Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 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 May 15, 1999, there were 7,828,920 shares of the Issuer's Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_
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Audio Book Club, Inc.
Quarter ended March 31, 1999
Form 10-QSB
Index
Page
----
PART I: Financial Information.
Item 1: Financial Statements.
Consolidated Balance Sheet at March 31, 1999 (unaudited) 3
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 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. 10
PART II: Other information
Item 1: Legal Proceedings. 16
Item 2: Changes in Securities and Use of Proceeds 16
Item 4: Submission of Matters to a Vote of Security Holders 17
Item 6: Exhibits and Reports on Form 8-K. 17
Signatures 18
Financial Data Schedule 19
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Part I Financial Information
Item 1. Financial Statements
AUDIO BOOK CLUB, INC.
Consolidated Balance Sheet
March 31, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,017
Short-term investments to be held to maturity 500
Accounts receivable, net of allowances for sales returns and doubtful
accounts of $2,539 5,651
Inventory 5,339
Royalty advances 1,325
Prepaid expenses 1,511
Deferred member acquisition costs - current 504
--------
Total current assets 15,847
Fixed assets, at cost, net of accumulated
depreciation of $485 1,257
Deferred member acquisition costs - non-current 1,073
Deferred financing costs 1,137
Prepaid expenses - non-current 225
Other intangibles, net 10,472
Goodwill, net 35,610
--------
$ 65,621
========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,045
Accrued expenses 2,334
Current portion of long-term debt 1,000
--------
Total current liabilities 7,379
--------
Long-term debt 42,750
--------
Commitments and contingencies
Preferred stock, no par value, authorized 5,000,000 shares; no shares
issued and outstanding
Common stock subject to contingent put 8,284
Common stock; no par value, authorized 75,000,000 shares; 7,078,920 issued
and outstanding 28,960
Contributed capital 2,372
Accumulated deficit (24,124)
--------
Total common stockholders' equity 7,208
--------
$ 65,621
========
</TABLE>
See accompanying notes to financial statements.
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AUDIO BOOK CLUB, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
Three months
ended March 31,
1999 1998
-------- --------
Sales $ 12,827 $ 4,765
Returns, discounts and allowances 2,898 1,236
-------- --------
Sales, net 9,929 3,529
Cost of sales 4,626 2,598
-------- --------
Gross profit 5,303 931
Expenses:
Advertising and promotion 1,486 1,509
General and administrative 2,015 651
Depreciation and amortization 1,414 5
-------- --------
Operating income (loss) 388 (1,234)
Interest (expense) income, net of interest income of
$23 in 1999 (1,053) 108
-------- --------
Net loss $ (665) $ (1,126)
======== ========
Net loss per share of common stock
(basic and diluted) $ (.09) $ (.18)
======== ========
See accompanying notes to financial statements.
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AUDIO BOOK CLUB, INC.
(Dollars in thousands)
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months
ended March 31,
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (665) $(1,126)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 1,414 5
Amortization of deferred member costs 74 --
Amortization of deferred financing fees 76 --
Changes in asset and liability accounts:
(Increase) in accounts receivable, net (728) (198)
(Increase) decrease in inventory (9) 97
(Increase) in prepaid expenses (925) (212)
(Increase) in royalty advances (364) (74)
(Increase) in deferred member costs (1,651) --
Increase (decrease) in accounts payable and accrued expenses
149 (450)
------- -------
Net cash (used) in operating activities (2,629) (1,958)
------- -------
Cash flows from investing activities:
Acquisition of fixed assets (49) (200)
Interest earned on short-term investment -- (73)
Additions to goodwill relating to acquisitions (741) --
------- -------
Net cash (used) in investing activities (790) (273)
------- -------
Cash flows from financing activities:
Increase in borrowings under revolving credit agreements 3,000 --
Payment of long-term debt (1,250) --
Proceeds of issuance of option -- 50
------- -------
Net cash provided by financing activities 1,750 50
------- -------
Net (decrease) in cash and cash equivalents (1,669) (2,181)
Cash and cash equivalents at beginning of period 2,686 3,655
------- -------
Cash and cash equivalents at end of period $ 1,017 $ 1,474
======= =======
</TABLE>
See accompanying notes to financial statements.
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AUDIO BOOK CLUB, INC.
Notes to 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 $2,242,003 and net loss
per share of $.32. This loss would have been primarily due to the direct
response advertising which results in an increase of membership in Audio Book
Club.
Use of Estimates
Management of the Company has made estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
(3) 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.
Effective February 15, 1999, the Company entered into an employment
agreement with its new Executive Vice President and Chief Technology Officer,
which provides for an annual base compensation of $150,000 and a
performance-based bonus of $15,000 payable at the end of the first year of
employment. Pursuant to the agreement, the Company granted five year non-plan
options to purchase 150,000 shares of common stock at an exercise price of
$9.75, vesting at various times over a four year period, and five year non-plan
options to purchase 8,000 shares of common stock at $.10 vesting on February 15,
1999.
In February 1999, the Company granted to employees of the Company five year
options under the 1997 Stock Option plan to purchase 20,000 shares of its common
stock at $8.00 per share, vesting over the next two years.
In March 1999, the Company granted to a law firm five year warrants to
purchase 20,000 shares of the Company's common stock at an exercise price of
$10.00 as partial payment for legal services provided in connection with the
acquisitions. The warrants have been valued at $2.46 using the Black-Scholes
valuation model and have been included in the cost of the acquisitions.
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In March 1999, the Company granted to employees of the Company or its
subsidiaries, five year options under the 1997 Stock Option plan to purchase an
aggregate of 62,600 shares of its common stock at $12.00 per share, vesting over
the next two years.
(4) Proposed Acquisition
On March 18, 1999, the Company entered into a definitive agreement to
acquire substantially all of the assets used by Doubleday Direct, Inc. in the
direct marketing and distribution of audiobooks and related products through
Doubleday's Audiobooks Direct club, including its membership file of
approximately 450,000 names. In connection with the closing of this acquisition,
Doubleday will grant to the Company the exclusive right to include Audio Book
Club new member solicitation inserts in Doubleday's club mailings and to send
direct mail new member solicitation packages to Doubleday's book club members
for the next four years without list rental or insertion fees. Thereafter, the
Company may continue to use the Doubleday lists while paying standard usage
fees. This agreement will relate to all of Doubleday's existing clubs and future
clubs provided such future clubs' lists are offered by Doubleday in the market
for rental. In addition, as part of the acquisition, the companies have agreed
to enter into a broad Internet marketing and promotion agreement including the
development of a co-branded web site. The Company cannot be assured that this
acquisition or the related agreements will be completed.
(5) 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 months ended March 31, 1999 and 1998 were 7,078,920
and 6,153,920, respectively.
Common equivalent shares that could potentially dilute basic earnings per
share in the future and that were not included in the computation of diluted
loss per share because of antidilution were 4,795,927 for the three months ended
March 31, 1999 and 379,100 for the three months ended March 31, 1998.
(6) 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 $54,000, the negotiated cost of transferring the phone numbers and is
amortizing the asset over six years.
Cash paid for interest expense was $1,092 for the three months ended March
31, 1999.
8
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(7) Subsequent Events
In April 1999, the Company sold 750,000 shares of its common stock for
gross proceeds of $8,250,000 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 an 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 April 1999, the Company granted options to purchase a total of 899,000
shares of the Company's common stock to an officer and director, Advisory Board
members, employees and consultants. The options vest at various times over the
next two years and all options have an exercise period of five years. Options to
purchase 24,000 shares have an exercise price of $10 13/16 and options to
purchase 20,000 shares have an exercise price of $11 5/8. Options to purchase
835,000 shares have an exercise price of $11.00 per share and options to
purchase 20,000 shares have an exercise price of $10.00 per share.
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Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Dollars in thousands)
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.
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.
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
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.
10
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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 and
Hot Mail web sites), America On-line, Inc., Broadcast.com, Inc. and Lycos, Inc.
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.
In December 1998, the Company completed a series of acquisitions and
combined the acquired businesses to form the Radio Group. The aggregate purchase
price paid for the businesses comprising the Radio Group was approximately $6.2
million in cash, the assumption of $2.3 million of liabilities, 600,000 shares
of common stock, options to purchase an additional 50,000 shares of common stock
at a price of $8.125 per share and options to purchase an additional 175,000
shares of common stock at a price of $13.125 per share. The Radio Group
produces, broadcasts, syndicates, sells and licenses popular "classic" and old
time radio and video programs, including vintage comedy, mystery, detective,
adventure and suspense programs. The Radio Group has an extensive library of
over 60,000 radio programs.
On December 31, 1998, the Company completed the acquisition of the
audiobook club division of The Columbia House Company ("CH Audiobook Club") for
which the Company paid cash consideration of $30.8 million and issued equity
securities. As a result of this acquisition, the Company more than doubled its
member file by adding over 650,000 names as of April 28, 1999. In addition,
Columbia House agreed to provide the Company with access to its continually
updated music, video, laser disc and DVD club membership lists for the next
seven years for purposes of acquiring new members without payment of list rental
or insertion fees.
On March 18, 1999, the Company entered into a definitive agreement to
acquire the assets used by Doubleday Direct, Inc. in the direct marketing and
distribution of audiobooks and related products through Doubleday's Audiobooks
Direct club, including its membership file of approximately 450,000 names. In
connection with the closing of this acquisition, Doubleday will grant to the
Company the exclusive right to include its Audio Book Club new member
solicitation inserts in Doubleday's club mailings and to send its direct mail
new member solicitation packages to Doubleday's book club members for the next
four years without payment of list rental or insert fees and thereafter with
standard usage fees. This agreement will relate to all of Doubleday's existing
clubs and future clubs provided such future clubs' lists are offered by
Doubleday in the market for rental. Audio Book Club will also be Doubleday's
exclusive recommended source for audiobooks. In addition, as part of the
acquisition, the companies have agreed to enter into a broad Internet marketing
and promotion agreement including the development of a co-branded web site. The
Company cannot be assured that this acquisition or the related agreements will
be completed.
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Results of Operations
(Dollars in thousands except per share data)
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
Gross sales for the three months ended March 31, 1999 were $12,827 an
increase of $8,062 or 169.2%, as compared to $4,765 for the three months ended
March 31, 1998. The increase in gross sales was primarily attributable to (1)
increased sales of audiobooks resulting from the continued expansion of Audio
Book Club's membership base, (2) sales from the CH Audiobook Club for the full
three months ended March 31, 1999 and (3) the inclusion of sales from the Radio
Group.
Returns, discounts and allowances for the three months ended March 31, 1999
were $2,898 or 22.6% of gross sales as compared to $1,236 or 25.9% of gross
sales for the prior comparable period. The decrease in returns as a percentage
of sales is due to 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 March 31, 1999 increased $6,400 or 181.4% to $9,929.
Cost of sales for the three months ended March 31, 1999 increased $2,028 to
$4,626 from $2,598 in the prior comparable period. Gross profit increased $4,372
to $5,303 for the three months ended March 31, 1999 from $931 in the prior
comparable period. Gross profit as a percentage of sales increased to 53.4% from
26.4% due to improvement in the price being paid by the Company for product at
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 new
members) decreased $23 or 1.5% to $ 1,486 for the three months ended March 31,
1999 as compared to $1,509 in the prior comparable period due to the
capitalization of direct response advertising in the three months ended March
31, 1999.
General and administrative expenses for the three months ended March 31,
1999 increased $1,364 to $ 2,015 from $651 for the three months ended March 31,
1998. The Company did not employ any personnel from the CH Audioboook Club. The
Company did acquire the operations of the Radio Group including personnel and
facilities. However, personnel costs were greatly reduced. General and
administrative expense increases are principally attributable to increased
expenses relating to the Radio Group, increased bad debt expenses as a result of
sales increases and increased personnel costs at Audio Book Club as the Company
continues to bring services previously performed by outside vendors inside as
opportunities present themselves to reduce costs.
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Depreciation and amortization expenses for the three months ended March 31,
1999 were $1,414, an increase of $1,409, as compared to $5 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 for Audio Book Club. The increase in amortization
is attributable to the amortization of goodwill and other intangible assets in
connection with the Company's acquisitions.
Net interest expense for the three months ended March 31, 1999 was $1,053
as compared to net income of $108 for the three months ended March 31, 1998. The
interest expense in 1999 is principally attributable to debt incurred in
connection with the Company's various acquisitions.
Primarily due to increased sales of $8,062, improvements in returns and
gross profit as a percentage of sales and the capitalization of direct response
advertising, the Company's earnings before depreciation, amortization, interest
and taxes ("EBITDA") increased $3,031 to $1,802 for the three months ended March
31, 1999. Net loss for the three months ended March 31, 1999 was $665 or $.09 an
improvement of $461 or $.09 as compared to a net loss of $1,126, or $.18 for the
three months ended March 31, 1998.
Liquidity and Capital Resources
The Company's capital requirements have been and will continue to be
significant due to, among other things, payment for the proposed acquisition of
Doubleday's Audiobooks Direct, 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. Historically, the Company's cash requirements have
exceeded cash flows from operations.
For the three months ended March 31, 1999, the Company's cash decreased by
$1,669 as the Company used net cash of $2,629 and $790 for operating and
investing activities, respectively, and had cash provided by financing
activities of $1,750. During the three months ended March 31, 1998, the
Company's cash decreased $2,181, as the Company used net cash of $1,958 and $273
for operating and investing activities, respectively, and had cash provided by
financing activities of $50.
For the three months ended March 31, 1999, net cash used in operations
principally consisted of the net loss of $665, increases in accounts receivable
of $728, increases in prepaid expenses of $925 and increases in deferred member
acquisition costs of $1,651. Net cash used in operations was partially offset by
depreciation and amortization expenses included in the net loss of $1,483.
For the three months ended March 31, 1998, the cash used in operating
activities consisted of, in addition to the net loss of $1,126 increases in
receivables, prepaid expenses and royalty advances of $198, $212 and $74
respectively, and a decrease in accounts payable and accrued expenses of $450.
The net cash used in operations was partially reduced by a decrease in inventory
of $97 and depreciation and amortization of $5.
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The increase in accounts receivable during the three months ended March 31,
1999 is principally due to higher sales. The increase in prepaid expenses is
principally attributable to a payment made as part of an Internet advertising
agreement which is being expensed over the life of the agreement, costs relating
to a May direct mail campaign and deferred financing fees relating to an equity
investment made in April 1999. Deferred new member acquisition costs relate to
the Company's method of accounting for direct response advertising as described
above.
Cash used in investing activities in both periods was for the acquisition
of fixed assets, principally for computer equipment, for the three months ended
March 31, 1999 additions to goodwill for additional costs incurred in the
acquisitions and adjustments to purchase price.
For the three months ended March 31, 1999, net cash provided by financing
activities consisted of increased borrowings under the Company's revolving
credit agreement less a principal payment on the Company's long-term bank debt
and a payment on the related party subordinated loan.
On March 18, 1998, (the "Wolf Purchase Date") the Company sold to Carl Wolf
an option ("Wolf Option") to purchase 50,000 shares of Common Stock at any time
commencing on the Wolf Purchase Date through the fifth anniversary of the Wolf
Purchase Date at an exercise price of $5.00 per share (market value at Wolf
Purchase Date.) The purchase price of the Wolf Option was $50.
In March 1999, the Company entered into an agreement to acquire Audiobooks
Direct, a business of Doubleday Direct, Inc. (a subsidiary of Bertelsmann,
Inc.). The Company is currently exploring various financing alternatives to fund
the Audiobooks Direct acquisition. There can be no assurance that the
acquisition will be completed.
In April 1999, the Company completed the sale of a 9.6 percent equity
interest in the Company to Quantum Partners, LDC ("Quantum"), a fund advised by
Soros Fund Management, LLC, through a direct purchase of the Company's common
stock. Quantum purchased 750,000 shares of common stock and the Company received
total proceeds of $8,250.
In April 1999, the Company announced plans to develop a media portal web
site. This site, when created, is intended to expand the Company's Internet
presence and to potentially derive additional revenue from the many visits the
Company drives to its web site as a result of its Internet advertising and
branding. The web site is planned to be launched this summer and is planned to
offer various content and e-commerce opportunities. The Company is also actively
working on various cross-marketing arrangements with other e-commerce providers
and is acquiring additional products to offer on the new site.
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In April 1999, the Company agreed to enter into a strategic marketing
alliance with bidnow.com allowing the companies to cross promote each other's
services through various links and banners to be located on their respective web
sites. Audio Book Club also announced an agreement to proceed with Quantum, a
fund advised by Soros Fund Management LLC, to make an investment in bidnow.com.
The closing of the investment is contingent on the completion of due diligence.
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.
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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 March 1999, the Company's shareholders 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.
Effective February 1999, the Company granted to an employee five year
options to purchase 150,000 shares of common stock at an exercise price of
$9.75, vesting at various times over a four year period, and five year options
to purchase 8,000 shares of common stock at $.10 vesting on February 15, 1999 as
consideration for entering into an employment agreement.
In March 1999, the Company granted to a law firm five year warrants to
purchase 20,000 shares of the Company's common stock at an exercise price of
$10.00 as partial payment for legal services provided in the acquisitions. The
warrants have been valued at $2.46 using the Black-Scholes valuation model and
have been included in the cost of the acquisitions.
During the three months ended March 31, 1999, the Company granted to
employees of the Company five year options under the 1997 Stock Option plan to
purchase 82,600 shares of its common stock at prices between $8.00 and $12.00
per share, vesting over the next two years.
16
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
On March 26, 1999, at a special meeting of the Company's stockholders, 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
Stockholders' vote on these matters was as follows:
(1) Amendment to Articles of Incorporation
Numbers of votes cast for: 6,532,119
Number of votes cast against: 110,212
Abstentions: 10,819
(2) Adoption of 1999 Stock Incentive Plan
Numbers of votes cast for: 4,625,012
Number of votes cast against: 129,486
Abstentions: 18,460
Broker non-votes: 1,880,192
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Report dated January 14, 1999 reporting acquisition of Columbia House
Audiobook Club.
Report dated February 25, 1999 amending 8-K reporting acquisition of Radio
Spirits, Inc.
Report dated March 16, 1999 amending 8-K reporting acquisition of Columbia
House Audiobook Club.
Report dated April 16, 1999 amending 8-K reporting acquisition of Columbia
House Audiobook Club.
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.
Report dated April 27, 1999 amending 8-K reporting acquisition of Columbia
House Audiobook Club.
17
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Audio Book Club, Inc. has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Audio Book Club, Inc.
Dated: May 17, 1999 By: /s/ Michael Herrick
---------------------------------------
Michael Herrick
Co-Chief Executive Officer
Dated May 17, 1999 By: /s/ John F. Levy
---------------------------------------
John F. Levy
Chief Financial and Accounting Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the Company's
financial statements included in this quarterly report on Form 10-QSB, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 1,017
<SECURITIES> 500
<RECEIVABLES> 8,190
<ALLOWANCES> 2,539
<INVENTORY> 5,339
<CURRENT-ASSETS> 15,847
<PP&E> 1,742
<DEPRECIATION> 485
<TOTAL-ASSETS> 65,621
<CURRENT-LIABILITIES> 7,379
<BONDS> 42,750
0
0
<COMMON> 28,960
<OTHER-SE> (21,752)
<TOTAL-LIABILITY-AND-EQUITY> 7,208
<SALES> 9,929
<TOTAL-REVENUES> 9,929
<CGS> 4,626
<TOTAL-COSTS> 4,626
<OTHER-EXPENSES> 4,915
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,053
<INCOME-PRETAX> (665)
<INCOME-TAX> 0
<INCOME-CONTINUING> (665)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (665)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
