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 March 31, 1998
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.
(Exact name of Small Business Issuer as specified in its charter)
Florida 65-0429858
(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
(Address of principal executive offices) Zip Code)
Issuer's telephone number, including area code: (561) 241-1426
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 _X_ No___
As of May 13, 1997, there were 6,153,920 shares of the Issuer's Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_
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Audio Book Club, Inc.
Quarter ended March 31,1998
Form 10-QSB
Index
Page
PART I: Financial Information.
Item 1: Financial Statements.
Balance Sheet at March 31, 1998 (unaudited) 3
Statements of Operations for the three months
ended March 31, 1997 and 1998 (unaudited) 4
Statements of Cash Flows for the three months ended
March 31, 1997 and 1998 (unaudited) 5
Notes to Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11
PART II:
Item 1: Legal Proceedings. 16
Item 2: Changes in Securities and Use of Proceeds 16
Item 6: Exhibits and Reports on Form 8-K. 17
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Part I Financial Information
Item 1. Financial Statements
AUDIO BOOK CLUB, INC.
Balance Sheet
March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,474,032
Short term investments to be held to maturity 5,216,577
Accounts receivable, net of allowances for sales returns and doubtful
accounts of $808,769 1,981,456
Inventory 1,603,416
Royalty advances 341,253
Prepaid expenses 317,551
Web site development 168,242
------------
Total current assets 11,102,527
Prepaid expenses - non-current 108,302
Fixed assets and software, at cost, net of accumulated depreciation of $21,795 87,025
------------
$ 11,297,854
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,339,198
Accrued expenses 227,272
------------
Total current liabilities 2,566,470
------------
Commitments and contingencies
Stockholders' equity:
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; 6,153,920
issued and outstanding 25,741,063
Contributed capital 590,217
Accumulated deficit (17,599,896)
------------
Total stockholders' equity 8,731,384
------------
$ 11,297,854
============
</TABLE>
See accompanying notes to financial statements.
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AUDIO BOOK CLUB, INC.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1998
----------- -----------
<S> <C> <C>
Sales $ 2,996,403 4,765,239
Returns, discounts and allowances 685,869 1,235,473
----------- -----------
Sales, net 2,310,534 3,529,766
Cost of sales 1,330,783 2,598,340
----------- -----------
Gross profit 979,751 931,426
Expenses:
Advertising and promotion (for acquisition and
retention of members) 199,359 1,509,332
General and administrative 353,456 526,378
Professional fees 79,933 124,975
Depreciation and amortization 1,383 5,247
----------- -----------
Operating income (loss) 345,620 (1,234,506)
Interest (expense) income, net of interest income of
$576 in 1997 (113,845) 108,538
----------- -----------
Net income (loss) 231,775 (1,125,968)
=========== ===========
Net income (loss) per share of common stock $ .07 (.18)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
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AUDIO BOOK CLUB, INC.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 231,775 (1,125,968)
Adjustments to reconcile net income or loss to net cash used in operating
activities:
Depreciation and amortization 1,383 5,247
Imputed interest on notes payable - related parties 114,421
Changes in asset and liability accounts:
(Increase) in accounts receivable, net (598,497) (198,000)
Decrease in due from related party 20,000
(Increase) decrease in inventory (36,699) 96,958
(Increase) in prepaid expenses (203,405)
(Increase) in prepaid expenses - non-current (8,333)
Decrease (increase) in royalty advances 1,576 (73,735)
(Increase) in web site development (168,242)
(Decrease) in accounts payable and accrued expenses (727,657) (450,198)
---------- ----------
Net cash used in operating activities (993,698) (2,125,676)
---------- ----------
Cash flows from investing activities:
Interest earned on short-term investment (72,878)
Acquisition of fixed assets and software (1,200) (32,467)
---------- ----------
Net cash (used) in investing activities (1,200) (105,345)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes payable - related parties 945,000
Proceeds of issuance of option 50,000
---------- ----------
Net cash provided by financing activities 945,000 50,000
---------- ----------
Net (decrease) in cash and cash equivalents (49,898) (2,181,021)
Cash and cash equivalents at beginning of period 92,856 3,655,053
---------- ----------
Cash and cash equivalents at end of period $ 42,958 1,474,032
========== ==========
</TABLE>
See accompanying notes to financial statements.
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Audio Book Club, Inc.
Notes to Financial Statements
(Information at March 31, 1998 and for the three months
ended March 31, 1997 and 1998 is unaudited)
(1) Organization
Audio Book Club, Inc. (the "Company"), a Florida corporation, was formed on
August 16, 1993. The Company is a direct marketer of audiobooks through Audio
Book Club, a membership club which markets and sells audiobooks by mail order
and via the Internet.
(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 Annual Report
on Form 10-KSB for the year ended December 31, 1997. 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.
Cash and Cash Equivalents
Securities with maturities of three months or less when purchased are
considered to be cash equivalents.
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 three months
ended March 31, 1997 and March 31,1998, no writedown of royalty advances was
recorded.
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Prepaid Expenses
Prepaid expenses consist principally of supplies bought in bulk, insurance
and a payment for Internet advertising being expensed over the period of the
advertising agreement. All current prepaid expenses will be expensed over a
period of time no greater than the next twelve months.
Web Site Development
Web site development costs consist of payments to third parties and
purchased software which will benefit future periods and which are being
expensed over the period of benefit. Ongoing maintenance and other recurring
charges are expensed as incurred as are all internal costs and charges.
Fixed Assets and Computer Software
Fixed assets, consisting primarily of furniture and computer equipment, and
purchased computer software are recorded at cost. Depreciation is provided by
the straight-line method over the estimated useful life of five years for
equipment and three years for software.
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.
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.
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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 stockholders to the extent permitted under the Internal Revenue
Code. Conversely, future federal income taxes, if any, will be the obligation of
the Company.
(3) Internet Agreements
In 1998, the Company entered into a series of agreements with various
Internet companies to provide permanent placements and banner advertisements
throughout their Web Sites. Each of these agreements require monthly payments
and provide for termination of the agreement by the Company at its option. The
agreements provide for guaranteed impressions and, in some cases, provide for
additional guarantees. If the Company chooses to maintain all the agreements
through December 31, 1998, total payments in 1998 under the agreements would be
approximately $3,300,000.
In March 1998, the Company signed an agreement to utilize on its web site
Net Perceptions' GroupLens Recommendation Engine, an advanced tool designed to
deliver highly personalized content. The integration of this engine is intended
to create a personalized audiobook buying experience customized for each
individual user. Once users have logged onto the Company's web site, they will
be offered audiobook selections which correspond to their previous buying
patterns.
(4) Leases - Related Parties
The Company sublets office space from an entity wholly-owned by officers
and directors of the Company. Rent expense for each of the three months ended
March 31, 1997 and 1998 amounted to $9,500 and $12,046, respectively.
In January 1998, the Company amended a sublease agreement to provide for
additional space at its New Jersey location. Minimum monthly rent under the
amended lease is $2,900 per month through December 1998 and is subject to two
extension periods of five years each under certain conditions. In May 1998, the
Company amended a sublease agreement to provide for additional space at its
Florida location. Minimum monthly rent under the amended lease is $1,960 per
month through November 2000 and is subject to two extension periods of three
years each under certain conditions.
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Minimum annual lease commitments under noncancelable operating leases are
as follows:
Year ending
December 31, Amount
------------ ------
1998 $ 55,708
1999 23,520
2000 21,566
---------
Total lease
commitments $ 100,794
=========
(5) Stock Options
In January 1998, the Company granted to an officer options to purchase
30,000 shares of Common Stock at an exercise price equal to 110% of the initial
public offering price per share of the Company's Common Stock. Also, in
February, 1998, the Company granted to a consultant to the Company, options to
purchase 5,000 shares of Common Stock at an exercise price equal to the market
value of the Common Stock on February 2, 1998. In February, the Company granted
to each of two officers options to purchase 100,000 shares of Common Stock at an
exercise price equal to the market value of the Common Stock on the date of the
grant. These options vest over various periods commencing one year from grant
and extending over a period from two years to five years and are exercisable
immediately upon vesting.
On March 18, 1998, Carl T. Wolf was elected to the Company's Board of
Directors. Mr. Wolf has been granted options to purchase 22,500 shares of the
Company's Common Stock at $5.00 per share which vest and are exercisable
one-third on, March 18, 1998 (the "Grant Date") and one-third on the first and
second anniversaries of such Grant Date.
At March 31, 1998, there were 442,500 additional shares available for grant
under the Plan.
On March 18, 1998, the Company also sold to Mr. Wolf an option to purchase
50,000 shares of Common Stock. Such options immediately vest and are exercisable
at an exercise price of $5.00 per share and have a five year term. The purchase
price of the option was $50,000. The Company also agreed that, if Wolf continues
to serve as an active and participating member of the Company's Board of
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Directors for six months from the Wolf Purchase Date, that Wolf shall have the
right, but not the obligation, to purchase an additional option ("Additional
Wolf Option") for an additional 25,000 shares for $25,000. The Additional Wolf
Option shall have a five year term from date of purchase and shall have an
exercise price of $5.00 per share.
In March 1998, the Company granted options to purchase 21,600 shares of the
Company's Common Stock at $4.40 per share to a company. (See Note 7)
(6) Net Loss Per Share of Common Stock
The weighted average used in the net loss per share computations for the
three months ended March 31, 1997 and 1998 were 3,256,400 and 6,153,920,
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 -0- for the three months ended March
31, 1997 and 379,100 for the three months ended March 31, 1998.
(7) Supplemental Cash Flow Information
During the three months ended March 31, 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 $114,421. In March 1998, the Company
granted 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.
Such options immediately vest and are exercisable and have a five year term. The
Company has recorded an asset in the amount of $54,000, the negotiated cost of
transferring the phone numbers and is amortizing the asset over six years.
(8) Subsequent Events
In April 1998, the Company entered into an agreement with a major
commercial bank for a line of credit in the amount of $500,000. The interest
rate on the amounts drawn down under the line of credit is 0.50% below the
bank's reference rate. The line of credit is available until April 1, 1999.
There are no commitment or other fees attached to the line of credit. The
Company has not drawn down any amounts under the line of credit.
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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.
The Company is a direct marketer of audiobooks through Audio Book Club, a
membership club which markets and sells audiobooks by mail and via the Internet.
The Company commenced operations in January 1994 and undertook its first direct
mail campaign in August 1994. As of May 6 1998, Audio Book Club's total member
file consisted of 320,594 names.
Since its inception, the Company has engaged in an aggressive membership
recruitment program to establish a core Audio Book Club member base and to
continually expand such member base. The Company has acquired Audio Book Club
members primarily through direct mailings of member solicitation packages,
online computer service and Internet advertising, advertisements in magazines,
newspapers and other publications and package insert programs.
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. Promotional costs for new and current members are expensed
on the date the promotional materials are mailed. Internet advertising is
expensed as it occurs. The Company does not capitalize any new member
acquisition costs.
In March 1995, the Company established an Internet web site which offers
visitors to the web site the opportunity to join Audio Book Club, execute club
transactions online (if a member), utilize the web site's search engine to
locate many of the web site's thousands of audiobook selections and sample audio
clips of any of the web site's selections. The Company's web site also provides
additional options, such as alerting visitors when a new title of an author or
reader previously specified by the visitor is released and offering reviews of
selected titles.
The Company's web site 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. In March 1998, the
Company signed an agreement to utilize on its web site Net Perceptions'
GroupLens Recommendation Engine, an advanced tool designed to deliver highly
personalized content. The integration of this engine is intended to create a
personalized audiobook buying experience customized for each individual user.
Once
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users have logged onto the Company's web site, they will be offered audiobook
selections which correspond to their previous buying patterns.
The Company's web site currently has links from numerous search engines and
audiobook related sites. The web site is also linked to catalog listing sites
offered by online computer and Internet services.
In 1998, the Company entered into the following agreements to increase its
Internet presence:
o In April 1998, the Company entered into an advertising agreement with
Yahoo! (http//www.yahoo.com), a leading global Internet media company.
The agreement with Yahoo! is a banner advertising program which will
enable consumers to "click through" from Yahoo! directly to the Audio
Book Club web site.
o In April 1998, the Company entered into an exclusive advertising
agreement with Juno Online Services, L.P. (http//www.juno.com), the
second largest provider of consumer e-mail in the United States with
over 4.8 million subscribers. Audio Book Club will be the exclusive
audiobook seller advertised on the Juno service. Juno provides
electronic mail service completely free to anyone with access to a
personal computer running Microsoft(R) Windows(R) and equipped with a
modem.
o An agreement with America Online, Inc., the world's leading online
service. Under the agreement, in addition to impressions generated
through a channel carriage, the Company will receive impressions
throughout the AOL Service in areas such as Chat and E-mail, as well
as such areas as Instant Messenger, Timesavers and Net Find search
terms on AOL.com. Audio Book Club will also be promoted in both the
"Auto & Travel" and "Books, Music and Video" departments of both the
AOL Service and the AOL.com Shopping Channels.
o An agreement with Excite, Inc., (http//www.excite.com) to promote
Audio Book Club through Excite.com. During the term of the agreement,
Audio Book Club will be the exclusive audiobook club available to
consumers visiting the Excite site.
o An agreement with AudioNet, Inc. making the Company the exclusive
retailer of audiobooks on AudioNet's Web site
(http://www.audionet.com).
o An agreement with go2net, Inc. making the Company the exclusive
retailer of books and audiobooks on go2net's MetaCrawler search engine
(http://www.metacrawler.com) and StockSite financial Web site
(http://www.stocksite.com).
o An agreement with GeoSystems Global Corp., the leader in interactive
mapping. As part of the agreement, the Company will receive a
permanent link, on
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the MapQuest(R) Web site (http://www.mapquest.com) where MapQuest
users access custom driving directions.
In addition to the foregoing, the Company continues to explore arrangements
with additional Internet companies.
The Company continues to work to expand and improve its web site including
increasing the number of audiobook titles to select, and audio clips to preview
through its search engine, improving recommendation features and streamlining
the join process.
The Company expects to incur significant expenditures in connection with
its expansion strategy (including costs associated with expansion and
maintenance of its Internet web site, new member recruitment advertising and
member retention programs) 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
March 31, 1998.
Results of Operations
Three Months Ended March 31, 1997 Compared to Three Months Ended
March 31, 1998
Gross sales for the three months ended March 31, 1998 were $4,765,239 an
increase of $1,768,836 or 59.0%, as compared to $2,996.403 for the three months
ended March 31, 1997. The increase in gross sales was primarily attributable to
increased sales of audiobooks resulting from the continued expansion of Audio
Book Club's membership base and a significant increase in new members. The
Company's total member file increased by 51,677 names or 20% in the first
quarter ended March 31,1998.
Returns, discounts and allowances for the three months ended March 31, 1998
were $1,235,473 or 25.9% of gross sales as compared to $685,869 or 22.9% of
gross sales for the prior comparable period. The increase in returns, discounts
and allowances was primarily due to an increase in members and gross sales.
As a result of higher gross sales, net sales for the three months ended
March 31, 1998 increased $1,219,232 or 52.8% to $3,529,766.
Cost of sales for the three months ended March 31, 1998 increased
$1,267,557 to $2,598,340 from $1,330,783 in the prior comparable period. Gross
profit decreased $48,325 to $931,426 for the three months ended March 31, 1998
from $979,751 in the prior comparable period. The increase in cost of goods sold
is attributable to higher net sales. The decrease in gross profit is principally
attributable to the large increase in new member enrollments in the first
quarter of 1998. Initial purchases by new members are at substantially reduced
prices to encourage enrollment. These offers, which are typically four books for
either $.99 or $.01 plus shipping and handling, result in an initial loss to the
Company which is recovered through additional member purchases at regular
prices. Because the Company does not capitalize any new member acquisition
costs, the initial purchase has the effect of reducing gross profit in the
period of enrollment.
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Advertising and promotion expenses (for acquisition and retention of new
members) increased $1,309,973 or 657.1% to $1,509,332 for the three months ended
March 31, 1998 as compared to $199,359 in the prior comparable period. This
increase was principally due to increased spending on direct mail and a
significant investment in the Internet.
General and administrative expenses for the three months ended March 31,
1998 increased $172,922 to $526,378 from $353,456 for the three months ended
March 31, 1997. As a percentage of net sales, general and administrative
expenses declined to 14.9% from 15.3% in the three months ended March 31, 1997.
Professional fees for the three months ended March 31, 1998 were $124,975
an increase of $45,042 as compared to $79,933 for the prior comparable period.
As a percentage of net sales, professional fees, were 3.5% for three months
ended March 31, 1998 and March 31, 1997.
Depreciation and amortization expenses for the three months ended March 31,
1998 were $5,247, an increase of $3,864, as compared to $1,383 for the prior
comparable period. Net interest income for the three months ended March 31, 1998
was $108,538 as compared to a net expense of $113,845 for the three months ended
March 31, 1997.
Primarily due to increased advertising of $1,309,973, including significant
expenditures to increase the Company's Internet presence, the Company incurred a
net loss for the three months ended March 31, 1998 of $1,125,968 as compared to
net income of $231,775, for the three months ended March 31, 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 promotion and building,
expanding and maintaining an Internet web site. Historically, the Company's cash
requirements have exceeded cash flows from operations.
During the three months ended March 31, 1998, the Company's cash decreased
$2,181,021, as the Company used net cash of $2,125,676 and $105,345 for
operating and investing activities, respectively, and had cash provided by
financing activities of $50,000. For the three months ended March 31, 1997, the
Company's cash decreased by $49,898, as the Company used net cash of $993,698
and $1,200 for operating and investing activities, respectively, and had cash
provided by financing activities of $945,000.
For the three months ended March 31, 1997, net cash used in operating
activities, consisted of increases in receivables and inventory of $598,497 and
$36,699, respectively and a decrease in accounts payable of $727,657. The net
cash used in operations was partially reduced by net income of $231,775 imputed
interest on notes payable to related parties of $114,421, a decrease in due to
related parties of $20,000, a decrease in royalty advances of $1,576 and
depreciation and amortization expense of $1,383.
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For the three months ended March 31, 1998, the cash used in operating
activities consisted of, in addition to the net loss of $1,125,968, increases in
receivables, prepaid expenses, royalty advances and capitalized web site
development of $198,000 $230,405 $73,735 and 168,242 respectively, and a
decrease in accounts payable and accrued expenses of $450,198. The net cash used
in operations was partially reduced by a decrease in inventory of $96,958 and
depreciation and amortization of $5,247.
The increase in accounts receivable during the three months ended March 31,
1998 is principally due to higher sales and a significant increase in new
members. The increase in prepaid expenses is principally attributable to a
payment made as part of an Internet advertising agreement which is being
expensed over the life of the agreement. Web site development costs consist of
payments to third parties and purchased software which will benefit future
periods and which are being expensed over the period of benefit. Ongoing
maintenance and other recurring charges are expensed as incurred as are all
internal costs and charges.
Cash used in investing activities in both periods was for the acquisition
of fixed assets, principally for computer equipment, and for the three months
ended March 31, 1998, interest earned on short term investments.
For the three months ended March 31, 1997, net cash provided by financing
activities consisted of loans from the Company's officers and directors. On
March 18, 1998, (the "Wolf Purchase Date") the Company sold to Carl Wolf an
option ("Wolf Option") to purchase 50,000 shares of Common Stock at any time
commencing on the Wolf Purchase Date through the fifth anniversary of the Wolf
Purchase Date at an exercise price of $5.00 per share (market value at Wolf
Purchase Date.) The purchase price of the Wolf Option was $50,000.
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
Internet activities, direct marketing and other new member 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 March 31, 1998.
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
Internet initiatives and direct mail campaigns 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 direct mail and Internet advertising campaigns. For fiscal periods
in which the Company conducts significant direct mail and Internet advertising
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.
15
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
On March 18, 1998, (the "Wolf Purchase Date") the Company sold to Carl Wolf
an option ("Wolf Option") to purchase 50,000 shares of Common Stock at any time
commencing on the Wolf Purchase Date through the fifth anniversary of the Wolf
Purchase Date at an exercise price of $5.00 per share (market value at Wolf
Purchase Date.) The purchase price of the Wolf Option was $50,000. Mr. Wolf had
full access to information relating to the Company and represented to the
Company that he had the required investment intent and that he had such
knowledge and experience in financial and business matters such that he was
capable of evaluating the merits and risks of the investment. The Company relied
on Section 4(2) under the Securities Act of 1993, as amended, as a transaction
by an issuer not involving a public offering.
On October 22, 1997, the Company's Registration Statement on Form SB-2 (No.
333-30665) relating to its initial public offering (the "IPO") was declared
effective by the Securities and Exchange Commission. The managing underwriter of
the IPO was L.H. Friend, Weinress, Frankson & Presson, Inc. The Company sold
2,300,000 shares of common stock for gross proceeds of $23,000,000 and a
non-management selling shareholder sold 110,000 shares for gross proceeds of
$1,100,000. The Company incurred aggregate offering expenses of $3,234,337
(including $1,840,000 of underwriting discounts and commissions and $632,500 for
the managing underwriter's non-accountable expense allowance) in connection with
the IPO. As a result, the Company received net proceeds of 19,765,663 from the
IPO.
The Company used a portion of the net 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 Company invested $5,000,000 in a bank certificate of
deposit bearing interest at 5.5% which matured on May 2, 1998. The Company
estimates that it has used approximately $4,080,000 for direct mail membership
recruitment advertising ($3,000,000), Internet promotion, development and
maintenance ($700,000) and general working capital purposes ($380,000). The
Company intends to use the remaining net proceeds of the offering for membership
recruitment advertising, Internet web site marketing and development and for
working capital and general corporate purposes.
16
<PAGE>
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Report dated May 4, 1998 reporting changes in Registrant's certifying
accountants.
17
<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: May 13, 1998 By: /s/ Michael Herrick
----------------------------------------
Michael Herrick
Co-Chief Executive Officer
Dated May 13, 1998 By: /s/ John F. Levy
---------------------------------------------
John F. Levy
Chief Financial and Accounting Officer
18
<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>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<CASH> 1,474,032
<SECURITIES> 5,216,577
<RECEIVABLES> 2,790,225
<ALLOWANCES> 808,769
<INVENTORY> 1,603,416
<CURRENT-ASSETS> 11,102,527
<PP&E> 108,820
<DEPRECIATION> 21,795
<TOTAL-ASSETS> 11,297,854
<CURRENT-LIABILITIES> 2,566,470
<BONDS> 0
0
0
<COMMON> 25,741,063
<OTHER-SE> (17,009,679)
<TOTAL-LIABILITY-AND-EQUITY> 11,297,854
<SALES> 3,529,766
<TOTAL-REVENUES> 3,529,766
<CGS> 2,598,340
<TOTAL-COSTS> 1,509,332
<OTHER-EXPENSES> 656,600
<LOSS-PROVISION> 18,607
<INTEREST-EXPENSE> (108,538)
<INCOME-PRETAX> (1,125,968)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,125,968)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,125,968)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
