<PAGE>
As filed with the Securities and Exchange Commission on March 15, 2000
Registration No. 333-95793
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM SB-2
POST-EFFECTIVE
AMENDMENT NO. 1
to
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MEDIABAY, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Florida 5961 65-0429858
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(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification number) identification number)
</TABLE>
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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)
---------------------
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)
---------------------
Copies to:
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<S> <C>
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
Telecopier No. (212) 885-5001
</TABLE>
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.
================================================================================
<PAGE>
PROSPECTUS
3,650,000 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 3,650,000 shares of common
stock.
Our shares are listed on the Nasdaq National Market under the symbol "MBAY." On
March 14, 2000, the last reported sale price on the Nasdaq National Market was
$10.00 per share.
Norton Herrick, our Chairman and a principal shareholder of MediaBay, has
agreed to purchase 250,000 of the shares of common stock being offered under
this prospectus at the initial public offering price.
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 ........................... $ 9.00 $32,850,000
Underwriting discounts and commissions .......... $ .63 $ 2,299,500
Proceeds, before expenses, to MediaBay .......... $ 8.37 $30,550,500
</TABLE>
The underwriters may, under certain circumstances, for 45 days after the date
of this prospectus, purchase up to 547,500 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 March 15, 2000
<PAGE>
TABLE OF CONTENTS
Page
-----
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
---
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.
<PAGE>
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.
3
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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
<PAGE>
The Offering
Shares offered by MediaBay........... 3,650,000 shares
Total shares outstanding after
this offering........................ 13,421,866 shares
Use of proceeds...................... To repay outstanding indebtedness 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 March 14, 2000. You should be aware that the total shares outstanding after
this offering does not include:
o 647,190 shares reserved for issuance upon conversion of convertible
promissory notes with a conversion price of $11.125 per share;
o 249,550 shares reserved for issuance upon conversion of a convertible
promissory note with a conversion price equal to the lesser of $11.125 and
the average closing bid price of our common stock for the five trading
days prior to conversion;
o Approximately 2.8 million shares reserved for issuance upon exercise of
outstanding warrants and non-plan options with a weighted average exercise
price of $11.38 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 547,500 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
<PAGE>
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:
6
<PAGE>
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 3,650,000 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 $28.3 million of indebtedness.
<TABLE>
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Years Ended December 31,
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1999 Pro
1995 1996 1997 1998 1999 Forma(1)
--------------- ------------- ------------- ------------- ------------ -------------
(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)
----------- --------- --------- ---------- ---------- ----------
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
</TABLE>
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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 $13,045
Total assets .......................................... 93,973 95,973 97,331
Current liabilities ................................... 20,275 20,275 16,555
Long-term debt ........................................ 37,383 34,559 9,976
Common stock subject to contingent put rights ......... 4,283 3,639 3,639
Shareholders' equity .................................. 32,032 37,500 67,161
</TABLE>
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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.
7
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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.
We may need to raise additional funds to finance our capital requirements.
Our capital requirements have historically exceeded cash flow from our
operations. Because we intend to use approximately $28.3 million of the net
proceeds of this offering to repay outstanding indebtedness, we will not have
these proceeds available for other corporate purposes. As a result, we may need
to raise additional funds in the near future to finance our capital
requirements. Our business could suffer and we may need to adjust our plans if
financing is not available when required or is not available on acceptable
terms.
8
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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 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.
9
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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.
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.
10
<PAGE>
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.
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;
11
<PAGE>
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.
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.
12
<PAGE>
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 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, Norton Herrick, Michael Herrick and Howard
Herrick and their affiliates will own approximately 29.4% of our outstanding
common stock (28.9% 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 $10.0 million principal amount of
debt outstanding under convertible promissory notes. 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 notes, 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 13,421,866 shares of common
stock (13,969,366 shares if the underwriters exercise their over-allotment
option in full). This includes the 3,650,000 shares we are selling in this
offering (4,197,500 shares if the underwriters exercise their over-allotment
option in full) and the approximately 3,750,000 shares which are currently
freely tradeable without restriction under the Securities Act of 1933. The
remaining approximately 6,020,000 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>
2,400,000 Immediately available.
1,020,000 60 days after the date of this prospectus due to lock-up agreements with the managing
underwriter.
860,000 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 7.6 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 $8.41 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 $.59 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.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to MediaBay from the sale of common stock in this
offering are estimated to be $29.7 million ($34.2 million if the underwriters
exercise their over-allotment option in full), after deducting underwriting
discounts and commissions and estimated offering expenses, of which $775,000
are being paid from the net proceeds of this offering. We intend to use these
net proceeds as follows:
o to repay $28.3 million of indebtedness under our credit agreement; and
o for working capital and general corporate purposes.
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 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.
We are negotiating with our lenders under the credit agreement for them to
provide us with an asset based line of credit of up to $7 million less any
proceeds received from the representatives' exercise of the over-allotment
option. If we are unable to obtain a line of credit from them on terms
satisfactory to us, we believe that we will be able to obtain other suitable
financing. We anticipate that any line of credit we obtain will continue to be
secured by a pledge of our assets and our subsidiaries' assets.
If the representatives exercise the over-allotment option, we intend to
use the net proceeds for working capital and general corporate purposes and to
reduce our borrowing availability under the anticipated line of credit.
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 March 14, 2000) ......... 16.875 9.875
</TABLE>
On March 14, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $10.00 per share. As of March 14, 2000, there were
approximately 57 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.
18
<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
3,650,000 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 $28.3 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 $ -0-
--------- --------- --------
Long-term debt ......................................... $ 37,383 $ 34,559 $ 9,976
--------- --------- ---------
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 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
13,421,866 shares issued and outstanding, as
adjusted ............................................ 58,743 64,211 93,872
Contributed capital ................................... 3,455 3,455 3,455
Accumulated deficit ................................... (30,166) (30,166) (30,166)
--------- --------- ---------
Total shareholders' equity .......................... $ 32,032 $ 37,500 $ 67,161
--------- --------- ---------
Total capitalization ............................... $ 77,418 $ 79,418 $ 80,776
========= ========= =========
</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.
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 March 3, 2000, we had 62 full-time employees. Of these employees, 7
served in management and 30 served in operational positions at our Audio Book
Club operations and 4 served in management and 21 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 ................ 33 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, 33, 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
<PAGE>
<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 March 14, 2000, options to purchase an
aggregate of 1,981,900 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 March 14, 2000, options to purchase an aggregate of 1,931,850 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 March 14, 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 March 14, 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 ................................... 4,131,431(1) 29.5% 23.1%
Howard Herrick ................................... 3,602,640(2) 35.4 26.1
Michael Herrick .................................. 1,038,460(3) 10.1 7.4
Quantum Partners LDC ............................. 750,000 7.7 5.6
Kaya Flamboya
Willemsted, Curacao
Netherlands, Antilles
President and Fellows of Harvard College ......... 700,000 7.2 5.2
c/o Harvard Management Company, Inc.
600 Atlantic Avenue
Boston, Massachusetts 02210
Carl P. Amari .................................... 447,875(4) 4.6 3.3
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) 8,973,996 60.6% 49.7%
</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, (e) 910,221 shares of common stock issuable upon exercise of
warrants issued on December 31, 1998 or under a December 1998 letter
agreement, (f) 249,550 shares issuable upon conversion of a convertible
promissory note, based on an $11.125 conversion price and (g) 250,000
shares which Mr. Herrick has agreed to purchase in this offering. Does not
include (i) 2,714,180 shares held by the Norton Herrick Irrevocable Trust,
(ii) 64,779 shares which may become issuable to Mr. Herrick upon exercise
of warrants which may be required to issue to Mr. Herrick and (ii)
additional shares if the promissory note is converted at a conversion
price less than $11.125 per share. 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. See "Related Party Transactions."
(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. If the remaining $2,776,250 owed to Mr. Herrick under the note
is refinanced, repaid or replaced, 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. 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 March 14,
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 3,913,750 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 2.8 million shares of common stock at a weighted average price of
approximately $11.38 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 910,221 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 $7.2 million principal amount convertible
promissory notes 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 notes may be adjusted as a result of this offering.
The conversion price of a $2.8 million principal amount convertible
promissory note that is held by Norton Herrick is subject to anti-dilution
protection for issuances of securities below the conversion price, currently
the lesser of $11.125 per share or the average closing bid price of our common
stock for the five trading days prior to conversion. Mr. Herrick waived his
right to any anti-dilution adjustments resulting from 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, 13,421,866 shares of common stock will be outstanding
(13,969,366 shares if the underwriters exercise their over-allotment option in
full). Of these shares, 7,750,000 shares (approximately 8,300,000 shares if the
underwriters exercise their over-allotment option in full), including the
3,650,000 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 approximately 6,020,000 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 2.3 million of
these restricted shares, plus an approximately 6.5 million additional shares
issuable upon exercise of outstanding options, warrants and convertible notes,
are currently registered for resale and may, subject in some cases, 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>
2,400,000 Immediately available.
1,020,000 60 days after the date of this prospectus due to lock-up agreements with the managing
underwriter.
860,000 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. ............................ 984,000
L.H. Friend, Weinress, Frankson & Presson, Inc. ........ 983,000
Pennsylvania Merchant Group ............................ 983,000
Advest, Inc. ........................................... 100,000
BlueStone Capital Partners, L.P. ....................... 100,000
First Southwest Company ................................ 100,000
Gilford Securities Corporation ......................... 100,000
Janney Montgomery Scott LLC ............................ 100,000
Scott & Stringfellow, Inc. ............................. 100,000
H.C. Wainwright & Co., Inc. ............................ 100,000
---------
Total ............................................... 3,650,000
=========
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 547,500 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 $.35 per share and such dealers may reallow a concession not
in excess of $.10 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.
<PAGE>
<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 ......... $ .63 $2,299,500 $2,644,425
</TABLE>
In addition, we estimate that we will spend approximately $1,015,000 in
expenses for this offering, including accountable expenses of the
representatives of up to $115,000. 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>
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 F-7
and 1998
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, F-49
1997
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>
- --------------------------------------------------------------------------------
MEDIABAY, INC.
[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.
SEC Registration ...................... $ 14,573
NASD Filing Fee ....................... $ 6,020
Legal Fees and Expenses* .............. $ 400,000(1)
Printing and Engraving Costs* ......... $ 150,000
Accounting Fees* ...................... $ 100,000
Transfer Agent Fees* .................. $ 3,000
Miscellaneous* ........................ $ 226,407
------------
Total ............................... $ 900,000(2)
============
- ------------
* Estimated
** To be provided by amendment.
(1) Of this amount, $125,000 was previously paid.
(2) Of this amount $775,000 are being paid from the net proceeds of this
offering.
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 3,913,750 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
+ 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 March 14, 2000.
MEDIABAY, INC.
By: /s/ Norton Herrick
-------------------------------------------
Norton Herrick
Chairman and Director
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------- ---------------------------------------------- ---------------
<S> <C> <C>
/s/ Norton Herrick Director and Chairman (Principal Executive March 14, 2000
- ------------------------- Officer)
Norton Herrick
* Director, Chief Executive Officer and March 14, 2000
- ------------------------- President (Principal Executive Officer)
Michael Herrick
* Director and President of Audio Book Club, March 14, 2000
- ------------------------- Inc.
Jesse Faber
* Director and Executive Vice President March 14, 2000
- -------------------------
Howard Herrick
* Executive Vice President and Chief Financial March 14, 2000
- ------------------------- Officer (Principal Financial and Accounting
John F. Levy Officer)
* Director and President of Radio Operations March 14, 2000
- -------------------------
Carl P. Amari
* Director March 14, 2000
- -------------------------
Carl T. Wolf
* Director March 14, 2000
- -------------------------
Roy Abrams
/s/ Norton Herrick
- -------------------------
Norton 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*
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>
<PAGE>
- ------------
* Previously filed
+ 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>
3,650,000 Shares(1)
MEDIABAY, INC.
Common Stock
UNDERWRITING AGREEMENT
March 15, 2000
ROTH CAPITAL PARTNERS, INC.
L.H. FRIEND, WEINRESS, FRANKSON & PRESSON, LLC
PENNSYLVANIA MERCHANT GROUP
As Representatives of the several Underwriters
c/o ROTH CAPITAL PARTNERS, INC.
24 Corporate Plaza
Newport Beach, California 92660
Ladies and Gentlemen:
MediaBay, Inc., a Florida corporation (the "Company"),
addresses you as the Representatives of each of the persons, firms and
corporations listed on Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirms its agreement with the several Underwriters
as follows:
1. Description of Shares.
The Company proposes to issue and sell 3,650,000 shares of its
authorized and unissued common stock, no par value (the "Firm Shares"), to the
several Underwriters. The Company also proposes to grant to the Underwriters an
option to purchase up to 547,500 additional shares of the Company's common
stock, no par value (the "Option Shares") solely for the purpose of covering
over-allotments, as provided in Section 7 hereof. As used in this Agreement,
the term "Shares" shall include the Firm Shares and the Option Shares. All
shares of common stock, no par value, of the Company to be outstanding after
giving effect to the sales contemplated hereby, including the Shares, are
hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the Company.
- --------
(1) Plus an option to purchase up to 547,500 additional shares to
cover over-allotments.
<PAGE>
The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form SB-2 (File No. 333-95793)
with respect to the Shares, including a prospectus, has been prepared by the
Company in conformity with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the applicable rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission") under
the Act and has been filed with the Commission- such amendments to such
registration statement, such prospectuses and abbreviated registration
statements pursuant to Rule 462(b) of the Rules and Regulations (a "462
Registration Statement") as may have been required prior to the date hereof have
been similarly prepared and filed with the Commission- and the Company will file
such additional amendments to such registration statement, such amended
prospectuses and such abbreviated registration statements as may hereafter be
required. Copies of such registration statement and amendments together with
each exhibit filed therewith, of each related prospectus contained or filed as
part of any pre-effective amendment to such registration statement or filed
pursuant to Rule 424(a) (the "Preliminary Prospectuses") and of any abbreviated
462 Registration Statement have been delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if the Representatives, on behalf of the
several Underwriters, shall agree to the utilization of Rule 434 of the Rules
and Regulations, the information required to be included in any term sheet filed
pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations
pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if the
Representatives, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement" as
used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits (including exhibits incorporated by
reference), in the form in which it became or becomes, as the case may be,
effective (including, if the Company omitted information from the registration
statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434 of
the Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment
thereto or the filing of any 462 Registration Statement after the effective date
of such registration statement, shall also mean (from and after the
effectiveness of such amendment or the filing of any 462 Registration Statement)
such registration statement as so amended, together with any such abbreviated
registration statement. The term "Prospectus" as used in this Agreement shall
mean the prospectus relating to the Shares as included in such Registration
Statement at the time it becomes effective (including, if the Company omitted
information from the Registration Statement pursuant to Rule 430A(a) of the
Rules and Regulations, the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 430A(b) of the Rules
and Regulations); provided, however, that if in reliance
2
<PAGE>
on Rule 434 of the Rules and Regulations and with the consent of the
Representatives, on behalf of the several Underwriters, the Company shall have
provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as
applicable, prior to the time that a confirmation is sent or given for purposes
of Section 2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus
subject to completion" (as defined in Rule 434(g) of the Rules and Regulations)
last provided to the Underwriters by the Company and circulated by the
Underwriters to all prospective purchasers of the Shares (including the
information deemed to be a part of the Registration Statement at the time it
became effective pursuant to Rule 434(d) of the Rules and Regulations).
Notwithstanding the foregoing, if any revised prospectus shall be provided to
the Underwriters by the Company for use in connection with the offering of the
Shares that differs from the prospectus referred to in the immediately preceding
sentence (whether or not such revised prospectus is required to be filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the Underwriters for such use. If in reliance on Rule 434
of the Rules and Regulations and with the consent of the Representatives, on
behalf of the several Underwriters, the Company shall have provided to the
Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior
to the time that a confirmation is sent or given for purposes of Section
2(10)(a) of the Act, the Prospectus and the term sheet, together, will not be
materially different from the prospectus in the Registration Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or, to the Company's knowledge,
instituted proceedings for that purpose, and each such Preliminary Prospectus
has conformed in all material respects to the requirements of the Act and the
Rules and Regulations and, as of its date, has not included any untrue statement
of a material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up to
and on the Closing Date (hereinafter defined) and on any later date on which
Option Shares are to be purchased, (i) the Registration Statement and the
Prospectus, and any amendments or supplements thereto, contained and will
contain all material information required to be included therein by the Act and
the Rules and Regulations and will in all material respects conform to the
requirements of the Act and the Rules and Regulations, (ii) the Registration
Statement, and any amendments or supplements thereto, did not and will not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and (iii) the Prospectus, and any amendments or supplements thereto,
did not and will not include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
that none of the representations and warranties contained in this subparagraph
(b) shall apply to information contained in the Registration Statement or
Prospectus, or any amendment or supplement thereto, in reliance upon, and in
conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter specifically for use in the preparation thereof
or information omitted from the Registration Statement or Prospectus or any
amendment or supplement thereto relating to any Underwriter.
3
<PAGE>
(c) If the Company has elected to rely on Rule 462(b) and the
Rule 462 Registration Statement has not been declared effective (i) the Company
has filed a Rule 462 Registration Statement in compliance with, and that is
effective upon filing pursuant to, Rule 462(b) and has received confirmation of
its receipt and (ii) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462 Registration Statement, in compliance with Rule 111 promulgated under
the Act or the Commission has received payment of such filing fee.
(d) Each of the Company and its direct and indirect
subsidiaries (hereinafter, the "Subsidiaries") is duly incorporated and validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation with full corporate power and authority to own, lease and
operate its properties and conduct its business as described in the Prospectus;
each of the Company and its Subsidiaries is duly qualified to do business as a
foreign corporation and in good standing in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its business requires
such qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its Subsidiaries taken as a whole, (hereinafter, a "Material Adverse
Effect"); no proceeding has been instituted in any such jurisdiction revoking,
limiting or curtailing, or seeking to revoke, limit or curtail, such power and
authority or qualification; each of the Company and the Subsidiaries is in
possession of and operating in compliance with all authorizations, licenses,
certificates, consents, orders and permits from state, federal and other
regulatory authorities that are material to the conduct of its business, all of
which are valid and in full force and effect. Neither the Company nor any of its
Subsidiaries is in violation of its charter or bylaws and no event has occurred
which, with notice or lapse of time or both, would constitute a breach or
violation of any of the terms and provisions of, or constitute a default under,
any obligation, agreement, covenant or condition contained in any bond,
debenture, note or other evidence of indebtedness, or in any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which either the Company or any of its Subsidiaries
is a party or by which their properties or assets may be bound. Neither the
Company nor any of its Subsidiaries is in violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, administrative
agency, regulatory body, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or its properties except where
such violation would not have a Material Adverse Effect.
(e) Each of the Company and its Subsidiaries has the corporate
power and authority to enter into this Agreement and perform the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement on the part of the
Company, enforceable in accordance with its terms, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws relating to or affecting creditors'
rights generally or by general equitable principles and rules of law governing
specific performance, estoppel, waiver, injunctive relief, and other equitable
remedies (regardless of whether enforcement is sought in a proceeding at law or
in equity). The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions herein contemplated will not
conflict with or result in a breach or violation of any of the
4
<PAGE>
terms and provisions of, or constitute a default under, (i) any bond, debenture,
note or other evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement or
instrument to which the Company is a party or by which its properties may be
bound, except where such breach, violation or default would not have a Material
Adverse Effect or prevent the consummation of the transactions contemplated by
this Agreement, (ii) the charter or bylaws of the Company or (iii) any law,
order, rule, regulation, writ, injunction, judgment or decree of any court,
administrative agency, regulatory body, government or governmental agency or
body, domestic or foreign, having jurisdiction over the Company or its
properties, except where such breach, violation or default would not have a
Material Adverse Effect or prevent the consummation of the transactions
contemplated by this Agreement. No further approval or authorization of any
shareholder or the Board of Directors of the Company is required for the
issuance and sale or transfer of the Shares except as may be required under the
Act or under state, or other securities or Blue Sky laws. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or its properties or any other party is required for the execution and
delivery of this Agreement and the consummation by the Company of the
transactions herein contemplated, except such as may be required under the Act
or in connection with listing the Shares on NMS (as hereinafter defined), which
requirements have been satisfied in all material respects, and except such as
may be required by the National Association of Securities Dealers, Inc. (the
"NASD"), or under state, or other securities or Blue Sky laws.
(f) There is not pending or, to the Company's knowledge,
threatened, any action, suit, claim or proceeding against either the Company or
any of its Subsidiaries, any of Company's or any of its Subsidiaries' officers,
any of its properties, assets or rights before any court, administrative agency,
regulatory body, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or any of its Subsidiaries, its officers,
its properties, or otherwise which (i) might, individually or in the aggregate,
result in any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company or its
Subsidiaries, taken as a whole (a "Material Adverse Change"), or, (ii) might
prevent consummation of the transactions contemplated hereby or (iii) is
required to be disclosed in the Registration Statement or Prospectus and is not
so disclosed. There are no agreements, contracts, leases or documents of the
Company of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement by the Act or the Rules and Regulations which have not
been accurately described in all material respects in the Registration Statement
or Prospectus or filed as exhibits to the Registration Statement. Neither the
Company nor its Subsidiaries is a party or subject to the provisions of any
injunction, judgment, decree or order of any court, administrative agency,
regulatory body, government or governmental agency or body domestic or foreign,
that could be expected to result in a Material Adverse Change. Each of the
Company and its Subsidiaries has conducted and is conducting its business in
compliance with all applicable federal, state, local and foreign statutes, laws,
rules, regulations, ordinances, codes, decisions, decrees, directives and
orders, except where the failure to do so would not, singly or in the aggregate,
have a Material Adverse Effect on the Company.
5
<PAGE>
(g) All outstanding shares of capital stock of each of the
Company and its Subsidiaries have been duly authorized and validly issued and
are fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase securities.
Except to the extent that a holder of options, warrants or other convertible
securities has elected to convert such securities but the Company has not
received actual notice of such election, the Company has an authorized, issued
and outstanding capitalization as set forth in the Prospectus. The capital stock
of the Company conforms to the description thereof contained in the Registration
Statement and the Prospectus (and such statements correctly state the substance
of the instruments defining the capitalization of the Company). The Shares to be
issued and sold by the Company hereunder have been duly authorized for issuance
and sale to the Underwriters pursuant to this Agreement, and, when issued and
delivered by the Company against payment therefor in accordance with the terms
of this Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold to the Underwriters free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest.
Except as set forth in the Prospectus, no preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
shareholders exists with respect to any of the Shares or the issuance and sale
thereof, other than those that have been satisfied or expressly waived prior to
the date hereof and those that will automatically expire upon and will not apply
to the consummation of the transactions contemplated on or before the Closing
Date. Except as disclosed in the Registration Statement, Prospectus and the
financial statements of the Company, and the related notes thereto included in
the Prospectus, the Company has no outstanding options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options (the
"Plan Options"), or other rights granted and exercised thereunder, set forth in
the Prospectus fairly and accurately presents, in all material respects, the
information required to be shown with respect to such plans, arrangements,
options and rights. All outstanding Plan Options have been duly authorized and
issued in compliance with the option plan pursuant to which such option was
granted and with all federal and state securities laws and the Florida Business
Corporation Act.
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, except as set forth in
the Registration Statement and Prospectus, there has not been (i) any Material
Adverse Change, (ii) any transaction that is material to either the Company or
any of its Subsidiaries, (iii) any material obligation, direct or contingent,
incurred by either the Company or any of its Subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any material change in the
capital stock or outstanding indebtedness for borrowed money of either the
Company or any of its Subsidiaries, (v) any dividend or distribution of any kind
declared, paid or made on the capital stock of either the Company or any of its
Subsidiaries, (vi) any default in the payment of principal of or interest on any
outstanding debt obligation which is not being repaid from the net proceeds of
the offering, or (vii) any loss or damage (whether or not insured) to the
property of either the Company or any of its Subsidiaries which has been
sustained or will have been sustained which has a Material Adverse Effect.
6
<PAGE>
(i) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its Subsidiaries has good and marketable
title to all properties and assets described in the Registration Statement and
Prospectus as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as would not
have a Material Adverse Effect and liens for taxes not yet due and payable, (ii)
the agreements to which either the Company or any of its Subsidiaries is a party
described in, or filed as exhibits to, the Registration Statement and Prospectus
are valid agreements, enforceable by the Company or its Subsidiaries, as the
case may be, except as the enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles and rules of law governing specific performance,
estoppel, waiver, injunctive relief and other equitable remedies (regardless of
whether enforcement is sought in a proceeding at law or in equity) and, to the
Company's knowledge, the other contracting party or parties thereto are not in
breach or default under any of such agreements, and (iii) either the Company or
its Subsidiaries has valid and enforceable leases for all properties described
in the Registration Statement and Prospectus, except as the enforcement thereof
may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws relating to or affecting creditors'
rights generally or by general equitable principles and rules of law governing
specific performance, estoppel, waiver, injunctive relief and other equitable
remedies (regardless of whether enforcement is sought in a proceeding at law or
in equity). Except as set forth in the Registration Statement and Prospectus,
the Company and its Subsidiaries own or lease all such properties as are
necessary to its operations as now conducted or as proposed to be conducted.
(j) Deloitte & Touche, LLP, KPMG LLP and BD&A Certified Public
Accountants, Ltd., who have delivered their reports with respect to the audited
financial statements of the Company, Audio Books Direct and Radio Spirits, Inc.
or the audited carve-out financial statements of the Columbia House Audiobook
Club, together with the related schedules and notes, filed with the Commission
as a part of the Registration Statement, which are included in the Prospectus,
are independent accountants within the meaning of the Act and the Rules and
Regulations. The audited financial statements of the Company, Audio Books Direct
and Radio Spirits, Inc. and the audited carve-out financial statements of the
Columbia House Audiobook Club, together with the related schedules and notes,
and any unaudited financial information, forming part of the Registration
Statement and Prospectus, fairly present, in all material respects, the
financial position and the results of operations of the Company, Audio Books
Direct, Radio Spirits and The Columbia House Audiobook Club at the respective
dates and for the respective periods to which they apply; and all audited
financial statements of the Company, Audio Books Direct and Radio Spirits, Inc.
and the audited carve-out financial statements of the Columbia House Audiobook
Club, together with the related schedules and notes, and any unaudited financial
information, filed with the Commission as part of the Registration Statement,
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as may be otherwise
stated therein. The selected and summary financial data included in the
Registration Statement fairly present, in all material respects, the information
shown therein at the respective dates and for the respective periods for which
they apply, and have been compiled on a basis consistent with the audited
financial statements presented therein. No other financial statements or
schedules are required to be included in the Registration Statement.
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(k) Each of the Company and its Subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization, and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(l) Each of the Company and its Subsidiaries has timely filed
all necessary federal, state, local and foreign income and franchise tax returns
and have paid all taxes shown thereon as due, and there is no tax deficiency
that has been or, might be asserted against the Company or any of its
Subsidiaries that might have a Material Adverse Effect. All tax liabilities are
adequately provided for on the books of each of the Company and its
Subsidiaries.
(m) Each of the Company and its Subsidiaries maintains
insurance with insurers of recognized financial responsibility of the types and
in the amounts which are adequate or which are otherwise required by any
agreement to which either the Company or a Subsidiary is a party, including, but
not limited to, insurance covering real and personal property owned or leased by
the Company or its Subsidiaries against theft, damage, destruction, acts of
vandalism, products liability, errors and omissions, and all other risks
customarily insured against, all of which insurance is in full force and effect.
The Company does not have any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a Material Adverse Effect.
(n) No labor disturbance by the employees of the Company or
any of its Subsidiaries exists or, to the Company's knowledge, is imminent. The
Company is not aware of any existing or imminent work stoppage or labor strike
by the employees of any of the Companies' or any of its Subsidiaries' principal
suppliers, subcontractors, distributors (domestic or foreign) that might be
expected to result in a Material Adverse Change. No collective bargaining
agreement exists with any of the Company's employees and, to the Company's
knowledge, no such agreement is imminent.
(o) If any full-time employee identified in the Prospectus has
entered into any non-competition, non-disclosure, confidentiality or other
similar agreement with any party other than the Company or its Subsidiaries,
such employee is neither in violation thereof nor is expected to be in violation
thereof solely as a result of the business conducted or expected to be conducted
by the Company as described in the Prospectus or such person's performance of
his or her obligations to the Company. Substantially all of the key employees
engaged by or on behalf of the Company or any of its Subsidiaries to render
services for the Company or any of its Subsidiaries have entered into an
agreement with the Company or such Subsidiary, as the case may be, providing for
terms and conditions of non-disclosure and confidentiality in connection with
such services ("Confidentiality Agreements").
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To the Company's knowledge, the Confidentiality Agreements are the legal, valid,
binding and enforceable instruments of the employees, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws relating to or affecting rights
generally or by general equitable principles and rules of law governing specific
performance, estoppel, waiver, injunctive relief, and other equitable remedies
(regardless of whether enforcement is sought in a proceeding at law or in
equity). To the Company's knowledge, no employee of the Company is in violation
of any Confidentiality Agreement.
(p) The Common Stock is registered pursuant to Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is
approved for listing on the Nasdaq National Market System ("NMS"). The Company
has taken no action designed to, or likely to have the effect of, terminating
the registration of the Common Stock under the Exchange Act or delisting the
Common Stock from NMS, nor has the Company received any notification that the
Commission or NMS is contemplating terminating such registration or quotation.
(q) Each of the Company and its Subsidiaries owns or possesses
rights to use all patents, patent rights, patent licenses, inventions, trade
secrets, trademarks, service marks, trade names, copyrights, service names, mask
works, technology, know-how and other proprietary intellectual rights which are
necessary to conduct its business as now conducted and as described in the
Registration Statement and Prospectus, except where the failure to do so would
not have a Material Adverse Effect. Except as set forth in the Registration
Statement and the Prospectus, the expiration of any patents, patent rights,
trade secrets, trademarks, service marks, trade names or copyrights would not
have a Material Adverse Effect. The Company or its assignor has duly and
properly filed with the U.S. Patent and Trademark Office all pending trademark
and service mark applications (the "Trademark Applications") referred to in the
Registration Statement and Prospectus. The information contained in the
Registration Statement and Prospectus concerning the Trademark Applications and
patents owned by or licensed to the Company or its Subsidiaries is accurate in
all material respects. Neither the Company nor any of its Subsidiaries has
received any notice of, nor has it any knowledge of, any infringement of or
conflict with asserted rights of either the Company or any of its Subsidiaries
by others with respect to any patents, patent rights, inventions, trade secrets,
trademarks, service marks, trade names, copyrights, mask works, technology or
know-how. Neither the Company nor any of it Subsidiaries has received any notice
of, nor has it any knowledge of, any infringement of or conflict with asserted
rights of others with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or copyrights which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, might have a Material Adverse Effect.
(r) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it is not and will not become an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the 1940 Act and such rules and regulations.
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(s) Each of the Company and such Subsidiaries has submitted
all reports and other documentation necessary to be submitted in accordance with
all foreign regulatory orders, laws and regulations in jurisdictions in which
the Company or such Subsidiary is conducting business except where such failure
would not have a Material Adverse Effect. Neither the Company nor any such
Subsidiaries has received notification of violation of any applicable statute,
rule, regulation or order administered or issued by any foreign administrative
agency, regulatory body, government or governmental agency in foreign
jurisdictions in which it is conducting business.
(t) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its Subsidiaries is in compliance with
all laws, orders, rules and regulations relating to the use, treatment, storage
and disposal of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to its business except where failure
to do so would not have a Material Adverse Effect, (ii) neither the Company nor
any of its Subsidiaries has received notice from any administrative agency,
regulatory body, government, governmental authority or third party of an
asserted claim under Environmental Laws, (iii) neither the Company nor any of
its Subsidiaries will be required to make material capital expenditures to
comply or cause its Subsidiaries to comply with Environmental Laws in the
foreseeable future and (iv) no property which is, or has been, owned, leased or
occupied by the Company or an of its Subsidiaries has been designated as a
Superfund site pursuant to the Comprehensive Response, Compensation, and
Liability Act of 1980, as amended, or otherwise designated as a contaminated
site under applicable state or local law.
(u) The Company has not distributed, and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(v) Neither the Company nor any of its Subsidiaries has at any
time during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign or domestic office or failed to disclose fully any
contribution in violation of law, or (ii) made any payment to any foreign or
domestic governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by
applicable law.
(w) The Company has not taken and will not take, directly or
indirectly, any action designed to or that could reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(x) Except as otherwise set forth in the Registration
Statement and the Prospectus, each officer and director of the Company, and each
person listed on Schedule B attached hereto has agreed in writing (each such
writing, a "Lock-Up Agreement") that such person will not, except as set forth
in such Lock-Up Agreements, for the applicable period set forth in such Lock-Up
Agreements, offer or sell any shares of Common Stock, or any securities
convertible into or exercisable or exchangeable for Common Stock (collectively,
"Securities"), now owned or hereafter acquired by such person. The
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Company has provided to counsel for the Underwriters true, accurate and complete
copies of all of the Lock-up Agreements presently in effect or effected hereby.
To the Company's knowledge, the Lock-Up Agreements are the legal, valid, binding
and enforceable instruments of the parties thereto, except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws relating to or affecting rights
generally or by general equitable principles and rules of law governing specific
performance, estoppel, waiver, injunctive relief, and other equitable remedies
(regardless of whether enforcement is sought in a proceeding at law or in
equity).
(y) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any shareholder who owns beneficially more than five
percent (5%) of the Common Stock of the Company or any of the members of the
families of any of them, except as disclosed in the Registration Statement and
the Prospectus.
(z) Except as disclosed in the Registration Statement and the
Prospectus, neither the Company nor any of its officers or directors is a party
to any arrangements or understandings, whether oral or written, nor has the
Company or any such person made any payments for commissions or similar payment
in connection with the transactions contemplated by this Agreement.
(aa) There are no persons with registration or other similar
rights to have any securities registered pursuant to the Registration Statement
or otherwise registered by the Company under the Act, other than those who have
entered into Lock-up Agreements and waived any applicable registration rights
with respect to the Registration Statement.
(bb) No relationship, direct or indirect, exists between or
among the Company on the one hand and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, that is required by the
Act or the Rules and Regulations to be described in the Registration Statement
and the Prospectus that is not described as so required.
(cc) The Preliminary Prospectuses and Prospectus delivered to
the Underwriters for use in connection with this offering were identical to the
versions of the Preliminary Prospectuses and Prospectuses created to be
transmitted to the Commission for filing via Electronic Data Gathering Analysis
and Retrieval System ("EDGAR"), except to the extent permitted by Regulation
S-T.
(dd) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government of Cuba
or with any person or affiliate located in Cuba.
3. Purchase, Sale and Delivery of Shares.
On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company agrees to sell to the Underwriters, and
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each Underwriter agrees, severally and not jointly, to purchase from the
Company, at a purchase price of $8.37 per share, the respective number of Firm
Shares which is set forth opposite the name of such Underwriter in Schedule A
hereto (subject to adjustment as provided in Section 10).
Arrangement for electronic transfer of, or delivery of
definitive certificates for the Firm Shares to be purchased by the Underwriters
pursuant to this Section 3 shall be made against payment of the purchase price
therefor by the several Underwriters by wire transfer in same day funds, at the
offices of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP, Philadelphia,
Pennsylvania (or at such other place as may be agreed upon between the
Representatives and the Company), at 10:00 A.M. Eastern Standard Time, on March
20, 2000 or such other date as the Representatives and the Company may determine
(or at such time and date to which payment and delivery shall have been
postponed pursuant to Section 11 hereof), such time and date of payment and
delivery being herein called the "Closing Date;" provided, however, that if the
Company has not made available to the Representatives copies of the Prospectus
within the time provided in Section 4(4) hereof, the Representatives may, in
their sole discretion, postpone the Closing Date until no later than two (2)
full business days following delivery of copies of the Prospectus to the
Representatives. The certificates for the Firm Shares to be so delivered will be
made available to you at such office or such other location including, as you
may reasonably request at least two (2) full business days prior to the Closing
Date and will be in such names and denominations as you may request. If the
Representatives so elect, delivery of the Firm Shares may be made by credit
through full fast transfer to the accounts at The Depository Trust Company
designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the
several Underwriters intend to make a public offering (as such term is described
in Section 11 hereof) of the Firm Shares at a public offering price of $9.00 per
share.
4. Further Agreements of the Company.
The Company covenants and agrees with each of the Underwriters that:
(1) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible. The Company will use its best efforts
to cause any 462 Registration Statement as may be required subsequent to the
date the Registration Statement is declared effective to become effective as
promptly as possible. The Company will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement,
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any subsequent amendment to the Registration Statement or any 462 Registration
Statement has become effective or any supplement to the Prospectus has been
filed. If the Company omitted information from the Registration Statement at the
time it was originally declared effective in reliance upon Rule 430A(a) of the
Rules and Regulations, the Company will provide evidence reasonably satisfactory
to you that the Prospectus contains such information and has been filed, within
the time period prescribed, with the Commission pursuant to subparagraph (1) or
(4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission. If the Company files a term sheet
pursuant to Rule 434 of the Rules and Regulations, the Company will provide
evidence reasonably satisfactory to you that the Prospectus and term sheet
meeting the requirements of Rule 434(b) or (c), as applicable, of the Rules and
Regulations have been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and
Regulations. If for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence reasonably satisfactory to you that the Prospectus contains such
information and has been filed with the Commission within the time period
prescribed. The Company will notify you promptly of any request by the
Commission for the amending or supplementing of the Registration Statement or
the Prospectus or for additional information. Promptly upon your request, the
Company will prepare and file with the Commission any amendments or supplements
to the Registration Statement or Prospectus which, in the opinion of counsel for
the several Underwriters ("Underwriters' Counsel"), may be necessary or
advisable in connection with the distribution of the Shares by the Underwriters.
The Company will promptly prepare and file with the Commission, and promptly
notify you of the filing of, any amendments or supplements to the Registration
Statement or Prospectus which may be necessary to correct any statements or
omissions, if, at any time when a prospectus relating to the Shares is required
to be delivered under the Act, any event shall have occurred as a result of
which the Prospectus or any other prospectus relating to the Shares as then in
effect would include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The Company will file
no amendment or supplement to the Registration Statement or Prospectus which
shall not previously have been submitted to you a reasonable time prior to the
proposed filing thereof or to which you object, subject, however, to compliance
with the Act and the Rules and Regulations and the provisions of this Agreement.
(2) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceeding for that purpose; and it will promptly
use its best efforts to prevent the issuance of any stop order or to obtain its
prompt withdrawal if such stop order should be issued.
(3) The Company will arrange for qualification (including by
providing full cooperation with Underwriter's Counsel, whose services in this
matter are required and which you and the Company will seek to expedite) of the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, provided,
however, that the Company shall not be required in connection therewith or as a
condition thereof to qualify as a foreign corporation or to
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execute a general consent to service of process in any jurisdiction in which it
is not otherwise required to be so qualified or to so execute a general consent
to service of process. In each jurisdiction in which the Shares shall have been
qualified as above provided, the Company will make and file such statements and
reports in each year as are or may be required by the laws of such jurisdiction
for such purpose.
(4) The Company will furnish to you, as soon as
available, and, in the case of the Prospectus and any term sheet or abbreviated
term sheet under Rule 434, copies of each Registration Statement (which will
include all exhibits), each Preliminary Prospectus, the Prospectus and any
amendments or supplements to such documents, including any prospectus prepared
to permit compliance with Section 10(a)(3) of the Act, all in such quantities as
you may from time to time reasonably request. Notwithstanding the foregoing, if
the Representatives, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the Company shall provide
to you copies of a Preliminary Prospectus updated in all respects through the
date specified by you in such quantities as you may from time to time reasonably
request.
(5) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement, complying with the provisions of Section 11(a) of the Act
and covering a twelve (12) month period beginning after the effective date of
the Registration Statement.
(6) During a period of three (3) years after the date
hereof, the Company will furnish to its shareholders as soon as practicable
after the end of each respective period, annual reports (including financial
statements audited by independent certified public accountants) and will furnish
to you and the other several Underwriters hereunder, upon request (i)
concurrently with furnishing such reports to its shareholders, statements of
operations of the Company for each of the first three (3) quarters in the form
furnished to the Company's shareholders, (ii) concurrently with furnishing to
its shareholders, a balance sheet of the Company as of the end of such fiscal
year, together with statements of operations, of shareholders' equity, and of
cash flows of the Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent certified public accountants, and
(iii) as soon as they are available, copies of all reports (financial or other)
mailed to all of the Company's shareholders. During such three (3) year period,
if the Company shall have active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts of
the Company and such subsidiaries are consolidated, and shall be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated.
(7) The Company will apply the net proceeds from the
sale of the Shares being sold by it in the manner set forth under the caption
"Use of Proceeds" in the Prospectus.
(8) The Company will maintain a transfer agent and,
if necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for the Common Stock.
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(9) If at any time during the earlier of the
forty-five (45) day period after the Registration Statement becomes effective or
the date on which all of the Option Shares are purchased, any rumor, publication
or event relating to or affecting the Company shall occur as a result of which
in your opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith consult with you concerning the substance of and whether to
disseminate a press release or other public statement, commenting on such rumor,
publication or event.
(10) The Company will cause the Securities to be
included for quotation on NMS following the Firm Closing Date.
(11) Without the prior written consent of Roth
Capital Partners, Inc., which consent shall not be unreasonably withheld, for
the period from the date hereof until 120 days after the date hereof, the
Company will not, in connection with a Financing Transaction, directly or
indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock,
except for issuances pursuant to the exercise or conversion of securities of the
Company outstanding on the date hereof pursuant to the terms of such securities
as of the date hereof and to the extent not prohibited by applicable contractual
obligations of such security holders. For purposes of this Agreement, the term
"Financing Transaction" shall mean any transaction or series or combination of
transactions engaged in, directly or indirectly, by the Company for the primary
purpose of raising capital. The term Financing Transaction shall not include a
transaction engaged in by the Company for a bona fide strategic business purpose
approved by the Company's board of directors and not for the primary purpose of
raising capital.
5. Expenses.
(a) The Company agrees with each Underwriter that:
(1) The Company will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto; the printing of this Agreement, the Agreement Among Underwriters, the
Selected Dealer Agreement, any Blue Sky filing fees and related expenses, the
Underwriters' Questionnaire and Power of Attorney, and any instruments related
to any of the foregoing; the issuance and delivery of the Shares hereunder to
the several Underwriters, including transfer taxes, if any, the cost of all
certificates representing the Shares and transfer agents' and registrars' fees;
the fees and disbursements of counsel for the Company; all fees and other
charges of the Company's independent certified public accountants; the cost of
furnishing to the several Underwriters copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectus and the Prospectus, and
any amendments or supplements to any of the foregoing; NASD filing fees and the
cost of qualifying the Shares under the laws of such
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jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings any
Blue Sky qualifications); all other expenses directly incurred by the Company in
connection with the performance of its obligations hereunder; and accountable
expenses of the Underwriters (including legal fees and expenses of Underwriter's
counsel) up to a maximum of $115,000. In the event that the offering is
terminated, the Underwriters will be reimbursed only for their actual,
accountable out-of-pocket expenses. The provisions of this Section 5(a)(1) are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company hereby agrees to pay.
(2) In addition to its other obligations under
Section 8(a) hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 8(a) hereof, it will reimburse the Underwriters on a
monthly basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment to the Company.
Any such interim reimbursement payments which are not made to the Underwriters,
or any such return of reimbursement payments which are not made to the Company
within thirty (30) days of a request for reimbursement or determination that any
interim reimbursement payment is improper, as the case may be, shall bear
interest, compounded daily, determined on the basis of the prior rate (or other
commercial lending rate for borrowers of the highest credit standing) listed in
The Wall Street Journal on and from the date of such request or the date of such
determination, as the case may be.
(b) It is agreed that any controversy arising out of
the operation of the interim reimbursement arrangements set forth in Section
5(a)(2) hereof, including the amounts of any requested reimbursement payments,
the method of determining such amounts and the basis on which such amounts shall
be apportioned among the reimbursing parties, shall be settled by arbitration
conducted pursuant to the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for arbitration or
a written notice of intention to arbitrate, therein electing the arbitration
tribunal. Any such arbitration will be limited to the operation of the interim
reimbursement provisions contained in Section 5(a)(2) hereof and will not
resolve the ultimate propriety or enforceability of the obligation to indemnify
for expenses which is created by the provisions of Sections 8(a) and 8(b) hereof
or the obligation to contribute to expenses which is created by the provisions
of Section 8(d) hereof.
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6. Conditions of Underwriters' Obligations.
The obligations of the several Underwriters to purchase and pay
for the Shares as provided herein shall be subject to the accuracy, as of the
date hereof and the Closing Date and any later date on which Option Shares are
to be purchased, as the case may be, of the representations and warranties of
the Company herein, to the performance by the Company of its obligations
hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 4:30 P.M., Eastern Standard Time, on the date following the date of
this Agreement, or such later date and time as shall be consented to in writing
by you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise in accordance with Section
4(1) of this Agreement) shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may have reasonably requested to enable them to pass upon the matters referred
to in this Section.
(c) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date, or any later date on which Option Shares are to
be purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, the
opinion of Blank Rome Tenzer Greenblatt LLP, counsel for the Company, dated as
of the Closing Date or such later date on which Option Shares are to be
purchased, as the case may be, addressed to the Underwriters and with reproduced
copies or signed counterparts thereof for each of the Underwriters,
substantially to the effect that:
(1) Each of the Company and its Subsidiaries has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation;
(2) Each of the Company and its Subsidiaries has the
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus;
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(3) Each of the Company and its Subsidiaries is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which its ownership or leasing of property or the conduct
of its business requires, except where the failure to so qualify would not have
a Material Adverse Effect;
(4) To such counsel's knowledge, the authorized,
capital stock of the Company is as set forth in the Prospectus as of the dates
stated therein. The issued and outstanding shares of capital stock of the
Company have been duly authorized, validly issued and are fully paid and
nonassessable, and have not been issued in violation of the Company's Articles
of Incorporation or bylaws or in violation of or subject to any statutory
preemptive right or right of first refusal or any preemptive right or right of
first refusal contained in the Company's Articles of Incorporation or bylaws or
in any agreement or contract to which the Company is a party and which is known
to such counsel.
(5) The Firm Shares or the Option Shares, as the case
may be, to be issued by the Company pursuant to the terms of this Agreement have
been duly authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be validly issued and fully paid and
nonassessable and will not have been issued in violation of or subject to any
statutory preemptive right or right of first refusal or any preemptive right or
right of first refusal contained in the Company's Articles of Incorporation or
bylaws or in any agreement or contract to which the Company is a party and which
is known to such counsel; and the forms of certificates evidencing the Shares
comply with Florida law;
(6) The Company has the corporate power and authority
to enter into this Agreement and to issue, sell and deliver to the Underwriters
the Shares to be issued and sold by it hereunder;
(7) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been duly executed
and delivered by the Company and, is a valid and binding agreement of the
Company, enforceable in accordance with its terms, and except as enforceability
may be limited by (a) applicable bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or similar laws and court decisions relating
to or affecting creditors' rights generally, (b) general principles of equity,
regardless of whether applied in a proceeding at law or in equity, (c) judicial
imposition of an implied covenant of good faith and fair dealing, and (d)
federal or state laws or public policy relating to the enforceability of the
indemnification and contribution provisions set forth in this Agreement;
(8) Based solely on telephone calls made to the
Commission on the Effective Date, the Closing Date and on such later date on
which Option Shares are purchased, the Registration Statement has become
effective under the Act and no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or, to such counsel's knowledge, threatened under
the Act;
(9) The Registration Statement and the Prospectus,
and each amendment or supplement thereto (other than the financial statements
(including supporting schedules), financial data
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derived therefrom (including Exhibit 27.1 to the Registration Statement) and
other financial and statistical data and information contained therein or
excluded therefrom as to which such counsel need express no opinion), as of the
effective date of the Registration Statement, complied as to form in all
material respects with the requirements of the Act and the applicable Rules and
Regulations;
(10) The (a) statements in the Prospectus under the
captions "Dividend Policy," "Management - Limitations on Liability and
Indemnification Matters" and "Description of Capital Stock" summarizing the
Business Corporation Act of the State of Florida, (b) the description in the
Prospectus of the Articles of Incorporation and bylaws of the Company, and (c)
the statements, contained in the Prospectus under the caption "Shares Eligible
for Future Sale," regarding Rule 144 promulgated under the Act, are accurate in
all material respects.
(11) Except as set forth on a schedule to the
opinion, which schedule shall relate solely to the notice provisions contained
in the Registration and Shareholder Rights Agreement dated as of December 30,
1998 by and among the Company, The Columbia House Company, WCI Record Club, Inc.
and Sony Music Entertainment, Inc. and the Representative's Warrant Agreement
dated as of October 22, 1997 by and between the Company and L.H. Friend
Weinress, Frankson & Presson, LLC, the performance of the Company's obligations
pursuant to this Agreement will not (a) result in any violation of the Articles
of Incorporation or bylaws of the Company or any of its Subsidiaries or (b)
conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any bond, debenture, note or other
evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument known to
such counsel and to which the Company or any of its Subsidiaries is a party or
by which its properties are bound (assuming repayment by the Company of the
outstanding indebtedness under the Credit Agreement as defined in the opinion),
or any applicable statute, rule or regulation which an attorney exercising
reasonable diligence would recognize as being applicable to transactions of the
type contemplated hereunder, or any order, writ or decree of any court,
government or governmental agency or body known to us to which the Company or
any of its properties or operations is subject, which such breach, conflict,
violation or default could reasonably be expected to have a Material Adverse
Effect;
(12) To such counsel's knowledge, no consent,
approval, authorization or order of or qualification with any court, government
or governmental agency or body that could reasonably be expected to have
jurisdiction over the Company or any of its Subsidiaries or any of the Company's
or its Subsidiaries' properties or operations is necessary in connection with
the consummation by the Company of the transactions herein contemplated, except
(i) such as have been obtained under the Act or in connection with listing the
Shares on the NMS or (ii) such as may be required by the NASD or under state or
other securities or Blue Sky laws in connection with the purchase and the
distribution of the Shares by the Underwriters;
(13) To such counsel's knowledge, neither the
Company, ABC Investment Corp., Radio Spirits, Inc., Video Yesteryear, Inc.,
Audio Book Club, Inc. nor MediaBay.com, Inc. is conducting its business in
violation of what is permitted by its respective Articles of Incorporation or
Certificate of Incorporation, as the case may be.
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(14) To such counsel's knowledge, except as set forth
in the Registration Statement and Prospectus, all holders of securities of the
Company that have the right to include such securities in the Registration
Statement, have, with respect to the offering contemplated hereby and thereby,
waived such rights; and
(15) Except as set forth in the Registration
Statement and the Prospectus to the knowledge of such counsel, there is no
actual or threatened action, suit, claim or proceeding relating to patents,
patent rights or licenses, trademarks or trademark rights, copyrights,
collaborative research, licenses or royalty arrangements or agreements or trade
secrets, know-how or proprietary techniques or technology, including, processes
and substances, owned by or affecting the business operations of the Company or
any of its Subsidiaries and which action, suit, claim or proceeding could
reasonably be expected to have a Material Adverse Effect.
In addition, such counsel shall state that although they are
not passing upon and do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus, and, except to the extent specifically set forth in
the opinion, have not undertaken any independent investigation to determine the
existence or absence of such factual conditions and circumstances, based upon
such counsel's participation in discussions with representatives of the Company,
representatives of the Representatives and counsel to the Representatives in
connection with the preparation of the Registration Statement and Prospectus
contained therein or excluded therefrom, nothing has come to the attention of
such counsel which leads such counsel to believe that the Registration Statement
(other than the financial statements (including supporting schedules)), other
financial information derived therefrom (including Exhibit 27.1 to the
Registration Statement) and other financial and statistical data and information
contained therein or excluded therefrom, as to which such counsel need express
no opinion), on the Effective Date, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) the Prospectus
(other than the financial statements (including supporting schedules)), other
financial information derived therefrom (including Exhibit 27.1 to the
Registration Statement) and other financial and statistical data and information
contained therein or excluded therefrom, as to which such counsel need express
no opinion), as of the Closing Date, contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely, as
to matters of fact, to the extent such counsel deems proper, upon appropriate
certificates of executive officers of the Company, of the Company's transfer
agent and of government officials. Such counsel may rely as to matters involving
the application of laws of any jurisdiction other than the State of New York,
the State of Florida, or the federal laws of the United States, to the extent
satisfactory in form and scope to counsel for the Underwriters, upon the opinion
of counsel qualified to pass on the laws of such jurisdiction; provided,
however, that the foregoing opinion shall also state that the Underwriters are
justified in relying upon such counsel and copies of such opinion shall be
delivered to you and Underwriter's counsel. References to the Registration
Statement and the Prospectus in this subsection (d) shall include any
20
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amendment or supplement thereto at the date of such opinion. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, an
opinion of Klehr, Harrison, Harvey, Branzburg & Ellers, LLP, in form and
substance reasonably satisfactory to you, with respect to the sufficiency of all
such corporate proceedings and other legal matters relating to this Agreement
and the transactions contemplated hereby as you may reasonably require, and the
Company shall have furnished to such counsel such documents as they may have
requested for the purpose of enabling them to pass upon such matters.
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
letter, or letters from Deloitte & Touche, LLP, addressed to the Underwriters,
dated the Closing Date or such later date on which Option shares are to be
purchased, as the case may be (in each case, the "Bring Down Letter"),
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in the letter delivered
to you concurrently with the execution of this Agreement (herein called the
"Original Letter"), dated the date hereof, or such later date on which Option
Shares are to be purchased, as the case may be, (i) confirming, to the extent
true, that the statements and conclusions set forth in the Original Letter are
accurate as of the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, and (ii) setting forth any revisions and
additions to the statements and conclusions set forth in the Original Letter
that are necessary to reflect any changes in the facts described in the Original
Letter since its date, or to reflect the availability of more recent financial
statements, data or information. The Bring Down Letter shall not disclose any
change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company from that set forth in the Registration
Statement or Prospectus, which, in your sole judgement, is material and adverse
and that makes it, in your sole judgment, impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus. The Original Letter shall be addressed to or for the use of the
Underwriters and the Company's Board of Directors in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their examination of
the balance sheets of the Company as of December 31, 1999 and December 31, 1998,
respectively, and related statements of operations, changes in shareholders'
equity (deficit) and cash flows for the twelve months ended December 31, 1999
and December 31, 1998, respectively, (iii) state that nothing came to their
attention that caused them to believe that the financial statements included in
the Registration Statement and Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act and the
Rules and Regulations and that any adjustments thereto have not been properly
applied to the historical amounts in the compilation of such statements, and
(iv) address other matters agreed upon by Deloitte & Touche LLP and you.
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References to the Registration Statement and the Prospectus in
the preceding subparagraph (f) with respect to either letter referred to above
shall include any amendment or supplement thereto at the date of such letter.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company (in their
respective capacities), to the effect that, and you shall be satisfied that:
(1) The representations and warranties of the Company
in this Agreement are true and correct in all material respects, as if made on
and as of the Closing Date and such later date on which Option Shares are to be
purchased, as the case may be, and the Company has complied with all the
agreements and satisfied all the conditions (unless waived) on its part to be
performed or satisfied at or prior to the Closing Date or any later date on
which Option Shares are to be purchased, as the case may be;
(2) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or, to such officer's knowledge, threatened under
the Act;
(3) When the Registration Statement became effective
and at all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, conformed in all material respects to the requirements of the Act and
the Rules and Regulations and, as of its date, did not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; and at the time the Registration Statement became
effective and at all times subsequent thereto up to and on the Closing Date and
on any later date on which Option Shares are to be purchased, (i) the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the foregoing shall not apply to
information contained in the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof or information
omitted from the Registration Statement or Prospectus or any amendment or
supplement thereto relating to any Underwriter; and, since the effective date of
the
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Registration Statement, there has occurred no event required to be set forth in
an amended or supplemented Prospectus which has not been so set forth; and
(4) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (a) any Material Adverse Change, (b) any transaction that is material to
the Company and its Subsidiaries taken as a whole, except transactions entered
into in the ordinary course of business, (c) any obligation, direct or
contingent, that is material to the Company and its Subsidiaries taken as a
whole, incurred by the Company or any of its Subsidiaries, except obligations
incurred in the ordinary course of business, (d) any change in the capital stock
(other than exercises of options and warrants outstanding on the Effective Date
or conversions of convertible notes outstanding on the Effective Date) or
outstanding indebtedness of the Company or any of its Subsidiaries that is
material to the Company and its Subsidiaries taken as a whole or is out of the
ordinary course of business of the Company or such Subsidiary , (e) any dividend
or distribution of any kind declared, paid or made on the capital stock of the
Company, or (f) any loss or damage (whether or not covered by insurance) to the
property of the Company which has been sustained or will have been sustained
which has a Material Adverse Effect.
(h) The Company shall have obtained and delivered to you the
Lock-up Agreements complying with the provisions of this Agreement and Schedule
B hereof.
(i) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company) as to the accuracy of the
representations and warranties of the Company herein, as to the performance by
the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder.
(j) The Company shall have obtained an insurance policy, in
form and substance and with an insurer satisfactory to Roth Capital Partners,
Inc. in their sole discretion, providing for coverage substantially similar to
the Company's present officers' and directors' liability insurance coverage and
which is in a face amount of no less than the amount of the Company's current
insurance coverage and which such insurance policy shall name as an insured
party Roth Capital Partners, Inc. and each person, if any, who controls Roth
Capital Partners, Inc. within the meaning of Section 15 of the Act or Section 20
of the Exchange Act and shall cover all losses, claims, damages, or liabilities,
joint or several, to which such Underwriter or such controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
caused by, related to or based upon or in connection with the matters set forth
in subparagraphs (i) through (iv) of paragraph (a) of Section 8 hereof accruing
or asserted from the date hereof through no less than three years from the
Closing Date.
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company will furnish you with such
number of conformed copies of such opinions, certificates, letters and documents
as you shall reasonably request.
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7. Option Shares.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters, solely for the
purpose of covering over-allotments in connection with the distribution and sale
of the Firm Shares only, a nontransferable option to purchase the Option Shares
at the purchase price per share for the Firm Shares set forth in Section 3
hereof (the "Option"). The Option may be exercised by the Representatives on
behalf of the several Underwriters on one or more occasions in whole or in part
during the period of forty-five (45) days after the date on which the Firm
Shares are initially offered to the public by giving written notice (the "Option
Notice") to the Company. The number of Option Shares to be purchased by each
Underwriter upon the exercise of the Option shall be the same proportion of the
total number of Option Shares to be purchased by the several Underwriters
pursuant to the exercise of the Option as the number of Firm Shares purchased by
such Underwriter (set forth in Schedule A hereto) bears to the total number of
Firm Shares purchased by the several Underwriters (set forth in Schedule A
hereto), adjusted by the Representatives in such manner as to avoid fractional
shares, or as otherwise agreed among the several Underwriters.
Arrangement for electronic transfer of or delivery of
definitive certificates for the Option Shares to be purchased by the several
Underwriters pursuant to the exercise of the Option granted by this Section 7
shall be made against payment of the purchase price therefor by the several
Underwriters by wire transfer in same day funds. In the event of any breach of
the foregoing, the Company shall reimburse the Underwriters for the interest
lost and any other expenses borne by them by reason of such breach. Such
delivery and payment shall take place at the offices of Klehr, Harrison, Harvey,
Branzburg & Ellers LLP, 260 South Broad Street, Philadelphia, Pennsylvania, or
at such other place as may be agreed upon between the Representatives and the
Company (i) on the Closing Date, if written notice of the exercise of such
option is received by the Company at least two (2) full business days prior to
the Closing Date, or (ii) on a date which shall not be earlier than the second
(2nd) full business day following the date the Company receives written Notice
of the Option and shall not be later than the third (3rd) full business day
following the date the Company receives written Notice of the Option, if such
notice is received by the Company after the date two (2) full business days
prior to the Closing Date.
The certificates for the Option Shares to be so delivered will
be made available to you at such office or such other location, as you may
reasonably request at least two (2) full business day prior to the date of
payment and delivery and will be in such names and denominations as you may
request, such request to be made at least two (2) full business days prior to
such date of payment and delivery. If the Representatives so elect, delivery of
the Option Shares may be made by credit through full fast transfer to the
accounts at The Depository Trust Company designated by the Representatives.
It is understood that each of you, individually, and not as
the Representatives of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior to
the date of payment and delivery for the Option Shares to be purchased by such
Underwriter or
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Underwriters. Any such payment by you shall not relieve any such Underwriter or
Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company herein, to the
accuracy of the statements of the Company and officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, to the conditions set forth in Section 7 hereof, and to
the condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be reasonably
satisfactory in form and substance to you and to Underwriters' Counsel, and you
shall have been furnished with all such documents, certificates and opinions as
you may reasonably request in order to evidence the accuracy and completeness of
any of the representations, warranties or statements, the performance of any of
the covenants or agreements of the Company or the satisfaction of any of the
conditions herein contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, and each person, if any, who controls any Underwriter within the
meaning of the Act or the Exchange Act, against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter or such controlling
person may become subject (including, without limitation, in its capacity as an
Underwriter), under the Act, the Exchange Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities (or
actions in respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of the Company herein contained,
(ii) any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading or
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, and agrees to reimburse each Underwriter for any legal or other
expenses reasonably incurred by it in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, such Preliminary Prospectus or the Prospectus, or
any such amendment or supplement thereto, in reliance upon, and in conformity
with, written information relating to any Underwriter furnished (or not
furnished in the case of an omission or alleged omission of information relating
to any Underwriter) to the Company by such Underwriter, directly or through the
Representatives, specifically for use in the preparation thereof. This indemnity
agreement shall be in addition to any liabilities which the Company may
otherwise have.
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(b) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company against any losses, claims, damages or
liabilities, joint or several, to which the Company may become subject under the
Act or otherwise, specifically including, but not limited to, losses, claims,
damages or liabilities (or actions in respect thereof) arising out of or based
upon (i) any breach of any representation, warranty, agreement or covenant of
such Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(b) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished (or not furnished in
the case of an omission or alleged omission of information relating to any
Underwriter) to the Company by such Underwriter, directly or through the
Representatives, specifically for use in the preparation thereof, and agrees to
reimburse the Company for any legal or other expenses reasonably incurred by the
Company in connection with investigating or defending any such loss, claim,
damage, liability or action.
The indemnity agreement in this Section 8(b) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each director
of the Company, and each person, if any, who controls the Company within the
meaning of the Act or the Exchange Act. This indemnity agreement shall be in
addition to any liabilities which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof, but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8 except to the extent that it has been
prejudiced by such omission. In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it shall elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it which are different from or additional to those
available to the indemnifying party, and that it is a conflict for the
indemnified party or parties to be represented by such counsel, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice from the
indemnifying party to such indemnified
26
<PAGE>
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 8(a), 8(b), or 8(c) hereof who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the action or
(iii) the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. In no event shall
any indemnifying party be liable in respect of any amounts paid in settlement of
any action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld or
delayed. No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened proceeding
in respect of which any indemnified party is or could have been a party and
indemnification could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on all claims that are the subject matter of such
proceeding.
(d) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this Section
8 but it is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by the percentage that the underwriting discount bears to the public offering
price (less the underwriting discount), and the Company and Norton Herrick are
responsible for the remaining portion, provided, however, that (i) no
Underwriter shall be required to contribute any amount in excess of the amount
by which the underwriting discount applicable to the Shares purchased by such
Underwriter exceeds the amount of damages which such Underwriter has otherwise
been required to pay and (ii) no person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 8(d) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter or the Company within the meaning
of the Act or the Exchange Act and each officer of the Company who signed the
Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks
27
<PAGE>
in light of the ability of the parties to investigate the Company and its
business in order to assure that adequate disclosure is made in the Registration
Statement and Prospectus as required by the Act and the Exchange Act.
9. Representations, Warranties, Covenants and Agreements to Survive
Delivery.
All representations, warranties, covenants and agreements of the
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Section 8
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter within the meaning of the Act or the Exchange Act, or by or on
behalf of the Company, or any of its officers, directors or controlling persons
within the meaning of the Act or the Exchange Act, and shall survive the
delivery of the Shares to the several Underwriters hereunder or termination of
this Agreement.
10. Substitution of Underwriters.
If any Underwriter or Underwriters shall fail to take up and pay
for the number of Firm Shares agreed by such Underwriter or Underwriters to be
purchased hereunder upon tender of such Firm Shares in accordance with the terms
hereof, and if the aggregate number of Firm Shares which such defaulting
Underwriter or Underwriters so agreed but failed to purchase does not exceed 10%
of the Firm Shares, the remaining Underwriters shall be obligated, severally in
proportion to their respective commitments hereunder, to take up and pay for the
Firm Shares of such defaulting Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business hours)
another underwriter or underwriters (which may include any nondefaulting
Underwriter) satisfactory to the Company. If no such underwriter or underwriters
shall have been substituted as aforesaid by such postponed Closing Date, the
Closing Date may, at the option of the Company, be postponed for a further
twenty-four (24) hours, if necessary, to allow the Company the privilege of
finding another underwriter or underwriters, satisfactory to you, to purchase
the Firm Shares which the defaulting Underwriter or Underwriters so agreed but
failed to purchase. If it shall be arranged for the remaining Underwriters or
substituted underwriter or underwriters to take up the Firm Shares of the
defaulting Underwriter or Underwriters as provided in this Section 10, (i) the
Company shall have the right to postpone the time of delivery for a period of
not more than seven (7) full business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees promptly to
file
28
<PAGE>
any amendments to the Registration Statement, supplements to the Prospectus or
other such documents which may thereby be made necessary, and (ii) the
respective number of Firm Shares to be purchased by the remaining Underwriters
and substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and pay
for all such Firm Shares so agreed to be purchased by the defaulting Underwriter
or Underwriters or substitute another underwriter or underwriters as aforesaid
and the Company shall not find or shall not elect to seek another underwriter or
underwriters for such Firm Shares as aforesaid, then this Agreement shall
terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, then the Company shall not be liable to
any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier of
(i) 9:30 A.M., Eastern Standard Time, on the first full business day following
the effective date of the Registration Statement, or (ii) the time of the public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the public offering shall mean the time
of the release by you, for publication, of the first newspaper advertisement
relating to the Shares, or the time at which the Shares are first generally
offered by the Underwriters to the public by letter, telephone, telegram or
telecopy, whichever shall first occur. By giving notice as set forth in this
Section 11 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided herein.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company shall have failed, refused or been unable to perform any
agreement hereunder on its part to be performed, or because any other condition
of the Underwriters' obligations hereunder required to be fulfilled is not
fulfilled in all material respects, including, without limitation, any change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company from that set forth in the Registration
Statement or Prospectus, which, in your sole judgment, is material and adverse,
or (ii) if additional governmental restrictions, not in force and effect on the
date hereof, shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the New York
Stock Exchange or on the NMS or in the over the counter market
29
<PAGE>
by the NASD, or trading in securities generally shall have been suspended on
either such exchange or in the over the counter market by the NASD, or if a
banking moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your sole judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the opinion of the
Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event of
termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 5(a)(1) and (2), 5(b)
and 8 hereof. Any termination pursuant to any of subparagraphs (ii) through (v)
above shall be without liability of any party to any other party except as
provided in Sections 5(a)(1) and (2), 5(b) and 8.
If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each case
confirmed by letter. If the Company shall elect to prevent this Agreement from
becoming effective, the Company shall promptly notify you by telephone, telecopy
or telegram, in each case, confirmed by letter.
12. Notices.
All notices or communications hereunder, except as
herein otherwise specifically provided, shall be in writing and if sent to you
shall be mailed, delivered, or telecopied (and confirmed by letter), and deemed
given when received, to the addresses set forth below:
If to the Underwriters:
c/o Roth Capital Partners, Inc.
18301 Von Karman, Suite 100
Irvine, California 92715
Facsimile Number: (714) 852-9603
Attention: General Counsel
With a copy to:
Klehr, Harrison, Harvey, Branzburg & Ellers, LLP
260 South Broad Street
Philadelphia, PA, 19102
Facsimile Number: (215) 568-6603
Attention: Stephen T. Burdumy, Esq.
30
<PAGE>
If to the Company:
MediaBay, Inc.
2295 Corporate Blvd., N.W.
Suite 222
Boca Raton, Florida 33421
Facsimile Number: (___)___________
Attention: Chief Executive Officer
With a copy to:
Blank Rome Tenzer Greenblatt LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
Facsimile Number: (212) 885-5001
Attention: Robert J. Mittman, Esq.
13. Parties.
This Agreement shall inure to the benefit of and be binding upon
the several Underwriters and the Company and their respective executors,
administrators, successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or entity, other
than the parties hereto and their respective executors, administrators,
successors and assigns, and the controlling persons within the meaning of the
Act or the Exchange Act, officers and directors referred to in Section 8 hereof,
any legal or equitable right, remedy or claim in respect of this Agreement or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of the parties hereto and their respective executors, administrators,
successors and assigns and said controlling persons and said officers and
directors, and for the benefit of no other person or entity. No purchaser of any
of the Shares from any Underwriter shall be construed a successor or assign by
reason merely of such purchase.
In all dealings with the Company under this Agreement, you
shall act on behalf of each of the several Underwriters, and the Company shall
be entitled to act and rely upon any statement, request, notice or agreement
made or given by you jointly or by Roth Capital Partners, Inc. on behalf of you.
14. Applicable Law.
The validity and interpretation of this Agreement, and the terms
and conditions set forth herein, shall be governed by, and construed in
accordance with, the laws of the State of New York.
31
<PAGE>
15. Consent to Jurisdiction and Service of Process.
All judicial proceedings arising out of or relating to this
Agreement shall be initiated and tried exclusively in the State and Federal
courts located in the state of California. The aforementioned choice of venue is
intended by the parties to be mandatory and not permissive in nature, thereby
precluding the possibility of litigation between the parties with respect to or
arising out of this Agreement in any jurisdiction other than that specified in
this Section 14. The parties accept for themselves and in connection with their
respective properties, generally and unconditionally, the nonexclusive
jurisdiction of the aforesaid courts and waive any defense of forum non
conveniens and irrevocably agree to be bound by any judgment rendered thereby in
connection with this Agreement. Each party hereby authorizes and accepts service
of process sufficient for personal jurisdiction in any action against it as
contemplated by this Section 14 by registered or certified mail, return receipt
requested, postage prepaid, to its address for the giving of notices as set
forth in this Agreement.
16. Counterparts.
This Agreement may be executed by facsimile and in one or more
counterparts, each of which will constitute an original and all of which taken
together shall constitute one and the same agreement.
17. Information Supplied by Underwriters.
The statements set forth in the last paragraph on the front cover
page and under the heading "Underwriting" in the Prospectus constitute the only
information furnished by any Underwriter to the Company for use in the
Registration Statement or Prospectus for the purposes of Section 8 hereof.
32
<PAGE>
If the foregoing correctly sets forth the understanding among the Company and
the several Underwriters, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
the Company and the several Underwriters.
Very truly yours,
MEDIABAY, INC.
By: ___________________________________
Name:
Title:
Accepted as of the date first above written:
ROTH CAPITAL PARTNERS, INC.
L.H. FRIEND, WEINRESS, FRANKSON, &
PRESSON, LLC
PENNSYLVANIA MERCHANT GROUP
On their behalf and on behalf of each of the
several Underwriters named in
Schedule A hereto.
By: ROTH CAPITAL PARTNERS, INC.
By:_____________________________
Name:
Title:
For and on behalf of the Representatives
33
<PAGE>
SCHEDULE A
Number of Firm Shares
Underwriters To Be Purchased
- --------------------------------------- -------------------------------------
Roth Capital Partners, Inc.
L.H. Friend, Weinress, Frankson & Presson, L.L.C
Pennsylvania Merchant Group
34
<PAGE>
SCHEDULE B
LOCK-UP AGREEMENTS
1. Andrew Guardi
2. Carl Amari
3. Carl Frankson
4. Carl Wolf
5. Dennis Friend
6. Douglas Dust
7. Gregory Presson
8. Howard Herrick
9. Jesse Faber
10. John Levy
11. Michael Herrick
12. Norton Herrick
13. N. Herrick Irrevocable Trust
14. Patrick Bannister
15. Rob Toro
16. Roy Abrams
17. Stephen Weinress
18. Steve McLaughlin
19. Christina Vrba
<PAGE>
21 Evan Herrick
22. Fleet National Bank
23. Frankfurt, Garbus, Klein & Selz
24. Harvey Stober
25. ING Capital (U.S.) Capital Corporation
26. John Ramsey
27. Jordan Finger
28. Karen Cha
29, Karen Olsen
30. Karen Wolf
31. Michael Schoen
32. Nisar Kermalli
33, Robert Klein
34. Stuart McPhee
35. Timothy Koebuba
36. Timothy Mattox
37. Timothy O'Neil
38. Vince Amari
39. Viracom, Inc.
40, Marjorie Goddard
41. Harvard'
42. Premier
<PAGE>
EXHIBIT 5
BLANK ROME TENZER GREENBLATT LLP
405 LEXINGTON AVENUE
NEW YORK, NEW YORK 10174
February __, 2000
MediaBay, Inc.
20 Community Place
Morristown, New Jersey 07960
Gentlemen:
You have requested our opinion with respect to the sale by MediaBay,
Inc., a Florida corporation (the "Company") pursuant to a Registration Statement
(the "Registration Statement") on Form SB-2 under the Securities Act of 1933, as
amended (the "Act"), of : (i) up to ___________ shares (the "Shares") of common
stock, no par value of the Company ("Common Stock").
We have examined originals, or copies certified or otherwise identified
to our satisfaction of such documents and corporate and public records as we
deem necessary as a basis for the opinion hereinafter expressed. With respect to
such examination, we have assumed the genuiness of all signatures appearing on
all documents presented to us as conformed or reproduced copies. Where factual
matters relevant to such opinion were not independently established, we have
relied upon certificates of appropriate state and local officials, and upon
certificates of executive officers and responsible employees and agents of the
Company. Based upon the foregoing, it is our opinion that the Shares when sold,
paid for and issued as contemplated by the Registration Statement, will be
validly issued, fully paid and nonassessable.
We hereby consent to the use of this opinion in the Registration
Statement, and to the use of our name as counsel in connection with the
Registration Statement and in the Prospectus forming a part thereof. In giving
this consent, we do not thereby concede that we come within the categories of
persons whose consent is required by the Act or the General Rules and
Regulations promulgated thereunder.
Very truly yours,
/s/ Blank Rome Tenzer Greenblatt LLP
BLANK ROME TENZER GREENBLATT LLP
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in the Post-Effective Amendment No. 1 to Registration
Statement No. 333-95793 of Mediabay, Inc. (previously Audio Book Club, Inc.) on
Form SB-2, expected to be filed on March 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
March 15, 2000
<PAGE>
EXHIBIT 23.2(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Doubleday Direct, Inc.:
We consent to the use in the registration statement on Post-Effective Amendment
No. 1 to 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 LLP
New York, New York
March 15, 2000
<PAGE>
EXHIBIT 23.3
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
March 15, 2000
