstanding to be, and this Note shall thereupon become, forthwith due
and payable, without any presentment, demand, protest or other notice of any
kind, all of which are hereby expressly waived, and the Company shall forthwith
pay to the Holder such principal and interest.
(c) Subject to Sections 3.6 and 3.7, during the continuance of an Event
of Default described in Section 7.1(a) and irrespective of whether the Note
shall have become due and payable pursuant to Section 7.2(b), the Holder may, at
the Holder's option, by notice in writing to the Company, declare the principal
amount of this Note at the time outstanding, and accrued and unpaid interest
thereon, to be, and the same shall thereupon become, forthwith due and payable,
without any presentment, demand, protest or other notice of any kind, all of
which are hereby expressly waived, and the Company shall forthwith pay to the
Holder such principal and interest.
(d) During the continuance of an Event or Default and irrespective of
whether this Note shall become due and payable pursuant to Section 7.2(a), (b)
or (c) and irrespective of whether the Holder shall otherwise have pursued or be
pursuing any other rights or Remedies, subject to Section 3.6 and Section 3.7,
the Holder may proceed to protect and enforce its rights under this Note by
exercising such Remedies as are available to such holder in respect thereof
under applicable law, either by suit in equity or by action at law, or both,
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whether for specific performance of any agreement contained herein or in aid of
the exercise of any power granted herein.
(e) No course of dealing on the part of the Holder nor any delay or
failure on the part of the Holder to exercise any right shall operate as a
waiver of such right or otherwise prejudice the Holder's rights, powers and
Remedies. All rights and Remedies of the Holder hereunder and under applicable
law are cumulative to, and not exclusive of, any other rights or Remedies the
Holder would otherwise have.
(f) The rights of the Holder to receive payments in respect of this Note,
and to exercise any Remedies, solely as between the Holder and the holders of
the Senior Debt, shall be subject in all respects to the provisions of Section
3; provided, however, that all such rights shall remain unconditional and
absolute as between the Holder and the Company.
7.3 If a declaration is made pursuant to Section 7.2(b) arising solely out of
an Event of Default described in Section 7.1(e) regarding the Senior Debt, then
and in every such case, if the holders of the Senior Debt waive such default in
respect of the Senior Debt or such default is cured, and the holders of the
Senior Debt rescind or annul any and all accelerations of the maturity of all or
any portion of the Senior Debt and any required or demanded repurchase of all or
any portion thereof, then, upon written notice to the Holder of such events with
respect to the Senior Debt, any declaration made pursuant to Section 7.2(b) and
the consequences thereof, shall automatically and without any further action on
the part of the Holder, be annulled and rescinded; provided, however, that at
the time such declaration is deemed annulled and rescinded: (i) no judgment or
decree shall have been entered for the payment of any moneys due on or pursuant
to this Note; and (ii) no other Default or Event of Default shall be continuing;
provided further that no such rescission and annulment shall extend to or affect
any subsequent Default or Event of Default or impair any right consequent
thereon.
8. Interpretation of this Note
8.1 As used herein, the following terms have the respective meanings set
forth below or set forth in the Section hereof following such term:
"Affiliate" means and includes with respect to any person, at any time,
each other person (other than, with respect to the Company, a subsidiary of the
Company): (a) that directly or indirectly through one or more intermediaries
controls, or is controlled by, or is under common control with, such person; (b)
that beneficially owns or holds five percent or more of any class of the Voting
Stock of such person; (c) five percent or more of the Voting Stock (or if such
other person is not a corporation, five percent or more of the equity interest)
of which is beneficially owned or held by such person; or (d) that is an officer
or director of or holds a position of comparable authority with such person; at
such time; provided, however, that no person holding this Note shall be deemed
to be an "Affiliate" of the Company solely by virtue of the ownership of such
securities. As used in this definition: "control" means the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of a person, whether through the ownership of voting securities, by
contract or otherwise.
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"Applicable Interest Law" means any present or future law (including,
without limitation, the laws of the State of New York and the United States of
America) which has application to the interest and other charges pursuant to
this Note.
"Board of Directors" means, at any time, the board of directors of the
Company or any committee thereof that, in the instance, shall have the lawful
power to exercise the power and authority of such board of directors.
"Capital Lease" means, at any time, a lease of any property with respect
to which the lessee is required to recognize the acquisition of an asset and the
incurrence of a liability in accordance with GAAP.
"Cash Equivalents" means, for all purposes of Section 3 hereof,
equivalents of cash that are acceptable to the Senior Agent in its reasonable
business judgment.
"Change in Control" means, at any time, an occurrence or event or failure
of an event to occur, as a result of which a person or group of related persons
(other than the Herricks, an Affiliate of any of the Herricks, or any trust for
the benefit of any of the Herricks) acquires more than 50% of the Voting Stock
of the Company.
"Debt" with respect to any person, means, without duplication, the
liabilities of such person with respect to: (a) borrowed money; (b) the deferred
purchase price of property acquired by such person (excluding accounts payable
and accrued expenses arising in the ordinary course of business, but including
all liabilities created or arising under any conditional sale or other title
retention agreement with respect to any such property); (c) borrowed money
secured by any Lien existing on property owned by such person (whether or not
such liabilities have been assumed); (d) Capital Leases of such person; (e)
letters of credit, bankers acceptances or similar instruments serving a similar
function issued or accepted by banks and other financial institutions for the
account of such person (whether or not representing obligations for borrowed
money), other than undrawn trade letters of credit in the ordinary course of
business; (f) Swaps of such person; and (g) any Guaranty of such person of any
obligation or liability of another person of obligations of the type listed in
clause (a) through clause (f) of this definition of Debt; provided that, with
respect to the Company, Debt shall not include any unfunded obligations which
may now or hereafter exist with respect to Company's Plans. As used in this
definition, "Swaps" means, with respect to any person, obligations with respect
to interest rate swaps and currency swaps and similar obligations obligating
such person to make payments, whether periodically or upon the happening of a
contingency, except that if any agreement relating to such obligation provides
for the netting of amounts payable by and to such person thereunder or if any
such agreement provides for the simultaneous payment of amounts by and to such
person, then in each such case, the amount of such obligations shall be the net
amount thereof. The aggregate net obligation of Swaps at any time shall be the
aggregate amount of the obligations of such person under all Swaps assuming all
such Swaps had been terminated by such person as of the end of the then most
recently ended fiscal quarter of such person. If such net aggregate obligation
shall be an amount owing to such person, then the amount shall be deemed to be
zero. Unless the context otherwise requires, "Debt" means Debt of the Company or
of a subsidiary of the Company.
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"Default" means any event which, with the giving of notice or the passage
of time, or both, would become an Event of Default.
"Environmental Law" means any law, statute or regulation enacted by any
governmental authority in connection with or relating to the protection or
regulation of the environment, including, without limitation, those laws,
statutes and regulations regulating the disposal, removal, production, storing,
refining, handling, transferring, processing or transporting of Hazardous
Materials and any applicable orders, decrees or judgments issued by any court of
competent jurisdiction in connection with any of the foregoing.
"Environmental Permit" means any permit, approval, identification number
or other authorization required by any Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) that is treated as a single employer together with the Company
under Section 414 of the IRC.
"GAAP" means accounting principles as promulgated from time to time in
statements, opinions and pronouncements by the American Institute of Certified
Public Accountants and the Financial Accounting Standards Board and in such
statements, opinions and pronouncements of such other entities with respect to
financial accounting of for-profit entities as shall be accepted by a
substantial segment of the accounting profession in the United States.
"Guaranty" means with respect to any person (for the purposes of this
definition, the "Guarantor") any obligation (except the endorsement in the
ordinary course of business of negotiable instruments for deposit or collection)
of such person guaranteeing or in effect guaranteeing any indebtedness, dividend
or other obligation of any other person (the "Primary Obligor") in any manner,
whether directly or indirectly, including, without limitation, obligations
incurred through an agreement, contingent or otherwise, by the Guarantor: (a) to
purchase such indebtedness or obligation or any property constituting security
therefor; (b) to advance or supply funds (i) for the purchase or payment of such
indebtedness, dividend or obligation; or (ii) to maintain working capital or
other balance sheet condition or any income statement condition of the Primary
Obligor or otherwise to advance or make available funds for the purchase or
payment of such indebtedness, dividend or obligation; (c) to lease property or
to purchase securities or other property or services primarily for the purpose
of assuring the owner of such indebtedness or obligation of the ability of the
Primary Obligor to make payment of the indebtedness or obligation; or (d)
otherwise to assure the owner of the indebtedness or obligation of the Primary
Obligor against loss in respect thereof.
"Hazardous Material" means all or any of the following: (a) substances
that are defined or listed in, or otherwise classified pursuant to, any
applicable Environmental Laws as "hazardous substances", "hazardous materials",
"hazardous wastes", "toxic substances" or any other formulation intended to
define, list or classify substances by reason of deleterious properties such as
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ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity,
"TLCP toxicity" or "EP toxicity"; (b) oil, petroleum or petroleum derived
substances, natural gas, natural gas liquids or synthetic gas and drilling
fluids, produced waters and other wastes associated with the exploration,
development or production of crude oil, natural gas or geothermal resources; (c)
any flammable substances or explosives or any radioactive materials; (d)
asbestos or urea formaldehyde in any form; and (e) dielectric fluid containing
levels of polychlorinated biphenyls in excess of fifty parts per million.
"IRC" means the Internal Revenue Code of 1986, together with all rules
and regulations promulgated pursuant thereto, as amended from time to time.
"Issue Date" means December 31,1998.
"Lien" means any interest in property securing an obligation owed to, or
a claim by, a person other than the owner of such property (for purposes of this
definition, the "Owner"), whether such interest is based on the common law,
statute or contract, and includes but is not limited to: (a) the security
interest lien arising from a mortgage, encumbrance, pledge, conditional sale or
trust receipt or a lease, consignment or bailment for security purposes, and the
filing of any financing statement under the Uniform Commercial Code of any
jurisdiction, or an agreement to give any of the foregoing; (b) reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances affecting real
property; and (c) any interest in any property held by the owner evidenced by a
conditional sale agreement, Capital Lease or other arrangement pursuant to which
title to such property has been retained by or vested in some other person for
security purposes. The term "Lien" does not include negative pledge clauses in
loan agreements and equal and ratable security clauses in loan agreements.
"Material Adverse Effect" means, with respect to any event or
circumstance (either individually or in the aggregate with all other events and
circumstances), an effect caused thereby or resulting therefrom that would be
materially adverse as to, or in respect of: (a) the business, operations,
profits, financial condition or properties of the Company and its subsidiaries,
taken as a whole; (b) the ability of the Company to perform its obligations
under this Note; or (c) the validity or enforceability of this Note.
"Note" means and includes each 9% Convertible Senior Subordinated Note
due December 31, 2004 issued by the Company, as the same may be amended,
modified, supplemented, refunded, refinanced or extended from time to time.
"Plan" means an "employee benefit plan" (as defined in section 3(3) of
ERISA) that is or, within the preceding five years, has been established or
maintained, or to which contributions are or, within the preceding five years,
have been made or required to be made, by the Company or any ERISA Affiliate or
with respect to which the Company or any ERISA Affiliate may have any liability.
"Voting Stock" means with respect to any corporation, any shares of stock
of such corporation whose holders are entitled under ordinary circumstances to
vote for the election of directors of such corporation (irrespective of whether
at the time any stock of any other class or classes shall have or might have
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voting power by reason of the happening of any contingency), and, in the case of
the Company, shall include the Common Stock. Except as otherwise provided,
references herein to "Voting Stock" shall mean Voting Stock of the Company.
8.2 (a) Unless otherwise provided herein, all financial statements delivered
in connection herewith will be prepared in accordance with GAAP. Where the
character or amount of any asset or liability or item of income or expense, or
any consolidation or other accounting computation is required to be made for any
purpose hereunder, it shall be done in accordance with GAAP; provided, however,
that if any term defined herein includes or excludes amounts, items or concepts
that would not be included in or excluded from such term if such term were
defined with reference solely to GAAP, such term will be deemed to include or
exclude such amounts, items or concepts as set forth herein.
(b) Whenever accounting amounts of a group of persons are to be
determined "on a consolidated basis" it shall mean that, as to balance sheet
amounts to be determined as of a specific time, the amount that would appear on
a consolidated balance sheet of such persons prepared as of such time, and as to
income statement amounts to be determined for a specific period, the amount that
would appear on a consolidated income statement of such persons prepared in
respect of such period, in each case with all transactions among such persons
eliminated, and prepared in accordance with GAAP except as otherwise required
hereby.
8.3 Where any provision herein refers to action to be taken by any person, or
which such person is prohibited from taking, such provision shall be applicable
whether such action is taken directly or indirectly by such person, including
actions taken by or on behalf of any partnership in which such person is a
general partner.
8.4 (a) The titles of the Sections of this Note appear as a matter of
convenience only, do not constitute a part hereof and shall not affect the
construction hereof. The words "herein," "hereof," "hereunder" and "hereto"
refer to this Note as a whole and not to any particular Section or other
subdivision. References to Annexes and Sections are, unless otherwise specified,
references to Sections of this Note. References to Annexes and Schedules are,
unless otherwise specified, references to Schedules attached to this Note.
(b) Each covenant contained herein shall be construed (absent an express
contrary provision herein) as being independent of each other covenant contained
herein, and compliance with any one covenant shall not (absent such an express
contrary provision) be deemed to excuse compliance with one or more other
covenants.
8.5 THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF FLORIDA, WITHOUT REGARD TO ANY CHOICE OF LAW
RULES WHICH WOULD REQUIRE THE APPLICATION OF THE LAW OF ANY OTHER JURISDICTION.
IN ADDITION, THE PARTIES HERETO SELECT, TO THE EXTENT THEY MAY LAWFULLY DO SO,
THE INTERNAL LAWS OF THE STATE OF FLORIDA AS THE APPLICABLE INTEREST LAW.
-35-
<PAGE>
9. Miscellaneous
9.1 All communications under this Note shall be in writing and shall be
delivered either by nationwide overnight courier or by facsimile transmission
(confirmed by delivery by nationwide overnight courier sent on the day of the
sending of such facsimile transmission). Communications to the Company shall be
addressed as set forth on Annex 1, or at such other address of which the Company
shall have notified the Holder. Communications to the Holder shall be addressed
as set forth on Annex 1, or at such other address of which such Holder shall
have notified the Company (and the Company shall record such address in the
register for the registration and transfer of this Note). Any communication
addressed and delivered as herein provided shall be deemed to be received when
actually delivered to the address of the addressee (whether or not delivery is
accepted) or received by the telecopy machine of the recipient. Any
communication not so addressed and delivered shall be ineffective.
Notwithstanding the foregoing provisions of this Section 9.1, service of process
in any suit, action or proceeding arising out of or relating to this Note or any
transaction contemplated hereby, or any action or proceeding to execute or
otherwise enforce any judgment in respect of any breach hereunder or under any
document hereby, shall be delivered in the manner provided in Section 9.6(c).
9.2 All warranties, representations, statements of fact, certifications and
covenants contained in this Note or in any certificate, financial statement,
report or notice delivered or provided hereunder shall be considered to have
been relied upon by the other party hereto and shall survive the delivery to
such party regardless of any investigation made by or on behalf of any party
hereto. All statements in any certificate, delivered pursuant to the terms
hereof shall constitute warranties and representations hereunder. All
obligations hereunder (other than payment of this Note, but including, without
limitation, reimbursement obligations in respect of costs, expenses and fees)
shall survive the payment of this Note and the termination hereof. Subject to
the preceding, this Note embodies the entire agreement and understanding between
the Company and the Holder, and supersedes all prior agreements and
understandings, relating to the subject matter hereof.
9.3 The provisions hereof are intended to be for the benefit of the Holder,
from time to time, of this Note, and shall be enforceable by any such Holder
whether or not an express assignment to such Holder of rights hereunder shall
have been made by the payee or his successors or assigns. In the event that the
payee named herein transfers or assigns less than all of this Note, the term
"Holder" as used herein shall be deemed to refer to the assignor and assignee or
assignees hereof, collectively, and any action permitted to be taken by the
Holder hereunder shall be taken only upon the consent or approval of persons
comprising the Holder that own that percentage interest in the principal amount
of this Note as shall be designated by the payee named herein at the time of
such assignment. Anything contained in this Section 9.3 notwithstanding, the
Company may not assign any of its respective rights, duties or obligations
hereunder other without the prior written consent of the Holder. For purposes of
the avoidance of doubt, the Holder of this Note shall be permitted to pledge or
otherwise grant a lien in and to this Note; provided, however, that any such
pledgee or holder of a Lien shall not be considered a Holder hereunder until it
-36-
<PAGE>
shall have foreclosed upon this Note in accordance with applicable law and
informed the Company, in writing, of the same.
9.4 (a) This Note may be amended, and the observance of any term hereof may
be waived, with (and only with) the written consent of the Company and the
Holder, provided, however, that without the written consent of the holders of
Senior Debt, no amendment, supplement or modification of the provisions of
Section 3, or any defined term to the extent used therein, shall be effective as
to any holder of Senior Debt who has not consented to such amendment, supplement
or modification.
Any amendment or waiver consented to as provided in this Section 9.4
shall be binding upon the then current Holder and upon each future holder of
this Note and upon the Company whether or not this Note shall have been marked
to indicate such amendment or waiver. No such amendment or waiver shall extend
to or affect any obligation, covenant, agreement, Default or Event of Default
not expressly amended or waived or impair any right consequent thereon.
9.5 (a) The Company shall pay when billed the reasonable costs and expenses
(including reasonable attorneys' fees) incurred by the Holder in connection with
the consideration, negotiation, preparation or execution of any amendments,
waivers, consents, standstill agreements and other similar agreements with
respect to this Note (whether or not any such amendments, waivers, consents,
standstill agreements or other similar agreements are executed).
(b) At any time when the Company and the Holder are conducting
restructuring or workout negotiations in respect hereof, or a Default or Event
of Default exists, the Company shall pay when billed the reasonable costs and
expenses (including reasonable attorneys' fees and the fees of professional
advisors) incurred by the Holder in connection with the assessment, analysis or
enforcement of any rights or remedies that are or may be available to the
Holder.
(c) If the Company shall fail to pay when due any principal of, or
interest on, this Note, the Company shall pay to the Holder, to the extent
permitted by law, such amounts as shall be sufficient to cover the costs and
expenses, including but not limited to reasonable attorneys' fees, incurred by
the Holder in collecting any sums due on this Note.
9.6 (a) THE PARTIES HERETO VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT ANY
OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF,
UNDER OR IN CONNECTION WITH THIS NOTE OR TRANSACTIONS CONTEMPLATED HEREBY.
(b) ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
NOTE OR TRANSACTIONS CONTEMPLATED HEREBY OR ANY ACTION OR PROCEEDING TO EXECUTE
OR OTHERWISE ENFORCE ANY JUDGMENT IN RESPECT OF ANY BREACH UNDER THIS NOTE MAY
BE BROUGHT BY SUCH PARTY IN ANY FEDERAL DISTRICT COURT LOCATED IN NEW YORK
COUNTY, NEW YORK, OR ANY NEW YORK STATE COURT LOCATED IN NEW YORK COUNTY, NEW
-37-
<PAGE>
YORK AS SUCH PARTY MAY IN ITS SOLE DISCRETION ELECT, AND BY THE EXECUTION AND
DELIVERY OF THIS NOTE, THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY SUBMIT
TO THE NON-EXCLUSIVE IN PERSONAM JURISDICTION OF EACH SUCH COURT, AND EACH OF
THE PARTIES HERETO IRREVOCABLY WAIVES AND AGREES NOT TO ASSERT IN ANY PROCEEDING
BEFORE ANY TRIBUNAL, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, ANY CLAIM THAT
IT IS NOT SUBJECT TO THE IN PERSONAM JURISDICTION OF ANY SUCH COURT. IN
ADDITION, EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING
OF VENUE IN ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
NOTE OR TRANSACTION CONTEMPLATED HEREBY BROUGHT IN ANY SUCH COURT, AND HEREBY
IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN
ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
(c) EACH PARTY HERETO IRREVOCABLY AGREES THAT PROCESS PERSONALLY SERVED
OR SERVED BY U.S. EXPRESS, REGISTERED OR CERTIFIED MAIL OR BY NATIONWIDE
OVERNIGHT COMMERCIAL COURIER OR DELIVERY SERVICE AT THE ADDRESSES PROVIDED
HEREIN FOR NOTICES SHALL CONSTITUTE, TO THE EXTENT PERMITTED BY LAW, ADEQUATE
SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO THIS NOTE OR TRANSACTION CONTEMPLATED HEREBY, OR ANY ACTION OR PROCEEDING TO
EXECUTE OR OTHERWISE ENFORCE ANY JUDGMENT IN RESPECT OF ANY BREACH HEREUNDER.
RECEIPT OF PROCESS SO SERVED SHALL BE CONCLUSIVELY PRESUMED AS EVIDENCED BY A
DELIVERY RECEIPT FURNISHED BY THE UNITED STATES POSTAL SERVICE OR ANY COMMERCIAL
DELIVERY SERVICE.
(d) NOTHING HEREIN SHALL IN ANY WAY BE DEEMED TO LIMIT THE ABILITY OF ANY
HOLDER OF THIS NOTE TO SERVE ANY WRITS, PROCESS OR SUMMONSES IN ANY MANNER
PERMITTED BY APPLICABLE LAW OR TO OBTAIN JURISDICTION OVER THE COMPANY IN SUCH
OTHER JURISDICTION, AND IN SUCH OTHER MANNER, AS MAY BE PERMITTED BY APPLICABLE
LAW.
IN WITNESS WHEREOF, the Company has caused this Promissory Note to be
duly executed and delivered by one of its duly authorized officers or
representatives.
MEDIABAY, INC.
By: _________________________________________
Name: John Levy
Title: Executive Vice President and Chief
Financial Officer
-38-
<PAGE>
Annex I
1. Holder's Payment Instructions
Citibank
153 E. 53rd Street
New York, NY 10043
ABA # 021000089
Credit: Norton Herrick
Account # 37101489
2. Addresses for Notices
(a) If to the Company, to:
MediaBay, Inc.
20 Community Place
P.O. Box 2346
Morristown, NJ 07962-2346
Attention: Chief Financial Officer
Telephone No.: 973-539-9528
Facsimile No.: 973-539-1273
with a copy to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attention: Robert J. Mittman, Esq.
Telephone No.: (212) 885-5555
Facsimile No.: (212) 885-5001
(b) If to the payee, to:
Mr. Norton Herrick
2295 Corporate Blvd., N.W.
Suite 222
P.O. Box 5010
Boca Raton, FL 33431
Telephone No.: 561-241-9880
Facsimile No.: 561-241-9887
with a copy to:
Olshan Grundman Frome Rosenzweig & Wolosky LLP
505 Park Avenue
New York, NY 10022
Attention: Steven Wolosky, Esq.
Telephone No.: 212-753-7200
Facsimile No.: 212-980-7177
-39-
<PAGE>
[FORM OF ELECTION TO CONVERT]
The undersigned hereby irrevocably elects to exercise its right,
pursuant to the 9% Convertible Senior Subordinated Promissory Note due December
31, 2004 (the "Note") of MediaBay, Inc. (the "Company") in the outstanding
principal amount of $_________, which Note is tendered herewith, to convert
$__________ of the amount outstanding under the Note to __________________
shares of the common stock of the Company (the "Shares"), all in accordance with
the terms of the Note. The undersigned requests that a Certificate for such
Shares be registered in the name of ______________, whose address is
____________, and that such Certificate be delivered to ________________, whose
address is _________________, [and that a replacement Note in the principal
amount of $___________, representing the balance of the principal amount
outstanding thereunder after giving effect to this conversion, be issued in the
amount of $_________ and delivered to ___________, whose address is
____________].
Dated: Signature: _________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Note.)
____________________________________________
____________________________________________
(Insert Social Security or Other
Identifying Number of Holder)
-40-
<PAGE>
Schedule 6.3
1. Debt incurred under the Senior Credit Agreement on the Issue Date
2. Debt incurred under the $2,000,000 Convertible Senior Subordinated Promissory
Note Due December 31, 2004 issued to _________________ on the date hereof.
<PAGE>
MediaBay, Inc.
Subsidiaries As of 2/4/00
COMPANY STATE OF INCORPORATION
- ------- ----------------------
ABC INTERNET SERVICES, INC. NEW YORK
ABC INVESTMENT CORP. DELAWARE
RADIO SPIRITS, INC. DELAWARE
VIDEO YESTERYEAR, INC. DELAWARE
AUDIO BOOK CLUB, INC. DELAWARE
BOOKSALOUD, INC. FLORIDA
MULTIMEDIA FULFILLMENT, INC. DELAWARE
MediaBay.com, Inc. DELAWARE
AudioBook.com, Inc. DELAWARE
AudioBookClub.com, Inc. DELAWARE
ABC-COA ACQUISITION CORP. DELAWARE
MediaBay Services, Inc. DELAWARE
DownloadBay.com, Inc. DELAWARE
ClassicEntertainment.com, Inc. DELAWARE
ABCInvestmentcorp.com, Inc. DELAWARE
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Mediabay, Inc.
(previously Audio Book Club, Inc.) on Form SB-2, expected to be filed on or
about February 15, 2000, of our report dated February 14, 2000, appearing in the
Prospectus, which is part of this Registration Statement, and of the use of our
report on the financial statements of The Columbia House Audiobook Club, a
division of The Columbia House Company, dated March 18, 1999, for the year ended
December 18, 1998.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/S/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 15, 2000
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Doubleday Direct, Inc.:
We consent to the use in the registration statement on Form SB-2 of MediaBay,
Inc. (formerly Audio Book Club, Inc.) of our report dated March 12, 1999, with
respect to the balance sheets of Audio Books Direct, a wholly-owned operation of
Doubleday Direct, Inc. (the "Club"), as of June 30, 1998 and 1997, and the
related statements of operations, divisional deficit, and cash flows for the
years then ended. Our report includes an explanatory paragraph stating that the
Club was operated as an integral part of Doubleday Direct, Inc. and had no
separate legal existence. We also consent to the reference to our firm under the
heading "Experts" in the registration statement and related prospectus.
KPMG
New York, New York
February 14, 2000
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
MediaBay, nc. (formerly Audio Book Club, Inc.)
Boca Raton, Florida
We hereby consent to the inclusion in this Registration Statement on Form SB-2
of MediaBay, Inc. (formerly Audio Book Club, Inc.) of our report dated November
20, 1998 relating to the financial statements of Radio Spirits, Inc. as of
December 31, 1997 and for the year then ended and to the reference to us under
the heading "Experts" in the Prospectus, which is part of this Registration
Statement.
/s/ BD&A Certified Public Accountants, Ltd.
- -------------------------------------------
BD&A Certified Public Accountants, Ltd.
Elmhurst, Illinois
February 15, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
THE DECEMBER 31, 1999 FINANCIAL STATEMENTS IN THIS REGISTRATION STATEMENT ON
FORM SB-2 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 198
<SECURITIES> 100
<RECEIVABLES> 14,803
<ALLOWANCES> 5,911
<INVENTORY> 7,386
<CURRENT-ASSETS> 26,242
<PP&E> 2,411
<DEPRECIATION> 892
<TOTAL-ASSETS> 93,973
<CURRENT-LIABILITIES> 20,275
<BONDS> 0
0
0
<COMMON> 63,406
<OTHER-SE> (27,091)
<TOTAL-LIABILITY-AND-EQUITY> 93,973
<SALES> 46,227
<TOTAL-REVENUES> 46,227
<CGS> 23,687
<TOTAL-COSTS> 23,687
<OTHER-EXPENSES> 24,729
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,518
<INCOME-PRETAX> (6,707)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,707)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,707)
<EPS-BASIC> (.82)
<EPS-DILUTED> (.82)
</TABLE>
