Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to _________
Commission file number 1-13469
Audio Book Club, Inc.
(Exact name of Small Business Issuer as specified in its charter)
Florida 65-0429858
(State or other jurisdiction of (I.R.S. Employment
incorporation or organization) Identification No.)
2295 Corporate Blvd., N.W., Suite 222, Boca Raton, Florida 33431
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (561) 241-1426
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for shorter period
that the registrant was required to file such report) and (2) has been subject
to such filing requirement for the past 90 days. Yes __X__ No _____
As of August 16, 1999, there were 9,118,920 shares of the Issuer's Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one):
Yes _____ No __X__
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Audio Book Club, Inc.
Quarter ended June 30, 1999
Form 10-QSB
Index
Page
PART I: Financial Information.
Item 1: Financial Statements.
Consolidated Balance Sheet at June 30, 1999 (unaudited) 3
Consolidated Statements of Operations for the three and six months
ended June 30, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 (unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations. 12
PART II: Other Information
Item 1: Legal Proceedings. 20
Item 2: Changes in Securities and Use of Proceeds 20
Item 6: Exhibits and Reports on Form 8-K. 21
Signatures 22
Articles of Amendment to Articles of Incorporation 23
Financial Data Schedule 25
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Part I Financial Information
Item 1. Financial Statements
AUDIO BOOK CLUB, INC.
Consolidated Balance Sheet
June 30, 1999
(Dollars in thousands)
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 594
Short-term investments to be held to maturity 100
Accounts receivable, net of allowances for sales returns and
doubtful accounts of $3,544 6,502
Inventory 5,876
Royalty advances 2,810
Prepaid expenses 1,222
Deferred member acquisition costs - current 1,906
--------
Total current assets 19,010
Fixed assets, at cost, net of accumulated
depreciation of $608 1,360
Deferred member acquisition costs - non-current 2,545
Deferred financing costs 1,574
Prepaid expenses - non-current 558
Other intangibles, net 15,042
Goodwill, net 47,363
--------
$ 87,452
========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 5,876
Accrued expenses 3,516
Current portion of long-term debt 2,520
--------
Total current liabilities 11,912
--------
Long-term debt 53,080
--------
Commitments and contingencies
Preferred stock, no par value, authorized 5,000,000 shares; no
shares issued and outstanding
Common stock subject to contingent put 4,283
Common stock; no par value, authorized 75,000,000 shares;
7,878,920 issued and outstanding 41,902
Contributed capital 2,323
Accumulated deficit (26,048)
--------
Total common stockholders' equity 18,177
--------
$ 87,452
========
See accompanying notes to consolidated financial statements.
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AUDIO BOOK CLUB, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 12,545 $ 5,647 $ 25,372 $ 10,412
Returns, discounts and allowances 3,582 1,516 6,480 2,752
-------- -------- -------- --------
Sales, net 8,963 4,131 18,892 7,660
Cost of sales 4,682 2,512 9,308 5,110
-------- -------- -------- --------
Gross profit 4,281 1,619 9,584 2,550
Expenses:
Advertising and promotion 1,611 2,176 3,097 3,685
General and administrative 2,024 536 4,039 1,187
Depreciation and Amortization 1,451 6 2,865 11
-------- -------- -------- --------
Operating loss (805) (1,099) (417) (2,333)
Interest (expense) income, net of interest income of $64 and
$87 for three and six months ended June 30,1999,
respectively (1,119) 83 (2,172) 191
-------- -------- -------- --------
Net loss $ (1,924) $ (1,016) $ (2,589) $ (2,142)
======== ======== ======== ========
Net loss per share of common stock
(basic and diluted) $ (.25) $ (.17) $ (.35) $ (.35)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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AUDIO BOOK CLUB, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,589) $ (2,142)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,865 11
Amortization of deferred member acquisition costs 299 --
Amortization of deferred financing fees 152 --
Changes in asset and liability accounts:
(Increase) in accounts receivable, net (1,578) (1,185)
(Increase) in inventory (546) (230)
(Increase) in prepaid expenses (598) (455)
(Increase) decrease in royalty advances (563) 34
(Increase) in deferred member acquisition costs (4,750) --
Increase in accounts payable and accrued expenses 2,863 688
-------- --------
Net cash used in operating activities (4,445) (3,279)
-------- --------
Cash flows from investing activities:
Acquisition of fixed assets and software (276) (533)
Maturity of short-term investment 500 5,140
Purchase of short-term investment (100) (500)
Acquisition of Audio Books Direct (18,799) --
Additions to goodwill relating to acquisitions (596) --
-------- --------
Net cash (used in) provided by investing activities (19,271) 4,107
-------- --------
Cash flows from financing activities:
Increase in borrowings under amended credit agreement 10,750 --
Net proceeds from issuance of common stock 8,367 --
Proceeds from issuance of long-term debt 4,350 --
Payments of long-term debt (1,500) --
Increase in deferred financing costs (343) --
Proceeds from issuance of option -- 50
-------- --------
Net cash provided by financing activities 21,624 50
-------- --------
Net (decrease) increase in cash and cash equivalents (2,092) 878
Cash and cash equivalents at beginning of period 2,686 3,655
-------- --------
Cash and cash equivalents at end of period $ 594 $ 4,533
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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AUDIO BOOK CLUB, INC.
(Dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(Unaudited)
(1) Organization
Audio Book Club, Inc. (the "Company"), a Florida corporation, was formed on
August 16, 1993. The Company markets audiobooks through its membership club,
which markets and sells audiobooks via the Internet and by mail order. The
Company is also a publisher of audio and video content including classic radio
and video programs and markets and sells that content on audio cassettes, CDs
and video cassettes via numerous distribution channels including the Internet,
catalogues, radio shows, retail and other outlets.
(2) Significant Accounting Policies
Basis of Presentation
The interim unaudited financial statements should be read in conjunction
with the Company's audited financial statements contained in its Annual Report
on Form 10-KSB for the year ended December 31, 1998. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates. On an ongoing basis management reviews its estimates based
on current available information. Changes in facts and circumstances may result
in revised estimates. In the opinion of management, the interim unaudited
financial statements include all material adjustments, all of which are of a
normal recurring nature, necessary to present fairly the Company's financial
position, results of operations and cash flows for the periods presented. The
results for any interim period are not necessarily indicative of results for the
entire year or any other interim period.
Advertising and Promotional Costs
Promotional costs directed at current members are expensed on the date the
promotional materials are mailed. The cost of any premiums, gifts or the
discounted audiobooks in the promotional offer to new members is expensed as
incurred. The Company accounts for direct response advertising for the
acquisition of new members in accordance with AICPA Statement of Position 93-7,
Reporting on Advertising Costs (SOP 93-7). SOP 93-7 states that the cost of
direct response advertising (a) whose primary purpose is to elicit sales to
customers who could be shown to have responded specifically to the advertising
and (b) that results in probable future benefits should be reported as assets
net of accumulated amortization. Prior to 1999, the Company had expensed these
costs as incurred. Beginning in 1999, the Company must capitalize such direct
response advertising costs and amortize these costs over the period of future
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benefit, which has been determined to be 30 months, in accordance with SOP 93-7
because the Company, after five years of operations, now has a sufficient
historical pattern of results. The costs are being amortized on a straight-line
basis. If the Company had expensed the cost of direct response advertising as
incurred, the Company would have reported a net loss of $ 4,798 and $7,040 and a
net loss per share of common stock of $.62 and $.95 for the three and six months
ended June 30, 1999, respectively. The majority of this loss would have been
primarily due to the direct response advertising, which results in an increase
of membership in Audio Book Club.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(3) Acquisition
On June 15, 1999, a wholly-owned subsidiary of the Company acquired from
Doubleday Direct, Inc. ("Doubleday") its business of direct marketing and
distribution of audiobooks and related products through Doubleday's Audiobooks
Direct Club ("Audiobooks Direct"). At the time of the acquisition, Audiobooks
Direct was one of the industry's leading direct marketers of audiobooks using a
membership club format.
As part of the acquisition, the Company acquired Audiobooks Direct's total
membership file of over 500,000 members as well as some other assets relating
exclusively to the Audiobooks Direct Club. The Company also entered into a
reciprocal marketing arrangement with Doubleday pursuant to which it received
the exclusive rights, with respect to audiobooks, for three years, subject to a
one-year extension, at no additional cost and an additional three years, at
market rates, to insert its new member acquisition materials into the member
mailings of Doubleday's consumer book clubs and Doubleday Select's professional
book clubs, as well as rights to distribute its member solicitation packages via
direct mail campaigns to the Doubleday and Doubleday Select book club membership
lists. Subject to exceptions, we will also be Doubleday's exclusive source for
audiobooks.
In addition, the Company entered into a non-compete agreement whereby
Doubleday agreed not to engage in designated activities which compete with the
operation of Company's Audio Book Club for five years. Moreover, the Company
entered into a transitional services agreement with Doubleday.
At the time of the acquisition, together with Doubleday, the Company
announced the launch of a co-branded website to be coupled with an online
cross-marketing and advertising campaign.
As consideration for the acquisition and the related transactions,
including the mailing, non-compete, and transitional services agreements,
Doubleday received from the Company cash consideration of $18,615.
The Company also incurred cash costs and fees of $184 and estimates
additional costs and fees of approximately $175. The Company has accounted for
the acquisition using the purchase method of accounting. The total purchase
price of approximately $18,974 has been allocated on a preliminary basis as
follows: royalty advances ($1,286), prepaid expenses ($26), identifiable
intangible assets ($5,400, representing customer lists,
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covenant not to compete and certain agreements acquired in the acquisition) and
goodwill ($12,262). Identifiable intangible assets will be amortized over their
estimated useful lives (ranging from 3 to 7 years) and goodwill will be
amortized over a period not to exceed 20 years.
The following unaudited pro forma consolidated results of operations for
the six months ended June 30, 1999 and 1998 assume that the acquisition of
Doubleday occurred as of January 1, 1998. Additionally, the unaudited pro forma
consolidated results of operations for the six months ended June 30, 1998
assumes that the following transactions also occurred as of January 1, 1998:
(1) The acquisition of Radio Spirits, Inc. ("RSI") on December 14, 1998
and certain assets of an affiliated company, Buffalo Productions, Inc.
and a 50% interest in a joint venture owned by the principal of Radio
Spirits.
(2) The acquisition of substantially all of the assets used by Metacom,
Inc. in connection with its Adventures in Cassettes ("AIC") business
on December 14, 1998.
(3) The acquisition of substantially all of the assets used by Premier
Electronic Laboratories, Inc. ("Premier") in connection with its
business of licensing, producing, marketing, and selling classic
videos and radio programs on December 14, 1998
(4) The acquisition of substantially all of the assets used in the
audiobook club division of The Columbia House Company ("CH") on
December 31, 1998
1999 1998
---- ----
Net sales $ 27,613 $ 27,250
======== ========
Net loss $ (4,989) $ (9,807)
======== ========
Loss per share
(basic and diluted) $ (.67) $ (1.59)
======== ========
(4) Financings
In June 1999, in connection with the acquisition of Audiobooks Direct, the
Company, Fleet National Bank and ING (U.S.) Capital Corporation amended the
terms of the Company's existing credit agreement to provide for borrowing of an
additional $6,000 as a term advance under the credit agreement and increased the
Applicable Margin, as defined, by 1/4 of 1%.
At June 30, 1999, an aggregate of $37,170 principal amount of indebtedness
was outstanding under the credit agreement. The principal amount outstanding
under the term advance is payable in quarterly installments commencing on
September 30, 1999 through December 31, 2003 as follows: a quarterly payment of
$330 for each of the next two quarters, four quarterly payments of $930 in the
year 2000, four quarterly payments of $1,550 in the year 2001, four quarterly
payments of $2,170 in the year 2002 and four quarterly payments of $2,790 during
2003. At August 16, 1999, indebtedness outstanding under the credit agreement
was $28,633.
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In connection with the additional loan in June 1999, the Company granted
the lenders three-year warrants to purchase up to 119,546 shares of the
Company's common stock at an exercise price of $14.25, subject to adjustment.
The warrants have been valued at $2.63 using the Black-Scholes valuation model
and have been included in deferred financing costs.
In June 1999, the Company borrowed $4,350 from Norton Herrick, Chairman of
the Board and Co-Chief Executive Officer, by issuing a 9% bridge convertible
senior subordinated promissory note due December 14, 2004. In a separate letter
agreement, the Company agreed, subject to shareholder approval, that if the
Company refinanced or replaced this note with debt or equity financing provided
by anyone other than Mr. Herrick or a family member or affiliate of Mr. Herrick,
the Company will issue to Mr. Herrick warrants to purchase an additional 125,000
shares of common stock at $12 per share, which warrants shall also be identical
to the warrants issued to him in connection with the initial note issued to Mr.
Herrick in December 1998. Subsequent to June 30, 1999, this promissory note was
repaid. See footnote (8) below.
(5) Stockholders' Equity and Stock Options and Warrants
In March 1999, the Company's stockholders approved (i) an amendment to the
Company's Articles of Incorporation to increase the Company's authorized common
stock to 75,000,000 shares and (ii) the adoption of the Company's 1999 Stock
Incentive Plan. The 1999 Stock Incentive Plan provides for grants of awards of
stock options, restricted stock, deferred stock or other stock based awards. A
total of 2,500,000 shares of common stock have been reserved for issuance
pursuant to the plan.
In April 1999, the Company sold 750,000 shares of its common stock for
gross proceeds of $8,250 to a "qualified institutional buyer" as such term is
defined in Rule 144A of the Securities Act of 1933.
In April 1999, the Company formed a Technology Advisory Board ("Advisory
Board") to further enhance its Internet strategy. The Advisory Board consists of
five members. The Advisory Board will work with the Company to increase its
online business and its strategic alliances on the Internet.
In June 1999, the Company sold 50,000 shares of its common stock for gross
proceeds of $550 to three "qualified institutional buyers" as such term is
defined in Rule 144A of the Securities Act of 1933.
In addition to 119,546 warrants granted in connection with the financing
described in footnote (4) above, during the six months ended June 30, 1999, the
Company granted both plan and non-plan options and warrants to purchase a total
of 1,185,100 shares of the Company's common stock to officers, directors,
Advisory Board members, employees and consultants. The options and warrants vest
at various times and have exercise periods of five and ten years. Exercise
prices range from $8.00 to $13.1875 per share except for 8,000 warrants which
have an exercise price of $.10 per share. In addition, the Company canceled
five-year options to purchase a total of 11,800 shares of the Company's common
stock.
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(6) Net Loss Per Share of Common Stock
The weighted average number of common shares used in the net loss per share
computations for the three and six months ended June 30, 1999 were 7,762,986 and
7,418,699, respectively and 6,153,920 for the comparable periods of the prior
year.
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 5,834,217 at June 30, 1999 and
945,600 at June 30, 1998. Included in the June 30, 1999 common share equivalents
are 1,258,427 shares assuming the conversion of a $14,000 9% convertible senior
subordinated promissory note.
(7) Supplemental Cash Flow Information
In March 1998, the Company granted options to purchase 21,600 shares of the
Company's Common Stock at $4.40 per share to a company as compensation for the
costs incurred in transferring to the Company the toll free phone numbers, (800)
AUDIOBOOK and (888) AUDIOBOOK. Such options were immediately vested and
exercisable and have a five-year term. The Company has recorded an asset in the
amount of $54, the negotiated cost of transferring the phone numbers and is
amortizing the asset over six years.
During the six months ended June 30, 1999, 8,000 of the options and
warrants granted were granted to an officer of the Company below the current
market price at the date of grant. These options have been valued at $7.16 each
using the Black-Scholes valuation model and have been included in prepaid
expenses and are being amortized over the term of the related employment
agreement.
Included in the total options and warrants granted during the six months
ended June 30, 1999 were options and warrants granted to the Internet Advisory
Board members. These options were valued at $113 using the Black-Scholes
valuation model and have been included in prepaid expenses and are being
amortized over the period of service.
Included in the total options and warrants granted during the six months
ended June 30, 1999 were warrants granted to a law firm as partial payment for
legal services provided in connection with the Company's various acquisitions.
The warrants have been valued at $2.46 each using the Black-Scholes valuation
model and have been included in the cost of the acquisitions.
Cash paid for interest expense was $2,176 for the six months ended June 30,
1999.
(8) Subsequent Events
In July 1999, the Company sold 540,000 shares of its common stock for gross
proceeds of $7,020 to a "qualified institutional buyer" as such term is defined
in Rule 144A of the Securities Act of 1933.
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In July 1999, the Company repaid the $4,350 9% bridge convertible senior
subordinated promissory note due December 31, 2004 to Norton Herrick and issued
him warrants, subject to shareholder approval, to purchase 125,000 shares of
common stock at $12 per share.
Subsequent to June 30, 1999, the Company granted options to purchase 70,500
shares of the Company's common stock to an officer, employees and consultants at
exercise prices ranging from $12 1/2 to $13 1/2. The options have an exercise
period of five years and vest over various periods.
In August 1999, Norton Herrick, Chairman of the Board and Co-Chief
Executive Officer sold $5,000 of the original $14,000 9% convertible senior
subordinated promissory note due December 31, 2004 issued to him in December
1998 in connection with various acquisitions by the Company to ABC Investment,
L.L.C., an unaffiliated third party. The $5,000 promissory note has
substantially the same terms and conditions as the original promissory note.
In August 1999, the Company sold 700,000 shares of its common stock for
gross proceeds of $9,100 to a "qualified institutional buyer" as such term is
defined in Rule 144A of the Securities Act of 1933. Fees associated with the
transaction were $273 and were paid to an unaffiliated third party.
In August 1999, the Company, Fleet National Bank and ING (U.S.) Capital
Corporation amended the terms of the Company's existing credit agreement whereby
certain covenants under the agreement were adjusted as a result of recent
acquisition activity and sales of common stock. In connection therewith the
Company paid a fee of $290.
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Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Dollars in thousands, except per share data)
Introduction
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: The statements which are not historical facts contained in this
Quarterly Report are forward looking statements that involve risks and
uncertainties, including but not limited to, the Company's ability to
successfully implement a strategy of continued growth and other risks described
in the Company's Registration Statement on Form S-3. The Company's actual
results may differ materially from the results discussed in any forward-looking
statement.
Audio Book Club, Inc. (the "Company") markets audiobooks through its
membership club, which markets and sells audiobooks via the Internet and by mail
order. The Company is also a publisher of audio and video content including
classic radio and video programs and markets and sells that content on audio
cassettes, CDs and video cassettes via numerous distribution channels including
the Internet, catalogues, radio shows, retail and other outlets.
On July 23, 1999, MediaBay.com, the Company's media portal and e-commerce
site was launched simultaneously with its Woodstock 99 official webcast
broadcast. MediaBay.com offers visitors a single location for the entertainment
features of leading content-driven websites and the product selection and
service of great commerce-driven sites. The MediaBay.com network of websites
includes www.audiobookclub.com, www.audiobook.com, www.radiospirits.com,
www.videoyesteryear.com and www.downloadbay.com.
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 acquisition, 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 has aggressively pursued marketing opportunities on the
Internet by entering into advertising arrangements with respect to audiobooks
with various Internet companies such as Microsoft Corporation (for its MSNBC
website, MSN.com portal, Hot Mail and web TV services and link exchange
property), Broadcast.com, Inc. and Mail.com. The Company's Internet web site
offers visitors the opportunity to become club members, and offers club members
and visitors the opportunity to execute club transactions online and locate and
sample thousands of audiobook selections.
Promotional costs directed at current members are expensed on the date the
promotional materials are mailed. The cost of any premiums, gifts or the
discounted audiobooks in the promotional offer to new members is expensed as
incurred. The Company accounts for direct response advertising for the
acquisition of new members in
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accordance with AICPA Statement of Position 93-7, Reporting on Advertising Costs
(SOP 93-7). SOP 93-7 states that the cost of direct response advertising (a)
whose primary purpose is to elicit sales to customers who could be shown to have
responded specifically to the advertising and (b) that results in probable
future benefits should be reported as assets net of accumulated amortization.
Prior to 1999, the Company had expensed these costs as incurred. Beginning in
1999, the Company must capitalize such direct response advertising costs and
amortize these costs over the period of future benefit, which has been
determined to be 30 months, in accordance with SOP 93-7 because the Company,
after five years of operations, now has a sufficient historical pattern of
results. The costs are being amortized on a straight-line basis.
On June 15, 1999, a wholly-owned subsidiary of the Company acquired from
Doubleday Direct, Inc. ("Doubleday") its business of direct marketing and
distribution of audiobooks and related products through Doubleday's Audiobooks
Direct Club ("Audiobooks Direct"). At the time of the acquisition, Audiobooks
Direct was one of the industry's leading direct marketers of audiobooks using a
membership club format.
As part of the acquisition, the Company acquired Audiobooks Direct's total
membership file of over 500,000 members as well as some other assets relating
exclusively to the Audiobooks Direct Club. The Company also entered into a
reciprocal marketing arrangement with Doubleday pursuant to which it received
the exclusive rights, with respect to audiobooks, for three years, subject to a
one-year extension, at no additional cost and an additional three years, at
market rates, to insert its new member acquisition materials into the member
mailings of Doubleday's consumer book clubs and Doubleday Select's professional
book clubs, as well as rights to distribute its member solicitation packages via
direct mail campaigns to the Doubleday and Doubleday Select book club membership
lists. Subject to exceptions, we will also be Doubleday's exclusive source for
audiobooks.
In addition, the Company entered into a non-compete agreement whereby
Doubleday agreed not to engage in designated activities which compete with the
operation of Company's Audio Book Club for five years. Moreover, the Company
entered into a transitional services agreement with Doubleday.
At the time of the acquisition, together with Doubleday, the Company
announced the launch of a co-branded website to be coupled with an online
cross-marketing and advertising campaign. As part of the agreement, the
companies will also cross promote the other's services through animated links
and banners to be located on their respective websites, including
www.doubledaybookclub.com and www.literaryguild.com and Audio Book Club's
www.audiobookclub.com site.
Additionally, the Company entered into a fulfillment agreement whereby the
Company will move all of its fulfillment operations currently performed by
outside third parties to Doubleday's book fulfillment center. The Company
anticipates this move to occur during the fourth quarter of 1999 and also
anticipates a reduction in fulfillment costs once fully integrated into the
Doubleday center
As consideration for the acquisition and the related transactions,
including the mailing, non-compete, and transitional services agreements,
Doubleday received from the Company cash consideration of $18,615. The Company
also incurred cash costs and fees of $184 and estimates additional costs and
fees of approximately $175.
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Results of Operations
(Dollars in thousands except per share data)
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30,
1998
Gross sales for the three months ended June 30, 1999 were $12,545, an
increase of $6,898 or 122.2% as compared to $5,647 for the three months ended
June 30, 1998. The increase in gross sales was primarily attributable to (1)
increased sales of audiobooks resulting from the continued expansion of the
Company's membership base, (2) sales from the CH audiobook club for the full
three months ended June 30, 1999, (3) sales from RSI, AIC and Premier
(Collectively, the "Radio Group"), and (4) the inclusion of sales from
Audiobooks Direct since its acquisition on June 15, 1999.
Returns, discounts and allowances for the three months ended June 30, 1999
were $3,582 or 28.6% of gross sales as compared to $1,516 or 26.8% of gross
sales for the prior comparable period. The increase in returns as a percentage
of gross sales is primarily due to increased returns at the Audio Book Club,
partially offset by the historically lower return rates from the Radio Group and
the CH audiobook club. The increase in returns, discounts and allowances was
primarily due to the increased gross sales.
Principally as a result of higher gross sales, net sales for the three
months ended June 30, 1999 increased $4,832 or 117.0% to $8,963.
Cost of sales for the three months ended June 30, 1999 increased $2,170 to
$4,682 from $2,512 in the prior comparable period. Gross profit increased $2,662
to $4,281 for the three months ended June 30, 1999 from $1,619 in the prior
comparable period. Gross profit as a percentage of net sales increased to 47.8%
from 39.2% due to improvement in the price being paid by the Company for product
for the audiobook clubs, better fulfillment arrangements and higher gross profit
as a percentage of net sales at the Radio Group.
Advertising and promotion expenses (for acquisition and retention of
members) decreased $565 or 26.0% to $1,611, for the three months ended June 30,
1999 as compared to $2,176 in the prior comparable period. The decrease is due
to the capitalization of direct response advertising in the three months ended
June 30, 1999, partially offset by higher non-capitalized advertising expenses
resulting from an increase in audio book club membership through continued
expansion and acquisition and the acquisition of the Radio Group.
General and administrative expenses for the three months ended June 30,
1999 increased $1,488 to $2,024 from $536 for the three months ended June 30,
1998. General and administrative expense increases are principally attributable
to the acquisition and integration of the Radio Group including its personnel
and facilities, increased bad debt expenses as a result of sales increases and
increased personnel and related costs as the Company continues to grow and bring
services previously performed by outside vendors inside as opportunities present
themselves to reduce costs. The Company did not employ any personnel from the CH
audiobook club or from Audiobooks Direct.
14
<PAGE>
Depreciation and amortization expenses for the three months ended June 30,
1999 were $1,451, an increase of $1,445, as compared to $6 for the prior
comparable period. The increase in depreciation expense relates to the
acquisition of fixed assets in the Radio Group acquisitions and the depreciation
of Internet development costs. The increase in amortization is attributable to
the amortization of goodwill and other intangible assets in connection with the
Company's various acquisitions.
Net interest expense for the three months ended June 30, 1999 was $1,119 as
compared to net interest income of $83 for the three months ended June 30, 1998.
The interest expense in 1999 is attributable to debt incurred in connection with
the Company's various acquisitions.
Primarily due to increased gross sales of $6,898, improvements in gross
profit as a percentage of net sales and the capitalization of direct response
advertising, the Company's earnings before interest, taxes, depreciation and
amortization, ("EBITDA") increased $1,739 to $646 for the three months ended
June 30, 1999. Net loss for the three months ended June 30, 1999 was $1,924 or
$.25 per share of common stock as compared to a net loss of $1,016 or $.17 per
share of common stock for the three months ended June 30, 1998. The increase was
primarily attributable to increase interest expense and amortization of goodwill
and other intangibles in connection with the Company's various acquisitions.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Gross sales for the six months ended June 30, 1999 were $25,372 an increase
of $14,960 or 143.7%, as compared to $10,412 for the six months ended June 30,
1998. The increase in gross sales was primarily attributable to (1) increased
sales of audiobooks resulting from the continued expansion of the Company's
membership base, (2) sales from the CH audiobook club for the full six months
ended June 30, 1999, (3) sales from RSI, AIC and Premier (collectively, the
"Radio Group"), and (4) the inclusion of sales from Audiobooks Direct since its
acquisition on June 15,1999.
Returns, discounts and allowances for the six months ended June 30, 1999
were $6,480 or 25.5% of gross sales as compared to $2,752 or 26.4% of gross
sales for the prior comparable period. The decrease in returns as a percentage
of gross sales is due to historically lower return rates from the Radio Group
and the CH audiobook club partially offset by an increase in returns at the
Audio Book Club for the six month period ended June 30, 1999. The increase in
returns, discounts and allowances was primarily due to the increased gross
sales.
Principally as a result of higher gross sales, net sales for the six months
ended June 30, 1999 increased $11,232 or 146.6% to $18,892.
Cost of sales for the six months ended June 30, 1999 increased $4,198 to
$9,308 from $5,110 in the prior comparable period. Gross profit increased $7,034
to $9,584 for the six months ended June 30, 1999 from $2,550 in the prior
comparable period. Gross profit as a percentage of net sales increased to 50.7%
from 33.3% due to improvement in the price being paid by the Company for product
for the audiobook clubs, better
15
<PAGE>
fulfillment arrangements and higher gross profit as a percentage of net sales at
the Radio Group.
Advertising and promotion expenses (for acquisition and retention of
members) decreased $588 or 16.0% to $ 3,097, for the six months ended June 30,
1999 as compared to $3,685 in the prior comparable period. The decrease is due
to the capitalization of direct response advertising in the six months ended
June 30, 1999 partially offset by higher non-capitalized advertising expenses
resulting from an increase in Audio Book Club membership through continued
expansion and acquisition and the acquisition of the Radio Group.
General and administrative expenses for the six months ended June 30, 1999
increased $2,852 to $ 4,039 from $1,187 for the six months ended June 30, 1998.
General and administrative expense increases are principally attributable to the
acquisition and integration of the Radio Group including its personnel and
facilities, increased bad debt expenses as a result of sales increases and
increased personnel and related costs as the Company continues to grow and bring
services previously performed by outside vendors inside as opportunities present
themselves to reduce costs. The Company did not employ any personnel from the CH
Audiobook Club or from Audiobooks Direct.
Depreciation and amortization expenses for the six months ended June 30,
1999 were $2,865, an increase of $2,854, as compared to $11 for the prior
comparable period. The increase in depreciation expense relates to the
acquisition of fixed assets in the Radio Group acquisitions and the depreciation
of Internet development costs. The increase in amortization is attributable to
the amortization of goodwill and other intangible assets in connection with the
Company's various acquisitions.
Net interest expense for the six months ended June 30, 1999 was $2,172 as
compared to net interest income of $191 for the six months ended June 30, 1998.
The interest expense in 1999 is attributable to debt incurred in connection with
the Company's various acquisitions.
Primarily due to increased gross sales of $14,960, improvements in gross
profit as a percentage of net sales and the capitalization of direct response
advertising, the Company's EBITDA increased $4,770 to $2,448 for the six months
ended June 30, 1999. Net loss for the six months ended June 30, 1999 was $2,589
or $.35 per share of common stock as compared to a net loss of $2,142 or $.35
per share of common stock for the six months ended June 30, 1998. The increase
in net loss was primarily attributable to increased interest expense and
amortization of goodwill and other intangibles in connection with the Company's
various acquisitions.
Liquidity and Capital Resources
The Company's capital requirements have been and will continue to be
significant due to, among other things, expansion of working capital, costs
associated with direct mail campaigns, other new member recruitment advertising
and promotion and brand building, expanding and maintaining an Internet web site
and an Internet media portal.
16
<PAGE>
Historically, the Company's cash requirements have exceeded cash flows from
operations.
For the six months ended June 30, 1999, the Company's cash decreased by
$2,092 as the Company used net cash of $4,445 and $19,271 for operating and
investing activities, respectively, and had cash provided by financing
activities of $21,624. During the six months ended June 30, 1998, the Company's
cash increased $878, as the Company used net cash of $3,279 for operating
activities and had cash provided by investing and financing activities of $4,107
and $50, respectively.
For the six months ended June 30, 1999, net cash used in operations
principally consisted of the net loss of $2,589, increases in accounts
receivable of $1,578, increases in prepaid expenses of $598, increases in
deferred member acquisition costs of $4,750 offset by an increase in accounts
payable and accrued expenses of $2,863. Net cash used in operations was
partially offset by depreciation and amortization expenses of $3,316 included in
the net loss.
The increase in accounts receivable during the six months ended June 30,
1999 is principally due to higher sales. The increase in prepaid expenses is
principally attributable to payments made as part of an Internet advertising
agreement, which is being expensed over the life of the agreement. Deferred
member acquisition costs relate to the Company's method of accounting for direct
response advertising as described above. The increase in accounts payable and
accrued expenses was primarily attributable to timing of vendor payments and
invoicing. Subsequent to June 30, 1999 this increase has been significantly
reduced.
For the six months ended June 30, 1998, the cash used in operating
activities consisted of, in addition to the net loss of $2,142, increases in
accounts receivable and prepaid expenses of $1,185 and $455, respectively,
offset by an increase in accounts payable and accrued expenses of $688.
Cash used in investing activities for the six months ended June 30, 1999
was primarily attributable to the acquisition of Audiobooks Direct.
For the six months ended June 30, 1999, net cash provided by financing
activities consisted of increased borrowings under the Company's credit
agreement, as amended, for the acquisition of Audiobooks Direct described above,
proceeds from the sales of common stock as described above, and the issuance of
a related party subordinated note in connection with the acquisition of
Audiobooks Direct as described above. These increases were partially offset by
principal payments on the Company's long-term bank debt and a payment on the
previous related party subordinated loan.
In April 1999, the Company completed the sale 750,000 shares of common
stock to Quantum Partners, LDC, a fund advised by Soros Fund Management, LLC.
The Company received total proceeds of $8,250.
In June 1999, in connection with the acquisition of Audiobooks Direct, the
Company, Fleet National Bank and ING (U.S.) Capital Corporation amended the
terms of the Company's existing credit agreement to provide for borrowing of an
additional $6,000 as a term advance under the credit agreement and increased the
Applicable Margin, as defined, by 1/4 of 1%.
17
<PAGE>
At June 30, 1999, an aggregate of $37,170 principal amount of indebtedness
was outstanding under the credit agreement. The principal amount outstanding
under the term advance is payable in quarterly installments commencing on
September 30, 1999 through December 31, 2003 as follows: a quarterly payment of
$330 for each of the next two quarters, four quarterly payments of $930 in the
year 2000, four quarterly payments of $1,550 in the year 2001, four quarterly
payments of $2,170 in the year 2002 and four quarterly payments of 2,790 during
2003. At August 16, 1999, indebtedness outstanding under the credit agreement
was $28,633.
In connection with the additional loan in June 1999, the Company granted
the lenders three-year warrants to purchase up to 119,546 shares of the
Company's common stock at an exercise price of $14.25, subject to adjustment.
In June 1999, the Company borrowed $4,350 from Norton Herrick, Chairman of
the Board and Co-Chief Executive Officer, by issuing a 9% bridge convertible
senior subordinated promissory note due December 14, 2004. In a separate letter
agreement, the Company agreed, subject to shareholder approval, that if the
Company refinanced or replaced this note with debt or equity financing provided
by anyone other than Mr. Herrick or a family member or affiliate of Mr. Herrick,
the Company will issue to Mr. Herrick warrants to purchase an additional 125,000
shares of common stock at $12 per share, which warrants shall also be identical
to the warrants issued to him in connection with the initial note issued to Mr.
Herrick. Subsequent to June 30, 1999, this promissory note was repaid. See
below.
In June 1999, the Company sold 50,000 shares of its common stock for gross
proceeds of $550 to a "qualified institutional buyer" as such term is defined in
Rule 144A of the Securities Act of 1933.
In July 1999, the Company sold 540,000 shares of its common stock for gross
proceeds of $7,020 to a "qualified institutional buyer" as such term is defined
in Rule 144A of the Securities Act of 1933.
In July 1999, the Company repaid the $4,350 9% bridge convertible senior
subordinated promissory note due December 31, 2004 to Norton Herrick and issued
him warrants, subject to shareholder approval, to purchase 125,000 shares of
common stock at $12 per share.
In August 1999, Norton Herrick, Chairman of the Board and Co-Chief
Executive Officer sold $5,000 of the original $14,000 9% convertible senior
subordinated promissory note due December 31, 2004 issued to him in December,
1998 in connection with various acquisitions by the Company to ABC Investment,
L.L.C., an unaffiliated third party. The $5,000 promissory note has
substantially the same terms and conditions as the original promissory note.
In August 1999, the Company sold 700,000 shares of its common stock for
gross proceeds of $9,100 to a "qualified institutional buyer" as such term is
defined in Rule 144A of the Securities Act of 1933. Fees associated with the
transaction were $273 and were paid to an unaffiliated third party.
In August 1999, the Company, Fleet National Bank and ING (U.S.) Capital
Corporation amended the terms of the Company's existing credit agreement whereby
certain covenants under the agreement were adjusted as a result of recent
acquisition activity and sales of common stock. In connection therewith the
Company paid a fee of $290.
18
<PAGE>
Impact of Year 2000 Issue
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. This Year 2000 issue
potentially affects all individuals and companies (including the Company, its
customers, business partners, vendors, suppliers, service providers and banks.)
Management believes its systems, and those of its primary service providers
are Year 2000 compliant and has received notification of such from our primary
service providers. Management is continuing its communications with its
principal vendors to ensure that they are Year 2000 compliant. Management does
not anticipate that the Company will incur significant operating expenses or be
required to invest in computer system improvements to be Year 2000 compliant.
Management is developing contingency plans that identify alternative
vendors, suppliers and service providers in the event current vendors, suppliers
or service providers suffer significant disruption as a result of Year 2000
compliance failures.
Should some of the Company's systems or those of its service providers or
vendors not be available due to Year 2000 problems, in a reasonably likely worst
case scenario, the Company may experience delays in its ability to perform
certain functions, but does not expect an inability to perform critical
functions or to otherwise conduct its business.
Quarterly Fluctuations
The Company's operating results vary from period to period as a result of
purchasing patterns of members, the timing, costs, magnitude and success of
Internet initiatives and direct mail campaigns and other new member recruitment
advertising, member attrition, the timing and popularity of new audiobook
releases and product returns. The timing of new member enrollment varies
depending on the timing, magnitude and success of new member advertising,
particularly direct mail and Internet advertising campaigns.
19
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings.
The Company has been named as a co-defendant together with a collection
agency used by the Company, in a lawsuit in the United States District Court for
the Northern District of Illinois, alleging violations by such collection agency
and the Company of the Fair Debt Collection Practices Act. Such lawsuit has been
brought by a Class Action on behalf of individuals, limited to those who were
sent certain collection letters within the state of Illinois during the one year
period preceding the filing of the lawsuit. The lawsuit has not yet been
certified as a Class Action. The collection agency has agreed to indemnify the
Company and therefore the Company believes that the outcome of the action will
not have a material adverse impact on the Company.
Item 2. Changes in Securities and Use of Proceeds.
In April 1999, the Company completed the sale of 750,000 shares of common
stock to Quantum Partners, LDC, a fund advised by Soros Fund Management, LLC.
The Company received total proceeds of $8,250. The proceeds were used to
finance, in part, the acquisition of Audiobooks Direct.
In June 1999, the Company sold 50,000 shares of its common stock for gross
proceeds of $550 to a "qualified institutional buyer" as such term is defined in
Rule 144A of the Securities Act of 1933. The proceeds were used for general
corporate purposes.
In June 1999, in connection with the additional bank loan to partly finance
the Audiobooks Direct acquisition, the Company granted the lenders three-year
warrants to purchase up to 119,546 shares of the Company's common stock at an
exercise price of $14.25 per share, subject to adjustment.
In addition to 119,546 warrants granted in connection with the financing
mentioned above, during the three months ended June 30,1999, the Company granted
both plan and non-plan options and warrants to purchase a total of 925,500
shares of the Company's common stock to an officer, a director, Advisory Board
members, employees and consultants. The options and warrants vest at various
times and have a exercise periods of five and ten years years. Exercise prices
range from $10.00 to $13.1875 per share. In addition, the Company canceled
five-year options to purchase a total of 11,800 shares of the Company's common
stock.
20
<PAGE>
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 3.1 Articles of Amendment to Articles of Incorporation of Audio
Book Club, Inc.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
(i) Report dated April 16, 1999 amending 8-K reporting acquisition of
Columbia House Audiobook Club.
(ii) Report dated April 23, 1999 updating the financial statements and
pro-forma information provided in Report on Form 8-K reporting acquisition of
Columbia House Audiobook Club for incorporation in the Registration Statement on
Form S-3.
(iii) Report dated April 27, 1999 amending 8-K reporting acquisition of
Columbia House Audiobook Club.
(iv) Report dated June 29, 1999 reporting the acquisition from Doubleday
Direct, Inc. its Audiobooks Direct Club.
21
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Audio Book Club, Inc. has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Audio Book Club, Inc.
Dated: August 16, 1999 By: /s/ Michael Herrick
----------------------------------
Michael Herrick
Co-Chief Executive Officer
Dated August 16, 1999 By: /s/ John F. Levy
----------------------------------
John F. Levy
Chief Financial and
Accounting Officer
22
Exhibit 3.1
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
AUDIO BOOK CLUB, INC.
- --------------------------------------------------------------------------------
(present name)
Pursuant to the provisions of section 607.1006, Florida Statutes, this Florida
profit corporation adopts the following articles of amendment to its articles of
incorporation:
FIRST: Amendment(s) adopted: (indicate article number(s) being amended, added or
deleted)
The first paragraph of ARTICLE III, which is hereby amended to increase the
authorized shares of Common Stock, shall read as follows:
"The total number of shares of capital stock which the Corporation
shall have authority to issue is Eighty Million (80,000,000) shares, of
which Seventy Five Million (75,000,000) shares shall be Common Stock,
without par value, and Five Million (5,00,000) shares shall be Preferred
Stock, without par value."
SECOND: If an amendment provides for an exchange, reclassification or
cancellation of issued shares, provisions for implementing the amendment if not
contained in the amendment itself, are as follows:
23
<PAGE>
THIRD: The date of each amendment's adoption: March 26, 1999.
FOURTH: Adoption of Amendment(s) (CHECK ONE)
|X| The amendment(s) was/were approved by the shareholders. The number of
votes cast for the amendment(s) was/were sufficient for approval.
|_| The amendment(s) was/were approved by the shareholders through voting
groups.
The following statement must be separately provided for each voting
group entitled to vote separately on the amendment(s):
"The number of votes cast for the amendment(s) was/were
sufficient for approval by _________________________________."
voting group
|_| The amendment(s) was/were adopted by the board of directors without
shareholder action and shareholder action was not required.
|_| The amendment(s) was/were adopted by the incorporators without shareholder
action and shareholder action was not required.
Signed this 26 day of March, 1999.
Signature /s/ Michael Herrick
---------------------------------------------------------
(By the Chairman or Vice Chairman of the Board of Directors,
President or other officer if adopted by the shareholders)
OR
(By a director if adopted by the directors)
OR
(By an incorporator if adopted by the incorporators)
Michael Herrick
---------------
Typed or printed name
Assistant Secretary
-------------------
Title
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the
Company's financial statements included in this quarterly report on Form
10-QSB, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 594
<SECURITIES> 100
<RECEIVABLES> 10,046
<ALLOWANCES> 3,544
<INVENTORY> 5,876
<CURRENT-ASSETS> 19,010
<PP&E> 1,968
<DEPRECIATION> 608
<TOTAL-ASSETS> 87,452
<CURRENT-LIABILITIES> 11,912
<BONDS> 53,080
0
0
<COMMON> 41,902
<OTHER-SE> (23,725)
<TOTAL-LIABILITY-AND-EQUITY> 87,452
<SALES> 18,892
<TOTAL-REVENUES> 18,892
<CGS> 9,308
<TOTAL-COSTS> 9,308
<OTHER-EXPENSES> 10,001
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,172
<INCOME-PRETAX> (2,589)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,589)
<EPS-BASIC> (.35)
<EPS-DILUTED> (.35)
</TABLE>
