<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file number 1-13469
Audio Book Club, Inc.
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(Exact name of Small Business Issuer as specified in its charter)
Florida 65-0429858
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(State or other jurisdiction of (I.R.S. Employment
incorporation or organization) Identification No.)
2295 Corporate Blvd., N.W., Suite 222, Boca Raton, Florida 33431
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (561) 241-1426
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Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for shorter
period that the registrant was required to file such report) and (2) has been
subject to such filing requirement for the past 90 days.
Yes No X
--- ---
As of December 3, 1997, there were 6,153,920 shares of the Issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE>
Audio Book Club, Inc.
Quarter ended September 30,1997
Form 10-QSB
<TABLE>
<CAPTION>
Index
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Page
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PART I: Financial Information.
<S> <C> <C>
Item 1: Financial Statements.
Balance Sheet at September 30, 1997 (unaudited) 3
Statements of Operations for the three months
ended September 30, 1996 and 1997 and the
nine months ended September 30, 1996 and
1997 (unaudited) 4
Statements of Cash Flows for the nine months ended
September 30, 1996 and 1997 (unaudited) 5
Notes to Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations. 12
PART II:
Item 1: Legal Proceedings. 18
Item 2: Changes in Securities and Use of Proceeds 18
Item 6: Exhibits and Reports on Form 8-K. 19
</TABLE>
<PAGE>
Part I Financial Information
Item 1. Financial Statements
AUDIO BOOK CLUB, INC.
Balance Sheet
September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
September 30,
Assets 1997
----
Current Assets :
<S> <C>
Cash $ 114,741
Accounts receivable, net of allowances for sales returns
and doubtful accounts of $993,282 1,267,670
Inventory 1,177,044
Royalty advances 221,123
Deferred offering costs 277,817
Prepaid expense 36,921
Prepaid loan costs, net 29,669
------------
Total current assets 3,124,985
Fixed assets, at cost, net of accumulated depreciation
of $12,854 24,381
============
$ 3,149,366
============
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable $ 1,385,072
Accrued expenses 345,860
Bank debt 9,000,000
------------
Total current liabilities 10,730,932
Notes payable - related parties 5,975,200
------------
Total liabilities 16,706,132
------------
Commitments and contingencies
Stockholders' deficiency:
Preferred Stock, no par value, authorized 5,000,000 shares;
no shares issued and outstanding --
Common Stock; no par value, authorized 25,000,000
shares; 3,256,400 shares issued and outstanding 200
Contributed capital 486,217
Accumulated deficit (14,043,183)
------------
Total stockholders' deficiency (13,556,766)
------------
$ 3,149,366
============
</TABLE>
<PAGE>
AUDIO BOOK CLUB, INC.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
-------------------------------- --------------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 1,743,691 $ 3,783,040 $ 5,968,350 $ 10,282,371
Returns, discounts and allowances 843,657 1,677,967 1,808,858 3,087,256
------------ ------------ ------------ ------------
Sales, net 900,034 2,105,073 4,159,492 7,195,115
Cost of sales 802,773 946,072 3,130,997 3,756,620
------------ ------------ ------------ ------------
Gross profit 97,261 1,159,001 1,028,495 3,438,495
Expenses:
Advertising and promotion (for
acquisition and retention of members) 1,761,013 1,662,296 4,247,847 3,912,033
General and administrative 631,589 607,658 1,432,989 1,333,435
Professional fees 4,668 40,468 84,152 193,003
Depreciation and amortization 1,093 6,835 3,134 11,513
------------ ------------ ------------ ------------
Operating loss (2,301,102) (1,158,256) (4,739,627) (2,011,489)
Interest expense, net of interest income of
$2,154 and $4,840, for the three
months, and $2,349 and $6,354, for
the nine months ended September 30,
1996 and 1997 respectively 62,388 163,972 119,382 478,617
------------ ------------ ------------ ------------
Net loss $ (2,363,490) $ (1,322,228) $ (4,859,009) $ (2,490,106)
============ ============ ============ ============
Net loss per share of common stock $ (0.71) $ (0.41) $ (1.47) $ (0.76)
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
AUDIO BOOK CLUB, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months
ended September 30
-----------------------------------
1996 1997
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,859,009) $(2,490,106)
Adjustments to reconcile net loss to net cash used
operating activities:
Depreciation and amortization 3,134 11,513
Imputed interest on notes payable - related parties 121,731 254,892
Changes in asset and liability accounts:
(Increase) in accounts receivable, net (56,379) (672,040)
Decrease in due from related party -- 20,000
(Increase) in inventory (14,398) (340,384)
Decrease in prepaid advertising 63,341 --
(Increase) decrease in royalty advances (243,791) 14,317
(Increase) in prepaid expenses -- (36,921)
Increase in accounts payable and accrued expenses 488,821 89,491
----------- -----------
Net cash used in operating activities (4,496,550) (3,149,238)
----------- -----------
Cash flows from investing activities:
Acquisition of fixed assets (12,336) (9,518)
----------- -----------
Cash flow from financing activities:
Proceeds from issuance of notes payable -
related parties 4,400,200 1,295,000
Repayment of notes payable - related parties -- (6,800,000)
Proceeds from issuance of bank debt -- 9,000,000
Prepaid loan costs -- (36,542)
Deferred offering costs -- (277,817)
----------- -----------
Net cash provided by financing activities 4,400,200 3,180,641
----------- -----------
Net increase (decrease) in cash (108,686) 21,885
----------- -----------
Cash at beginning of period 140,977 92,856
----------- -----------
Cash at end of period $ 32,291 $ 114,741
=========== ===========
</TABLE>
<PAGE>
Audio Book Club, Inc.
Notes to Financial Statements
(Information at September 30, 1997 and for the three and nine month periods
ended September 30, 1996 and 1997 is unaudited)
(1) Organization
Audio Book Club, Inc. (the "Company"), a Florida corporation, was
formed on August 16, 1993. The Company is a negative option membership club
engaged principally in mail order and Internet sales of audiocassettes.
(2) Significant Accounting Policies
Basis of Presentation
The interim unaudited financial statements should be read in
conjunction with the Company's audited financial statements contained in its
Registration Statement on Form SB-2. The preparation of financial statements
in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
these estimates. On an ongoing basis management reviews its estimates based on
current available information. Changes in facts and circumstances may result
in revised estimates. In the opinion of management, the interim unaudited
financial statements include all material adjustments, all of which are of a
normal recurring nature, necessary to present fairly the Company's financial
position, results of operations and cash flows for the periods presented. The
results for any interim period are not necessarily indicative of results for
the entire year or any other interim period.
Inventory
Inventory, consisting principally of audio cassettes held for resale,
is valued at the lower of cost (weighted average cost method) or market.
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 on contractural terms. Royalty advances not expected to be
recovered through royalties on sales are charged to royalty expense. For the
nine months ended September 30, 1996 and September 30, 1997, no writedown of
royalty advances was recorded.
Deferred Offering Costs
As of September 30, 1997, the Company had incurred expenses of
$277,817 related to its initial public offering (see Note 6 - Subsequent
Events), including legal and accounting fees and expenses. A portion of such
amounts were provided for in accounts payable and accrued expenses. Upon
successful completion of the offering, the associated costs were deducted from
net proceeds of the offering.
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Prepaid Expenses
Prepaid expenses consist principally of envelopes, mailers and other
supplies bought in bulk which will be used in recurring mailings to new and
current members over a period of time no greater than the next twelve months.
Revenue Recognition
Sales are recorded upon shipment of merchandise and simultaneous
billing. Net sales are sales less actual returns for the period and an
estimated allowance for future returns on sales made during the period. The
allowance for future returns is based upon historical experience and
evaluation of current return trends.
Advertising and Promotional Costs
The Company expenses the 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
individuals that include order forms for the Company's products, and to a
lesser extent print advertisements. The capitalized costs of advertising are
amortized in the month of publication of the magazine in which it appears or
the month in which the individual letters are mailed. Promotional costs for
new and current members are expensed on the date the promotional materials are
mailed. Internet advertising is expensed as it occurs.
Net (Loss) per Share
In September 1997, the Company declared a 16,282 for 1 Common Stock
split. The number of common stock shares authorized and outstanding and the
net loss per share of common stock have been restated to give effect to the
16,282 for 1 Common Stock split.
In accordance with Staff Accounting Bulletin Topic 4:D, 50,000 stock
options granted during the twelve month period preceding the date of the
Company's initial public offering have been included in the calculation of
weighted average shares outstanding for the three and nine month periods ended
September 30, 1996, even though the impact of such incremental shares is
antidilutive.
Fair Value of Financial Instruments
In estimating the fair value of financial instruments, the Company
has assumed that the carrying value of cash, short-term investments, accounts
receivable, accounts payable and accrued expenses approximates fair value
because of the short maturity of those instruments.
Use of Estimates
Management of the Company has made estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
<PAGE>
(3) Amended Articles of Incorporation
In September 1997, the Company amended and restated its Articles of
Incorporation to provide for, among other items, the increase in authorized
shares of stock from 10,000 to 30,000,000, of which 25,000,000 are designated
as Common Stock, with no par value, and 5,000,000 are designated as Preferred
Stock, with no par value.
(4) Supplemental Cash Flow Information
Cash expended for interest was none for the nine months ended
September 30, 1996 and $230,079 for the nine months ended September 30, 1997,
respectively. In accordance with Staff Accounting Bulletin Topic 5:T, the
Company has imputed an interest cost on the portion of the non-interest
bearing notes payable to related parties which were not converted to equity
upon the completion of the Company's initial public offering. The imputed
interest rate used in calculating the imputed interest cost was based on the
terms negotiated by the Company for its bank debt and was 7.75% and 8.00% for
the nine months ended September 30, 1996 and 1997, respectively. Accordingly,
for the nine months ended September 30, 1996 and 1997, the Company had a
noncash financing activity related to the recognition of imputed interest on a
portion of the notes payable - related parties of $121,731 and $254,892,
respectively.
Immediately prior to the consummation of the initial public offering,
the Company's Chairman, Chief Executive Officer and founder converted
$5,975,200 of indebtedness owed to him under a loan agreement into 597,520
shares of common stock at a price per share equal to the initial offering
price of the common stock.
(5) Related Parties
(a) Leases
The Company sublets office space from an entity wholly-owned by
officers and directors of the Company. Rent expense for the three months ended
September 30, 1996 and 1997 amounted to $9,500 and $28,500 for each of the
nine months ended September 30, 1996 and 1997.
On July 1, 1997, the Company entered into a new lease for office
space for its corporate offices in Florida. Minimum monthly rental under the
lease is $1,167 per month through November, 1997, at which time the monthly
rent increases to $1,307. The lease expires on November 30, 2000 and is
subject to two extension periods of three years each. A company affiliated
with the Chairman, Chief Executive Officer and founder has guaranteed the
lease.
Minimum annual lease commitments under noncancelable operating leases
are as follows:
Year ending December 31, Amount
------------------------- ------
1997 $43,979
1998 39,684
1999 15,684
2000 14,377
------
Total lease commitments $113,724
=======
<PAGE>
(b) Notes Payable
On September 15, 1997, the Company repaid the $800,000 of outstanding
notes payable plus accrued interest to the Company's Chief Operating Officer
and Executive Vice President.
(6) Subsequent Events
(a) Initial Public Offering
The Company's Registration Statement on Form SB-2 for its initial
public offering was declared effective by the Securities and Exchange
Commission on October 22, 1997. On October 27, 1997, the Company closed its
initial public offering of 2,300,000 shares of Common Stock, with no par
value, at a price of $10.00 per share of Common Stock. In connection with the
public offering, the underwriters were granted an over-allotment option to
purchase an additional 345,000 shares of Common Stock, exercisable until
December 6, 1997. The underwriters have partially exercised their over
allotment option by purchasing 110,000 shares from a minority shareholder
(with holdings of less than 5% of the Company's common stock.) At the closing
of the initial public offering, the Company received cash proceeds of
$20,562,229, after underwriting discounts and commissions and certain other
expenses paid at closing.
(b) Repayment of Bank Debt
The Company used a portion of the proceeds to repay loans from a
major bank in the aggregate principal amount of $9,000,000 plus accrued
interest thereon of $56,167.
(c) Conversion of Related Party Debt
Immediately prior to the consummation of the offering, the Company's
Chairman, Chief Executive Officer and founder converted $5,975,200 of
indebtedness owed to him to under a loan agreement into 597,520 shares of
common stock at a price per share equal to the initial offering price of the
common stock.
<PAGE>
(d) Proforma Balance Sheet
On a proforma basis, assuming the initial public offering, the
conversion of indebtedness into common stock, the repayment of bank debt and
other related transactions had occurred on September 30, 1997, the Company`s
Balance Sheet would be presented as follows:
Condensed Proforma Balance Sheet as of September 30,1997
Giving Effect to Initial Public Offering and Related Transactions
(unaudited)
<TABLE>
<CAPTION>
Assets As of September 30, 1997
(Proforma) (unaudited)
<S> <C>
Current assets:
Cash and short-term securities $ 11,620,803
Accounts receivable (net) 1,267,670
Inventory 1,177,044
Royalty advances 221,123
Prepaid expenses 36,921
------------
Total current assets 14,323,561
------------
Fixed assets (net) 24,381
$ 14,347,942
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,385,072
Accrued expenses 345,860
------------
Total liabilities 1,730,932
------------
Stockholders' Equity
Preferred Stock, no par value, authorized
5,000,000 shares; no shares issued and
outstanding -0-
Common Stock; no par value, authorized
25,000,000 shares; 6,153,920
outstanding 26,259,812
Contributed capital 486,217
Accumulated (deficit) (14,129,019)
------------
Total stockholders' equity 12,617,010
------------
$ 14,347,942
============
</TABLE>
<PAGE>
(e) Income Taxes
Prior to October 22, 1997, the Company had elected to be taxed as a
small business corporation (S corporation) under Section 1362 of the Internal
Revenue Code. As a small business corporation, all federal income taxes, if
any, are the obligations of the stockholders. Conversely, any losses incurred
by the Company may be used by the stockholders.
As a result of the consummation of the Company's public offering
effective on October 22, 1997, the Company's S corporation election terminated
and the Company ceased to be an S corporation. Commencing October 22, 1997 the
Company became taxable as an incorporated entity (C Corporation). Accordingly
losses incurred by the Company on or after October 22, 1997 may be used by the
Company and not by the shareholders to the extent permitted under the Internal
Revenue Code. Conversely, future federal income taxes, if any, will be the
obligation of the Company.
(f) Marketing Agreement
In the normal course of business, the Company makes commitments for
certain marketing and promotional expenses. Subsequent to September 30, 1997,
the Company entered into a marketing and promotional agreement which obligates
the Company to expend $925,000 in equal monthly payments over a twelve month
period commencing in November 1997.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
"Safe Harbor " Statement under the Private Securities Litigation
Reform Act of 1995: The statements which are not historical facts contained in
this Quarterly Report are forward looking statements that involve risks and
uncertainties, including but not limited to, the Company's ability to
successfully implement a strategy of continued growth and other risks
described in the Company's Registration Statement on Form SB-2. The Company's
actual results may differ materially from the results discussed in any forward
looking statement.
On October 27, 1997, the Company closed its initial public offering
of 2,300,000 shares of Common Stock, with no par value, at price of $10.00 per
share of Common Stock. At the closing of the initial public offering, the
Company received cash proceeds of $20,562,229, after underwriting discounts
and commissions and certain other expenses paid at closing. The Company used a
portion of the proceeds to repay loans from a major bank in the aggregate
principal amount of $9,000,000 plus accrued interest thereon of $56,167.
Immediately prior to the consummation of the offering, the Company's
Chairman, Chief Executive Officer and founder converted $5,975,200 of
indebtedness owed to him under a loan agreement into 597,520 shares of common
stock at a price per share equal to the initial offering price of the common
stock.
The Company is a direct marketer of audio books through Audio Book
Club, a membership club which markets and sells audio books by mail order and
via the Internet. Since its inception in January 1994, the Company has engaged
in an aggressive membership recruitment program to establish a core Audio Book
Club member base and continually expand such member base. The Company's
Internet web site (www.audiobookclub.com) offers visitors to the web site the
opportunity to join Audio Book Club, execute club transactions on-line (if a
member), utilize the site's search engine to locate any of the site's audio
book selections and sample audio clips of many of the site's selections.
The Company expects to incur significant expenditures in connection
with its expansion strategy (including costs associated with new member
recruitment advertising, member retention programs and expansion and
maintenance of its Internet web site) which will result in losses until such
time as the Company is able to further increase its membership base revenue to
support both its operations and continued expansion programs. The Company
anticipates that its existing cash and anticipated cash flow from operations
will be sufficient to satisfy its contemplated cash requirements for at least
twelve months from September 30, 1997.
<PAGE>
Results of Operations
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1997
Gross sales for the three months ended September 30, 1997 were
$3,783,040, an increase of $2,039,349 or 116.96%, as compared to $1,743,691
for the three months ended September 30, 1996. The increase in gross sales was
primarily attributable to increased sales of audio books resulting from the
continued expansion of Audio Book Club's membership base.
Returns, discounts and allowances for the three months ended
September 30, 1997 were $1,677,967 or 44.35% of gross sales as compared to
$843,657 or 48.38% of gross sales for the prior comparable period. The
decrease in returns, discounts and allowances as a percentage of sales was
primarily due to an improvement in the quality of members as the Company
matures.
The Company, during the third quarter of 1997, offered dual featured
selections to its members as a marketing test in two mailings. These offerings
had higher price points than typically offered with the Company's single
featured selections. The Company anticipated higher gross sales for the dual
featured selections, as well as correspondingly higher returns, which the
Company believed would result in higher net sales. However the actual return
experience for mailings with dual featured selections exceeded return rates
for other mailings in 1997 and Company expectations. As a result, the
Company's returns as a percentage of gross sales for the three months ended
September 30, 1997 were inflated by the results of the marketing test.
The effect on returns of the dual featured selections was compounded
by the timing of the Company's member mailings which offered the dual main
selections. The Company sends out seventeen mailings per year to its members.
The timing of the mailings is consistent with historical Club industry
patterns, that is mailings occur every four weeks with the exception of four
"seasonal" mailings that fall in between the regular four week periods. This
pattern results in eight periods when mailings are only two weeks apart.
Because the dual featured selections were tested within two weeks of other
mailings, this had a further negative impact on returns. The Company has
implemented a change to its member mailing schedule for 1998 whereby member
mailings will be sent evenly every three weeks. Nevertheless, the Company's
overall returns for the three months ended September 30, 1997, as a percentage
of gross sales were 4.03% less than the prior comparable period. The Company
does not currently anticipate offering dual featured selections in the future.
As a result of higher gross sales and decreasing returns, discounts
and allowances as a percentage of such sales, net sales for the three months
ended September 30, 1997 increased $1,205,039 or 133.89% to $2,105,073.
Cost of sales as a percentage of net sales for the three months ended
September 30, 1997 declined from 89.19%, in the prior comparable period, to
44.94%, in the current period. Conversely, gross profit increased $1,061,740
or 1,091.64% to $1,159,001 for the three months ended September 30,1997, from
$97,261 in the prior comparable period. Gross profit as a percentage of net
sales increased from 10.81% for the three months ended September 30, 1996 to
55.06% for the three months ended September 30, 1997. The dramatic reduction
in cost of goods sold as a percentage of net sales and the dramatic
improvement in gross profit margin is principally attributable to a larger
percentage of net sales from increasing sales to members as opposed to revenue
from sales of audio books in connection with new member enrollments at
<PAGE>
substantially reduced prices; new fulfillment arrangements at lower costs and
increased licensing of products which reduces overall production costs.
Advertising and promotion expenses (for acquisition and retention of
new members) decreased $98,717 or 5.61% to $1,662,296 for the three months
ended September 30, 1997 as compared to $1,761,013 in the prior comparable
period. This decrease was principally due to lower per piece mailing costs of
member solicitation packages and member mailings, as the number of pieces in
each mailing increases, which were partially offset by increased expenses
associated with advertising and promotion activities to a larger membership
base.
General and administrative expenses for the three months ended
September 30, 1997 decreased $23,931 or 3.79% to $607,658 from $631,589. As a
percentage of net sales, general and administrative expenses declined to
28.87% for the three months ended September 30, 1997 from 70.17% in the prior
comparable period. In prior years, the Company invested in corporate
infrastructure capable of supporting operations in excess of its then-current
level of operations. As a result, the Company was not required to hire
additional personnel and incur additional administrative expenses to support
higher revenue volumes. Accordingly, general and administrative expenses
actually decreased while volume increased.
Professional fees for the three months ended September 30, 1997 were
$40,468, an increase of $35,800, as compared to $4,668 for the prior
comparable period. Depreciation and amortization expenses for the three months
ended September 30, 1997 were $6,835, an increase of $5,742, as compared to
$1,093 for the prior comparable period. Net interest expense for the three
months ended September 30, 1997 increased $101,584 to $163,972. The increase
in net interest expense was due to increased borrowings.
Primarily due to increased sales, lower returns and allowances as a
percentage of gross sales, significantly lower cost of goods sold as a
percentage of net sales and correspondingly higher gross profit, and the
ability to operate at higher volumes without hiring additional personnel or
incurring additional administrative expenses, the loss for the three months
ended September 30, 1997, declined by 44.06% or $1,041,262, from $2,363,490 in
the prior comparable period to $1,322,228 for the three months ended September
30, 1997.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1997
Gross sales for the nine months ended September 30, 1997 were
$10,282,371, an increase of $4,314,021 or 72.28%, as compared to $5,968,350
for the nine months ended September 30, 1996. The increase in gross sales was
primarily attributable to increased sales of audio books resulting from the
continued expansion of Audio Book Club's membership base.
Returns, discounts and allowances for the nine months ended September
30, 1997 were $3,087,256 or 30.02% of gross sales as compared to $1,808,858 or
30.31% for the prior comparable period and as a percentage is virtually
unchanged.
Expansion of Audio Book Club's membership base, increased revenue
from members and increased new member enrollment revenue resulted in an
increase in net sales of $3,035,623 or 72.98% for the nine months ended
September 30, 1997 to $7,195,115 as compared to $4,159,492 for the prior
comparable period.
Cost of sales as a percentage of net sales for the nine months ended
September 30, 1997 declined from 75.27%, in the prior comparable period, to
52.21%, in the current period. Conversely, gross profit increased $2,410,000 or
<PAGE>
234.32% to $3,438,495 for the nine months ended September 30,1997, from
$1,028,495 in the prior comparable period. Gross profit as a percentage of net
sales increased from 24.73% for the nine months ended September 30, 1996 to
47.79% for the nine months ended September 30, 1997. The dramatic reduction in
cost of goods sold as a percentage of net sales and the dramatic improvement in
gross profit margin is principally attributable to a larger percentage of net
sales from increasing catalog sales to members as opposed to revenue from sales
of audio books in connection with new member enrollments at substantially
reduced prices; new fulfillment arrangements at lower costs and increased
licensing of products which reduces overall production costs.
Advertising and promotion expenses (for acquisition and retention of
new members) decreased $335,814, or 7.91%, to $3,912,033 for the nine months
ended September 30, 1997 as compared to $4,247,847 in the prior comparable
period. This decrease was principally due to lower per piece mailing costs of
member solicitation packages and member mailings, as the number of pieces in
each mailing increases, which were partially offset by increased expenses
associated with advertising and promotion activities to a larger membership
base.
General and administrative expenses for the nine months ended
September 30, 1997 decreased $99,554, or 6.95% to $1,333,435 from $1,432,989.
General and administrative expenses, as a percentage of net sales, for the
nine months ended September 30, 1997, were 18.53%, a reduction from 34.45% in
the prior comparable period. In prior years, the Company invested in corporate
infrastructure capable of supporting operations in excess of its then-current
level of operations. As a result, the Company was not required to hire
additional personnel and incur additional administrative expenses to support
higher revenue volumes. Accordingly, general and administrative expenses
actually decreased on higher volume.
Professional fees for the nine months ended September 30, 1997 were
$193,003, an increase of $108,851, as compared to $84,152 for the prior
comparable period. Depreciation and amortization expenses for the nine months
ended September 30, 1997 were $11,513, an increase of $8,379, as compared to
$3,134 for the prior comparable period. Net interest expense for the nine
months ended September 30, 1997 increased $359,235 to $478,617. The increase
in net interest expenses was due to increased borrowings.
Primarily due to increased sales, lower returns and allowances as a
percentage of gross sales, significantly lower cost of goods sold as a
percentage of net sales and correspondingly higher gross profit, and the
ability to operate at higher volumes without hiring additional personnel or
incurring additional administrative expenses, the loss for the nine months
ended September 30, 1997, declined by 48.75% or $2,368,903, from $4,859,009 in
the prior comparable period to $2,490,106 for the nine months ended September
30, 1997.
Liquidity and Capital Resources
The Company's capital requirements have been and will continue to be
significant due to, among other things, costs associated with direct mail
campaigns, other new member recruitment advertising and building, expanding
and maintaining an Internet web site. Historically, the Company's cash
requirements have exceeded cash flows from operations.
On October 27, 1997, the Company closed its initial public offering
of 2,300,000 shares of Common Stock, with no par value, at price of $10.00 per
share of Common Stock. At the closing of the initial public offering, the
Company received cash proceeds of $20,562,229, after underwriting discounts
and commissions and certain other expenses paid at closing. The
<PAGE>
Company used a portion of the proceeds to repay loans from a major bank in the
aggregate principal amount of $9,000,000 plus accrued interest thereon of
$56,167.
Immediately prior to the consummation of the offering, the Company's
Chairman, Chief Executive Officer and founder converted $5,975,200 of
indebtedness owed to him under a loan agreement into 597,520 shares of common
stock at a price per share equal to the initial offering price of the common
stock.
During the nine months ended September 30, 1997, the Company's cash
increased $21,885, as the Company used net cash of $3,149,238 and $9,518 for
operating and investing activities, respectively, and had cash provided by
financing activities of $3,180,641. For the nine months ended September 30,
1996, the Company's cash decreased by $108,686, as the Company used net cash
of $4,496,550 and $12,336 for operating and investing activities,
respectively, and had cash provided by financing activities of $4,400,200.
Net cash used in operating activities in each period consisted
principally of net losses of $4,859,009 and $2,490,106 for the nine months
ended September 30, 1996 and 1997, respectively.
For the nine months ended September 30, 1996, net cash used in
operating activities, consisted of, in addition to the net loss, increases in
receivables, inventory and royalty advances of $56,379, $14,398 and $243,791,
respectively. The net cash used in operations was partially reduced by imputed
interest on notes payable to related parties of $121,731, a decrease in
prepaid advertising of $63,341 and an increase in accounts payable of
$488,821.
For the nine months ended September 30, 1997, the cash used in
operating activities consisted of, in addition to the net loss, increases in
receivables, inventory and prepaid expenses of $672,040, $340,384 and $36,921,
respectively. The net cash used in operations was partially reduced by imputed
interest on notes payable to related parties of $254,892, a decrease in
royalty advances of $14,317 and an increase in accounts payable of $89,491.
The increase in accounts receivable during the nine months ended
September 30, 1997 is principally due to significantly higher sales. The
increase in inventory is principally due to higher sales and an expanded
number of titles.
Cash used in investing activities in both periods was for the
acquisition of fixed assets, principally for computer equipment.
For the nine months ended September 30, 1996, net cash provided by
financing activities consisted of loans from the Company's officers and
directors. For the nine months ended September 30, 1997, the Company borrowed
$9,000,000 from a major bank and $1,295,000 from officers and directors.
During the nine months ended September 30, 1997, loans outstanding from
officers and directors of the Company were reduced in the amount of
$6,800,000. Net cash provided by financing activities was partially offset by
an increase of $277,817 in deferred offering costs.
Upon consummation of the initial public offering, loans from the
major bank were repaid and deferred offering costs were netted against
proceeds from the offering.
After giving effect to the repayment of the bank debt and related
interest, the Company received cash proceeds from the initial public offering
of $11,506,062. The proceeds have been invested in short-term bank investments
none of which have a maturity of greater than 180 days.
<PAGE>
Based on the Company's currently proposed plans and assumptions
relating to the implementation of its business plan (including the timing and
success of its direct marketing and other new recruitment advertising, as well
as the availability and terms of attractive acquisition opportunities), the
Company anticipates that its existing cash and anticipated cash flow from
operations will be sufficient to satisfy its contemplated cash requirements
for at least twelve months from September 30, 1997.
New Accounting Standard
In March 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings per Share. SFAS No. 128 establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock. This statement is effective for years ending after December 15,
1997 and early adoption is not permitted. When adopted, the statement will
require restatement of prior years' earnings per share. The Company will adopt
this statement for its fiscal year ended December 31, 1997. In addition, the
Company believes the adoption of SFAS No. 128, including the effect on prior
periods will not have a material effect on its financial statements.
Quarterly Fluctuations
The Company's operating results vary from period to period as a
result of purchasing patterns of members, the timing, costs, magnitude and
success of direct mail campaigns and other new member recruitment advertising,
member attrition, the timing and popularity of new audio book releases and
product returns. The timing of new member enrollment varies depending on the
timing, magnitude and success of new member advertising, particularly direct
mail campaigns. For fiscal periods in which the Company conducts significant
direct mail campaigns, the Company's operating results will be adversely
affected because the increased membership acquisition expenses incurred may
not generate corresponding revenues from such campaigns until the following
periods.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
In September 1997, the Company amended and restated its Articles of
Incorporation to provide for, among other items, the increase in authorized
shares of stock from 10,000 to 30,000,000, of which 25,000,000 are designated
as Common Stock, with no par value, and 5,000,000 are designated as Preferred
Stock, with no par value. Also, in September 1997, the Company declared a
16,282 for 1 Common Stock split.
On October 27, 1997, the Company closed its initial public offering
of 2,300,000 shares of Common Stock, with no par value, at a price of $10.00
per share of Common Stock. The gross proceeds of the offering prior to any
expenses, discounts and commissions were $23,000,000.
Immediately prior to the consummation of the offering, the Company's
Chairman, Chief Executive Officer and founder converted $5,975,200 of
indebtedness owed to him under a loan agreement into 597,520 shares of common
stock at a price per share equal to the initial offering price of the Common
Stock. The shares issued upon the conversion of the indebtedness were issued
pursuant to an exemption under Section 4(2) of the Securities and Exchange Act
of 1933, as amended.
In connection with the initial public offering, the underwriters were
granted an over-allotment option for an additional 345,000 shares of Common
Stock, exercisable until December 6, 1997. The underwriters have partially
exercised their over-allotment option by purchasing 110,000 shares from a
minority shareholder (with holdings of less than 5% of the Company's common
stock.) In connection with the initial public offering, the Company also
granted to the principal underwriter and its designees, for nominal
consideration, warrants to purchase from the Company up to 230,000 shares of
Common Stock at a price of $16.50 per share for a period of five years
expiring, October 22, 2002.
The Registration Statement on Form SB-2 (No. 333-30665) was declared
effective by the Securities and Exchange Commission on October 22, 1997.
At the closing of the initial public offering, the Company received
cash proceeds of $20,562,229, after underwriting discounts and commissions and
certain other expenses paid at closing. The Company used a portion of the
proceeds to repay loans from a major bank in the aggregate principal amount of
$9,000,000 plus accrued interest thereon of $56,167. The remaining funds in
the amount of $11,506,062 have been invested in short-term investments and
will be used to implement the Company's business plan and fund working capital
requirements. The Company anticipates using the proceeds to fund membership
recruitment advertising, Internet web site marketing and development and for
working capital and general corporate purposes.
<PAGE>
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Audio Book Club, Inc. has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Audio Book Club, Inc.
Dated: December 3, 1997 By: /s/ Michael Herrick
-----------------------
Michael Herrick
Chief Operating Officer
Dated December 3, 1997 By: /s/ Robert R. Klein
-----------------------
Robert R. Klein
Chief Financial and Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the Company's
financial statements included in this quarterly report on Form 10-QSB, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 114,741
<SECURITIES> 0
<RECEIVABLES> 2,260,952
<ALLOWANCES> 993,282
<INVENTORY> 1,177,044
<CURRENT-ASSETS> 3,124,985
<PP&E> 37,235
<DEPRECIATION> 12,854
<TOTAL-ASSETS> 3,149,366
<CURRENT-LIABILITIES> 10,730,932
<BONDS> 5,975,200
0
0
<COMMON> 200
<OTHER-SE> (13,556,966)
<TOTAL-LIABILITY-AND-EQUITY> 3,149,366
<SALES> 7,195,115
<TOTAL-REVENUES> 7,195,115
<CGS> 3,756,620
<TOTAL-COSTS> 3,912,033
<OTHER-EXPENSES> 1,537,951
<LOSS-PROVISION> 745,000
<INTEREST-EXPENSE> 478,617
<INCOME-PRETAX> (2,490,106)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,490,106)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,490,106)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
