Proxy Statement Pursuant to Section 14(A) of the Securities
Exchange Act of 1934 (Amendment No. __)
Filed by the registrant [X]
Filed by a party other than the registrant [_]
Check the appropriate box:
[X] Preliminary proxy statement
[_] Definitive proxy statement
[_] Definitive additional materials
[_] Soliciting material pursuant to Rule a-11(c) or Rule 14a-12
Audio Book Club, Inc.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined).
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(4) Proposed maximum aggregate value of transaction:
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(5) Total Fee Paid:
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[_] Fee paid previously with preliminary materials.
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[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing party:
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(4) Date filed:
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<PAGE>
PRELIMINARY COPY
Audio Book Club, Inc.
2295 Corporate Boulevard, N.W. - Suite 222
Boca Raton, Florida 33431
August 30, 1999
Dear Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders of
Audio Book Club, Inc. (the "Company") which will be held on Monday, September
27, 1999 at 9:00 A.M. local time at The Headquarters Plaza Hotel, 3 Headquarters
Plaza, Morristown, New Jersey 07960.
The Notice of Annual Meeting and Proxy Statement which follow describe the
business to be conducted at the meeting.
Your Board of Directors unanimously believes that the election of the
nominees specified in the Proxy Statement as directors, the proposal to change
the Company's name to MediaBay, Inc. and the proposals approving certain terms
of the December 31, 1998 and June 11, 1999 letter agreements between the Company
and Norton Herrick, it's Co-Chief Executive Officer, is in the best interests of
the Company and its shareholders and, accordingly, recommends a vote "FOR" the
election of the nominees and the proposals on the enclosed proxy card.
Whether or not you plan to attend the meeting in person, it is important
that your shares be represented and voted. After reading the enclosed Notice of
Annual Meeting and Proxy Statement, may I urge you to complete, sign, date and
return the enclosed proxy card in the envelope provided. If the address on the
accompanying material is incorrect, please advise our Transfer Agent,
Continental Stock Transfer & Trust Company, in writing, at 2 Broadway, New York,
New York 10004.
Your vote is very important, and we will appreciate a prompt return of your
signed proxy card. We hope to see you at the meeting and appreciate your
continued support.
Sincerely yours,
Norton Herrick
Co-Chief Executive Officer
<PAGE>
AUDIO BOOK CLUB, INC.
2295 Corporate Boulevard, N.W., Suite 222
Boca Raton, Florida 33431
--------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MONDAY, SEPTEMBER 27, 1999
--------------------
To the Shareholders of AUDIO BOOK CLUB, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting ("Annual Meeting") of
Shareholders of Audio Book Club, Inc. (the "Company") will be held on Monday,
September 27, 1999, at 9:00 A.M. local time at The Headquarters Plaza Hotel, 3
Headquarters Plaza, Morristown, New Jersey 07960, for the following purposes:
1. To elect three Class II directors to hold office until the 2002 Annual
Meeting of Shareholders and until their respective successors have been duly
elected and qualified;
2. To approve an amendment to the Company's Articles of Incorporation to
effect a change in the Company's name to MediaBay, Inc.;
3. To approve certain terms of a letter agreement dated December 31, 1998
between the Company and Norton Herrick, its Co-Chief Executive Officer, relating
to a loan made to the Company by Mr. Herrick to help finance the Company's
acquisition of The Columbia House Audio Book Club;
4. To approve certain terms of a letter agreement dated June 11, 1999
between the Company and Norton Herrick relating to a loan made by Mr. Herrick to
help finance the Company's acquisition of Doubleday Direct Inc.'s Audiobooks
Direct Club; and
5. To transact such other business as may properly come before the Annual
Meeting or any adjournment or adjournments thereof.
Only shareholders of record at the close of business on August 9, 1999 are
entitled to notice of and to vote at the Annual Meeting or any adjournments
thereof.
By Order of the Board of Directors,
Norton Herrick
Co-Chief Executive Officer
August 30, 1999
<PAGE>
PRELIMINARY COPY
AUDIO BOOK CLUB, INC.
2295 Corporate Boulevard, N.W., Suite 222
Boca Raton, Florida 33431
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PROXY STATEMENT
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ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MONDAY, SEPTEMBER 27, 1999
This proxy statement (the "Proxy Statement") is furnished in connection
with the solicitation of proxies by the Board of Directors of Audio Book Club,
Inc. (the "Company") for use at the Annual Meeting of Shareholders (the "Annual
Meeting") to be held on Monday, September 27, 1999, including any adjournment or
adjournments thereof, for the purposes set forth in the accompanying Notice of
Meeting.
Management intends to mail this proxy statement and the accompanying form
of proxy to shareholders on or about August 31, 1999.
Proxies in the accompanying form, duly executed and returned to the
management of the Company and not revoked, will be voted at the Annual Meeting.
Any proxy given pursuant to such solicitation may be revoked by the shareholder
at any time prior to the voting of the proxy by a subsequently dated proxy, by
written notification to the Secretary of the Company, or by personally
withdrawing the proxy at the Annual Meeting and voting in person.
The address and telephone number of the principal executive offices of the
Company are: 2295 Corporate Blvd., N.W., Suite 222, Boca Raton, Florida 33431,
Telephone No.: (561) 241-1426.
OUTSTANDING SHARES AND VOTING RIGHTS
Only shareholders of record at the close of business on August 9, 1999 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting. As
of the Record Date, there were issued and outstanding 8,418,920 shares of the
Company's common stock, no par value per share (the "Common Stock"). Each share
of Common Stock entitles the holder to one vote on each matter submitted to a
vote at the Annual Meeting. Messrs. Norton Herrick and Howard Herrick, who
together maintain voting rights to approximately 40.6% of the Company's voting
securities, have indicated an intention to vote for the election of the nominees
listed below as Class II directors and the proposals to approve the change in
the Company's name to MediaBay, Inc. and to approve certain terms of the
December 31, 1998 and June 11, 1999 letter agreements between the Company and
Norton Herrick. See "Voting Security Ownership of Certain Beneficial Owners and
Management."
<PAGE>
VOTING PROCEDURES AND PROXY INFORMATION
The Class II directors will be elected by the affirmative vote of a
plurality of the shares of Common Stock present in person or represented by
proxy at the Annual Meeting voting as a single class, provided a quorum exists.
A quorum is established if, as of the Record Date, at least a majority of the
outstanding shares of Common Stock are present in person or represented by proxy
at the Annual Meeting. The proposed amendment to the Company's Articles of
Incorporation to change the Company's name to MediaBay, Inc. requires the
affirmative vote of the holders of a majority of the shares of Common Stock
outstanding on the Record Date. All other matters at the meeting, including, but
not limited to, the proposals to approve certain terms of the December 31, 1998
and June 11, 1999 letter agreements between the Company and Norton Herrick, will
be decided by the affirmative vote of a majority of the shares of Common Stock
present in person or represented by proxy at the meeting and entitled to vote on
the subject matter voting as a single class, provided a quorum exists. Votes
will be counted and certified by one or more Inspectors of Election who are
expected to be employees of Continental Stock Transfer & Trust Company, the
Company's transfer agent. Messrs. Norton Herrick and Howard Herrick who, in the
aggregate, have the right to vote approximately 40.6% of the Common Stock issued
and outstanding at the Record Date have indicated their intent to vote these
shares in favor of the nominees for Class II directors and proposals I, II and
III discussed below.
In accordance with Florida law, abstentions and "broker non-votes" (i.e.,
proxies from brokers or nominees indicating that such persons have not received
instructions from the beneficial owner or other persons entitled to vote shares
as to a matter with respect to which the brokers or nominees do not have
discretionary power to vote) will be treated as present for purposes of
determining the presence of a quorum. For purposes of determining approval of a
matter presented at the meeting, abstentions will be deemed present and entitled
to vote and will, therefore, have the same legal effect as a vote "against" a
matter presented at the meeting. Broker non-votes will be deemed not entitled to
vote on the subject matter as to which the non-vote is indicated. Abstentions
and broker non-votes will have no effect on the election of directors.
The enclosed proxies will be voted in accordance with the instructions
thereon. Unless otherwise stated, all shares represented by such proxy will be
voted as instructed. Proxies may be revoked as noted above.
The entire cost of soliciting proxies, including the costs of preparing,
assembling, printing and mailing this Proxy Statement, the proxy and any
additional soliciting material furnished to shareholders, will be borne by the
Company. Arrangements will be made with brokerage houses and other custodians,
nominees and fiduciaries to send proxies and proxy materials to the beneficial
owners of stock, and such persons may be reimbursed for their expenses by the
Company. Proxies may also be solicited by directors, officers or employees of
the Company in person or by telephone, telegram or other means. No additional
compensation will be paid to such individuals for these services.
ELECTION OF DIRECTORS
The Company's By-Laws provide that the Board of Directors of the Company is
divided into three classes (Class I, Class II and Class III). At each Annual
Meeting of Shareholders, directors constituting one class are elected for a
three-year term. At this year's Annual Meeting of Shareholders, three (3) Class
II directors will be elected to hold office for a term expiring at the Annual
Meeting of Shareholders to be held in 2002. It is the intention of the Board of
Directors to nominate Michael Herrick, Roy Abrams and Carl Amari as Class II
directors. Each director will be elected to serve until a successor is elected
and qualified or until the director's earlier resignation or removal.
At this year's Annual Meeting of Shareholders, the proxies granted by
shareholders will be voted individually for the election, as directors of the
Company, of the persons listed below, unless a proxy specifies that it is not to
be voted in favor of a nominee for director. In the event either or both of the
nominees listed
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<PAGE>
below shall be unable to serve, it is intended that the proxy will be voted for
such other nominees as are designated by the Board of Directors. Each of the
persons named below has indicated to the Board of Directors that he will be
available to serve.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION
OF THE NOMINEES SPECIFIED BELOW.
The following information is with respect to the nominees for election at
this Annual Meeting of Shareholders:
CLASS II DIRECTORS
(To be Elected)
(New Term Expires in 2002)
Michael Herrick, 32, co-founded the Company and has been Vice Chairman of
the Board of the Company since January 1996, Chief Operating Officer of the
Company since January 1997, Co-Chief Executive Officer of the Company since
April 1998 and a 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.
Mr. Herrick is a member of the Board of Directors of the Audio Publisher's
Association.
Roy Abrams, 55, has been a director of the Company since October 1997.
Since April 1993 and from 1986 through March 1990, Mr. Abrams has owned and
operated Abrams Direct Marketing, a marketing consulting firm. 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.
Carl P. Amari, 35, has been the President of the Company's Radio Group
division since the acquisition by the Company of the Radio Group in December
1998. Since 1989, Mr. Amari was the CEO, and principal shareholder of Radio
Spirits, Inc. Radio Spirits is recognized as the largest company in the world
specializing in the syndication, sales and licensing of old time radio
programming. He currently produces and hosts a weekly radio program, "When Radio
Was", aired in Chicago. He is also the executive producer of a nationally
syndicated version of the same program, which airs on 500 affiliates, as well as
for three other related syndicated radio programs. RSI twice made Inc's list of
the fastest growing privately held companies. Norton Herrick has agreed to use
his best efforts to cause Mr. Amari to be nominated to serve as a director and
has agreed to vote his shares to elect Mr. Amari to serve as a director.
The following information is with respect to incumbent directors in Class I
and Class III of the Board of Directors who are not nominees for election at
this Annual Meeting of Shareholders:
CLASS I DIRECTORS
(Term Expires in 2001)
Norton Herrick, 60, co-founder of the Company, has been Chief Executive
Officer, Chairman of the Board and a director of the Company since its inception
and was President of the Company from its inception until January 1996. Mr.
Herrick has been a private businessman for over 30 years and through his
wholly-owned affiliates, Mr. Herrick has completed transactions, including
building, managing and marketing primarily
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<PAGE>
real estate valued at an aggregate of approximately $2 billion. Mr. Herrick
serves on the advisory board of the Make A Wish Foundation, the advisory
committee of the National Multi Housing Council and the National Board of
Directors for People for the American Way.
Jesse Faber, 44, 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.
CLASS III DIRECTORS
(Term Expires in 2000)
Howard Herrick, 34, co-founder of the Company, 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.
Carl T. Wolf, 56, has been a director of the Company since March 1998. Carl
T. Wolf is the managing partner of the Lakota Investment Group. Mr. Wolf was
formerly Chairman of the Board, President and Chief Executive Officer of Alpine
Lace Brands, Inc. ("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.
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.
The following is information with respect to certain of the Company's
officers who are not directors or nominees for director:
John F. Levy, 43, has been an employee of the Company since November 1997
and has served as Executive Vice-President and Chief Financial Officer of the
Company since January 1998. 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. Mr. Levy is a Certified
Public Accountant with nine years experience with the national public accounting
firms of Ernst & Young, Laventhol & Horwath and Grant Thornton.
Stephen M. McLaughlin, 33, has been Executive Vice President and Chief
Technology Officer of the Company since February 1999. Prior to joining the
Company, Mr. McLaughlin was Vice President, Information Technology for Preferred
Healthcare Staffing, Inc. (PHS), a nurse-staffing division of Preferred
Employers Holdings, Inc. Mr. McLaughlin co-founded and was a director, Chief
Operating Officer and Chief Information Officer of NET Healthcare, Inc., from
1997 until it was acquired by Preferred Employers Holdings in August 1998. In
1994, Mr. McLaughlin founded FX Media, Inc., an Internet and multimedia
development company. As CEO of FX Media, he served as senior software engineer
for all of its projects. Mr.
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<PAGE>
McLaughlin holds a degree in Computer Science and Engineering from the
Massachusetts Institute of Technology and conducted research at the MIT Media
lab.
Robert Toro, 35, has been Senior Vice President of Finance of the Company
since July 1999 and an employee of the Company since April 1999. Prior to
joining the Company, Mr. Toro was Senior Vice President of AM Cosmetics Co. and
had previously served in Senior Financial positions in both public and private
entertainment and publishing companies. From 1992 through early 1997, Mr. Toro
served in various Senior Financial positions with Marvel Entertainment Group,
Inc., a publicly traded youth entertainment company. Mr. Toro is a Certified
Public Accountant with six years of progressive experience with the national
public accounting firm of Arthur Andersen where he was employed immediately
prior to joining Marvel Entertainment Group.
During the fiscal year ended December 31, 1998, the Board of Directors held
two meetings. The meetings were attended by all of the directors, either in
person or by telephone. The Board also took action by unanimous written consent
in lieu of meetings.
The Company has established an Audit Committee which is responsible for
making recommendations concerning the engagement of independent public
accountants, reviewing the plans and results of the audit engagement with the
independent public accountants, approving professional services provided by the
independent public accountants and reviewing the adequacy of the Company's
internal accounting controls. The Audit Committee is currently comprised of
Messrs. Michael Herrick, Roy Abrams and Carl Wolf. The Company does not have a
compensation committee or a nominating committee.
Compliance with Section 16(A) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's officers,
directors, and persons who own more than 10% of a registered class of its equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors, and greater than 10%
shareholders are required by Securities and Exchange Commission regulations to
furnish the Company with copies of all forms that they file pursuant to Section
16(a).
Based solely upon the Company's review of the copies of such forms that it
received, the Company believes that, during the year ended December 31, 1998,
all filing requirements applicable to the Company's officers, directors, and
greater than 10% shareholders were complied with, except for a Form 4 with
respect to one transaction in April 1998, which was inadvertently filed in an
untimely manner by Mr. Carl Wolf.
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<PAGE>
EXECUTIVE COMPENSATION
Executive Compensation
The following table discloses for the fiscal years ended December 31, 1996,
1997 and 1998, compensation paid to Messrs. Norton Herrick and Michael Herrick,
the Company's Co-Chief Executive Officers and each other executive officer of
the Company whose salary together with any bonus was in excess of $100,000
during the fiscal year ended December 31, 1998 (the "Named Executives").
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------- Awards
----------------------
Securities Underlying
Name and Principal Position Year Salary Bonus Options/SAR's (#)
- --------------------------- ---- ------ ----- -----------------
Norton Herrick 1996 $ -0- $ -0- -0-
Co-Chief Executive 1997 19,354 -0- -0-
Officer 1998 100,000 -0- 1,000,000
Michael Herrick 1996 59,500 -0- -0-
Co-Chief Executive 1997 72,879 -0- -0-
Officer 1998 125,000 -0- 250,000
Jesse Faber 1996 15,062 25,000 -0-
President 1997 128,417 40,000 50,000
1998 140,000 35,000 50,000(1)
Howard Herrick 1996 102,000 -0- -0-
Executive Vice President 1997 115,129 -0- -0-
1998 125,000 -0- 250,000
John Levy 1996 -0- -0- -0-
Executive Vice President 1997 19,125 -0- -0-
and Chief Financial Officer 1998 137,083 7,500 50,000
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(1) Represents options originally granted in the fiscal year ended December 31,
1997 that are reflected in the 1997 column above whose exercise price was
reduced during fiscal 1998 to the fair market value of the underlying
Common Stock at the time of repricing.
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<PAGE>
The following table discloses options granted during the fiscal year ended
December 31, 1998 to the Named Executives:
OPTION/SAR GRANTS IN FISCAL YEAR ENDING DECEMBER 31, 1998
<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> <C>
Norton Herrick 250,000 13.8 $ 3.50 6/16/03
750,000 41.5 $ 5.25 9/10/03
Michael Herrick 100,000 5.5 $ 3.50 2/09/03
150,000 8.3 $ 7.88 11/05/03
Jesse Faber 50,000(2) 2.8 $ 3.50 Five Years from
Vesting(1)
Howard Herrick 100,000 5.5 $ 3.50 2/09/03
150,000 8.3 $ 7.88 11/05/03
John Levy 30,000(3) 1.7 $ 3.50 Five Years from
20,000(4) 1.1 $ 3.50 Vesting(3)(4)
</TABLE>
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(1) On September 17, 1997, the Company granted to Mr. Faber options to purchase
50,000 shares of our common stock at an exercise price equal to 110% of the
initial public offering price of its 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 subject to earlier expiration if Mr. Faber is not
employed by the Company.
(2) Reflects options originally granted on September 17, 1997 whose exercise
price was reduced on June 16, 1998 to the fair market value of the
underlying Common Stock at such date.
(3) Such options vest as to one-third of the shares covered thereby on January
1, 1999 with the balance vesting on January 1, 2000. Such options shall be
exercisable for a period of five years commencing immediately upon the
applicable vesting period subject to earlier expiration if Mr. Levy is not
employed by the Company.
(4) Such options vest as to one-half of the shares covered thereby on June 16,
1999 with the balance vesting on June 16, 2000. Such options shall be
exercisable for a period of five years commencing immediately upon the
applicable vesting period subject to earlier expiration if Mr. Levy is not
employed by the Company.
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<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, 1998. No options were exercised by the Named
Executives during fiscal 1998:
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, 1998 1998(1)
-------------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Norton Herrick 1,000,000 -0- $6,812,500 $ -0-
Michael Herrick 250,000 -0- 1,374,250 -0-
Jesse Faber 10,000 40,000 81,250 325,000
Howard Herrick 250,000 -0- 1,374,250 -0-
John Levy 10,000 40,000 81,250 325,000
</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. The closing sale price of the common stock on December 31, 1998 was
$11.625.
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 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 us during the term of the employment
agreement and for a period of two years thereafter. 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 us 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,
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<PAGE>
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 us during the term of the employment agreement and for a period of
two years thereafter. 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 us during the twelve months prior to the date of
termination.
In February 1999, the Company entered into an employment agreement with
Jesse Faber which provides for a base compensation at the rate of $154,000 per
annum. The agreement expires on October 31, 1999 and provides for a bonus of
$45,000 payable if Mr. Faber is employed by the Company at the end of the term.
Pursuant to the agreement, the Company granted to Mr. Faber options to purchase
10,000 shares of the common stock at an exercise price of $8.00 per share. The
options vest on October 31, 1999, provided that Mr. Faber is employed by the
Company on such date.
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 business and affairs 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.
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 the common stock at an exercise price
of $11.00 per share (which exceeded fair market value on the date of grant). The
option exercise price was subsequently repriced to $3.50 per share. Options for
10,000 shares vest at the end of the first year of the employment agreement and
options for 20,000 shares vest at the end of the second year of employment,
provided Mr. Levy is employed by the Company on the vesting dates. However, in
the event of a change in control, all options shall immediately vest and become
exercisable.
In January 1999, effective February 15, 1999, the Company entered into an
employment agreement with Stephen McLaughlin which provides for an annual base
compensation of $150,000 and a performance-based bonus of $15,000 payable if Mr.
McLaughlin is employed by the Company at the end of the first year of the
employment term. Pursuant to the agreement, the Company granted to Mr.
McLaughlin options to purchase 150,000 shares of the common stock at an exercise
price of $9.75 per share and options to purchase 8,000 shares of the common
stock at an exercise price of $.10 per share. The 8,000 options exercisable at
$.10 per share vested on February 15, 1999. The 150,000 options exercisable at
$9.75 vest as follows: options for 25,000 shares vested on February 15, 1999,
options for 25,000 shares vest at the end of the first year of the employment
agreement, options for 30,000 shares vest at the end of the second year of
employment, options for 35,000 shares vest at the end of the third year of the
employment agreement options for 35,000 shares vest at the end of the fourth
year of employment.
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<PAGE>
In December 1998, the Company's subsidiary, Classic Radio Holding Corp.,
entered into a three-year employment agreement with Carl Amari. Pursuant to the
agreement, Mr. Amari is entitled to receive a base salary of $200,000 per year
during the first 18 months of the agreement and $300,000 per year during the
second 18 months of the agreement. The agreement also provides that Mr. Amari
shall also be appointed as a member of the Company's Board of Directors for as
long as he is employed by Classic Radio.
Stock Plans
In June 1997, the Company's shareholders approved a stock 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 under the Internal Revenue Code of 1986, as
amended or (ii) nonqualified options. Incentive stock options may be granted
under the option plan to the officers and employees. 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 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 incentive stock options, 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.
Incentive stock options 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 100% 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 incentive stock options 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 incentive stock options granted to
persons holding 10% or more of the voting stock of the Company). All options
granted under 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.
As of the Record Date, options to purchase an aggregate of 1,963,300 shares
of the common stock have been granted under the option plan.
In March 1999, the Company's shareholders approved the Company's 1999 Stock
Incentive Plan. The 1999 plan provides for the grant of any or all of the
following types of awards: (1) stock options, which may be either incentive
stock options or non-qualified stock options, (ii) restricted stock, (iii)
deferred stock and (iv) other stock-based awards. Awards may be granted singly,
in combination, or in tandem, as determined by the administrators of the 1999
plan. A total of 2,500,000 shares of common stock, subject to anti-dilution
adjustment as provided in the 1999 plan, have been reserved for distribution
pursuant to the 1999 plan. The maximum number of shares of common stock that may
be issued upon the grant of an award to any employee of the Company on the last
day of any taxable year cannot exceed 1,500,000 shares during the term of the
1999 plan.
The 1999 plan can be administered by the Board of Directors or a Stock
Incentive Committee consisting of two or more non-employee members of the Board
of Directors appointed by the Board. The Board of Directors or Stock Incentive
Committee, as the case may be, shall determine those persons to whom awards
under the 1999 plan may be granted.
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<PAGE>
Under the 1999 plan, the Board of Directors or Stock Incentive Committee
may grant shares of restricted common stock either alone or in tandem with other
awards. Restricted and deferred stock awards give the recipient the right to
receive a specified number of shares of common stock, subject to such terms,
conditions and restrictions as the Board of Directors or Stock Incentive
Committee deem appropriate. Restrictions may include limitations on the right to
transfer the stock until the expiration of a specified period of time and
forfeiture of the stock upon the occurrence of certain events such as the
termination of employment prior to expiration of a specified period of time. In
addition, a participant in the 1999 plan who has received a deferred stock award
may request, under certain conditions, the Board of Directors or Stock Incentive
Committee to defer the receipt of an award (or an installment of an award) for
an additional specified period or until the occurrence of a specified event.
Other stock-based awards, which may include performance shares and shares
valued by reference to the performance of the Company or any parent or
subsidiary of the Company, may be granted either alone or in tandem with other
awards.
As of the Record Date, options to purchase an aggregate of 902,000 shares
of the Common Stock have been granted under the 1999 plan.
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<PAGE>
VOTING SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the Record Date
relating to the beneficial ownership of shares of Common Stock by (i) each
person or entity who is known by the Company to own beneficially 5% or more of
the outstanding Common Stock, (ii) each of the Company's directors and nominees
for director, (iii) each of the Named Executives, and (iv) all directors and
executive officers of the Company as a group:
<TABLE>
<CAPTION>
Number of Shares Percentage of Outstanding
of Common Stock Common Stock
Name of Beneficial Owner Beneficially Owned(2) Beneficially Owned
- ------------------------ --------------------- ------------------
<S> <C> <C>
Norton Herrick(1)......................... 3,444,109(3) 31.7%
Howard Herrick(1)......................... 3,941,100(4) 45.5
Quantum Partners LDC
Kaya Flamboya
Willemsted, Curaco
Netherlands, Antilles .................... 750,000(5) 8.9
Jeff Feinberg
c/o JLF Asset Management, LLC
660 Madison Avenue, 18th Floor
New York, New York 10021.................. 540,000(6) 6.4
Michael Herrick........................... 250,000(7) 2.9
Carl Wolf................................. 95,000(8) 1.1
John Levy................................. 21,000(9) *
Jesse Faber............................... 10,000(10) *
Roy Abrams................................ 10,000(11) *
All directors and executive officers as a
group (10 persons)........................ 7,150,164(3)(4)(7)(8)(9)(10)(11)(12) 61.7
</TABLE>
- ----------
* Less than 1%
(1) The address for each of Norton Herrick and Howard Herrick is in care of
Audio Book Club, Inc., 20 Community Place, Morristown, New Jersey 07690.
(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 the Record Date 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 the Record Date have been exercised
and converted.
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<PAGE>
(3) Includes (A) 8,200 shares of common stock held by Norton Herrick, (B)
488,460 shares of common stock held by Howard Herrick, (C) 488,460 shares
of common stock held by the M.E. Herrick Irrevocable Trust, of which
Michael Herrick is the sole beneficiary and Howard Herrick is the sole
trustee, (D) 1,000,000 shares of common stock issuable upon exercise of
options granted under the 1997 stock option plan, (E) 150,000 shares of
common stock issuable upon exercise of options granted to Evan Herrick
under the 1997 stock option plan, (F) 808,989 shares of common stock
issuable upon conversion of the Note at an initial conversion price of
$11.125 per share and (G) 500,000 shares of common stock issuable upon
exercise of a warrant issued on December 31, 1998 at an initial exercise
price of $12.00 per share. Does not include 2,714,180 shares held by the
Norton Herrick Irrevocable Trust of which Norton Herrick is the sole
beneficiary and Howard Herrick is the sole trustee and 775,000 shares of
common stock issuable upon exercise of options granted under the 1999 stock
incentive plan. The Norton Herrick Irrevocable ABC 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 in his own behalf and on behalf of the M.E. Herrick
Irrevocable Trust. Evan Herrick has irrevocably granted to Norton Herrick
sole voting and dispositive power with respect to the shares of common
stock issuable upon exercise of the 150,000 options granted to Evan Herrick
on November 5, 1998.
(4) Includes (A) 2,714,180 shares held by the Norton Herrick Irrevocable ABC
Trust, (B) 488,460 shares of common stock held by Howard Herrick, (C)
488,460 shares of common stock held by the M.E. Herrick Irrevocable Trust
and (D) 250,000 shares of common stock issuable upon exercise of options
granted under the 1997 stock option plan.
(5) According to a Schedule 13G filed with the Securities and Exchange
Commission, each of Soros Fund Management LLC ("SFM LLC"), Mr. George Soros
("Soros") and Mr. Stanley F. Druckenmiller ("Druckenmiller") may be deemed
the beneficial owners of the 750,000 shares that are held for the account
of Quantum Partners LDC ("Quantum Partners") a Cayman Islands exempted
limited duration company. SFM LLC, a Delaware limited liability company,
serves as principal investment advisor to Quantum Partners and, as such,
has been granted investment discretion over portfolio investments,
including the shares, held for the account of Quantum Partners. Soros is
the Chairman of SFM LLC. Druckenmiller is the Lead Portfolio Manager and a
Member of the Management Committee of SFM LLC. According to the Schedule
13G, SFM LLC has sole power to vote and dispose of the shares and each of
Soros and Druckenmiller have shared power to vote or dispose of the shares.
(6) Represents shares held by JLF Partners I, L.P. JLF Partners II, L.P. and
JLF Offshore Fund Ltd.
(7) Includes 250,000 shares of common stock issuable upon exercise of options
granted under the 1997 stock option plan. Does not include 488,460 shares
of common stock held by the M.E. Herrick Irrevocable Trust. The M.E.
Herrick Irrevocable Trust agreement provides that Howard Herrick shall have
sole voting and dispositive power over the shares held by the M.E. Herrick
Irrevocable Trust and Howard Herrick has granted to Norton Herrick sole
dispositive power over the shares held by the M.E. Herrick Irrevocable
Trust.
(8) Includes (A) 5,000 shares of Common Stock, (B) 50,000 shares of common
stock issuable upon exercise of options granted March 18, 1998 at an
exercise price of $5.00 per share, (C) 25,000 shares of common stock
issuable upon exercise of options purchased September 18, 1998 at an
exercise price of $5.00 per share, and (D) 15,000 shares of common stock
issuable upon exercise of options granted under the 1997 stock option plan.
(9) Includes 20,000 shares of common stock issuable upon exercise of options
granted under the 1997 stock option plan. Does not include 30,000 shares
issuable upon exercise of options granted under the 1997 stock option plan.
- 13 -
<PAGE>
(10) Represents shares of common stock issuable upon exercise of options granted
under the 1997 stock option plan.
(11) Represents shares of common stock issuable upon exercise of options granted
under the 1997 stock option plan.
(12) Includes (A) 25,000 shares of common stock issuable upon exercise of
options that are exercisable at $9.75 per share and 8,000 shares of common
stock issuable upon exercise of options that are exercisable at $.10 per
share held by Stephen McLaughlin and (B) 270,125 shares of common stock and
options to purchase 52,750 shares of common stock held by Carl Amari. Does
not include (A) 125,000 shares of common stock and options to purchase
100,000 shares of common stock held in escrow subject to release to Carl
Amari if certain EBITDA targets are met by the portion of the Radio Group's
business acquire from Mr. Amari through the Company's acquisition of Radio
Spirits, Inc. and (B) an additional 50,000 shares issuable upon exercise of
options issuable under the 1999 stock incentive plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases office space in Boca Raton, Florida pursuant to a lease
agreement which expires in November 2000. The Herrick Company, Inc., a company
wholly-owned by Norton Herrick, Chairman of the Board of Directors and the
Co-Chief Executive Officer, guaranteed the Company's obligations under this
lease. During 1998 and until March 1, 1999, the Company subleased additional
office space in Boca Raton, Florida at a monthly rent of $653 from H.H. Realty
Investors, a company wholly owned by Michael Herrick, Co-Chief Executive Officer
of the Company and Vice Chairman of the Board of Directors, Howard Herrick, the
Executive Vice President and a director and Evan Herrick, a son of Norton
Herrick and brother of Michael and Howard Herrick.
The Company also subleases office space in Morristown, New Jersey pursuant
to a sublease agreement dated as of January 1, 1995 between the Company and H.H.
Realty Investors. In January 1998, the sublease agreement was amended to provide
for additional space at its New Jersey location for a total of 2,328 usable
square feet. Minimum monthly rent was $2,900 per month through December 1998.
The sublease has been renewed on a monthly basis at a monthly rate of $2,900.
The Company believes that this lease is on commercially reasonable terms.
On November 17, 1995, Norton Herrick entered into a loan agreement pursuant
to which Norton Herrick agreed to loan the Company up to $8 million, including
the approximately $5.8 million 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 million 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 our initial public offering, as described below. 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 million loan from Bank
of America National Trust and Savings Association 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 $2.25 million 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. This loan was also to be due October 31, 1998,
and had an interest rate which was 2% under the bank's reference rate and was
payable monthly. As discussed below, all of these loans have either been repaid
or converted to equity.
The common stock of the Company owned by Norton Herrick was pledged as
security for the $3 million of bank loans. Additionally, in the event the
Company failed to repay such bank loans at maturity, the personal
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<PAGE>
guarantee of Norton Herrick would become effective. The Company used a portion
of the proceeds of our initial public offering to repay the bank in the
aggregate principal amount of $9 million plus accrued interest thereon of
$56,167.
Immediately prior to the consummation of the Company's 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 the Company's 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. 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.
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 our inception, and the Company
paid to such entities for such services, in the aggregate, $60,000 and $73,000,
during the years ended December 31, 1997 and 1998. The Company anticipates
obtaining similar services from time to time from companies affiliated with
Norton Herrick for which the Company will reimburse such companies' cost to
provide such services to the Company.
On March 18, 1998, the Company sold to Carl Wolf, a director of the
Company, an option to purchase 50,000 shares of the Company's common stock at an
exercise price of $5.00 per share (the market value on the purchase date). The
purchase price of the option was $50,000, and the option is exercisable until
March 18, 2003. The Company also granted to Mr. Wolf the right to purchase an
additional option for an additional 25,000 shares for $25,000, if Mr. Wolf
continued to serve as a director of the Company for six months. Mr. Wolf
exercised such right and purchased the additional option in September 1998. The
additional option has an exercise price of $5.00 per share and is exercisable
until September 2003.
In December 1998, the Company obtained a portion of the financing for its
recent acquisitions from Norton Herrick by issuing a $15 million principal
amount 9% Convertible Subordinated Promissory Note due December 31, 2004 (the
"Herrick Bridge Note") of which $1 million principal amount was repaid by the
Company on January 12, 1999.
Interest on the Herrick Bridge Note is payable monthly. The Herrick Bridge
Note is convertible, in whole or in part, at the holder's option, into shares of
common stock at the rate of one share per $11.125 of principal or interest
outstanding under the Herrick Bridge Note, subject to adjustment. As additional
consideration for the loan, the Company issued to Mr. Herrick five-year warrants
to purchase 500,000 shares of common stock at any exercise price of $12.00 per
share, subject to adjustment. Pursuant to the terms of a letter agreement dated
December 31, 1998 between the Company and Mr. Herrick (the "Letter Agreement"),
the interest rate of the Herrick Bridge Note will increase to 11%, the
conversion rate of the Herrick Bridge Note is subject to adjustment and the
exercise price of the warrants is subject to adjustment in the event that the
Herrick Bridge Note is not refinanced on or prior to September 30, 1999.
Pursuant to the Letter Agreement, the Company also agreed that if the Herrick
Bridge Note is refinanced 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 350,000 shares of common stock, which warrants will be
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<PAGE>
identical to the warrants issued to him in connection with the Herrick Bridge
Note. The Herrick Bridge Note is subordinated to the Company's obligations under
its credit facility with Fleet is secured by a second lien security interest of
certain assets of the Radio Group. Additionally, pursuant to the terms of a
letter agreement, Mr. Herrick agreed with Fleet not to take certain actions with
respect to the Herrick Bridge Note so long as he held the Herrick Bridge Note.
The terms of Mr. Herrick's investment were approved by the independent members
of the Company's Board of Directors. Prior to consummating the transaction, the
Company's Board of Directors obtained a fairness opinion from an investment
banker.
In connection with the Radio Group acquisition in December 1998, the
Company assumed a lease of property owned by Carl P. Amari, President of the
Radio Group, through a trust. The lease agreement provides for monthly rental
payments of $4,667 and expires in December 2005.
In June 1998, the Company obtained a portion of the financing for its
acquisition of the business of Doubleday Direct's Inc. Audiobooks Direct Club
from a $4,350,000 loan from Norton Herrick evidenced by an additional promissory
note (the "Additional Bridge Note") in the principal amount of $4,350,000. The
Additional Bridge Note was paid in full in July 1999. The Company also agreed
that subject to shareholder approval, it would issue to Mr. Herrick warrants to
purchase 125,000 shares of Common Stock on the same terms as the warrants issued
to him in December 1998 in connection with the Company's closing of certain
acquisitions.
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 and general and administrative
services and access to its corporate airplane to, and obtain insurance coverage
for, the Company at cost.
PROPOSAL I
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION
TO CHANGE THE COMPANY'S NAME TO "MEDIABAY, INC."
The Board of Directors has adopted a resolution proposing that the Company
amend its Articles of Incorporation to change the name of the Company to
"MediaBay, Inc."
Purpose of Amendment
The Board of Directors and management of the Company believe that the
proposed change in the Company's name will enable the Company to establish an
image which both identifies the Company's expanded business activities resulting
from prior acquisitions and emphasizes the importance of the Company's internet
presence and e commerce activities. In the event that the proposed amendment is
not approved at the Annual Meeting, the Company will not change its name. If the
corporate name is changed the Company intends to also change its common stock
trading symbol. The Board reserves the right to delay or cancel the name change
even if shareholder approval is obtained at the Annual Meeting.
Recommendation
The Board of Directors and management believe that a change in the
Company's name to "MediaBay, Inc." is advisable and recommends a vote "FOR" the
proposed amendment to the Company's Articles of Incorporation to change the
Company's name.
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<PAGE>
PROPOSAL II
PROPOSAL TO APPROVE CERTAIN TERMS OF A
DECEMBER 31, 1998 LETTER AGREEMENT
BETWEEN THE COMPANY AND NORTON HERRICK
In connection with the Company's acquisition of The Columbia House Audio
Book Club in December 1998, the Company, after exploring alternative forms of
financing, borrowed $15 million of financing for the acquisition from the
Company's Co-Chief Executive Officer, Norton Herrick, which was used to bridge
the difference between the amount the Company needed to consummate the
acquisition and the amount of financing the Company was able to obtain from
third parties. The bridge loan from Mr. Herrick was evidenced by the Company's
9% Convertible Senior Subordinated Promissory Note Due December 31, 2004 (the
"Herrick Bridge Note"). In January 1999, $1.0 million principal amount of the
Herrick Bridge Note was repaid.
In connection with the financing provided to the Company by Norton Herrick,
the Company and Mr. Herrick entered into a December 31, 1998 letter agreement
that provided, among other things, that in the event that the Company's Board of
Directors did not accept an offer to refinance the Herrick Bridge Note or the
Herrick Bridge Note was not refinanced on or prior to September 30, 1999, after
September 30, 1999, upon receipt of approval of the Company's shareholders
(which the Company's Board of Directors agreed to recommend to the Company's
shareholders), the interest rate of the Herrick Bridge Note will increase to
11%, the conversion price of the Herrick Bridge Note will be decreased to the
lesser of the conversion price then in effect or the average of the closing bid
price of the Common Stock for the five trading days prior to conversion, and (c)
the exercise price of warrants to purchase 500,000 shares of the Company's
Common Stock previously issued to Norton Herrick will be reduced (but not
increased) to the average of the 10 lowest closing bid prices of the Common
Stock for the 30 trading days prior to the date that shareholder approval has
been obtained, but not below $8.00 per share. These provisions will not apply if
Mr. Herrick sells the Herrick Bridge Note to an unaffiliated party.
In addition to the foregoing, if the Herrick Bridge Note is refinanced, in
whole or in part, by anyone other than Mr. Herrick or one of his affiliates, the
Company will issue to Mr. Herrick warrants to purchase an additional 350,000
shares of common stock (or a pro rata amount to the extent of the refinancing)
identical to the warrants initially issued to him in connection with the
December 31, 1998 financing. To date, $6,000,000 principal amount of the Herrick
Bridge Note has been refinanced.
The current conversion price of the Herrick Note is $11.125 and exercise
price of the Warrants is $12.00.
The Board and Mr. Herrick agreed to present the foregoing provisions to the
Company's shareholders for approval at the Company's next shareholder meeting.
Recommendation
The Board of Directors believes that the foregoing provisions were fair to
the Company and that the Company's acquisition of the Columbia House Audio Book
Club would not have been consummated without the bridge financing provided by
Norton Herrick. Therefore, the Board unanimously recommend that the shareholders
vote FOR the proposal.
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<PAGE>
PROPOSAL III
PROPOSAL TO APPROVE CERTAIN TERMS OF A
JUNE 11, 1999 LETTER AGREEMENT
BETWEEN THE COMPANY AND NORTON HERRICK
In connection with the Company's acquisition of Doubleday Direct Inc.'s
Audiobooks Direct Club in June 1999, the Company explored several methods of
financing, including, but not limited to, increase its available bank financing
and raising funds through the sale of debt and/or equity securities. Although
the Company was able to obtain additional bank financing which provided a
portion of the purchase price of the acquisition, in order to consummate the
acquisition in a timely manner, the Company borrowed $4,350,000 from Norton
Herrick which loan was evidenced by an additional $4,350,000 principal amount of
promissory notes (the "Additional Bridge Note"). In connection with this loan,
Mr. Herrick and the Company entered into a June 11, 1999 letter agreement which
provided, among other things, that if the Company refinances or replaces the
Additional Bridge 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 125,000 shares of the Company's
common stock (the "Additional Warrants") on terms identical to the warrants he
received in connection with the Herrick Bridge Note in December 1998.
In July 1999, the Company repaid the outstanding balance and accrued
interest on the $4,350,000 Additional Bridge Note from proceeds of the sale of
equity securities to an investor not affiliated with Mr. Herrick.
The Board and Mr. Herrick agreed that the Company would seek to obtain
shareholder approval of the issuance of the Additional Warrants.
Recommendation
The Board of Directors believes that the foregoing provisions were fair to
the Company and that the Company's acquisition of the business of Doubleday
Inc.'s Audiobooks Direct Club would not have been consummated without the bridge
financing provided by Mr. Norton Herrick as evidenced by the Additional Bridge
Note. Therefore, the Board unanimously recommends that the shareholders vote FOR
the proposal.
INDEPENDENT AUDITORS
Deloitte & Touche LLP reported on the financial statements of the Company
for the fiscal year ended December 31, 1998. It is currently anticipated that
Deloitte & Touche LLP will examine and report on the financial statements of the
Company for the year ending December 31, 1999. A representative of Deloitte &
Touche LLP is not expected to be present at the Annual Meeting.
SHAREHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Shareholders who wish to present proposals appropriate for consideration at
the Company's Annual Meeting of Shareholders to be held in the year 2000 must
submit the proposal in proper form and in satisfaction of the conditions
established by the Securities and Exchange Commission to the Company at its
address set forth on the first page of this Proxy Statement not later than April
12, 2000 in order for the proposition to be considered for inclusion in the
Company's proxy statement and form of proxy relating to such annual meeting. Any
such proposals, as well as any questions related thereto, should be directed to
the Secretary of the Company.
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<PAGE>
OTHER INFORMATION
A COPY OF THE COMPANY'S ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1998
IS BEING FURNISHED HEREWITH TO EACH SHAREHOLDER OF RECORD AS OF THE CLOSE OF
BUSINESS ON AUGUST 9, 1999.
The Board of Directors is aware of no other matters, except for those
incident to the conduct of the Annual Meeting, that are to be presented to
shareholders for formal action at the Annual Meeting. If, however, any other
matters properly come before the Annual Meeting or any adjournments thereof, it
is the intention of the persons named in the proxy to vote the proxy in
accordance with their judgment.
By order of the Board
of Directors,
Norton Herrick
Co-Chief Executive Officer
August 30, 1999
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<PAGE>
AUDIO BOOK CLUB, INC.
2295 Corporate Boulevard, N.W., Suite 222
Boca Raton, Florida 33431
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD SEPTEMBER 27, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints NORTON HERRICK and MICHAEL HERRICK and each
of them, Proxies, with full power of substitution in each of them, in the name,
place and stead of the undersigned, to vote at the Annual Meeting of
Shareholders of Audio Book Club, Inc. (the "Company") on Monday, September 27,
1999, at The Headquarters Plaza Hotel, 3 Headquarters Plaza, Morristown, New
Jersey 07960 or at any adjournment or adjournments thereof, according to the
number of votes that the undersigned would be entitled to vote if personally
present, upon the following matters:
1. ELECTION OF CLASS II DIRECTORS:
[_] FOR all nominees listed below [_] WITHHOLD AUTHORITY
(except as marked to the to vote for all nominees
contrary below). listed below.
Michael Herrick, Roy Abrams and Carl Amari
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space below.)
- --------------------------------------------------------------------------------
(Continued and to be signed on reverse side)
<PAGE>
2. Approval of amendment to Articles of Incorporation to change the Company's
name to MediaBay, Inc.
[_] FOR [_] AGAINST [_] ABSTAIN
3. Approval of terms of December 31, 1998 letter agreement between the Company
and Norton Herrick.
[_] FOR [_] AGAINST [_] ABSTAIN
4. Approval of terms of June 11, 1999 letter agreement between the Company and
Norton Herrick.
[_] FOR [_] AGAINST [_] ABSTAIN
5. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE INSTRUCTIONS GIVEN ABOVE. IF NO
INSTRUCTIONS ARE GIVEN, THIS PROXY WILL BE VOTED FOR THOSE NOMINEES AND THE
PROPOSALS LISTED ABOVE.
DATED: __________, 1999 Please sign exactly as name appears
hereon. When shares are held by joint
tenants, both should sign. When signing
as attorney, executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by President
or other authorized officer. If a
partnership, please sign in partnership
name by authorized person.
----------------------------------------
Signature
----------------------------------------
Signature if held jointly
Please mark, sign, date and return this proxy card using the enclosed envelope.
