FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 001-13469
Audio Book Club, Inc.
(Exact name of Registrant as specified in its charter)
Florida 65-0429858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2295 Corporate Boulevard, Suite 222, Boca Raton, Florida 33431
(Address of principal executive offices) (Zip code)
(561) 241-1426
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Securities: Exchanges on which Registered:
Common Stock American Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ___
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained in this form, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
State issuer's revenues for its most recent fiscal year. $15,119,093
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
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As of March 27, 1998 there were 6,153,920 shares of the registrant's common
stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format (check one):
Yes ___: No _X_
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Audio Book Club, Inc.
Index To
Annual Report on Form 10-KSB
For Year Ended December 31, 1997
<TABLE>
<S> <C>
PART I.......................................................................................................... 4
Item 1. Business............................................................................................... 4
Item 2. Description of Properties.............................................................................. 13
Item 3. Legal Proceedings...................................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................................................... 14
PART II......................................................................................................... 14
Item 5. Market for Common Equity and Related Stockholder Matters............................................... 14
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................................... 16
Item 7. Financial Statements .................................................................................. 22
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................................................................ 22
PART III........................................................................................................ 23
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............................................................... 23
Item 10. Executive Compensation................................................................................ 26
Item 11. Security Ownership of Certain Beneficial Owners and Management........................................ 30
Item 12. Certain Relationships and Related Transactions........................................................ 31
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................... 33
SIGNATURES...................................................................................................... 35
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PART I
Item 1. Business
Introduction
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 March 19, 1998, Audio Book Club's total
member file consisted of 306,798 names. As of December 31, 1997, Audio Book
Club's total member file consisted of 262,032 names compared to 154,653 and
64,398 names as of December 31, 1996 and 1995, respectively. The Company's total
member file has increased by approximately 376% from January 1, 1996 to March
19, 1998. The total member file consists of all members acquired by the Company,
including active and inactive members. 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.
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 site's search engine to locate
any of the site's audiobook selections and sample audio clips of many of the
site's selections. The Company believes that it offers one of the most
comprehensive libraries of audiobook titles, as members may order virtually any
of the 68,000 published titles in existence through the Company's Internet web
site or "special order" service.
Audiobook Industry Overview
Audiobooks are literary works or other printed materials read by the
author, a reader or a celebrity actor or an ensemble of readers or actors and
recorded primarily on audio cassette and, to a lesser extent, on compact disc.
Most hardcover books printed today are released simultaneously as audiobooks and
audiobook versions of other popular books are released from time to time, in
either an author-approved abridged version or an unabridged version. An abridged
audiobook is a condensed version of the printed book, typically recorded on two
to six audio cassettes and three to six hours in length. An unabridged audiobook
is a word-for-word version of the printed book, typically recorded on six to
twelve audio cassettes and six to twelve hours in length. Audiobook publishers
have traditionally focused their efforts on publishing abridged audiobooks
because they can be offered at lower prices than unabridged versions and,
therefore, can be more competitive with printed books and other forms of audio
cassette entertainment, such as music cassettes.
Audiobooks were first introduced in 1985 and, according to the Audio
Publishers Association (the "APA"), sales of audiobooks increased to
approximately $1.5 billion in 1995 from industry estimates of $250 million in
1988. In addition, according to the APA, sales of audiobooks increased
approximately 11.6% during 1996, compared to an increase in printed book sales
of 1% during 1996. Simba Information, Inc., a reporter
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of book information statistics, forecasts sales by book clubs (audio and print)
to grow more aggressively than any other consumer book segment.
Audiobooks are available in all genre categories including, fiction,
non-fiction, mystery, suspense, biography, fantasy and science fiction, romance,
spiritual, religion, humor, children's, business, self-improvement and
motivational. An industry source estimates that there were approximately 68,000
audiobook titles in existence as of January 1998, as compared to 11,500 titles
in 1985, with approximately 7,500 titles published in 1996.
The Company believes that consumers of audiobooks include those who
purchase printed books, as well as those who do not have time to read, as they
can be listened to while engaging in other activities, such as driving, walking
or exercising, and can be used by consumers who have difficulty reading. The
Company also believes that audiobooks offer exceptional entertainment value
because they can be enjoyed while relaxing at home in the same manner that a
person would watch television or listen to the radio.
When audiobooks were first introduced, they were available almost
exclusively in libraries. Currently, bookstores account for the largest
percentage of retail audiobook sales, selling approximately 47% of audiobooks in
1995 according to the APA. Bookstores, however, typically devote limited shelf
space to audiobooks. A survey conducted by Publishers Weekly in 1994 indicates
that bookstores devote only an average of 71 square feet to audiobooks. Because
of shelf space limitations, bookstores carry only a limited number of the
approximately 68,000 published audiobook titles.
Over the last several years, audiobook stores, which rent or sell only
audiobooks, have opened. Audiobooks are also offered on a limited basis in other
retail establishments such as convenience stores, video rental stores and
wholesale clubs (e.g. Costco), as well as by several mail order companies which
offer audiobooks for rental and sale through their catalogs. Audiobooks are also
currently offered through the limited number of audiobook member clubs, such as
Audio Book Club.
The Company believes that it is positioned to capitalize on opportunities
in the emerging and expanding markets for audiobooks because of its early
entrance into, and knowledge of, the audiobook club industry, established
membership base and Internet web site, knowledge of and experience in utilizing
mailing lists to target direct mail campaigns, selection of available audiobook
titles, established relationships with major audiobook publishers and emphasis
on providing friendly, efficient customer service.
Strategy
The Company's strategy is to establish Audio Book Club as the largest and
most convenient supplier of audiobooks by mail and via the Internet. Key
elements of the Company's strategy include:
o Expand Member Base. The Company believes that it has established a
core Audio Book Club member base which it intends to continue to
expand. The Company anticipates that its advertising activities will
continue to consist primarily of direct mailings of member
solicitation packages to prospective members whose names were obtained
from third-party mailing lists. In addition, the Company intends to
increase its direct mail and Internet web site
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and online computer service marketing and advertising activities. The
Company also intends to continue to test other forms of advertising,
including various magazine, newspaper and other print media, radio and
package insert programs.
o Optimize Member Acquisition Marketing Activities. The Company intends
to continue to analyze its database of results obtained from direct
mail campaigns (including the results obtained from each mailing list
utilized) and from print and other advertising, as well as Internet
marketing. The Company maintains a database of information regarding
each advertising campaign, including each third-party mailing list
that was utilized in the campaign, the quantity of names to which the
promotional mailings were sent, the response rate and the per member
acquisition cost. The Company believes that its emphasis on database
management improves its ability to efficiently target advertising
campaigns, thereby obtaining increased response rates and lower per
member acquisition costs.
o Maximize Per Member Revenues. The Company intends to continue to
analyze the results of its advertising activities and the purchasing
habits of its members to maximize sales to members and extend
membership life cycles. The Company maintains a database of
information on each name in its member file, including number and
genre of titles ordered, payment history, the advertising campaign
from which the member joined and a lifetime value analysis. The
Company believes that such analyses and evaluations enable the Company
to efficiently target advertising to potential members who have
characteristics of persons likely to join Audio Book Club, purchase
sufficient quantities of audiobooks to be a profitable source for the
Company and become long-term club members. The Company also intends to
utilize such information to target and establish "niche" clubs to
capitalize on consumer demand for audiobooks in specific genres and
audiobooks by specific authors.
o Cost Containment. The Company continuously seeks to reduce its costs
of doing business, including the costs associated with member
acquisition, catalog mailings and products. The Company believes that
as it expands its membership base it will achieve increased economies
of scale in connection with member recruitment advertising, member
mailings and order processing and product fulfillment, and be able to
order products and services in larger quantities and, therefore, be
able to negotiate more favorable licensing, purchasing and
manufacturing arrangements.
o International Expansion. The Company's long-term objectives include
expanding Audio Book Club internationally into English-speaking
countries such as Canada and the United Kingdom, as well as into other
countries with large English-speaking populations.
Consistent with its business plan, the Company may also seek to expand its
operations by acquiring companies in businesses which the Company believes will
complement or enhance its business. Any decision to make an acquisition will be
based upon a variety of factors, including the purchase price and financial
terms of the transaction, the business prospects and competitive position of
services provided and products offered by the acquisition candidate and the
extent to which any such acquisition would enhance the Company's prospects.
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The Company's strategy is subject to change as a result of a number of
factors, including progress or delays in the Company's expansion efforts,
success of the Company's member recruitment advertising, results of continual
test marketing, consumer acceptance of new products, the Company's ability to
identify suitable acquisition candidates and integrate any acquired businesses
into its operations and changes in market conditions, consumer buying habits and
consumer preferences. There can be no assurance that the Company will be able to
successfully implement its business strategy or otherwise expand its operations.
Audiobook Supply
The Company has established relationships with substantially all of the
major audiobook publishers, including Random House Audio Publishing, Inc.,
Bantam Doubleday Dell Audio Publishing, Simon & Schuster Audio, Harper Audio,
Time Warner Audio Books and Audio Renaissance Tapes. The Company has primarily
entered into non-exclusive agreements with selected audiobook publishers
pursuant to which the publisher grants to the Company a license to duplicate the
recordings and the packaging materials relating to each audiobook in such
publisher's audiobook library, including audiobooks as to which the publisher
acquires rights during the term of the agreement. The Company also enters into
agreements pursuant to which it receives licenses to duplicate the recordings
and packaging materials relating to selected audiobooks. The Company believes
that its ability to enter into license agreements with publishers enables it to
reduce the costs associated with obtaining its supply of audiobooks.
Typically, the Company pays to the publisher a royalty for each copy it
sells and an advance on its royalty obligations in exchange for the
non-exclusive license. Such licensing agreements generally have one or two-year
terms, permit the Company to sell audiobooks in the Company's inventory at the
expiration of the term during a "sell-off" period and prohibit the Company from
selling an audiobook prior to its release date. Most of the license agreements
permit the Company to arrange for the packaging, printing and cassette
duplication of audiobooks, as opposed to the publisher arranging for the
duplication. The Company, to the extent it is able to do so on favorable terms,
enters into arrangements with the publisher's recording duplicator and packaging
supplier.
In addition to entering into license agreements, the Company purchases
certain audiobooks from publishers' inventories at a substantial discount to the
suggested retail price. The Company from time to time also purchases certain
previously released audiobooks as remainder sales from publishers at a
substantial discount to wholesale prices, often below manufacturing cost.
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Member Acquisition
Since its inception, 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 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
continually analyzes the results of its marketing activities in an effort to
maximize sales, extend membership life cycles, and efficiently target its
marketing efforts to increase response rates to its advertisements and reduce
its per member acquisition costs.
Direct Mail
The Company regularly engages in direct mail campaigns designed to attract
potential Audio Book Club members. The Company obtains lists of names from
various list brokers based on criteria which the Company believes have
characteristics of persons likely to join Audio Book Club, purchase sufficient
quantities of audiobooks to be a profitable source for the Company and become
long-term members. The Company mails member solicitation packages to those
persons it has identified for a specific direct mail campaign. Each member
solicitation package contains a letter from Audio Book Club's editor explaining
the Audio Book Club concept and identifying the advantages of becoming a member,
an easy-to-use enrollment form for the prospective member to complete, a
brochure of audiobook titles and a self-addressed, postage paid reply envelope.
The Company believes that it has identified numerous lists that have performed
well in the past and, as a result, expects that future response rates and member
acquisition costs should improve.
Internet Web Site and Online Computer Service Advertising
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(TM) 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.
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.
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Prior to June 1997, the Company did not actively market its web site and
has only recently conducted limited test marketing of its web site. The Company
has since entered into the following agreements to increase its Internet
presence:
(1) 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.
(2) An agreement with Excite, Inc., (http//www.excite.com) to promote Audio
Book Club through Excite.com. Under the agreement, Audio Book Club will be
the exclusive audiobook clubs available to consumers visiting the Excite
site until at least August 31, 1999.
(3) An agreement with AudioNet, Inc. making the Company the exclusive retailer
of audiobooks on AudioNet's Web site (http://www.audionet.com) through
December 31, 1999.
(4) 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) through February 15, 1999.
(5) A strategic alliance with CitySearch.com (http://www.CitySearch.com) making
the Company the exclusive retailer, through December 31, 1998, of
audiobooks on CitySearch.com which includes the exclusive sponsorship of
the Books Area within the Arts & Entertainment area of every CitySearch.com
domestic market (currently nine markets.)
(6) An agreement with GeoSystems Global Corp., the leader in interactive
mapping. As part of the agreement, the Company will receive a permanent
link, through February 14, 1999 on the MapQuest(R) Web site
(http://www.mapquest.com) toolbar, an optional jump/bridge page featuring
"Road Trip Picks of the Week" and a permanent space in TripQuest, 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.
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Print Advertising
The Company has from time to time placed print advertisements in various
magazines and other forms of print media, including Forbes, The New Yorker,
People, Redbook and The Saturday Evening Post. Such advertisements either
contain a mail-in enrollment form with a listing of 25 to 50 audiobook titles
from which to order or invite the reader to call the Company to join the club.
The Company also advertises in catalogs which feature advertisements for mail
order catalogs. The Company does not pay for the placement of an advertisement
in these catalogs, but pays a fee based on the number of inquiries each such
catalog receives for the Audio Book Club catalog.
The Company intends to continue to test various print media and analyze and
evaluate the results of such advertising to determine the print media which
helps expand its membership base while reducing per member acquisition costs.
Other Advertising Activities
The Company has in the past and will continue in the future to test other
forms of advertising, including radio, television and package insert programs.
Package insert advertising enables the Company to include advertisements or
inserts in mailings or product shipments made by a third party to the third
party's customers to entice them to join Audio Book Club.
Audio Book Club
Members
As of March 19, 1998, Audio Book Club's total member file consisted of
306,798 names. As of December 31, 1997, Audio Book Club's total member file
consisted of 262,032 names. The total member file consists of all members
acquired by the Company, including currently active and inactive members. The
Company seeks to attract a financially sound and responsible membership base.
Accordingly, the Company targets its direct mail and other advertising efforts
to these types of persons. Results of the Company's membership survey indicate
that Audio Book Club members are typically time-constrained individuals who are
unable to read as much as they would like and are concentrated in the 30 to
65-year old age group.
Audio Book Club members can enroll in the club through the mail by
responding to direct mail or print media advertisements, online through the
Company's web site or by calling or faxing the Company. Audio Book Club
typically offers new members four audiobooks at a low introductory price ($.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, which the
Company believes is comparable to and competitive with audiobook retailers.
Audio Book Club encourages its members to purchase audiobooks, in addition
to satisfying their minimum purchase commitment, by offering all members special
discount pricing and other incentives based on the volume of their purchases.
Upon enrollment, the Company sends to the new member a "welcome package"
consisting of a membership guide with information concerning ordering, payment,
returns, cancellation, discounts and the club's bonus point and advantage member
programs; a questionnaire; a welcome letter from the club director; and a
"Member-Get-a-Member" form which enables the member to receive free audiobooks
for soliciting another person to join Audio Book Club.
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The Company engages in list rental programs to maximize the revenue
generation potential of its membership list. As Audio Book Club's membership
base grows, the Company anticipates that its list will become more attractive to
direct marketers as a source of potential customers.
Member Mailings
Audio Book Club members receive approximately 17 member mailings each year,
one mailing approximately every three weeks. Audio Book Club mailings typically
include a 32-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 a negative option reply form and a "Member-Get-a-Member"
form. The Company has recently acquired computer graphics equipment and hired
two computer graphic designers to design the creative aspects of the catalogs
and related materials included in the member mailings. The Company contracts
with print shops to print the catalogs and related materials.
Under the negative option reply system, the member receives the featured
selection unless he or she replies by the date specified on the reply card by
returning the reply card, calling the Company with a reply, faxing a reply to
the Company or replying online via the Company's Internet web site with a
decision not to receive such selection. Members can also use any of such methods
to order additional selections from each catalog.
The Company's Editorial Director selects which titles to feature, add to
and remove from each catalog after consideration of, among other factors, an
evaluation of the author, audiobook content and production quality; the reader;
sales of the author's previous audiobooks and printed books; the author's
reputation; the audiobook's relation to a movie, television show or other book
or audiobook; as well as independent publication reviews. The Company offers a
balance between unabridged and abridged audiobooks cassettes and compact discs
to satisfy differing member preferences. In addition, the Company emphasizes the
timely introduction of new audiobook titles to its catalogs.
The Company also offers a "special order" service which enables members to
call the Company and order virtually any of the approximately 68,000 published
titles in existence, whether or not listed in the Company's member mailings.
The Company intends to continue to test market complimentary products, such
as CD-Roms, videos, audio related products, printed books, audio and electronic
equipment, storage racks and cases and audio music cassettes and compact discs
to determine which products, if any, to add to its product offerings. The
Company from time to time offers certain of such products to Audio Book Club
members by including a promotional insert with its member mailings.
The Company also includes inserts for products or services of non-competing
companies in product shipments to customers and member mailings for which it
receives a fee based on the number of shipments and mailings in which the insert
is included. In addition, the Company is evaluating opportunities to enter into
joint venture arrangements
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with non-competing companies to offer their products or services to Audio Book
Club members.
Customer Service
In order to encourage members to maintain their relationship with Audio
Book Club and to maximize the long-term value of a member, the Company seeks to
provide friendly, efficient, personalized service. The Company's goal is to
remove potential barriers to making a purchase and to make members comfortable
shopping via mail order and on the Internet. Audio Book Club's negative option
system makes it easy for members to receive the featured selection without
having to take any action.
The Company offers fast ordering options, including (i) placing orders
online through the Company's web site, (ii) calling the Company with an order on
its toll-free order hotline and (iii) faxing an order to the Company. Orders are
sent fourth class mail and are typically delivered 10 to 14 days following the
receipt by the Company. For an additional fee, members can receive faster
delivery of an order either by priority delivery, which takes 3 to 5 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. The Company generally allows members
in good standing to order up to $50 of product on credit, which amount may be
increased if the member maintains a good credit history with the Company.
The Company's policy is to accept returns of damaged products and, to
maintain favorable customer relations, the Company generally accepts promptly
made returns of unopened products. The Company monitors each member's account to
determine if the member has made excessive returns. The Company's 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.
Fulfillment, Warehousing and Distribution
In October 1996, the Company entered into an agreement with National
Fulfillment Services ("NFS") pursuant to which NFS provides to the Company order
processing and data processing services. Such services include accepting member
orders, implementation of the Company's credit policies, inventory tracking,
billing, invoicing and generating periodic reports, such as reports of sales
activity, accounts receivable, aging customer profile and marketing
effectiveness. The Company's agreement with NFS expires on October 31, 1998,
unless earlier terminated by either party upon not less than 60 days notice.
In November 1996, the Company entered into an agreement with R.R. Donnelly
& Sons Company ("Donnelly") pursuant to which Donnelly provides to the Company
warehousing and distribution services. The initial term of the Company's
agreement with Donnelly expires on October 31, 1998 and the agreement provides
for automatic three-year renewals, provided that the Company may terminate the
agreement upon notice ranging from 60 days to six months (depending upon the
amount of termination payment) and Donnelly may terminate the agreement upon
notice of not less than six months.
Customer orders are sent directly to NFS where they are processed, and
invoices are generated by NFS and sent directly to Donnelly. Donnelly locates
the ordered
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audiobooks from inventory, packs and ships the order, using the invoice as a
packing list, to the Audio Book Club member.
Competition
The audiobook and mail order club industries are intensely competitive and
highly fragmented. The Company competes with existing audiobook clubs for
prospective members. The Company is currently aware of two other negative option
audiobook clubs.
The Company also competes with all other outlets through which audiobooks
are offered, including bookstores, audiobook stores(which rent or sell only
audiobooks), retail establishments such as convenience stores, video rental
stores and wholesale clubs (e.g. Costco), and mail order companies which offer
audiobooks for rental and sale through catalogs. In addition, the Company also
competes with mail order clubs and catalogs and other direct marketers that
offer products with similar entertainment value as audiobooks, such as music
cassettes and compact discs, printed books and videos, for discretionary
consumer spending.
Intellectual Property
The Company holds two United States service mark registrations and has
applied for several additional service marks relating to slogans and designs
used in its advertisements, member mailings and member solicitation packages and
service marks relating to an animated character used on the Internet. The
Company believes that its service marks have significant value and are important
to the marketing of Audio Book Club.
The Company relies on trade secrets and proprietary know-how, and employs
various methods, to protect its ideas, concepts and membership database. In
addition, the Company typically obtains confidentiality agreements with its
executives officers, employees, list managers and appropriate consultants and
service suppliers.
Employees
As of March 27, 1998, the Company had 14 full-time employees, of whom five
were in management and nine were in operational positions. The Company believes
its employee relations to be good. None of the Company's employees is covered by
a collective bargaining agreement.
Item 2. Properties
The Company shares office space in Boca Raton, Florida with The Herrick
Company, Inc., a company wholly-owned by Norton Herrick, Chairman of the Board,
Chief Executive Officer and beneficially a principal shareholder of the Company,
pursuant to separate leases. The Company leases 1,155 square feet of such space
pursuant to a lease agreement which expires in November 2000. The Company's rent
was $1,167 per month, and increased to $1,307 per month in December 1997. On
July 1, 1997, the Company entered into a new lease for additional office space
in Florida. The Herrick Company, Inc. guaranteed the Company's obligations under
the Company's leases for its Florida office. The Company has the option to
renew the lease for three-year periods on two occasions.
The Company also subleases 1,550 square feet of space in Morristown, New
Jersey at an annual rent of $24,000 pursuant to a sublease agreement dated as of
January 1, 1995 between the Company and H. H. Realty Investors, Inc., a company
wholly-owned by Michael Herrick, Chief Operating Officer, Vice Chairman of the
Board and a director of the Company, Howard Herrick, Executive Vice President
and a director of the Company, and Evan Herrick, a son of Norton Herrick and
brother of Michael and Howard Herrick. In January, 1998, the Company amended the
sublease agreement to
PAGE -13-
<PAGE>
provide for additional space at its New Jersey location for a total of 2,328
usable square feet. Minimum monthly rent under the amended lease is $2,900 per
month through December, 1998. The sublease relating to the New Jersey property
expires in December 1998, and may be extended if the master lease is extended.
H.H. Realty Investors, Inc. leases such property from an independent third
party. The Company believes that its leases are on commercially reasonable
terms.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock has been listed on The American Stock Exchange
("AMEX") under the symbol "KLB" since October 27, 1997.
The high and low sale prices during the period from October 27, 1997 and
December 31, 1997 were $11.125 and $4.00, respectively.
As of February 27, 1998, there were 63 holders of record of the Company's
Common Stock. In addition, the Company believes there are in excess of 300
beneficial owners of its Common Stock whose shares are held in "street name."
Dividend Policy
The Company has never paid any dividends on its Common Stock, and the Board
of Directors of the Company does not intend to declare or pay any dividends on
its Common Stock in the foreseeable future. The Board of Directors currently
intends to retain all available earnings (if any) generated by the Company's
operations for the development and growth of its business. The declaration in
the future of any cash or stock dividends on the Common Stock will be at the
discretion of the Board of Directors and will depend upon a variety of factors,
including earnings, capital requirements and financial position of the Company
and general economic conditions at the time in question. Moreover, the payment
of cash dividends on the Common Stock in the future could be further limited or
prohibited by the terms of financing agreements that may be entered into by the
Company (e.g., a bank line of credit or an agreement relating to the issuance of
other debt securities of the Company) or by the terms of any Preferred Stock
that may be issued and then outstanding.
Sales of 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. Moreover, in September 1997, the Company declared a
16,282 for 1 Common
PAGE -14-
<PAGE>
Stock split which was effected in October 1997. The shares issued as a result of
the split were issued pursuant to an exemption from registration under the
Securities Act of 1933 (the "Act") by virtue of Section 2(3) of the Act.
Immediately prior to the consummation of the Company's 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. The shares issued upon the conversion of the indebtedness
were issued pursuant to an exemption under Section 4(2) of the Act.
On October 27, 1997, the Company closed its initial public offering of
2,300,000 shares of Common Stock, no par value, at a price of $10.00 per share
of Common Stock. These shares had been registered on the Company's Registration
Statement on Form SB-2 (no. 333-30665). The gross proceeds of the offering prior
to any expenses, discounts and commissions were $23,000,000. The net proceeds to
the Company were $19,765,663.
In connection with the initial public offering, the underwriters were
granted an over-allotment option for an additional 345,000 shares of Common
Stock. The underwriters 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.
At closing, the Company used a portion of the proceeds of its initial
public offering to repay in full the entire outstanding principal balance of
$9,000,000 plus accrued interest thereon of $56,167 the Company had borrowed
from a bank. Since the date of the closing through December 31, 1997, the
Company used approximately $1,900,000 of the remaining net proceeds of the
offering for membership recruitment advertising. The Company has invested
$5,000,000 in a bank certificate of deposit bearing interest at 5.5% maturing on
May 2, 1998. The remaining funds are being used to implement the Company's
business plan and fund working capital requirements. The Company anticipates
using the net proceeds to fund additional membership recruitment advertising,
Internet web site marketing and development and for working capital and general
corporate purposes.
PAGE -15-
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Certain statements contained in this Item 6 and elsewhere in this Form
10-KSB constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve a number of known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such statements. Such factors include, but are not
limited to, the Company's limited operating history, history of losses,
significant capital requirements, ability to successfully implement a strategy
of continued growth, dependence on third-party providers and suppliers,
competition and other risks described n the Company's Registration Statement on
Form SB-2. The words "believe", "expect", "anticipate", "intend", and "plan" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof.
On October 27, 1997, the Company consummated its initial public offering of
Common Stock, which, after deducting offering expenses of $3,234,337, resulted
in net proceeds of $19,765,663. The Company immediately used a portion of the
proceeds to repay loans from a 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 audiobooks through Audio Book Club, a
membership club which markets and sells audiobooks 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 audiobook selections and
sample audio clips of many of the site's selections.
As of December 31, 1997, the Company's total member file consisted of
262,032 names, compared to 154,653 names as of December 31, 1996. The Company's
total member file has increased by approximately 307% from January 1, 1996 to
December 31, 1997. The total member file consists of all members acquired by the
Company, including active and inactive members.
The Company recognizes sales revenues (gross sales) upon shipment of
products, at which time customers are billed for the products ordered. Revenues
consist primarily
PAGE -16-
<PAGE>
of catalog sales of audiobooks to members at regular club price plus shipping
and handling less applicable discounts, and to a lesser extent, revenues from
new member enrollments. New member enrollment revenues represent the low
introductory price (typically two to four audiobooks for $.99 or less) at which
the Company offers the introductory audiobooks as an enticement for new members
to join Audio Book Club plus shipping and handling.
Accounts receivable are recorded net of allowances for sales returns and
doubtful accounts. The Company records returns, discounts and allowances each
period in an amount equal to actual returns plus an estimated allowance for
additional returns for sales made during such period. The allowances for
doubtful accounts and future sales returns are based upon historical experience
and an evaluation of current trends. The Company's allowances for sales returns
and doubtful accounts were $1,281,849 and $167,596, respectively, as of December
31, 1997.
Cost of sales includes the cost of audiobooks and product royalty,
shipping, mailing and fulfillment costs. The cost of sales of the introductory
audiobooks exceeds new member enrollment revenues from such introductory offer.
The Company's gross profit margin has increased as catalog sales of audiobooks
to members account for a greater percentage of sales. The Company's gross profit
percentage has also increased due to new fulfillment arrangements at lower costs
and increased licensing of products which reduces overall production costs.
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
December 31, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
The following table sets forth certain historical financial data for the
Company as a percentage of net sales:
Year Ended December 31
----------------------
1996 1997
---- ----
Net sales 100% 100%
=== ===
Cost of sales 77 55
Gross profit 23 45
Advertising and promotion expense (for
acquisition and retention of members) 98 68
General and administrative expense 35 20
Interest expense, net 4 4
Net loss (115) (49)
PAGE -17-
<PAGE>
Gross Sales for the year ended December 31, 1997 were $15,119,093, an
increase of $6,775,789, or 81%, as compared to $8,343,304 for the year ended
December 31, 1996. Such increase in gross sales was primarily attributable to
increased sales of audiobooks resulting from expansion of Audio Book Club's
membership base and increased purchases from members.
Returns, discounts and allowances for the year ended December 31, 1997 were
$5,040,939, or 33% of gross sales, as compared to $2,743,221, or 33% of gross
sales for the year ended December 31, 1996. The increase in returns, discounts
and allowances was primarily the result of an increase in sales of audiobooks.
Returns for the year ended December 31, 1997 were negatively impacted by
two marketing decisions. 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. The Company does not
currently anticipate offering dual featured selections in the future.
Returns were also negatively affected by the timing of the Company's member
mailings. 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. The returns for
mailings in these concentrated time frames exceed the Company's normal return
rates. The Company had a number of concentrated mailings in the fourth quarter
of 1997. The Company has implemented a change to its member mailing schedule for
1998 whereby member mailings will be sent evenly every three weeks.
Net sales for the year ended December 31, 1997 were $10,078,154, an
increase of $4,478,071, or 80%, as compared to $5,600,083 for the year ended
December 31, 1996. The increase in net sales was primarily attributable to
expansion of Audio Book Club's membership base and increased buying by members.
Cost of sales for the year ended December 31, 1997 were $5,495,358, an
increase of $1,168,014, or 27%, as compared to $4,327,344 for the year ended
December 31, 1996, primarily as a result of increased net sales. Cost of sales
includes the cost of audiobooks and product royalty, shipping, mailing and
fulfillment costs.
Cost of sales as a percentage of net sales for the year ended December 31,
1997 declined from 78%, in the prior comparable period, to 55%, in the current
period. Conversely, gross profit increased $3,310,0570 or 260% to $4,582,796 for
the year ended December 31, 1997, from $1,272,739 in the prior comparable
period. Gross
PAGE -18-
<PAGE>
profit as a percentage of net sales increased to 45% for the year ended December
31, 1997 from 23% for the year ended December 31, 1996. 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
audiobooks 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) increased $1,373,489 or 25% to $6,843,250 for the year ended December
31, 1997 as compared to $5,469,761 in the prior comparable period. Included in
the advertising expense in 1997 is approximately $2,000,000 relating to a direct
mail campaign, intended to attract new members, which was mailed to prospective
members the last week of December 1997 with an anticipated delivery date of
early January 1998. Total direct mail expenses for the solicitation of new
members for the year ended December 31, 1997 was approximately $5,743,000, an
increase of approximately $1,363,000 from the prior year. Catalogs and other
advertising costs to Audio Book Club members increased approximately $10,000, on
a much higher number of pieces mailed. This increase was controlled because as
the number of pieces in each mailing increases, the cost of each piece declines.
General and administrative expenses for the year ended December 31, 1997
were $1,990,051, or 20% of net sales, as compared to $1,948,821, or 35% of net
sales for the year ended December 31, 1996. General and administrative expenses
increased $41,230 or 2% for the year ended December 31, 1997 as compared to the
year ended December 31, 1996. During 1996, the Company established a 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 commensurate
with its increased level of operations. Accordingly, general and administrative
expenses declined significantly as a percentage of net sales.
Professional fees for the year ended December 31, 1997 were $226,504, as
compared to $99,093 for the year ended December 31, 1996. The increase in
professional fees is principally attributable to increased legal, accounting and
other professional fees associated with the reporting and compliance
requirements of a public company.
Depreciation and amortization expense for the year ended December 31, 1997
was $8,334 as compared to $5,193 for the year ended December 31, 1996. The
increase in depreciation expense resulted from the Company's investment in
computer equipment during the quarter ended December 31, 1997 which allows the
Company to design and create its catalogs and mailings internally which the
Company believes should result in substantial savings.
Net interest expense for the year ended December 31, 1997 increased
$224,368 to $435,508 from $211,140 in the prior comparable period. Included in
net interest expense is interest income of $105,631 for the year ended December
31, 1997 an
PAGE -19-
<PAGE>
increase of $97,993 from the year ended December 31, 1996. Interest income
increased due to the investment of the proceeds from the Company's initial
public offering. On September 15, 1997, the Company repaid the $800,000 of
outstanding notes payable plus accrued interest in the amount of $10,082 to the
Company's Chief Operating Officer and Executive Vice President. The Company used
a portion of the proceeds of the initial public offering to repay the loans from
a major bank in the aggregate principal amount of $9,000,000 plus accrued
interest thereon of $56,167. Accordingly, as of December 31, 1997, the Company
has no outstanding interest bearing indebtedness.
Primarily due to increased 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 year ended
December 31, 1997, declined by 24% or $1,540,418, from $6,461,269 in the prior
comparable period to $4,920,851 for the year ended December 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 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 received net proceeds of $19,765,663 from
its initial public offering of Common Stock. The Company immediately used a
portion of the proceeds to repay loans from a bank in the aggregate principal
amount of $9,000,000 plus accrued interest 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 year ended December 31, 1997, the Company's cash increased
$3,562,197 as the Company used net cash of $5,506,131 and $5,192,335 for
operating and investing activities, respectively, and had cash provided by
financing activities of $14,260,663.
For the year ended December 31, 1997, cash used in operating activities
consisted of, in addition to the net loss, increases in receivables, inventory,
current prepaid expenses, royalty advances and prepaid expenses non-current of
$1,187,286, $863,714, $111,896, $32,078 and $48,219, respectively. The net cash
used in operations was partially reduced by a decrease in amounts due from
related parties of $20,000 and an increase in accounts payable and accrued
expenses of $1,375,227.
The increase in accounts receivable during the year ended December 31, 1997
is principally due to significantly higher sales. The increase in inventory is
principally due to higher sales and an expanded number of titles.
PAGE -20-
<PAGE>
Cash used in investing activities during 1997 was principally for the
purchase of a short term investment to be held to maturity consisting of bank
certificates of deposit in the amount of $5,000,000 bearing interest at 5.5%
maturing on May 2, 1998 and of $100,000 bearing interest at 5.9% maturing on May
6, 1998. The Company also purchased fixed assets, principally for computer
equipment in the amount of $48,636. In the fourth quarter of 1997, the Company
invested in computer equipment which allows the Company to design and create its
catalogs and mailings internally which should result in substantial annual
savings.
The Company received cash proceeds from its initial public offering after
payment of all associated offering costs of $19,765,663.
During 1997, the Company entered into three-year employment agreements with
Michael Herrick and Howard Herrick, two-year employment agreements with Norton
Herrick and John Levy and a one-year employment agreement with Jesse Faber. The
Company's aggregate commitments under such employment agreements are
approximately $646,000, $472,000 and $201,000 during 1998, 1999 and 2000,
respectively.
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 December 31, 1997.
New Accounting Standard
In March 1997, the Financial Accounting Standards Board issued a Statement
of Financial Accounting Standards ("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 Accordingly, effective
December 31, 1997, the net loss per share information has been calculated and
presented in accordance the provisions of SFAS No. 128 and as further prescribed
by the relevant Staff Accounting Bulletins of the Securities and Exchange
Commission. In accordance with the provisions of SFAS No. 128, net loss per
share for the year ended December 31, 1996 has also been restated.
PAGE -21-
<PAGE>
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 audiobook releases, the timing of
member catalog mailings 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.
Item 7. Financial Statements
The response to this item is submitted as a separate section of this report
commencing on page F-1 following Item 13.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable
PAGE -22-
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The directors and executive officers of the Company are as follows:
Name Age Position
Norton Herrick 59 Chief Executive Officer, Chairman of the Board and
Director
Michael Herrick 31 Chief Operating Officer, Vice Chairman of the Board and
Director
Jesse Faber 42 President and Director
Howard Herrick 33 Executive Vice President and Director
John F. Levy 42 Executive Vice President and Chief Financial Officer
Roy Abrams 54 Director
Carl Wolf 53 Director
Norton Herrick
Chief Executive Officer, Chairman of the Board and Director. Director of
the Company since its inception. President of the Company from its inception
until January 1996. Mr. Herrick has been a private investor for over 30 years
and is currently Chairman and Chief Executive Officer of The Herrick Company,
Inc., a private investment firm he founded. Through his wholly-owned affiliates,
Mr. Herrick has owned and managed income producing properties, including office
buildings, shopping centers and multi-family apartment complexes, and has
completed transactions with respect to approximately 250 income producing
properties valued at an aggregate of approximately $2 billion. Mr. Herrick is
involved in the management of numerous entities he formed to acquire, finance,
manage and lease office, industrial and retail properties; and to acquire,
operate, manage, redevelop and sell residential rental properties. 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.
Term of Office: Norton Herrick will stand for re-election at the 1998
annual meeting of shareholders.
PAGE -23-
<PAGE>
Michael Herrick
Chief Operating Officer, Vice Chairman of the Board and Director. Director
of the Company since its inception, Michael Herrick co-founded the Company, has
been Vice Chairman of the Board of the Company since January 1996, Chief
Operating Officer of the Company since January 1997 and director of the Company
since its inception. Mr. Herrick has held various other offices with the Company
since its 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 limited partnership is a principal shareholder of The
Walking Company, a nationwide retailer of comfort and walking footwear and
related apparel and accessories. Since May 1989, Mr. Herrick has been employed
by The Herrick Company, Inc., and is currently one of its Vice Presidents. 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.
Term of Office: Michael Herrick will stand for re-election at the 1999
annual meeting of shareholders
Howard Herrick
Executive Vice President and Director. Howard Herrick has been a director
of the Company since its inception. Howard Herrick co-founded the Company and
has been Executive Vice President, Editorial Director and a director of the
Company since its inception. Since August 1993, Howard Herrick has been Vice
President of the corporate general partner of a limited partnership, which
limited partnership 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.
Term of Office: Howard Herrick will stand for re-election at the 2000
annual meeting of shareholders
Jesse Faber
President and Director. Director since October 27, 1997. Jesse Faber has
been President of the Company since October 1996 and a director since October
1997. 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.
From 1984 to 1989, Mr. Faber was Management Supervisor of Grey Direct, a direct
response advertising agency.
Term of Office: Jesse Faber will stand for re-election at the 1998 annual
meeting of shareholders.
PAGE -24-
<PAGE>
John Levy
John Levy has been Executive Vice-President and Chief Financial Officer of
the Company since January 1, 1998, and an employee of the Company since November
1997. Prior to joining the Company, Mr. Levy was Senior Vice President of
Tamarix Capital Corporation and had previously served as Chief Financial Officer
of both public and private entertainment and consumer goods companies. During
1994, Mr. Levy served as Chief Financial Officer of the Continuum 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 the 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
Thorton.
Roy Abrams
Director Since October 27, 1997. Since April 1993 and from 1986 through
March 1990, Mr. Abrams has owned and operated Abrams Direct Marketing, a
marketing consulting firm. From April 1990 to April 1993, Mr. Abrams was Vice
President of New Business Development of Getting to Know You, Inc., a new
homeowner welcoming service. From 1981 through 1985, Mr. Abrams was President of
Margrace Corporation, a publicly-held direct marketing company. From 1980
through 1981, Mr. Abrams was a director of mail order marketing of Hearst
Corporation, a publishing company. From 1976 to 1979, Mr. Abrams was employed by
Columbia House, a negative option and continuity direct marketing company, most
recently as Vice President, Merchandise and Continuity Marketing. From 1975 to
1976, Mr. Abrams was director of Mail Order Merchandise Marketing for American
Express Company.
Term of Office: Roy Abrams will stand for re-election at the 1999 annual
meeting of shareholders.
Carl Wolf
Director. Since March 1998. Carl T. Wolf is the managing partner of the
Lakota Investment Group and co-Chairman of the Board and Director of Saratoga
Beverage Group, Inc. Mr. Wolf was formerly Chairman of the Board, President and
Chief Executive Officer of Alpine Lace Brands, Inc. ("Alpine Lace"). 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. Alpine Lace was sold to Land O' Lakes, Inc. in December 1997.
Term of Office: Carl Wolf will stand for re-election at the 2000 annual
meeting of shareholders.
The Company has agreed that until October 22, 2000, if so requested by the
representative of the underwriters of its initial public offering, to use its
best efforts to nominate and elect a designee of the representative, (reasonably
acceptable to the Company), to serve on the Company's Board of Directors. The
representative has not yet exercised its right to designate such a person.
PAGE -25-
<PAGE>
Item 10. Executive Compensation
The following table discloses for the fiscal years ended December 31, 1996
and 1997, compensation paid to Norton Herrick, the Company's Chief Executive
Officer and each executive officer of the Company who received salary and bonus
in excess of $100,000 during the fiscal year ended December 31, 1997 (the "Named
Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
------
Securities Underlying
Name and Principal Position Year Salary Bonus Options/SAR's (#)
--------------------------- ---- ------ ----- -----------------
<S> <C> <C> <C> <C>
Norton Herrick: 1996 $ 0- -0- --
Chief Executive Officer 1997 19,354 -0- --
Jesse Faber 1996 15,062 25,000 --
President 1997 128,417 40,000 50,000
Howard Herrick 1996 102,000 -0- --
Executive Vice President 1997 115,129 -0- --
</TABLE>
The following table discloses options granted during the fiscal year ended
December 31, 1997 to the Named Executives:
OPTION/SAR GRANTS IN FISCAL YEAR ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
Number of
Shares Underlying % of Total Options Granted to Exercise Price
Name Options Granted Employees in Fiscal Year ($/share) Expiration Date
--------- --------------- ------------------------ --------- ---------------
<S> <C> <C> <C>
Jesse Faber 50,000 100.0% $11.00 Five Years from
Vesting(1)
</TABLE>
- ----------
(1) On September 17, 1997, the Company granted to Mr. Faber options to purchase
50,000 shares of Common Stock at an exercise price equal to 110% of the
initial public offering price of the Common Stock which was in excess of
fair market value on the date of grant. Such options shall vest as to
one-fifth of the shares covered thereby annually over a five-year period
commencing on October 31, 1998, provided, however, that such options shall
terminate and be canceled if Mr. Faber is no longer employed by the Company
prior to the date on which such options vest. Such options shall be
exercisable for a period of five years commencing immediately upon the
applicable vesting period, provided, however, if Mr. Faber is no longer
employed by the Company, such options shall expire on the earlier of the
date Mr. Faber is no longer employed by the Company (or up to one year
thereafter under certain circumstances) or five years following the date on
which such options vest. The per share weighted-average fair value of stock
options granted during the year ended December 31, 1997 was $4.55 on the
date of the grant using the Black-Scholes option-pricing model with the
following assumptions for the year ended December 31, 1997: risk free rate
of return 5.56%; option life five years from date of vesting; and no
dividend yield.
PAGE -26-
<PAGE>
The following table sets forth information concerning the number of options
owned by the Named Executives and the value of any in-the-money unexercised
options as of December 31, 1997. No options were exercised by the Named
Executives during fiscal 1997:
Aggregated Option Exercises
And Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options at December Money Options at December 31,
31, 1997 1997(1)
----------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jesse Faber 0 50,000 $-0- $-0-
</TABLE>
- ----------
(1) Year-end values for unexercised in-the-money options represent the positive
spread 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.
Stock Option Plan
In June 1997, the Company's shareholders approved a stock option plan (the
"Option Plan") pursuant to which 750,000 shares of Common Stock have been
reserved for issuance upon the exercise of options designated as either (i)
options intended to constitute incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended (the "Code") or (ii) nonqualified
options. ISOs may be granted under the Option Plan to officers and employees of
the Company. Non-qualified options may be granted to consultants, directors
(whether or not they are employees), employees or officers of the Company.
The purpose of the Option Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and other persons instrumental
to the success of the Company. The Option Plan is intended to qualify under Rule
16b-3 under the Securities Exchange Act of 1934. The Board of Directors, within
the limitations of the Option Plan, determines the persons to whom options will
be granted, the number of shares to be covered by each option, whether the
options granted are intended to be ISOs, the duration and rate of exercise of
each option, the option purchase price per share and the manner of exercise, and
the time, manner and form of payment upon exercise of an option.
ISOs granted under the Option Plan may not be granted at a price less than
the fair market value of the Common Stock on the date of grant (or 110% of fair
market value in the case of persons holding 10% or more of the voting stock of
the Company). The aggregate fair market value of shares for which ISOs granted
to any employee are exercisable for the first time by such employee during any
calendar year (under all stock option plans of the Company and any related
corporation) may not exceed $100,000. Options granted under the Option Plan will
expire not more than ten years from the date of grant (five years in the case of
ISOs granted to persons holding 10% or more of the voting stock of the Company).
All options granted under
PAGE -27-
<PAGE>
the Option Plan are not transferable during an optionee's lifetime (unless
otherwise provided in the option agreement) but are transferable at death by
will or by the laws of descent and distribution. In general, upon termination of
employment of an optionee, all options granted to such person which are not
exercisable on the date of such termination immediately terminate, and any
options that are exercisable terminate 90 days following termination of
employment.
Compensation of Directors
In his capacity as a director, Mr. Wolf has been granted options to
purchase 22,500 shares of the Company's common stock at $5.00 per share (fair
market value at the date of grant) 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. In addition, Mr. Wolf will receive annual
compensation of $5,000, payable on the anniversary of his joining the Company's
Board of Directors. Moreover, in March 1998 the Company sold Mr. Wolf an option
to purchase 50,000 shares of Common Stock and, the right, under certain
circumstances, to purchase an additional option covering 25,000 shares of Common
Stock. See "Item 12-Certain Relationships and Related Transactions".
Employment Agreements
The Company has entered into a two-year employment agreement, effective as
of October 22, 1997, with Norton Herrick which provides for an annual base
compensation of $100,000 and such increases and bonuses as the Board of
Directors may from time to time determine, based on criteria that it deems
appropriate at such time but which it has not yet been established. The
employment agreement does not require that Mr. Herrick devote any fixed amount
of time to the business and activities of the Company. The employment agreement
contains a provision prohibiting Mr. Herrick from, on his own behalf or on
behalf of any other person, persons, firms, partnership, corporation or company,
engaging or participating in any activities which are in direct conflict with
the interests of the Company; and from soliciting or attempting to solicit the
business or patronage of any person, firm, corporation, company or partnership
which had previously been a customer of the Company, for the purpose of selling
products and services similar to those provided by the Company during the term
of the employment agreement and for a period of two years thereafter. There can
be no assurance, however, that a court will not enforce such provision or only
partially enforce such provision. The employment agreement also provides that if
Mr. Herrick's employment is terminated under certain circumstances, including as
a result of a change in control, Mr. Herrick will be entitled to receive
severance pay equal to the greater of $200,000 or two times the total
compensation received by Mr. Herrick from the Company during the twelve months
prior to the date of termination.
The Company has entered into a three-year employment agreement, effective
October 22, 1997, with Michael Herrick which provides for an annual base
compensation of $125,000 and such increases and bonuses as the Board of
Directors may from time to time determine, based on criteria that it deems
appropriate at such time but which it has not yet been established. The
employment agreement requires Mr. Herrick to devote substantially all of his
business time to the Company's business and affairs. The employment agreement
contains a provision prohibiting Mr. Herrick from, on his own behalf or on
behalf of any other person, persons, firms, partnership, corporation or company,
engaging or participating in any activities which are in direct conflict with
the interests of the Company; and from soliciting or attempting to solicit the
business or patronage of any person, firm, corporation, company or partnership
which had previously been a customer of the Company, for the purpose of selling
products and services
PAGE -28-
<PAGE>
similar to those provided by the Company during the term of the employment
agreement and for a period of two years thereafter. There can be no assurance,
however, that a court will not enforce such provision or only partially enforce
such provision. The employment agreement also provides that if Mr. Herrick's
employment is terminated under certain circumstances, including as a result of a
change in control, Mr. Herrick will be entitled to receive severance pay equal
to the greater of $375,000 or three times the total compensation received by Mr.
Herrick from the Company during the twelve months prior to the date of
termination.
In September 1997, the Company entered into a one-year employment agreement
with Mr. Faber which provides for his employment through October 31, 1998, at an
annual base compensation of $140,000 and a bonus of $35,000, provided that he is
employed by the Company on October 31, 1998. On September 17, 1997, Company
granted to Mr. Faber options to purchase 50,000 shares of Common Stock at an
exercise price equal to 110% of the initial public offering price of the Common
Stock.
The Company has entered into a three-year employment agreement effective as
of October 22, 1997 with Howard Herrick which provides for an annual base
compensation of $125,000 and such increases and bonuses as the Board of
Directors may from time to time determine, based on criteria that it deems
appropriate at such time but which it has not yet been established. The
employment agreement requires Mr. Herrick to devote substantially all of his
business time to the Company's business and affairs. The employment agreement
contains a provision prohibiting Mr. Herrick from, on his own behalf or on
behalf of any other person, persons, firms, partnership, corporation or company,
engaging or participating in any activities which are in direct conflict with
the interests of the Company; and from soliciting or attempting to solicit the
business or patronage of any person, firm, corporation, company or partnership
which had previously been a customer of the Company, for the purpose of selling
products and services similar to those provided by the Company during the term
of the employment agreement and for a period of two years thereafter. There can
be no assurance, however, that a court will not enforce such provision or only
partially enforce such provision. The employment agreement also provides that if
Mr. Herrick's employment is terminated under certain circumstances, including as
a result of a change in control, Mr. Herrick will be entitled to receive
severance pay equal to the greater of $375,000 or three times the total
compensation received by the executive from the Company during the twelve months
prior to the date of termination.
In November 1997, the Company entered into a two year employment agreement
with John Levy which provides for an annual base compensation of $135,000, in
the first year of the agreement and an annual base compensation of $150,000 in
the second year of the agreement. Mr. Levy's agreement also provides for a
minimum bonus of $7,500 the first year of the agreement and a minimum bonus of
$12,500, the second year of the agreement, provided Mr. Levy is employed by the
Company on each such date.. As of January 1, 1998, the Company granted to Mr.
Levy options to purchase 30,000 shares of Common Stock at an exercise price of
$11.00 per share (which exceeded fair market value on the date of grant). The
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 the Company on the vesting dates.
However, in the event of a change in control, all options shall immediately vest
and become exercisable.
PAGE -29-
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of March 27, 1998,
based on information obtained from the persons named below, with respect to the
beneficial ownership of shares of Common Stock by (i) each person known by the
Company to be the beneficial owner of more than five percent of the outstanding
shares of Common Stock; (ii) each of the Company's executive officers, including
the Named Executives; (iii) each of the Company's directors; and (iv) all
directors and executive officers as a group:
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percentage of Beneficial
Beneficial Owners (1) Beneficially Owned (2) Ownership
--------------------- ---------------------- ----------
<S> <C> <C>
Norton Herrick 3,691,100(3) 60.0%
Howard Herrick 3,691,100(4) 60.0%
Michael Herrick 488,460(5) 7.9%
Jesse Faber -0-(6) -0-
John Levy -0-(7) -0-
Roy Abrams -0- -0-
Carl Wolf 57,500(8) *
All directors and executive 3,748,6000(3)(4)(5)(6)(7)(8) 60.4%
officers as a group
(7 persons)
</TABLE>
- ----------
* Less than one (1%) percent.
(1) The address for each named individual or group is in care of Audio Book
Club, Inc., 2295 Corporate Boulevard, Suite 222, Boca Raton, Florida,
33431.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days of March 27, 1998 upon the exercise of options, warrants or
convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options, warrants or convertible securities
that are held by such person (but not those held by any other person) and
which are exercisable within 60 days of March 27, 1998 have been exercised
and converted.
(3) Represents (i) 2,714,180 shares held by N. Herrick Irrevocable ABC Trust of
which Norton Herrick is the sole beneficiary and Howard Herrick is the sole
trustee (the "N. Herrick Trust"), (ii) 488,460 shares of Common Stock held
by Howard Herrick and (iii) 488,460 shares of Common Stock held by M.E.
Herrick Irrevocable Trust, of which Michael Herrick is the sole beneficiary
and Howard Herrick is the sole trustee (the "M.E.H. Trust"). The N. Herrick
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 on his own behalf and
on behalf of the M.E.H. Trust.
(4) Includes (i) the shares of Common Stock referred to in footnote 3(i) above
and footnote (5) below. Does not include options to purchase 100,000 shares
of common stock granted February 12, 1998 at an exercise price of $4.75
(market value at date of grant). Such shares to vest as to one-half of the
shares covered thereby on
PAGE -30-
<PAGE>
February 9, 1999 and one-half on February 9, 2000 provided, however, that
such options shall terminate and be canceled if the officer is no longer
employed by the Company prior to the date on which such options vest. Such
options shall be exercisable for a period of five years commencing
immediately upon vesting, provided, however, if the officer is no longer
employed by the Company, such options shall expire on the earlier of 90
days following the date the officer is no longer employed by the Company or
five years following the date on which such options vest.
(5) Represents shares held by the M.E.H. Trust. The M.E.H. Trust agreement
provides that Howard Herrick shall have sole voting and dispositive power
over the shares held by the M.E.H. Trust and Howard Herrick has granted to
Norton Herrick sole dispositive power over the shares held by the M.E.H.
Trust. Does not include options to purchase 100,000 shares of common stock
granted February 12, 1998 at en exercise price of $4.75 (market value at
date of grant). Such shares to vest as to one-half of the shares covered
thereby on February 9, 1999 and one-half on February 9, 2000 provided,
however, that such options shall terminate and be canceled if the officer
is no longer employed by the Company prior to the date on which such
options vest. Such options shall be exercisable for a period of five years
commencing immediately upon vesting, provided, however, if the officer is
no longer employed by the Company, such options shall expire on the earlier
of 90 days following the date the officer is no longer employed by the
Company or five years following the date on which such options vest.
(6) Does not include options to purchase 50,000 shares of Common Stock which
vest at various times commencing October 31, 1998.
(7) Does not include options to purchase 30,000 shares of Common Stock which
vest at various times commencing January 1, 1999.
(8) Represents shares issuable upon exercise of options. Does not include
options to purchase 15,000 shares of Common Stock which vest at various
times commencing March 18, 1999.
Item 12. Certain Relationships and Related Transactions
The Company has entered into a sublease agreement with H.H. Realty
Investors, Inc., a company wholly-owned by Michael Herrick, Chief Operating
Officer, Vice Chairman of the Board and a director of the Company, Howard
Herrick, Executive Vice President and a director of the Company, and Evan
Herrick, a son of Norton Herrick and brother of Michael Herrick and Howard
Herrick. Pursuant to the agreement, the Company subleased 1,550 square feet of
space in Morristown, New Jersey at an annual rent of $24,000. H.H. Realty
Investors, Inc. leases such property from an independent third party. In January
1998, the Company amended the 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.
On July 1, 1997, the Company entered into a new lease for office space in
Florida. The Herrick Company, Inc., a company wholly-owned by Norton Herrick,
Chairman of the Board, Chief Executive Officer and a principal shareholder of
the Company, guaranteed the Company's obligations under the Company's lease for
its Florida office.
PAGE -31-
<PAGE>
On November 17, 1995, Norton Herrick entered into a loan agreement pursuant
to which Norton Herrick agreed to loan the Company up to $8,000,000, including
the $5,380,000 aggregate amount of loans made to the Company by Norton Herrick
as of such date. The loan agreement was subsequently amended to increase
permitted borrowings by the Company of up to $13,000,000 and Norton Herrick
subsequently assigned his rights under the loan agreement to N. Herrick
Irrevocable ABC Trust, of which Norton Herrick is the sole beneficiary and
Howard Herrick is the sole trustee (the "N. Herrick Trust"). Borrowings under
the loan agreement were non-interest bearing and were converted into equity upon
the consummation of the Initial Public Offering. The loan agreement between the
Company and Norton Herrick was terminated on October 22, 1997.
In May 1997, the Company used the proceeds from a $6,000,000 loan from Bank
of America National Trust and Savings Association (the "Bank") to repay a
portion of the outstanding indebtedness under the loan agreement with the N.
Herrick Trust. On August 2, 1997, the Company borrowed an additional $2,250,000
from the Bank to fund working capital. The loan was to be due October 31, 1998,
and had an interest rate which was 1/2% under the Bank's reference rate and was
payable monthly.
On September 16, 1997, the Company borrowed an additional $750,000 from the
Bank to fund working capital. The loan was also to be due October 31, 1998, and
had an interest rate which was 1/2% under the bank's reference rate and was
payable monthly.
The Common Stock of the Company owned by Norton Herrick, the Chairman,
Chief Executive Officer and founder of the Company, was pledged as security for
the loans. Additionally, in the event the Company failed to repay the loans at
maturity, the personal guarantee of the Company's Chairman, Chief Executive
Officer and founder would have become effective.
The Company used a portion of the proceeds of its initial public offering
to repay the loans from the Bank in the aggregate principal amount of $9,000,000
plus accrued interest thereon of $56,167.
Immediately prior to the consummation of its initial public offering, the
N. Herrick Trust converted the outstanding $5,975,200 of indebtedness owed to it
by the Company under the loan agreement into 597,520 shares of Common Stock at a
price per share equal to the initial offering price of the Common Stock.
On May 12, 1997, Howard Herrick entered into a consolidation and
restatement of loan agreements with the Company relating to the aggregate
$400,000 loaned to the Company by Howard Herrick (consisting of a $50,000 loan
made in June 1994 and a $350,000 loan made in February 1997). Such borrowings,
did not bear interest through July 31, 1997 and, thereafter, bore interest at an
annual rate equal to the greater of 10% or the prime rate charged by Citibank,
N.A. of New York ("Citibank"). This loan, together with accrued interest, was
repaid in September 1997.
On May 12, 1997, the M.E. Herrick Irrevocable Trust (the "M.E.H. Trust"),
of which Michael Herrick is the sole beneficiary and Howard Herrick is the sole
trustee, entered into a loan agreement with the Company relating to the
aggregate $400,000 loaned to the Company by the M.E.H. Trust (consisting of a
$50,000 loan made in June 1994 and a $350,000 loan made in May 1997). Such
borrowings did not bear interest through July 31, 1997 and, thereafter, bore
interest at an annual rate equal to the greater of 10% or the prime rate charged
by Citibank. This loan, together with accrued interest, was repaid in September
1997.
PAGE -32-
<PAGE>
Companies wholly-owned by Norton Herrick have in the past provided certain
accounting, administrative and general office services to, and obtained
insurance coverage for, the Company at cost since the Company's inception, and
the Company paid to such entities for such services, in the aggregate, $38,928
and $60,000, during the years ended December 31, 1996 and 1997, respectively.
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.
During 1997, Abrams Direct Marketing ("ADM"), a company wholly-owned by Roy
Abrams, a director designee of the Company, provided independent marketing
consulting services to the Company and has been paid approximately $25,500 by
the Company for such services. In June 1997, the Company entered into a
consulting agreement with ADM pursuant to which ADM assists the Company in
connection with marketing activities, including designing, implementing and
reviewing the results of direct marketing campaigns and selecting direct
marketing lists, on an as-needed basis at the rate of $250 per hour.
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. The Company
and Wolf also agreed that, if Wolf continues to serve as an active and
participating member of the Company's Board of 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 of Additional Wolf Option and shall have an exercise
price of $5.00 per share.
The Company's policy with respect to transactions between the Company and
its officers, directors and 5% or greater shareholders is that each transaction
will be on terms no less favorable than could be obtained from independent third
parties. Notwithstanding the foregoing, companies affiliated with Norton Herrick
may continue to provide certain accounting, administrative and general office
services to, and obtain insurance coverage for, the Company at cost.
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
*3.1 Articles of Incorporation, as amended, of the Company.
*3.2 Bylaws, as amended, of the Company.
*10.1 Agreement between the Company and R.R. Donnelly & Sons Company,
dated as of January 23, 1997.
*10.2 Master Agreement for National Fulfillment Services, Inc. dated as
of October 25, 1996.
*10.3 Loan Agreement between the Company and M. E. Herrick Irrevocable
Trust, dated May 12. 1997.
*10.4 Consolidation and Restatement of Loan Agreements between the
Company and Howard Herrick, dated May 12, 1997.
*10.5 Employment Agreement between the Company and Norton Herrick.
PAGE -33-
<PAGE>
*10.6 Employment Agreement between the Company and Michael Herrick.
*10.7 Employment Agreement between the Company and Howard Herrick.
*10.8 Employment Agreement between the Company and Jesse Faber, dated
June 6, 1997.
*10.9 1997 Stock Option Plan
*10.10 Marketing Consulting Agreement between the Company and Abrams
Direct marketing dated June 6, 1997.
10.11 Employment Agreement dated November 10, 1997 between the Company
and John Levy.
*10.12 Underwriting Agreement dated October 27, 1997 between the Company,
Marc Sinensky and L.H. Friend, Weinress, Frankson & Presson, Inc.
10.13 Securities Purchase Agreement between the Company and Carl Wolf.
27 Financial Data Schedule.
(b) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and Reserves
(c) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during its quarter ended
December 31, 1997.
- --------------------------------------------------------------------------------
* Filed as an exhibit to the Company's Registration Statement on Form SB-2
(file no. 333-30665) and incorporated by reference thereto.
PAGE -34-
<PAGE>
Audio Book Club, Inc.
Form 10-KSB
Item 7
Index to Financial Statements
Page
----
Independent Auditors' Report F-2
Balance Sheet - December 31, 1997 F-3
Statements of Operations for the years ended
December 31, 1996 and 1997 F-4
Statements of Stockholders' (Deficiency) Equity
for the Years ended December 31, 1996 and
1997 F-5
Statements of Cash Flows for the years ended
December 31, 1996 and 1997 F-6
Notes to Financial Statements F-7 - F-16
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Audio Book Club, Inc.
We have audited the accompanying balance sheet of Audio Book Club, Inc. as of
December 31, 1997, and the related statements of operations, stockholders'
(deficiency) equity and cash flows for each of the years in the two-year period
ended December 31, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
statements. Those standards required 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Audio Book Club, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
-------------------------------------
KPMG Peat Marwick LLP
New York, New York
March 13, 1998
F-2
<PAGE>
AUDIO BOOK CLUB, INC.
Balance Sheet
December 31, 1997
Assets
Current assets:
Cash and cash equivalents $ 3,655,053
Short term investment to be held to maturity 5,143,699
Accounts receivable, net of allowances for sales returns and
doubtful accounts of $1,449,445 1,783,456
Inventory 1,700,374
Prepaid expenses 111,896
Royalty advances 267,518
------------
Total current assets 12,661,996
Prepaid expenses - non-current 48,219
Fixed assets, at cost, net of accumulated depreciation of
$16,547 59,805
------------
$ 12,770,020
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 2,776,544
Accrued expenses 240,124
------------
Total current liabilities 3,016,668
------------
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 486,217
Accumulated deficit (16,473,928)
------------
Total stockholders' equity 9,753,352
------------
$ 12,770,020
============
See accompanying notes to financial statements.
F-3
<PAGE>
Audio Book Club, Inc.
Statements of Operations
Years ended December 31,
1996 1997
------------ ------------
Sales $ 8,343,304 $ 15,119,093
Returns, discounts and allowances 2,743,221 5,040,939
------------ ------------
Sales, net 5,600,083 10,078,154
Cost of sales 4,327,344 5,495,358
------------ ------------
Gross profit 1,272,739 4,582,796
Expenses:
Advertising and promotion (for acquisition
and retention of members) 5,469,761 6,843,250
General and administrative 1,948,821 1,990,051
Professional fees 99,093 226,504
Depreciation and amortization 5,193 8,334
------------ ------------
Operating loss (6,250,129) (4,485,343)
Interest expense, net of interest income of
$7,638 and $105,631 in
1996 and 1997, respectively 211,140 435,508
------------ ------------
Net loss (6,461,269) (4,920,851)
============ ============
Net loss per share of common stock $ (1.95) $ (1.29)
============ ============
See accompanying notes to financial statements.
F-4
<PAGE>
AUDIO BOOK CLUB, INC.
Statements of Stockholders' (Deficiency) Equity
Years Ended December 31, 1996 and 1997
<TABLE>
<CAPTION>
Common
stock; no Contributed Accumulated
par value capital deficit Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 200 12,547 (5,091,808) (5,079,061)
Imputed interest on notes
payable -- related parties) -- 218,778 -- 218,778
Net loss -- -- (6,461,269) (6,461,269)
----------- ----------- ----------- -----------
Balance at December 31, 1996 200 231,325 (11,553,077) (11,321,552)
Imputed interest on notes
payable - related parties -- 254,892 -- 254,892
Conversion of notes payable -
related parties to common
stock 5,975,200 -- -- 5,975,200
Proceeds from sale of common
stock net of offering
expenses of $3,234,337 19,765,663 -- -- 19,765,663
Net loss -- -- (4,920,851) (4,920,851)
----------- ----------- ----------- -----------
Balance at December 31, 1997 $25,741,063 486,217 (16,473,928) 9,753,352
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
AUDIO BOOK CLUB, INC.
Statements of Cash Flows
Years ended December 31, 1996 and 1997
<TABLE>
<CAPTION>
-----------------------------------
Years ended December 31,
-----------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,461,269) (4,920,851)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 5,193 8,334
Imputed interest on notes payable - related parties 218,778 254,892
Changes in asset and liability accounts:
Decrease (increase) in accounts receivable, net 6,418 (1,187,826)
Decrease in due from related party -- 20,000
(Increase) in inventory (383,689) (863,714)
Decrease (increase) in prepaid expenses 63,341 (111,896)
(Increase) in prepaid expenses - non-current -- (48,219)
(Increase) in royalty advances (235,440) (32,078)
Increase in accounts payable and accrued expenses 1,170,410 1,375,227
------------ ------------
Net cash used in operating activities (5,616,258) (5,506,131)
------------ ------------
Cash flows from investing activities:
Purchase of short-term investment -- (5,143,699)
Acquisition of fixed assets (7,063) (48,636)
------------ ------------
Net cash used in investing activities (7,063) (5,192,335)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable - related parties 5,575,200 --
Repayment of notes payable - related parties -- (5,505,000)
Proceeds from issuance of bank debt -- 9,000,000
Repayment of bank debt -- (9,000,000)
Proceeds of sale of common stock, net of offering costs -- 19,765,663
------------ ------------
Net cash provided by financing activities 5,575,200 14,260,663
------------ ------------
Net decrease (increase) in cash and cash equivalents (48,121) 3,562,197
Cash and cash equivalents at beginning of period $ 140,977 92,856
------------ ------------
Cash and cash equivalents at end of period $ 92,856 $ 3,655,053
============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
AUDIO BOOK CLUB, INC.
Notes to Financial Statements
December 31, 1997
(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
Cash and Cash Equivalents
Securities with maturities of three months or less when purchased are
considered to be cash equivalents.
Inventory
Inventory, consisting primarily of audiocassettes held for resale, is
valued at the lower of cost (weighted average cost method) or market.
Fixed Assets
Fixed assets, consisting primarily of furniture and computer equipment, are
recorded at cost. Depreciation is provided by the straight-line method over the
estimated useful life of five years.
Revenue Recognition
Revenue is recorded upon shipment of merchandise and simultaneous billing.
Allowances for doubtful accounts and future returns are based upon historical
experience and evaluation of current trends.
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.
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
F-7
<PAGE>
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
The Company expenses all production costs of advertising the first time the
advertising takes place. Direct-response advertising consists primarily of print
advertisements and mailings to individuals that include order forms for the
Company's products. The capitalized costs of the direct mail 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. As of December 31, 1997, costs
of all direct mail advertising have been expensed and accordingly, there were no
capitalized costs of direct mail advertising.
Promotional costs for new and current members are expensed on the date the
promotional materials are mailed.
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, 1996 and 1997, no writedown of royalty advances was
recorded.
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.
Fair Value of Financial Instruments
In estimating the fair value for financial instruments, the Company has
assumed that the carrying amount of cash, short-term investments, accounts
receivable, accounts payable and accrued expenses approximates fair value
because of the short maturity of those instruments.
Impact of New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued a Statement
of Financial Accounting Standards ("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. Accordingly, effective
December 31, 1997, the net loss per share information has been calculated and
presented in accordance the provisions of SFAS No. 128 and as further prescribed
by the relevant Staff Accounting Bulletins of the Securities and Exchange
Commission. In accordance with the provisions of SFAS No. 128, net loss per
share for the year ended December 31, 1996 has also been restated.
F-8
<PAGE>
(3) Short Term Investments to be Held to Maturity
Short term investment to be held to maturity consists of a bank certificate
of deposit in the amount of $5,000,000 bearing interest at 5.5% maturing on May
2, 1998 and a bank certificate of deposit in the amount of $100,000 bearing
interest at 5.9% maturing on May 6, 1998 plus accrued interest on both
certificates of deposit.
(4) Notes Payable - Related Parties
Conversion of Related Party Debt
On November 17, 1995, the Company executed a loan agreement with Norton
Herrick, its Chairman, Chief Executive Officer and founder in the amount of
$8,000,000, of which $5,805,000 had been granted in the form of unsecured,
non-interest bearing advances as of December 31, 1995.
On February 6, 1997, the loan agreement was amended to increase the maximum
borrowing amount to $13,000,000 from $12,000,000. On May 12, 1997, the loan
agreement was further amended to stipulate that the loan does not and will not
bear interest, and removed all references to interest in prior documents.(See
note 5)
Immediately prior to the consummation of the Company's initial public
offering, the Company's Chairman, Chief Executive Officer, and founder converted
the outstanding $5,975,200 of indebtedness owed to him under the 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 loan agreement between the Company and
Norton Herrick was terminated on October 22, 1997.
Repayment of Related Party Debt
In June 1994, the Company received $50,000 from both the Chief Operating
Officer and Executive Vice President for a total of $100,000, in exchange for
the Company issuing two notes payable of $50,000 each.
In February 1997, the Company's Executive Vice President loaned the Company
an additional $350,000 pursuant to a loan agreement (the "1997 HH Loan"). On May
12, 1997, loans payable to the Company's Executive Vice President in the amounts
of $50,000 and $350,000 were consolidated via a consolidated and restated loan
agreement. The consolidated loan balance of $400,000 did not bear interest until
August 1, 1997, after which time interest was calculated at an annual rate of
10%.
On May 12, 1997, the Chief Operating Officer loaned the Company $350,000
pursuant to a loan agreement (the "1997 MEH Loan"). Borrowings under the 1997
MEH Loan were consolidated via a loan agreement with the $50,000 loan balance
originated in June of 1994. The consolidated loan balance of $400,000 did not
bear interest until August 1, 1997, after which time interest was calculated at
an annual rate of 10%.
On September 15, 1997, the Company repaid the $800,000 of outstanding notes
payable plus accrued interest in the amount of $10,082 to the Company's Chief
Operating Officer and Executive Vice President.
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
F-9
<PAGE>
public offering. The imputed rate used was based on the terms negotiated by the
Company for its bank debt and was 7.77% and 8.00% for the years ended December
31, 1996 and 1997, respectively. Interest expense imputed was $218,778 and
$254,892 for the years ended December 31, 1996 and 1997, respectively.
(5) Bank Debt
On May 9, 1997, the Company borrowed $6,000,000 from a major bank, which
was used to repay a portion of the outstanding notes payable to the Company's
Chairman, Chief Executive Officer, and founder. The loan had a one-year term,
had an interest rate which was 1/2% under the bank's reference rate which was
payable monthly.
On August 2, 1997, the Company borrowed an additional $2,250,000 from the
same major bank to fund working capital. The loan was to be due October 31,
1998, and had an interest rate which was 1/2% under the bank's reference rate
and which was payable monthly.
On September 16, 1997, the Company borrowed an additional $750,000 from the
same major bank to fund working capital. The loan was also to be due October 31,
1998, and had an interest rate which was 1/2% under the bank's reference rate
and was payable monthly.
The portion of the outstanding stock of the Company owned by the Chairman,
Chief Executive Officer, and founder was pledged as security for the loans.
Additionally, in the event the Company failed to repay the loans at maturity,
the personal guarantee of the Company's Chairman, Chief Executive Officer and
founder would become effective.
The Company used a portion of the proceeds of the initial public offering
to repay the loans from a major bank in the aggregate principal amount of
$9,000,000 plus accrued interest thereon of $56,167.
(6) Commitments and Contingencies
Leases - Related Parties
Rent expense for each of the years ended December 31, 1996 and 1997
amounted to $38,000.
On July 1, 1997, the Company entered into a new lease for office space.
Minimum monthly rent under the newly executed lease was $1,167 per month through
November, 1997, at which time the monthly rent increased 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.
The Company sublets office space from an entity wholly-owned by officers
and directors of the Company.
F-10
<PAGE>
Minimum annual lease commitments under noncancelable operating leases are
as follows:
Year ending
December 31, Amount
- ------------ ------
1998 $ 50,484
1999 15,684
2000 14,377
--------
Total lease
commitments $ 80,545
========
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 $646,000, $472,000 and $201,000 during 1998, 1999
and 2000, respectively.
(7) 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.
(8) 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 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.) The Company incurred expenses of $3,234,337 related to
its initial public offering, including underwriting discounts and commissions,
legal and accounting fees, printing expenses and other expenses Upon completion
of the offering, the associated costs were deducted from net proceeds of the
offering.
(9) Stock Option Plan
On June 20, 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. The Plan authorizes grants of options to purchase up
to 750,000 shares of authorized but unissued common stock. Under the Plan, the
Company may grant incentive and non-qualified stock options. The terms and
conditions of options granted under the Plan may vary at the discretion of the
Company's Board of Directors. In addition, shares issued pursuant to the
exercise of the options may be restricted as to their transferability.
F-11
<PAGE>
In September 1997, the Company granted to an officer options to purchase
50,000 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. Such options
shall vest as to one-fifth of the shares covered thereby annually over a
five-year period commencing on October 31, 1998, provided, however, that such
options shall terminate and be canceled if the officer is no longer employed by
the Company prior to the date on which such options vest. Such options shall be
exercisable for a period of five years commencing immediately upon vesting,
provided, however, if the officer is no longer employed by the Company, such
options shall expire on the earlier of 30 days following the date the officer is
no longer employed by the Company or five years following the date on which such
options vest.
Stock option activity during the year ended December 31, 1997 is as
follows:
Weighted
average
Shares exercise price
------ --------------
Outstanding at the beginning of the period $ -- $ --
Granted 50,000 11.00
Exercised -- --
Canceled -- --
------- ------
Outstanding at end of the year 50,000 $11.00
======= ======
At December 31, 1997, there were 700,000 additional shares available for
grant under the Plan.
The per share weighted-average fair value of stock options granted during
the year ended December 31, 1997 was $4.55 on the date of the grant using the
Black-Scholes option-pricing model with the following assumptions for the year
ended December 31, 1997: risk free rate of return 5.56%; option life five years
from date of vesting; and no dividend yield.
The Company applies APB 25 in accounting for its Plan and, accordingly, no
compensation cost has been recognized for its stock options in the financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS 123, the Company's net loss
per share would have been reduced to the amounts indicated below:
Year ended
December 31, 1997
Net loss as reported $(4,920,851)
Net loss adjusted for stock based
compensation costs $(4,928,440)
Basic net loss per share adjusted for stock
based compensation costs $(1.20)
Diluted net loss per share adjusted for stock
based compensation costs $(1.20)
F-12
<PAGE>
At December 31, 1997, the weighted average remaining contractual life of
outstanding options was eight years. At December 31, 1997, no options were
exercisable.
(10) 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 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).
Income tax benefit for the year ended December 31, 1997 differed from the
amount computed by applying the U.S. Federal income tax rate of 34% to the
pre-tax loss as a result of the following:
Computed tax benefit at 34% $(1,673,089)
Adjustment for partial-year C-corporation status $ 1,347,673
Adjusted computed tax benefit at 34% $ (325,416)
Increase in valuation allowance $ 325,416
for Federal deferred tax asset -----------
Income tax expense $ --
===========
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
Deferred tax assets:
Federal and state net operating loss carryforwards $ 269,715
Accounts receivable, principally due to allowance $ 112,778
for doubtful accounts and reserve for returns
Total gross deferred tax assets $ 382,493
Less valuation allowance $(382,493)
---------
Net deferred tax assets $ -0-
=========
The Company has provided a valuation allowance of $382,493 for deferred tax
assets as of December 31, 1997. 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.
F-13
<PAGE>
The Company has approximately $606,000 of net operating loss carryforwards
which may be used to offset possible future earnings, if any, in computing
future income tax liabilities.
(11) Net Loss Per Share of Common Stock
During March, 1997, the Financial Accounting Standards Board ("FASB")
released Statement of Financial Accounting Standards No. 128, :"Earnings per
Share" ("SFAS 128"). SFAS 128 establishes standards for computing and presenting
earnings per share and is effective for financial statements for both interim
and annual periods after December 15, 1997. Accordingly, effective December 31,
1997, the accompanying net loss per share information has been calculated and
presented in accordance with the provisions of SFAS 128 and as further
prescribed by the relevant Staff Accounting Bulletins of the Securities and
Exchange Commission.
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 used in the net loss per share computations for the
years ended December 31, 1997 and 1996 were 3,820,027 and 3,256,400.
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 50,000 for the year ended December
31, 1997 and -0- for the year ended December 31, 1996.
(12) Supplemental Cash Flow Information
No cash has been expended for income taxes for the years ended December 31,
1996 and 1997. Cash expended for interest was none and $286,246 for the years
ended December 31, 1996 and 1997, respectively.
During the years ended December 31, 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 $218,778 and $254,892,
respectively.
Immediately prior to the consummation of the Company's initial public
offering, the Company's Chairman, Chief Executive Officer, and founder converted
the outstanding $5,975,200 of indebtedness owed to him into 597,520 shares of
common stock at a price per share of $10.00.
(13) Related Party Transactions
Companies wholly-owned by Norton Herrick provided certain accounting,
administrative and general office services to, and obtained insurance coverage
for, the
F-14
<PAGE>
Company at cost in 1997, and the Company paid to such entities for such
services, in the aggregate $38,928 and $60,000, during the years ended December
31, 1996 and 1997, respectively. 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.
During 1997, Abrams Direct Marketing ("ADM"), a company wholly-owned by Roy
Abrams, a director designee of the Company, provided independent marketing
consulting services to the Company and has been paid approximately $25,500 by
the Company for such services. In June 1997, the Company entered into a
consulting agreement with ADM pursuant to which ADM assists the Company in
connection with marketing activities, including designing, implementing and
reviewing the results of direct marketing campaigns and selecting direct
marketing lists, on an as-needed basis at the rate of $250 per hour.
(14) Subsequent Events
(a) Leases
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.
(b) 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. Such options
shall vest as to one-third of the shares covered thereby on January 1, 1999 and
two-thirds on January 1, 2000 provided, however, that such options shall
terminate and be canceled if the officer is no longer employed by the Company
prior to the date on which such options vest. Such options shall be exercisable
for a period of five years commencing immediately upon vesting, provided,
however, if the officer is no longer employed by the Company, such options shall
expire on the earlier of 90 days following the date the officer is no longer
employed by the Company or five years following the date on which such options
vest.
In January, 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. Such options shall
vest one year after date of the grant provided, however, that such options shall
terminate and be canceled if the individual is no longer a consultant to the
Company. Such options shall be exercisable for a period of five years commencing
immediately upon vesting, provided, however, if the officers are no longer
employed by the Company, such options shall expire on the earlier of 90 days
following the date the individual officer is no longer employed by the Company
or five years following the date on which such options vest.
On February 12, 1998, 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. Such options shall
vest as to one-half of the shares covered thereby on February 9, 1999 and
one-half on February 9, 2000 provided, however, that such options shall
terminate and be canceled if the officers are
F-15
<PAGE>
no longer employed by the Company prior to the date on which such options vest.
Such options shall be exercisable for a period of five years commencing
immediately upon vesting, provided, however, if the officers are no longer
employed by the Company, such options shall expire on the earlier of 90 days
following the date the individual officer is no longer employed by the Company
or five years following the date on which such options vest.
(c) Internet Marketing Agreements
Subsequent to year end, 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 $2,800,000.
Board of Directors
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. In addition, Mr. Wolf shall receive
annual compensation of $5,000, payable on the anniversary of his joining the
Company's Board of Directors.
Also on March 18, 1998,the Company 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.
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized. Audio Book Club, Inc.
By: /s/ Michael Herrick
---------------------------------------
Date: March 27, 1998 Michael Herrick, Vice Chairman of the
Board and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Norton Herrick
Date: March 27, 1998 -----------------------------------------------
Norton Herrick, Chairman of the Board and Chief
Executive Officer
/s/ Michael Herrick
Date: March 27, 1998 -----------------------------------------------
Michael Herrick, Vice Chairman of the Board
and Chief Operating Officer
/s/ Jesse Faber
Date: March 27, 1998 -----------------------------------------------
Jesse Faber, President and Director
/s/ Howard Herrick
Date: March 27, 1998 -----------------------------------------------
Howard Herrick, Executive Vice President
and Director
/s/ John F. Levy
Date: March 27, 1998 -----------------------------------------------
John F. Levy, Executive Vice President
and Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ Roy Abrams
Date: March 27, 1998 -----------------------------------------------
Roy Abrams, Director
Date: -----------------------------------------------
Carl Wolf, Director
35
<PAGE>
AUDIO BOOK CLUB, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
for the years ended December 31, 1996 and 1997
<TABLE>
<CAPTION>
Balance Amounts Write-Offs Balance
Beginning Charged to Against End of
of Period Net Income Reserves Period
--------- ---------- -------- ------
<S> <C> <C> <C> <C>
Allowances for Sales Returns and Doubtful Accounts:
Year Ended December 31, 1996 $703,923 $3,610,621 $3,482,875 $ 831,669
-------- ---------- ---------- ----------
Year Ended December 31, 1997 $831,669 $6,073,746 $5,455,970 $1,449,445
-------- ---------- ---------- ----------
</TABLE>
S-1
EMPLOYMENT AGREEMENT
THIS AGREEMENT made as of the 10th day of November, 1997, by and between
Audio Book Club, Inc., a Florida corporation, with offices at 2295 Corporate
Boulevard, N.W., Suite 222, P.O. Box 5002, Boca Raton, Florida 33431-0802 (the
"Company"), and John F. Levy, residing at 110 Oak Tree Pass, Westfield, New
Jersey (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company is engaged in the audio book club business; and
WHEREAS, the Company desires to employ the Executive; and
WHEREAS, the Executive is willing to commit himself to serve and to
establish a minimum period during which he will serve the Company on the terms
and conditions herein provided.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained and intending to be
legally bound hereby, the parties agree as follows:
1. Recitals. The Whereas clauses recited above are hereby incorporated
by reference as though they were fully set forth herein.
2. Employment. The Company shall employ the Executive and the
Executive shall serve the Company, on the terms and conditions set forth
herein.
3. Term. The employment of the Executive by the Company as provided in
paragraph 2 shall commence on the effective date of this Agreement and end
on the second (2nd) anniversary of the effective date, subject, however, to
the other termination provisions contained herein.
4. Position and Duties. The Executive shall be employed by the Company
as an Executive Vice President and Chief Financial Officer. His power and
authority shall be and remain subject to the direction and control of the
Board of Directors and all officers senior to him including but not limited
to the Chief Operating Officer Michael Herrick and the Chief Executive
Officer Norton Herrick. The Executive shall have responsibility for the
financial oversight of the business and affairs of the Company, including
without limitation responsibility for all filings with the
<PAGE>
Securities and Exchange Commission, the Internal Revenue Service and all
other agencies (federal, state or local) and/or stock exchanges to which
the Company must report, subject to appropriate review and approval of the
Board of Directors and senior officers and such further revisions as the
Executive deems necessary. The scope of his duties and the extent of his
responsibilities shall be substantially the same as the duties and
responsibilities of other chief financial officers of public companies. The
Executive shall be required to spend his full time and attention, without
other outside business interests, in the performance of his duties and the
Company's business and affairs.
5. Compensation and Related Matters.
(a) Salary. During the term of this Agreement, the Company shall pay to the
Executive, as compensation for his services, an initial annual salary of
$135,000 in equal monthly installments during the first year of the term of this
Agreement; and $150,000 during the second year of the term of this Agreement. In
addition, the Executive may receive a performance-based bonus to be determined
by the Chief Executive Officer in his sole and absolute discretion with a
minimum bonus at the end of year one, provided the Executive is still employed
by the Company at that time, of Seven Thousand Five Hundred and 00/100 U.S.
Dollars ($7,500.00) and a minimum bonus at the end of year two, provided the
Executive is still employed by the Company at that time, of Twelve Thousand Five
Hundred and 00/100 U.S. Dollars ($12,500.00); such bonuses shall be paid within
forty-five (45) days after the end of each year.
(b) Expenses. The Executive shall receive prompt reimbursement for all
reasonable travel and business expenses in connection with services performed
hereunder in accordance with normal Company policy, as the same may be
determined from time to time.
(c) Insurance and Employee Benefits. The Executive shall receive insurance
and employee benefits applicable to all officers of the Company. In addition,
the Executive shall be reimbursed for reasonable costs associated with up to
twenty-four (24) hours of continuing education courses with respect to topics
germane to his duties, including reasonable local travel costs to attend such
courses and reasonable fees for such courses. In addition, the Company will
reimburse the Executive for his dues to the AICPA and ISCPA and subscriptions to
the Wall Street Journal, Business Week, Forbes Magazine and America Online. The
Executive will be provided with a portable computer, cellular phone and pocket
electronic organizer at the Company's expense.
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(d) Vacation. The Executive shall receive, prorata during each full year of
his employement, three (3) weeks paid vacation approved one (1) month in
advance. The Executive will make every effort to schedule the vacation time at a
time most convenient for the Company, with the Company recognizing that the
Executive's flexibility is limited by school calendars. Notwithstanding the
foregoing, the Executive shall not be entitled to vacation during the three (3)
week period prior to the date on which the Company's Annual Report on Form
10-KSB (or Form 10-K) or Quarterly Report on Form 10-QSB (or Form 10-Q) are
required to be filed with the Securities and Exchange Commission. In addition,
the Executive will receive normal Company holidays, plus two (2) days off for
Rosh Hashanah and one (1) day off for Yom Kippur unless such holy days fall on a
weekend.
(e) Stock Options. The Executive will receive stock options to acquire
thirty thousand (30,000) shares of Common Stock in the Company pursuant to and
in accordance with the Company's Stock Option Plan. Options with respect to ten
thousand (10,000) shares shall vest at the end of year one, provided that the
Executive is an employee of the Company at that time and options with respect to
twenty thousand (20,000) shares will vest at the end of year two, provided that
the Executive is still employed by the Company at that time. Such options shall
be exercisable at a price per share equal to one hundred ten percent (110%) of
the public offering price of the Common Stock in the initial public offering,
which was completed on October 27, 1997, and will be on the terms and conditions
as more specifically provided for in the Company's Stock Option Plan.
6. Termination by the Company. The Executive's employment hereunder may be
terminated by the Company without any breach of this Agreement only under the
circumstances described below.
(a) Death. The Executive's employment hereunder shall terminate upon his
death.
(b) Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, as determined by a physician mutually chosen by the
Executive and the Company, the Executive shall have been absent from his duties
hereunder for a consecutive period of forty-five (45) days and after notice of
termination is given (which may be given before or after the end of such 45 day
period but which will in no event be effective until, at the earliest, the day
following the forty-fifth day of the period) shall not have returned to the
performance of his duties hereunder, as
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that concept is contemplated in this Agreement, within ten (10) days after the
notice of termination is given, the Company may terminate the Executive's
employment hereunder.
(c) Cause. The Company may terminate the Executive's employment under this
Agreement at any time for cause. For purposes of this Agreement, the term
"cause" shall include one or more of the following: (i) willful misconduct, (ii)
continued failure by the Executive to perform his duties, as contemplated in
this Agreement, as Chief Financial Officer (other than through disability as
defined in paragraph 6(b), above), (iii) conviction of a crime or alcohol or
drug abuse, or (iv) the Executive's breach of this Agreement. The termination
shall be evidenced by written notice thereof to the Executive.
(d) Without Cause. In addition to any other rights the Company has to
terminate the Executive's employment under this Agreement, the Company may, at
any time, by a vote of not less than sixty percent (60%) of the directors then
in office (excluding the vote of the Executive if he is also a director),
terminate the Executive without cause upon ninety (90) days' prior written
notice to the Executive setting forth the reasons, if any, for the termination.
For purposes of this Agreement, the term "without cause" shall mean termination
by the Company on any grounds other than those set forth in paragraphs 6(a), (b)
or (c) hereof. It shall also be a termination without cause, at the election of
the Executive, if the Executive is asked to work at a business location of the
Company which is more than fifty (50) miles from Westfield, New Jersey.
Notwithstanding the foregoing, it is understood that travel in connection with
the performance of Executive's duties shall not be deemed to be termination
without cause.
(e) Severance Pay. In the event that the Company has terminated the
Executive's employment under this Agreement (i) "without cause" or (ii) in the
event there is a "Change of Control" (as defined below), then the Executive will
be entitled to receive severance pay equal to fifty percent (50%) of his base
salary for the unexpired period of his two (2) year employment term; such
payment, if any, shall be made to the Executive within thirty (30) days of such
termination of the Executive's employment.
(f) Change of Control. For purposes of this Agreement, a "Change of
Control" shall be deemed to occur, unless previously consented to in writing by
the Executive, and only if the Executive is not offered continued employment,
upon (i) the actual acquisition of fifty percent (50%) or more of the voting
securities of the Company by any company or entity or affiliated group of
companies or entities (other than pursuant to a bona fide underwriting agreement
relating to a public distribution of securities of the Company), (ii) the
completion of a tender or exchange offer for more
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than fifty percent (50%) of the voting securities of the Company by any company
or entity or affiliated group of companies or entities not affiliated with the
Executive, (iii) the completion of a proxy contest against the management for
the election of a majority of the Board of Directors of the Company if the group
conducting the proxy contest owns, has or gains the power to vote at least fifty
percent (50%) of the voting securities of the Company, or (iv) a merger or
consolidation in which the Company is not the surviving entity or a sale of or
substantially all of the assets of the Company.
(g) Change of Control Compensation. In the event of a completion of a
tender or exchange offer for more than fifty percent (50%) of the voting
securities of the Company by any company or entity or affiliated group of
companies or entities not affiliated with the Executive, the stock options,
described in paragraph 5(e), shall immediately be exercisable and any unvested
shall immediately vest.
(h) The Executive shall not be required to mitigate the amount of any
payment provided for in this paragraph 6 by seeking other employment or
otherwise nor shall the amount of any payment provided for in this paragraph 6
be reduced by any compensation earned by the Executive as the result of
employment by another employer or business or by profits earned by the Executive
from any other source at any time before and after the date of termination. The
amounts payable to the Executive under this Agreement shall not be treated as
damages, but as severance pay to which the Executive is entitled by reason of
his employment and the circumstances contemplated by this Agreement.
(i) The severance pay which the Executive will be entitled to receive as a
result of the termination of his employment under this Agreement, shall be the
Executive's exclusive remedy in the event of such termination.
7. Non-Competition and Confidentiality Covenant. The Executive hereby
covenants and agrees that he will not serve as an officer of or perform any
functions for any other company during the term of his employment under this
Agreement, except that the Executive shall be permitted to serve as a board
member of the Israel Histradrut Group Foundation, a not-for-profit entity,
provided serving as a board member for such entity does not interfere with the
performance of the Executive's duties under this Agreement. In addition, during
the term of this Agreement and for a period of two (2) years immediately
following the termination of his employment, whether said termination is
occasioned by the Company, the Executive or a mutual agreement of the parties,
the Executive shall not, for himself or on behalf of any other person, persons,
firm, partnership, corporation or company, engage or participate in any
activities which are in direct or indirect conflict
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with the interests of the Company or solicit or attempt to solicit the business
or patronage of any person, firm, corporation, company or partnership, which had
previously been a customer of the Company, for the purpose of selling products
and services similar to those provided by the Company.
Furthermore, the Executive acknowledges and agrees that: all mailing lists;
customer, member and prospect names; license or arrangement; front-end and
back-end marketing performance; financial statements; operating system, database
and other computer software, specific to the Company; and all information which
is known by the Executive to be subject to a confidentiality agreement or
obligation of confidentiality, even without a confidentiality agreement between
the Company and another person or party, shall be maintained by the Executive in
a confidential manner and the Executive agrees that the Executive will not use
such information to the detriment of the Company or disclose such information to
any third party, except as may be necessary in the course of performing the
Executive's job responsibilities. The Executive further agrees that these
obligations of confidentiality with respect to such information shall continue
after the Executive ceases to be employed by the Company. Disclosure of the
aforementioned information shall not be prohibited if such disclosure is
directly pursuant to a valid and existing order of a court or other governmental
body or agency within the United States; provided, however, that (i) the
Executive shall first have given prompt notice to the Company of any such
possible or prospective order (or proceeding pursuant to which any such order
may result), (ii) the Company shall have been afforded a reasonable opportunity
to review such disclosure and to prevent or limit any such disclosure, and (iii)
the Executive shall, if requested by the Company and at the Company's cost and
expense, use his best efforts to prevent or limit any such disclosure by means
of a protective order or a request for confidential treatment.
The Executive further acknowledges that the Executive will not disclose any
information with respect to the Company, its operations or its officers and
directors, whether or not such information is confidential, to Stephen Swid or
any entity or company in which Stephen Swid has an ownership interest or is a
director, officer or employee or to any attorneys, accountants, agents or
representatives of Stephen Swid or any of the aforementioned companies or
entities.
8. Indemnification. To the maximum extent permitted under the corporate
laws of the State of Florida or, if more favorable, the Articles of
Incorporation and/or By-Laws of the Company as in effect on the date of this
Agreement, (a) the Executive shall be indemnified and held harmless by the
Company, as provided under such corporate laws or such Articles of Incorporation
and/or By-
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Laws, as applicable, for any and all actions taken or matters undertaken,
directly or indirectly, in the performance of his duties and responsibilities
under this Agreement or otherwise on behalf of the Company, provided the
Executive did not act wantonly or recklessly or was not grossly negligent or
engaged in willful misconduct, and (b) without limiting clause (a), the Company
shall indemnify and hold harmless the Executive from and against (i) any claim,
loss, liability, obligation, damage, cost, expense, action, suit, proceeding or
cause of action (collectively, "Claims") arising from or out of or relating to
the Executive's acting as an officer, director, employee or agent of the Company
or any of its affiliates or in any other capacity, including, without
limitation, any fiduciary capacity, in which the Executive serves at the request
of the Company, and (ii) any cost or expense (including, without limitation,
fees and disbursements of counsel) (collectively, "Expenses") incurred by the
Executive in connection with the defense or investigation thereof. If any Claim
is asserted or other matter arises with respect to which the Executive believes
in good faith the Executive is entitled to indemnification as contemplated
hereby, the Company shall, at its election, to be determined in its sole and
absolute discretion, either assume the defense or investigation of such Claim or
matter or pay the Expenses incurred by the Executive in connection with the
defense or investigation of such Claim or matter, provided that the Executive
shall reimburse the Company for such amounts, plus simple interest thereon at
the then current Prime Rate as in effect from time to time, compounded annually,
if the Executive shall be found, as finally judicially determined by a court of
competent jurisdiction, not to have been entitled to indemnification hereunder.
9. Binding Agreement. This Agreement and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, divisees and legatees. In addition, this Agreement and the
obligations and rights of the Company hereunder shall be binding on any person,
firm or corporation which is a successor-in-interest to the Company.
10. Notice. For the purpose of this Agreement, notices, demands and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered personally, or by private
overnight courier or mail service, postage prepaid or (unless otherwise
specified) mailed by United States registered or certified mail, return receipt
requested, postage prepaid, addressed as follows:
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If to the Executive: To the address at the head of this Agreement
If to the Company: Audio Book Club, Inc.
2295 Corporate Boulevard, N.W., Suite 222
P.O. Box 5002
Boca Raton, Florida 33431-0802
(561) 241-1426
or to such other address as the parties may furnish to each other in writing.
Copies of all notices, demands and communications shall be sent to the home
addresses of all members of the Board of Directors of the Company.
11. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing signed by
the parties hereto, provided, however, that this Agreement may be modified,
waived or discharged by mutual agreement in writing.
(b) No delay, waiver, omission or forbearance (whether by conduct or
otherwise) by any party hereto at any time to exercise any right, option, duty
or power arising out of breach or default by the other party of any of the
terms, conditions or provisions of this Agreement to be performed by such other
party shall constitute a waiver by such party or a waiver of such party's rights
to enforce any right, option or power as against the other party or as to
subsequent breach or default by such other party, and no explicit waiver shall
constitute a waiver of similar or dissimilar terms, provisions or conditions at
the same time or at any prior or subsequent time.
12. Governing Law. This Agreement shall be construed in accordance with the
laws of the State of Florida and any action brought by either party shall be
commenced in the courts of the State of Florida. The Executive and the Company
hereby irrevocably and unconditionally consent to submit to the exclusive
jurisdiction of the courts of the State of Florida and the United States of
America located in Palm Beach County, Florida for any and all actions, suits or
proceedings arising out of or resulting from or relating to this
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Agreement and the transactions contemplated hereby and the parties agree not to
commence any action, suit or proceeding relating thereto except in such courts.
The parties hereby irrevocably and unconditionally waive any objection to the
laying of venue of any such action, suit or proceeding arising out of, resulting
from or relating to this Agreement or the transactions contemplated hereby in
such courts and hereby further irrevocably and unconditionally waive and agree
not to plead or claim in any such court that such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum.
13. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
15. Entire Agreement. This Agreement contains the entire understanding of
the Company and the Executive with respect to his employment by the Company.
This Agreement supersedes all prior agreements and understandings whether
written or oral between the Executive and the Company, and there are no
restrictions, agreements, promises, warranties or covenants other than those
stated in this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
shown below effective as of the date first written above.
"COMPANY"
Date Signed: 11/19, 1997 AUDIO BOOK CLUB, INC., a Florida
corporation
By: /s/ Norton Herrick
------------------------------------
Printed Name: NORTON HERRICK
--------------------------
Title: CEO
---------------------------------
"EXECUTIVE"
Date Signed: 11/19, 1997 /s/ John F. Levy
---------------------------------------
Printed Name: John F. Levy
--------------------------
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AMENDMENT TO EMPLOYMENT AGREEMENT
The Employment Agreement by and between Audio Book Club, Inc. (Company) and John
F. Levy (Executive) is hereby amended to clarify that the term "effective date"
of the Employment Agreement is November 10, 1977 provided that the Executive
shall not be elected to the offices of Executive Vice President and Chief
Financial Officer until January 1, 1998 and prior to such time shall serve as an
employee of the Company and receive compensation during such period at the
annual rate specified in the Employment Agreement prorated for the period
November 10, 1997 through December 31. 1997.
Dated as of November 11, 1997 "COMPANY"
Audio Book Club, Inc. a Florida Corporation
By: /s/ Norton Herrick
---------------------------------------
Norton Herrick, CEO
"EXECUTIVE"
/s/ John F. Levy
-------------------------------------------
John F. Levy
SECURITIES PURCHASE AGREEMENT
March 18, 1998
Mr. Carl Wolf
627 Inwood Lane
South Orange, New Jersey 07079
In order to induce Carl Wolf (the "Purchaser") to become a member of the
Board of Directors of Audio Book Club, Inc. (the "Company"), the Company hereby
agrees to (i) sell to the Purchaser the Option and (ii) grant to the Purchaser
the right to purchase the Additional Option (as hereinafter defined), pursuant
to the terms and conditions set forth herein.
1. Purchase of Option.
Subject to Section 9 of this Agreement, the Company hereby agrees to sell
to the Purchaser and Purchaser hereby agrees to purchase from the Company for a
purchase price of Fifty Thousand Dollars ($50,000) (the "Option Purchase Price")
an option (the "Option"), to purchase 50,000 shares (the "Option Shares") of
common stock, no par value (the "Common Stock"), of the Company, at any time
commencing on the date of this Agreement through 5:00 P.M. New York local time
on the fifth year anniversary of the date of this Agreement (the "Exercise
Period"), at an exercise price per Option Share equal to the closing sale price
of the Common Stock, as reported by the American Stock Exchange ("AMEX"), on the
date of this Agreement in the form attached as Exhibit A hereto.
2. Payment for and Delivery of the Option.
Payment of the Option Purchase Price by the Purchaser will be made by check
payable to Company or by wire transfer in accordance with instructions provided
to Purchaser by the Company on the date hereof. Upon payment in full of the
Option Purchase Price, the Company will issue and deliver to Purchaser the
Option.
3. Additional Option.
The Company hereby agrees that, in the event the Purchaser continues to
serve as a participating and active member of the Company's Board of Directors
for six months from the date of this Agreement, the Purchaser shall have the
right, commencing on the six month anniversary of the date of this Agreement and
expiring on the tenth day following the six month anniversary of the date of
this Agreement (the "Additional Option Purchase Period") to
<PAGE>
purchase an additional option (the "Additional Option" and together with the
Option, the "Purchaser's Options"). The Additional Option shall be exercisable
to purchase Twenty Five Thousand (25,000) shares ("Additional Option Shares" and
together with the Option Shares, the "Purchaser's Option Shares") of the Common
Stock of the Company for a purchase price of Twenty Five Thousand Dollars
($25,000) (the "Additional Option Purchase Price"). Such Additional Option will
be exercisable at any time, during the five (5)-year period from the date of
issuance to purchase the Additional Option Shares at an exercise price per share
equal to the closing sale price of the Common Stock, as reported by AMEX, on the
date of this Agreement. The Additional Option shall be substantially similar in
form to the Option.
4. Payment and Delivery of the Additional Option.
In the event that the Purchaser elects to purchase the Additional Option,
the Purchaser shall, during the Additional Option Purchase Period, deliver to
the Company at its principal place of business, by check or wire transfer, the
Additional Option Purchase Price. Upon receipt of the Additional Option Purchase
Price, the Company will issue and deliver to the Purchaser the Additional
Option. In the event that Purchaser fails to deliver the Additional Option
Purchase Price to the Company during the Additional Option Purchase Period, the
right to purchase such Additional Option shall terminate.
5. Restrictions on Transfer.
5.1 Purchaser understands that the Purchaser's Options and Purchaser's
Option Shares are "restricted securities" within the meaning of Rule 144
promulgated under the Act.
5.2 Purchaser agrees that it will not, sell, assign or transfer the
Purchaser's Options and the Purchaser's Option Shares in violation of the
Securities Act of 1933, as amended (the "Act"), or any other applicable state
securities laws ("Other Securities Laws") and understands that it cannot sell,
assign or transfer the Purchaser's Option Shares unless the Purchaser's Option
Shares are registered under the Act and Other Securities Laws or an exemption
from such registration is applicable to such transfer.
5.3 Purchaser understands that the certificate(s) representing the
Purchaser's Option Shares will bear a restrictive legend thereon substantially
as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR ANY OTHER APPLICABLE SECURITIES LAWS, AND ARE RESTRICTED SECURITIES
AS THAT TERM IS DEFINED UNDER RULE 144 PROMULGATED UNDER THE ACT.
THESE SECURITIES MAY
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NOT BE SOLD, PLEDGED, TRANSFERRED, DISTRIBUTED OR OTHERWISE DISPOSED
OF IN ANY MANNER UNLESS THEY ARE REGISTERED UNDER THE ACT AND ANY
APPLICABLE SECURITIES LAWS, OR UNLESS THE REQUEST FOR TRANSFER IS
ACCOMPANIED BY AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE
COMPANY, STATING THAT THE TRANSFER WILL NOT RESULT IN A VIOLATION OF
THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS."
5.4 Purchaser understands that Purchaser except as otherwise provided
herein, Purchaser has no rights whatsoever to request, and that the Company is
under no obligation whatsoever to furnish, a registration of the Purchaser's
Option Shares under the Act or any Other Securities Laws.
6. Registration Rights.
6.1 Registrable Securities. As used herein the term "Registrable Security"
means each of the Purchaser's Option Shares and any shares of Common Stock
issued upon any stock split or stock dividend in respect of such Purchaser's
Option Shares; provided, however, that with respect to any particular
Registrable Security, such security shall cease to be a Registrable Security
when, as of the date of determination, (i) it has been effectively registered
under the Act and disposed of pursuant thereto, (ii) registration under the Act
is no longer required for subsequent public distribution of such security, or
(iii) it has ceased to be outstanding. The term "Registrable Securities" means
any and/or all of the securities falling within the foregoing definition of a
"Registrable Security." In the event of any merger, reorganization,
consolidation, recapitalization or other change in corporate structure affecting
the Common Stock, such adjustment shall be made in the definition of
"Registrable Security" as is appropriate in order to prevent any dilution or
enlargement of the rights granted pursuant to this Section 6.
6.2 Piggyback Registration. If, at any time during the two years following
the date of this Agreement, the Company proposes to prepare and file any new
registration statement covering equity or debt securities of the Company, or any
such securities of the Company held by its shareholders (in any such case, other
than in connection with a merger, acquisition or pursuant to Form S-8 or
successor form) (for purposes of this Section 6, collectively, the "Registration
Statement"), it will give written notice of its intention to do so by registered
mail ("Notice"), at least twenty (20) days prior to the filing of each such
Registration Statement, to all holders of the Registrable Securities. Upon the
written request of such a holder (a "Requesting Holder"), made within (10) days
after receipt of the Notice, that the Company include any of the Requesting
Holder's Registrable Securities in the proposed Registration Statement,
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the Company shall, as to each such Requesting Holder, use its best efforts to
effect the registration under the Act of the Registrable Securities which it has
been so requested to register ("Piggyback Registration"), at the Company's sole
cost and expense and at no cost or expense to the Requesting Holders other than
any applicable underwriting or brokerage discounts and expenses of counsel, if
any, for the Requesting Holders or expenses of any other advisor to the
Requesting Holders, provided, however, that if, in the written opinion of the
Company's managing underwriter, if any, for the offering, the inclusion of all
or a portion of the Registrable Securities requested to be registered, when
added to the securities being registered by the Company or the selling
shareholder(s), will exceed the maximum amount of the Company's securities which
can be marketed (i) at a price reasonably related to their then current market
value, or (ii) without otherwise materially adversely affecting the entire
offering, then the Company may exclude from such offering all or a portion of
the Registrable Securities which it has been requested to register.
Notwithstanding the provisions of this Section 6.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
Section 6.2 (irrespective of whether any written request for inclusion of such
securities shall have already been made) to elect not to file any such proposed
Registration Statement, or to withdraw the same after the filing but prior to
the effective date thereof.
6.3 Demand Registration.
(a) If the Purchaser's Option Shares have not been registered under the Act
within two (2) years from the date of this Agreement, then at any time during
the period from such two (2) year date until the end of six (6) months from such
two (2) year date, any "Majority Holder" (as such term is defined in Section
6.3(c) below) of the Registrable Securities shall have the right (which right is
in addition to the Piggyback Registration rights provided for under Section 6.2
hereof), exercisable by written notice to the Company (the "Demand Registration
Request"), to have the Company prepare and file with the Securities and Exchange
Commission (the "Commission") on one occasion, at the sole expense of the
holder(s) of Registrable Securities, a Registration Statement and such other
documents, including a prospectus, as may be necessary (in the opinion of both
counsel for the Company and counsel for such Majority Holder) in order to comply
with the provisions of the Act, so as to permit a public offering and sale of
the Registrable Securities by the holders thereof for nine (9) consecutive
months.
(b) The Company agrees to give written notice of any Demand Registration
Request to all holders of the Registrable Securities within ten (10) days from
the date of the Company's
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receipt of any such Demand Registration Request. After receiving notice from the
Company as provided in this Section 6.3(b), holders of Registrable Securities
may request the Company to include their Registrable Securities in the
Registration Statement to be filed pursuant to Section 6.3(a) hereof by
notifying the Company of their decision to have such securities included within
ten (10) days of their receipt of the Company's notice. The Company's
obligations under Section 6.2 and this Section 6.3 are subject to the holders of
Registrable Securities furnishing the Company with such appropriate information
in connection the filing of a Registration Statement as the Company shall
reasonably request in writing.
(c) The term "Majority Holder" as used in Section 6.3 hereof shall mean any
holder or any combination of holders of Registrable Securities, if included in
such holders' Registrable Securities are that aggregate number of shares of
Common Stock (including Purchaser's Option Shares already issued and Purchaser's
Option Shares issuable pursuant to the exercise of outstanding Purchaser
Options, as would constitute a majority of the aggregate number of shares of
Common Stock (including Purchaser's Option Shares already issued, and
Purchaser's Option Shares issuable pursuant to the exercise of outstanding
Purchaser Options) included in all the Registrable Securities.
(d) Notwithstanding the foregoing provisions of this Section 6.3, no Demand
Registration Request shall obligate the Company to undergo an audit, other than
in the ordinary course of its business.
6.4 Covenants of the Company With Respect to Registration. The Company
covenants and agrees as follows:
(a) In connection with any registration under Section 6.3 hereof, the
Company shall file the Registration Statement as expeditiously as possible, but
in any event no later than forty-five (45) days following receipt of any demand
therefor, shall use its reasonable efforts to have any such Registration
Statement declared effective at the earliest possible time, and shall furnish
each holder of Registrable Securities such number of prospectuses as shall
reasonably be requested.
(b) The Company will take all necessary action which may be required in
qualifying or registering the Registrable Securities included in a Registration
Statement, for offering and sale under the securities or blue sky laws of up to
three (3) states as are reasonably requested by the holders of such securities,
provided that the Company shall not be obligated to execute or file any general
consent to service of process or to qualify as a foreign corporation to do
business under the laws of any such jurisdiction.
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6.5 Indemnification.
(a) The Company's obligations under this Section 6 are conditioned upon
receipt from any holder of Registrable Securities to be sold pursuant to a
Registration Statement, and its successors and assigns, of an agreement to
severally, and not jointly, indemnify, the Company, its officers and directors
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim,
damage or expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished by or on behalf of such holder, or its successors or
assigns, for inclusion in such Registration Statement in a form acceptable to
the Company and its counsel.
(b) If the Company shall enter into an underwriting agreement with a
managing underwriter selected for such underwritten offering the Company may
require that the holders of Registrable Securities shall be parties to any
underwriting agreement relating to an underwritten sale of their Registrable
Securities.
7. Purchaser's Representations and Warranties.
In order to induce the Company to execute this Agreement and to consummate
the transactions set forth herein, Purchaser hereby represents and warrants with
and covenants to the Company as follows:
7.1 Purchaser acknowledges that Purchaser has received and reviewed copies
of the Company's Prospectus dated October 22, 1997 relating to the Company's
initial public offering and Form 10-QSB for the three months ended September 31,
1997 and has had the opportunity to ask questions of and receive answers from
qualified representatives of the Company concerning the business and financial
condition of the Company and the terms and conditions of this Agreement, and all
of such questions have been answered to Purchaser's satisfaction.
7.2 Purchaser represents that the Purchaser is a sophisticated investor
familiar with the type of risks inherent in the acquisition of securities such
as the Purchaser's Options and the Purchaser's Option Shares and that, by reason
of his knowledge and experience in financial and business matters in general,
and investments of this type in particular, Purchaser is capable of evaluating
the merits and risks of an investment in the Purchaser's Options and Purchaser's
Option Shares.
7.3 Purchaser is able to bear the economic risk of an investment in the
Purchaser's Options and Purchaser's Option
-6-
<PAGE>
Shares, including, without limiting the generality of the foregoing, the risk of
losing part or all of Purchaser's investment in the Purchaser's Options and
Purchaser's Option Shares and Purchaser's probable inability to sell or transfer
the Purchaser's Options and Purchaser's Option Shares for an indefinite period
of time.
7.4 Purchaser is acquiring the Purchaser's Options and Purchaser's Option
Shares for Purchaser's own account and for the purpose of investment and not
with a view to, or for resale in connection with, any distribution within the
meaning of the Act or Other Securities Laws.
7.5 Purchaser further acknowledges that the Purchaser's Options and
Purchaser's Option Shares have not been registered under the Act or any of the
Other Securities Laws, and may not be sold, transferred or otherwise disposed of
except if an effective registration statement is then in effect or pursuant to
an exemption from registration under said Act.
7.6 Purchaser acknowledges that the Company has relied on the
representations contained herein and that the statutory basis for exemption from
the requirements of Section 5 of the Act may not be present if, notwithstanding
such representations, Purchaser were acquiring the Shares for resale or
distribution upon the occurrence or non-occurrence of some predetermined event.
8. The Company's Representations and Warranties.
In order to induce Purchaser to execute this Agreement and to consummate
the transactions set forth therein, the Company hereby represents and warrants
with and covenants to Purchaser as follows:
8.1 The Company is a corporation duly organized, validly existing and in
good standing under the laws of Florida and has all requisite corporate power
and authority to own and operate its properties and to carry on its business as
currently conducted and to enter into this Agreement and issue the Purchaser's
Options and Purchaser's Option Shares pursuant hereto.
8.2 This Agreement has been duly authorized, executed and delivered by or
on behalf of the Company and constitutes the valid and binding obligation of the
Company enforceable against the Company in accordance with its terms.
8.3 The issuance of the Purchaser's Option Shares upon exercise of the
Purchaser's Options by the Purchaser or the holder thereof has been duly
authorized and when issued upon exercise of the Purchaser's Options and payment
therefore is
-7-
<PAGE>
received by the Company will be validly issued, fully paid and nonassessable.
8.4 As of the date of this Agreement the Company has 6,153,920 shares of
Common Stock and options to purchase approximately 285,000 shares of Common
Stock outstanding.
9. Conditions to this Agreement.
This Agreement and the parties' obligations hereunder are conditioned upon
(i) AMEX's approval of the Company's additional listing application and (ii) the
consent of L.H. Friend, Weinress, Frankson & Presson, Inc. to the issuance of
the Purchaser's Options and the Purchaser's Option Shares upon exercise of the
Purchaser's Option.
10. Miscellaneous.
10.1 The Purchaser has carefully reviewed the jurisdictional notice below
and agrees to abide by any restrictions contained therein applicable to
Purchaser.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF CERTAIN STATES AND ARE BEING
OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF
SAID ACT AND SUCH LAWS. THE SECURITIES ARE SUBJECT TO THE RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER SAID ACT AND SUCH LAWS PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE
SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY.
NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF
THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE ANY INFORMATION PROVIDED TO THE
INVESTOR IN CONNECTION WITH THE PURCHASE OF THE SECURITIES OFFERED HEREBY. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
10.2 The representations and warranties contained herein shall be true at
and as of the respective dates of delivery of the certificates representing the
Purchaser's Options and Purchaser's Option Shares to Purchaser as though such
representations and warranties were made at and as of such respective dates and
all commitments and covenants made herein shall survive such respective dates.
10.3 All communications hereunder will be in writing and, except as
otherwise provided, will be delivered at, or mailed by certified mail, return
receipt requested, or telegraphed to, the following addresses: if to Purchaser,
addressed to Mr. Carl
-8-
<PAGE>
Wolf, 627 Inwood Lane, South Orange, New Jersey 07079; if to the Company to:
Audio Book Club, Inc., 2295 Corporate Boulevard, N.W., Suite 222, Boca Raton,
Florida 33431, with a copy to Tenzer Greenblatt, LLP, Attention: Robert J.
Mittman, Esq., 405 Lexington Avenue, New York, New York 10174.
10.4 This Agreement shall be deemed to have been made and delivered in New
York City and shall be governed as to validity, interpretation, construction,
effect and in all other respects by the internal laws of the State of New York.
Each of Purchaser and the Company (1) agrees that any legal suit, action or
proceeding arising out of or relating to this Agreement, shall be instituted
exclusively in New York State Supreme Court, County of New York, or in the
United States District Court for the Southern District of New York, (2) waives
any objection which the Purchaser or the Company may have now or hereafter to
the venue of any such suit, action or proceeding, and (3) irrevocably consents
to the jurisdiction of the New York State Supreme Court, County of New York, and
the United States District Court for the Southern District of New York in any
such suit, action or proceeding. Each of the Purchaser and the Company further
agrees to accept and acknowledge service of any and all process which may be
served in any such suit, action or proceeding in the New York State Supreme
Court, County of New York, or in the United States District Court for the
Southern District of New York and agrees that service of process upon the
Purchaser or the Company, as the case may be, mailed by certified mail to the
Purchaser's address or the Company's address, as the case may be, shall be
deemed in every respect effective service of process upon the Purchaser or the
Company, as the case may be, in any such suit, action or proceeding.
10.5 Each party hereto agrees to use its best efforts to take any action
which may be necessary or appropriate or reasonably requested by the other party
hereto in order to effectuate or implement the provisions of this Agreement.
10.6 The rights and obligations of the parties under this Agreement shall
bind and inure to the benefit of the parties and their respective successors and
assigns.
10.7 This Agreement may be executed in separate counterparts, all of which
shall constitute one agreement.
10.8 All notices required or permitted to be given hereunder shall be
personally delivered, sent by courier service or mailed by certified or
registered mail, postage prepaid, to the respective parties at the addresses set
forth herein and shall be deemed given upon receipt.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
PURCHASER:
/s/ Carl Wolf
---------------------------------------
Carl Wolf
SELLER:
AUDIO BOOK CLUB, INC.
By:/s/ John Levy
------------------------------------
Name: John Levy
Title: Executive Vice-President
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
AT DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,655,053
<SECURITIES> 5,143,699
<RECEIVABLES> 3,232,901
<ALLOWANCES> 1,449,445
<INVENTORY> 1,700,374
<CURRENT-ASSETS> 12,661,996
<PP&E> 76,352
<DEPRECIATION> 16,547
<TOTAL-ASSETS> 12,770,020
<CURRENT-LIABILITIES> 3,016,668
<BONDS> 0
0
0
<COMMON> 25,741,063
<OTHER-SE> (15,987,711)
<TOTAL-LIABILITY-AND-EQUITY> 12,770,020
<SALES> 10,078,154
<TOTAL-REVENUES> 10,078,154
<CGS> 5,495,358
<TOTAL-COSTS> 5,495,358
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 435,508
<INCOME-PRETAX> (4,920,851)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,920,851)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,920,851)
<EPS-PRIMARY> (1.29)
<EPS-DILUTED> 0
</TABLE>
