SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): June 15, 1999
AUDIO BOOK CLUB, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 1-13469 65-0429858
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
2295 Corporate Blvd., N.W., Suite 222, Boca Raton, FL 33431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 561-241-1426
- --------------------------------------------------------------------------------
Former name or former address, if changed since last report
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
On its Form 8-K filed June 29, 1999, Audio Book Club, Inc. ("ABC" or the
"Company") advised the Securities and Exchange Commission (the "Commission")
that it would file the required financial statements related to the acquisition
reported at a later date. Attached hereto are the required financial statements.
Table of Contents
(a) Historical financial statements of the business acquired (Audio Books
Direct, a wholly-owned operation of Doubleday Direct, Inc.)
March 31, 1999
Balance Sheet (unaudited)
Statement of Operations for the nine months ended (unaudited)
Statements of Divisional Deficit for the period ended (unaudited)
Statement of Cash Flows for the nine months ended (unaudited)
Notes to Financial Statements (unaudited)
March 31, 1998
Statement of Operations for the nine months ended (unaudited)
Statement of Cash Flows for the nine months ended (unaudited)
Notes to Financial Statements (unaudited)
June 30, 1998 and 1997
Independent Auditors' Report
Balance Sheet
Statements of Operations for the years ended
Statements of Divisional Deficit for the years ended
Statements of Cash Flows for the years ended
Notes to Financial Statements
(b) Pro Forma Condensed Combined Financial Information
Introduction
Pro Forma Condensed Combined Balance Sheet at March 31, 1999 and related
notes thereto.
Pro Forma Condensed Combined Statement of Operations for the three months
ended March 31, 1999 and related notes thereto.
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1998 and related notes thereto.
2
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Financial Statements
March 31, 1999
(Unaudited)
3
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Balance Sheet
(Dollars in Thousands)
(Unaudited)
March 31,
1999
--------
ASSETS
Current assets:
Accounts receivable, net $ 2,551
Inventory, net 1,787
--------
Total current assets 4,338
Royalty advances, net 743
--------
Total assets $ 5,081
========
LIABILITIES AND DIVISIONAL DEFICIT
Current liabilities:
Accrued royalties payable $ 296
Accrued promotional expenses, net 551
--------
Total current liabilities 847
Due to DDI and affiliates 16,854
Commitments
Divisional deficit (12,620)
--------
Total liabilities and divisional deficit $ 5,081
========
See accompanying notes to financial statements.
4
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Statements of Operations
Nine Months Ended March 31, 1999 and 1998
(Dollars in Thousands)
(Unaudited)
1999 1998
-------- --------
Net revenues $ 11,379 10,923
Cost of revenues 3,537 4,115
-------- --------
Gross profit 7,842 6,808
Operating expenses:
Selling & new member promotion 6,487 6,366
General and administrative 2,225 2,094
-------- --------
8,712 8,460
-------- --------
Net loss $ (870) (1,652)
======== ========
See accompanying notes to financial statements.
5
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Statements of Divisional Deficit
(Dollars in Thousands, unaudited)
Period Ended March 31, 1999
Balance at June 30, 1998 $(11,750)
Net Loss (nine months) (870)
--------
Balance at March 31, 1999 $(12,620)
========
See accompanying notes to financial statements.
6
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Statements of Cash Flows
Nine Months Ended March 31, 1999 and 1998
(Dollars in Thousands)
(Unaudited)
1999 1998
------- -------
Cash flows from operating activities:
Net income $ (870) $(1,652)
Adjustments to reconcile net loss to
net cash used in operating activities:
Change in net accounts receivable (664) (237)
Change in net inventory 91 55
Change in net royalty advances 211 101
Change in accrued royalties payable 234 136
Change in net accrued promotional expenses (289) 987
------- -------
Net cash used in operating activities (1,287) (610)
Cash flows from financing activities:
Net advances from DDI and affiliates
1,287 610
------- -------
Net cash provided by financing activities 1,287 610
------- -------
Net change in cash -- --
Cash at beginning of year -- --
------- -------
Cash at end of period $ -- $ --
======= =======
See accompanying notes to financial statements.
7
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999 and 1998
(Dollars in Thousands)
(Unaudited)
(1) The Company and Nature of Operations
Audio Books Direct (the "Club") is a direct marketer of audio books
primarily through negative option direct mail campaigns to members located
predominantly in the United States. Audio books are literary works that are
narrated on audiocassette. The Club represents the audio book operations of
Doubleday Direct, Inc., ("DDI", an indirect wholly-owned subsidiary of
Bertelsmann AG, a privately-owned German corporation). The Club has never
been operated as a separate legal entity, but rather an integral part of
DDI.
In February 1999, DDI signed a letter of intent with Audio Book Club, Inc.
("ABC") to sell substantially all of the assets of the Club to ABC for
approximately $21,000, plus the assumption of all unpaid publisher royalty
commitments.
(2) Basis of Presentation
The accompanying financial statements have been prepared on an accrual
basis using accounting principles which are consistent with those employed
by DDI. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These interim
financial statements should be read in conjunction with the audited
financial statements and notes thereto as of and for the year ended June
30, 1998. Included in the accompanying statements of operations are net
revenues and costs of revenues that substantially relate directly to the
Club. Selling, general and administrative expenses include those accounts
that relate directly to the Club as well as allocations from DDI (see note
7). These allocations are considered by management to be reasonable under
the circumstances. However, there can be no assurances that such
allocations will be indicative of future results.
The accompanying financial statements have been prepared on a going-concern
basis and do not reflect the pending sale of the Club to ABC or any
purchase accounting adjustments that may be made by ABC. These financial
statements are not necessarily indicative of results that would have
occurred if the Club had been a separate stand-alone entity during the
periods presented or of future results of the Club.
The accompanying financial statements as of March 31, 1999, and for the
nine month periods ended March 31, 1999 and 1998, are unaudited; however,
in the opinion of management, such statements include all adjustments,
consisting solely of normal recurring adjustments, necessary for a fair
presentation of the results for the periods presented.
(3) EPS
As the Club has never been operated as a separate legal entity, it does not
have a stand-alone capital structure. Therefore, earnings per share
information has not been presented.
8
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999 and 1998
(Dollars in Thousands)
(Unaudited)
(4) Supplemental Cash Flow Information
The Club does not maintain any cash balances. All cash transactions are
handled through DDI inter-company accounts and are therefore reflected as
adjustments to the amounts due to DDI. An analysis of the inter-company
balance with DDI as of and for the nine month period ended March 31, 1999
is as follows:
March 31,
1999
--------
Balance as of the beginning of the period $ 15,567
Net cash collections by DDI (10,321)
Charges and allocations from DDI 11,608
--------
Balance as of the end of the period $ 16,854
========
The Club did not expend any amounts relative to income taxes or third party
interest expense during the nine month periods ended March 31, 1999 or
1998.
5) Accounts Receivable
Accounts receivable as of March 31, 1999, consists of the following:
March 31,
1999
-------
Accounts receivable, trade $ 3,641
Less: Allowance for sales returns (474)
Allowance for doubtful accounts (616)
-------
$ 2,551
=======
9
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999 and 1998
(Dollars in Thousands)
(Unaudited)
(6) Inventory
Inventory as of March 31, 1999, consists of the following:
March 31,
1999
-------
Audio books $ 2,144
Promotional and other 125
Allowances (482)
-------
$ 1,787
=======
(7) Transactions with Related Parties
DDI, as owner of the Club, is responsible for fulfillment and warehousing
activities related to the Club's operations. Amounts charged to the Club
for these services were approximately $773 and $699 for the nine month
periods ended March 31, 1999 and 1998, respectively, of which $306 and
$282, respectively, represent corporate allocations. These amounts are
included in general and administrative expenses in the accompanying
statements of operations.
DDI, as owner of the Club, also provides certain administrative and support
services to the Club including: personnel and related employee benefits and
other overhead such as rent, utilities, finance, human resource and
information technology support, and interest. Amounts charged to the Club
for these services were approximately $1,613 and $1,401 for the nine month
periods ended March 31, 1999 and 1998, respectively, of which $1,164 and
$962, respectively, represent corporate allocations. These amounts are
included in general and administrative expenses in the accompanying
statements of operations.
Certain Bertelsmann publishing affiliates received royalty payments of $136
and $27 for the nine month periods ended March 31, 1999 and 1998,
respectively.
Inventory of approximately $59 and $473 was purchased from a Bertelsmann
affiliate for the nine month periods ended March 31, 1999 and 1998,
respectively.
10
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
NOTES TO FINANCIAL STATEMENTS
March 31, 1999 and 1998
(Dollars in Thousands)
(Unaudited)
(8) Commitments
Future advance payments to publishers required under existing royalty
agreements, upon the availability of the underlying titles, as of March 31,
1999, are as follows:
Third party publisher agreement for multiple titles $500
Agreements for individual titles 327
----
$827
====
11
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Financial Statements
June 30, 1998 and 1997
(With Independent Auditors' Report Thereon)
12
<PAGE>
Independent Auditors' Report
The Board of Directors
Doubleday Direct, Inc.:
We have audited the accompanying balance sheets of Audio Books Direct (the
"Club"), a wholly owned operation of Doubleday Direct, Inc., as of June 30, 1998
and 1997, and the related statements of operations, divisional deficit, and cash
flows for the years then ended. These financial statements are the
responsibility of the Club's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Audio Books Direct has been operated as an integral part of Doubleday Direct,
Inc., and has no separate legal existence. The basis of presentation of the
accompanying financial statements is described in note 2 to the financial
statements.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Audio Books Direct, a
wholly-owned operation of Doubleday Direct, Inc., as of June 30, 1998 and 1997,
and the results of its operations and its cash flows for the years then ended on
the basis described in the preceding paragraph and in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
New York, New York
March 12, 1999
13
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Balance Sheets
(Dollars in Thousands)
June 30, 1998 and 1997
1998 1997
Assets
Current assets:
Accounts receivable, net $ 1,887 1,404
Inventory, net 1,878 2,276
-------- --------
Total current assets 3,765 3,680
Royalty advances, net 954 231
-------- --------
Total assets 4,719 3,911
======== ========
Liabilities and Divisional Deficit
Current liabilities:
Accrued royalties payable 62 59
Accrued promotional expenses, net 840 13
-------- --------
Total current liabilities 902 72
Due to DDI and affiliates 15,567 13,332
Commitments
Divisional deficit (11,750) (9,493)
-------- --------
Total liabilities and divisional deficit $ 4,719 3,911
======== ========
See accompanying notes to financial statements.
14
<PAGE>
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Statements of Operations
(Dollars in Thousands)
Years ended June 30, 1998 and 1997
1998 1997
Net revenues $ 15,001 9,693
Cost of revenues 5,440 4,023
-------- --------
Gross profit 9,561 5,670
-------- --------
Operating expenses:
Selling and new member promotion 8,971 10,126
General and administrative 2,847 1,878
-------- --------
11,818 12,004
-------- --------
Net loss $ (2,257) (6,334)
======== ========
See accompanying notes to financial statements.
15
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Statements of Divisional Deficit
(Dollars in Thousands)
Years ended June 30, 1998 and 1997
Balance at July 1, 1996 $ (3,159)
Net loss (6,334)
--------
Balance at June 30, 1997 (9,493)
Net loss (2,257)
--------
Balance at June 30, 1998 $(11,750)
========
See accompanying notes to financial statements.
16
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
Statements of Cash Flows
(Dollars in Thousands)
Years ended June 30, 1998 and 1997
1998 1997
Cash flows from operating activities:
Net loss $(2,257) (6,334)
Adjustments to reconcile net loss to
net cash used in operating activities:
Change in net accounts receivable (483) (841)
Change in net inventory 398 (610)
Change in royalty advances (723) (191)
Change in accrued royalties payable 3 42
Change in net accrued promotional expenses 827 (372)
------- -------
Net cash used in operating activities (2,235) (8,306)
------- -------
Cash flows from financing activities:
Net advances from DDI and affiliates 2,235 8,306
------- -------
Net cash provided by financing activities 2,235 8,306
------- -------
Net change in cash -- --
Cash at beginning of year -- --
------- -------
Cash at end of year
$ -- --
======= =======
See accompanying notes to financial statements.
17
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in Thousands)
(1) The Company and Nature of Operations
Audio Books Direct (the "Club") is a direct marketer of audio books
primarily through negative option direct mail campaigns to members located
predominately in the United States. Audio books are literary works that are
narrated on audiocassette. The Club represents the audio book operations of
Doubleday Direct, Inc., ("DDI", an indirect wholly-owned subsidiary of
Bertelsmann AG, a privately-owned German corporation). The Club has never
been operated as a separate legal entity, but rather an integral part of
DDI.
In February 1999, DDI signed a letter of intent with Audio Book Club, Inc.
("ABC") to sell substantially all of the assets of the Club to ABC for
approximately $21,000, plus the assumption of all unpaid publisher royalty
commitments.
(2) Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles which are consistent with those
employed by DDI. Included in the accompanying statements of operations are
net revenues and costs of revenues that substantially relate directly to
the Club. Selling, general and administrative expenses include those
accounts that relate directly to the Club as well as allocations from DDI
(see note 6). These allocations are considered by management to be
reasonable under the circumstances. However, there can be no assurances
that such allocations will be indicative of future results.
The accompanying financial statements have been prepared on a going-concern
basis and do not reflect the pending sale of the Club to ABC or any
purchase accounting adjustments that may be made by ABC. These financial
statements are not necessarily indicative of results that would have
occurred if the Club had been a separate stand-alone entity during the
periods presented or of future results of the Club.
Supplemental Cash Flow Information
The Club does not maintain any cash balances. All cash transactions are
handled through DDI inter-company accounts and are therefore reflected as
adjustments to the amounts due to DDI. An analysis of the inter-company
balance with DDI as of and for the years ended June 30, 1998 and 1997, is
as follows:
18
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in Thousands)
1998 1997
-------- --------
Balance as of the beginning of the year $ 13,332 $ 5,027
Net cash collections by DDI (13,694) (10,109)
Charges and allocations from DDI 15,929 18,414
-------- --------
Balance as of the end of the year $ 15,567 13,332
======== ========
The Club did not expend any amounts relative to income taxes or third party
interest expense during the years ended June 30, 1998 or 1997.
Revenue Recognition
Current member sales, including shipping and handling charges, are recorded
and club members are billed upon shipment of merchandise. Net sales
represent sales less actual returns and allowances (i.e., claims) for the
period and an estimated provision for future returns and allowances on
sales made during the period. The provision for future returns is based
upon historical experience and an evaluation of current trends. A provision
for estimated bad debts is also recognized based upon historical experience
and an evaluation of current trends at the time of sale and is included in
general and administrative expenses.
Cost of Sales
The Club charges inventory, shipping and postage and all royalty expenses
for current members to cost of sales.
Inventory
Inventory, consisting primarily of pre-recorded audio books held for
resale, is valued at the lower of cost (weighted average first-in-first-out
method) or market.
Promotional Expenses
The Club expenses the capitalized production costs of advertising the first
time the advertising takes place or when the advertising is initially
mailed. Direct-response advertising consists primarily of direct mailings
to both prospective and current members that include order forms for the
Club's products, and to a lesser extent print advertisements to prospective
members. Promotional costs for prospective and current members are expensed
on the date the promotional materials are mailed. Accrued promotional
expenses represent amounts due for promotional campaigns which have not yet
been paid. Such amounts are paid by DDI.
19
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in Thousands)
Royalties
The Club is liable for royalties to licensors based upon revenue earned
from the respective licensed product. Advances made for the right to
distribute audio book products are recorded as advances and expensed as the
related sales are made. An allowance is established for advances not
considered recoverable based upon projected sales. Such allowance was
approximately $480 and $316 as of June 30, 1998 and 1997, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Income Taxes
The Club is not subject to income taxes directly. However the accompanying
financial statements reflect the accounting for income taxes as if the Club
were to have been a separate tax filer in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. If the Club were to have
been a separate tax filer hypothetical deferred tax assets, primarily
representing the tax effected net operating loss carryforwards in various
jurisdictions, amounted to approximately $3,000 at June 30, 1998. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
future periods. Management has determined that a valuation allowance for
the entire amount is necessary.
Fair Value of Financial Instruments
In estimating the fair value for financial instruments, the Club has
assumed that the carrying amount of accounts receivable and royalties
payable approximates fair value because of the short maturity of those
instruments. It is not practical to estimate the fair market value of the
amount due to DDI and affiliates due to the related party nature of the
underlying transactions.
20
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in Thousands)
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders, which is not currently
required. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Adoption of
this statement will not impact the Club's financial position, results of
operations, or cash flows, and any effect will be limited to the form and
content of its disclosure. This statement is effective for fiscal years
beginning after December 15, 1997.
(3) Liquidity
The Club is dependent on DDI to fund working capital and operational cash
requirements. If the Club was operated as a stand-alone entity, it would
require alternative sources of financing. DDI has committed to provide
continued funding through June of 1999 if the Club remains as a
wholly-owned operation.
(4) Accounts Receivable
Accounts receivable as of June 30, 1998 and 1997, consists of the
following:
1998 1997
------- -------
Accounts receivable, trade $ 2,799 2,391
Less: Allowance for sales returns (418) (377)
Allowance for doubtful accounts (494) (610)
------- -------
$ 1,887 1,404
======= =======
21
<PAGE>
AUDIO BOOKS DIRECT
(A Wholly-Owned Operation of Doubleday Direct, Inc.)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1997
(Dollars in Thousands)
(5) Inventory
Inventory as of June 30, 1998 and 1997, consists of the following:
1998 1997
------- -------
Audio books $ 2,215 2,408
Promotional and other 187 99
Allowances (524) (231)
------- -------
$ 1,878 2,276
======= =======
(6) Transactions with Related Parties
DDI, as owner of the Club, is responsible for fulfillment and warehousing
activities related to the Club's operations. Amounts allocated to the Club
for these services were approximately $960 and $734 for the years ended
June 30, 1998 and 1997, respectively and are included in general and
administrative expenses in the accompanying statements of operations.
DDI, as owner of the Club, also provides certain administrative and support
services to the Club including: personnel and related employee benefits and
other overhead such as rent, utilities, finance, human resource and
information technology support, and interest. Amounts allocated to the Club
for these services were approximately $1,942 and $1,137 for the years ended
June 30, 1998 and 1997, respectively and are included in general and
administrative expenses in the accompanying statements of operations.
Certain Bertelsmann publishing affiliates received royalty payments of $143
and $218 for the years ended June 30, 1998 and 1997.
Inventory of approximately $526 and $802 for the years ended June 30, 1998
and 1997 was purchased from a Bertelsmann affiliate.
(7) Commitments
Future advance payments to publishers required under existing royalty
agreements, upon the availability of the underlying titles, as of June 30,
1998 are as follows:
Affiliated publisher agreement for multiple titles $125
Third party publisher agreement for multiple titles 500
Agreements for individual titles 289
----
$914
====
22
<PAGE>
Pro Forma Condensed Combined Financial Statements
Introduction
(Unaudited)
The unaudited pro forma condensed combined financial information presented
herein gives effect to the purchase of Audio Books Direct ("ABD"), a
wholly-owned operation of Doubleday Direct, Inc., on June 15, 1999.
Additionally, the statement of operations for the year ended December 31, 1998
gives effect to the following transactions:
(1) The acquisition of Radio Spirits, Inc. ("RSI") on December 14, 1998
and certain assets of an affiliated company, Buffalo Productions, Inc.
("BPI") and a 50% interest in a joint venture owned by the principal
of Radio Spirits (the "JV").
(2) The acquisition of substantially all of the assets used by Metacom,
Inc. in connection with its Adventures in Cassettes ("AIC") business
on December 14, 1998.
(3) The acquisition of substantially all of the assets used by Premier
Electronic Laboratories, Inc. ("Premier") in connection with its
business of licensing, producing, marketing, and selling classic
videos and radio programs on December 14, 1998
(4) The acquisition of substantially all of the assets used in the audio
book club division of the Columbia House Company ("CH") on December
31, 1998.
The unaudited pro forma condensed combined balance sheet data at March 31, 1999
combines the historical condensed consolidated balance sheet of ABC and its
subsidiaries as of March 31, 1999, which includes the effect of the acquisitions
discussed in (1), (2), (3) and (4) above, and ABD's balance sheet as of March
31, 1999. The pro forma adjustments to the balance sheet assume that the
acquisition of ABD was consummated at the end of the period being presented.
The unaudited condensed combined pro forma statement of operations data being
presented for the three months ended March 31, 1999 combines the historical
condensed consolidated statements of operations of ABC and its subsidiaries,
which includes the effect of the acquisitions discussed in (1), (2), (3) and (4)
above for the entire three month period and ABD's statement of operations for
the three months ended March 31, 1999. The pro forma adjustments to the
condensed combined pro forma statement of operations assume that the acquisition
of ABD was consummated on January 1, 1999.
The unaudited condensed combined pro forma statement of operations data being
presented for the year ended December 31, 1998 gives effect to the above
transactions assuming the transactions occurred January 1, 1998 and includes the
results of operations for ABC for the year ended December 31, 1998, which
includes the results of operations for the acquisitions discussed in (1), (2)
and (3) above from the closing date of the respective acquisitions; RSI for the
period from January 1, 1998 through December 14, 1998, AIC for the twelve months
ended October 31, 1998, Premier for the twelve months ended October 31, 1998, CH
for the year ended December 31, 1998 and ABD for the twelve months ended March
31, 1999. The pro forma adjustments to the unaudited condensed combined
statement of operations give effect to events which are directly attributable to
the transactions, factually supportable and expected to have a continuing
impact.
ABC expects to achieve certain increases in net revenues and reductions in costs
subsequent to the various transactions described above as a result of, among
other factors, increased membership, increased volume discounts, increased
buying power and the elimination of
23
<PAGE>
duplicative ownership efforts. To comply with the Commission's pro forma
reporting rules, only adjustments that are directly attributable to the
transactions and are factually supportable have been made.
The unaudited pro forma condensed combined financial statements are intended for
information purposes only and are not necessarily indicative of the future
financial position or future results of operations of the combined company, or
of the financial position or results of operations of the combined company that
would have actually occurred had the acquisitions taken place as of the date or
for the periods presented.
These unaudited pro forma condensed combined financial statements should be read
in conjunction with the financial statements, including the accompanying notes,
of ABD which are attached, and of ABC included in the Company's quarterly report
on Form 10-QSB for the three months ended March 31, 1999 and the Company's
annual report on Form 10-KSB for the fiscal year ended December 31, 1998.
24
<PAGE>
Pro Forma Condensed Combined Balance Sheet
March 31, 1999
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------------
Notes Notes
ABC ABD Debit (1) Credit (1) Pro Forma
------------------- -------------------------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and short-term investments $1,517 $8,250 (2) $258 (2) $926
318 (3)
8,265 (4)
Accounts receivable, net 5,651 2,551 2,551 (5) 5,651
Inventory, net 5,339 1,787 1,787 (5) 5,339
Other current assets 3,340 126 (2) 3,191
23 (8)
------------------- ------------
Total current assets 15,847 4,338 15,107
Fixed assets, net 1,257 1,257
Other intangibles, net 10,472 10,472
Goodwill, net 35,610 18,182 (6) 53,792
Other non-current assets 2,435 743 318 (3) 3,855
359 (7)
------------------- ------------
$65,621 $5,081 $84,483
=================== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $6,379 $847 $847 (5) $287 (8) $6,666
Current portion of long-term debt 1,000 1,000
------------------- ------------
Total current liabilities 7,379 847 7,666
------------------- ------------
Long-term debt/Due to Parent 42,750 16,854 16,854 (5) 10,350 (9) 53,100
------------------- ------------
Common stock subject to contingent put 8,284 8,284
Common stock 28,960 7,866 (2) 37,185
359 (7)
Contributed capital 2,372 2,372
Accumulated deficit (24,124) (12,620) 12,620 (10) (24,124)
------------------- ------------
Total common stockholders' equity 7,208 (12,620) 15,433
------------------- ------------
$65,621 $5,081 $84,483
=================== ============
</TABLE>
See notes to Pro Forma Condensed Combined Balance Sheet
25
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1999
(Unaudited)
(1) Reflects the acquisition by ABC at the end of the period being presented.
(2) Reflects proceeds, related costs and issuance of common stock from the
direct sale of 750,000 shares of the Company's common stock to a "qualified
institutional buyer" as such term is defined in Rule 144A of the Securities
Act of 1933.
(3) Represents cash financing costs associated with the debt incurred in the
acquisition.
(4) Represents cash disbursed by ABC in the acquisition.
(5) Reflects the reduction of assets not acquired and liabilities not assumed
in the acquisition.
(6) Records the preliminary allocation of the excess of the purchase price over
the net assets acquired to goodwill.
(7) Reflects non-cash financing costs associated with the debt incurred in the
acquisition.
(8) Reflects estimated professional fees incurred in connection with the
acquisition.
(9) Reflects debt incurred by ABC in the acquisition.
(10) Reflects the elimination of ABD retained earnings deficit.
26
<PAGE>
Pro Forma Condensed Combined Statement of Operations
For the three months ended March 31, 1999
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma
ABC ABD Adjustments Pro Forma
----------------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Sales $12,827 $5,306 $18,133
Returns, discounts and allowances 2,898 1,538 4,436
----------------------------- ---------------
Sales, net 9,929 3,768 13,697
Cost of sales 4,626 1,153 5,779
----------------------------- ---------------
Gross profit 5,303 2,615 7,918
Expenses:
Advertising and promotion 1,486 3,279 4,765
General and administrative 2,015 712 2,727
Depreciation and amortization 1,414 227 (1) 1,641
----------------------------- ---------------
Operating income (loss) 388 (1,376) (1,215)
Interest (expense) income, net (1,053) (278)(2) (1,331)
----------------------------- ---------------
Net loss ($665) ($1,376) ($2,546)
============================= ===============
Net loss per share of common stock
(basic and diluted) ($0.09) ($0.36)
============== ===============
Weighted Average number of common
shares outstanding (in thousands) 7,079 7,079
============== ===============
</TABLE>
See notes to Pro Forma Condensed Combined Statement of operations.
27
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
(1) Represents amortization of goodwill over a 20-year life.
(2) Represents interest expense and amortization of deferred financing fees in
connection with additional debt incurred in the Acquisition.
28
<PAGE>
Pro Forma Condensed Combined Statement of Operations
For the year ended December 31, 1998
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Radio Pro Forma
ABC Group(a) CH Combined ABD Adj. Notes Combined
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $22,242 $12,772 $17,244 $52,258 $21,886 $74,144
Returns, discounts and allowances 7,348 228 2,857 10,433 6,430 16,863
---------------------------------------------------- ------------
Sales, net 14,894 12,544 14,387 41,825 15,456 57,281
Cost of sales 9,452 5,505 6,118 21,075 4,861 25,936
---------------------------------------------------- ------------
Gross profit 5,442 7,039 8,269 20,750 10,595 31,345
Expenses:
Advertising and promotion 8,910 1,552 8,857 19,319 9,094 28,413
General and administrative 3,673 4,153 1,307 9,133 2,978 (161) (1) 11,950
Depreciation and amortization 24 183 207 5,986 (2) 6,193
---------------------------------------------------------------- ------------
Operating income (loss) (7,165) 1,151 (1,895) (7,909) (1,477) (5,825) (15,211)
Interest (expense) income, net 180 (115) 65 (5,220) (3) (5,155)
---------------------------------------------------------------- ------------
Income (loss) before provision for
income taxes (6,985) 1,036 (1,895) (7,844) (1,477) (11,045) (20,366)
Provision for income taxes 279 279 279
---------------------------------------------------------------- ------------
Net income ($6,985) $757 ($1,895) ($8,123) ($1,477) ($11,045) ($20,645)
================================================================ ============
Net loss per share of common stock
(basic and diluted) ($1.13) ($2.88)
========= ============
Weighted Average number of common
shares outstanding (in thousands) 6,154 925 7,079
========= ============ ============
</TABLE>
See notes to Pro Forma Condensed Combined Statement of operations.
(a) Includes the results of operations of RSI, AIC, and Premier for the periods
specified in the Pro Forma Condensed Combined Financial Statements
Introduction.
29
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
(1) Represents a reduction in officer's salary and rent based on executed
agreements pursuant to the transactions.
(2) Represents amortization of goodwill and identifiable intangible assets in
connection with the transactions based on their estimated useful life
follows:
Goodwill 20 years
Customer Lists 3 years
Covenant not to compete 5 years
Mailing Agreements 7 years
(3) Represents interest expense and amortization of deferred financing fees
associated with the transactions.
30
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: July 20, 1999
Audio Book Club, Inc.
/s/ John F. Levy
----------------------------
Executive Vice President and
Chief Financial Officer
31
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Doubleday Direct, Inc.:
We consent to the incorporation by reference in the registration statement (No.
33-74413) on Form S-3 of Audio Book Club, Inc. of our report dated March 12,
1999, with respect to the balance sheets of Audio Books Direct, a wholly-owned
operation of Doubleday Direct, Inc. (the "Club"), as of June 30, 1998 and 1997,
and the related statements of operations, divisional deficit, and cash flows for
the years then ended, which report appears in the Form 8-K/A of Audio Book Club,
Inc. dated July 20, 1999. Our report includes an explanatory paragraph stating
that the Club has been operated as an integral part of Doubleday Direct, Inc.
and has no separate legal existence.
/s/ KPMG LLP
New York, New York
July 20, 1999
32
