SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): April 23, 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., Boca Raton, FL 33431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 561-241-1426
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Former name or former address, if changed since last report
<PAGE>
Item 5. Other Events.
Audio Book Club, Inc. is filing this report to update the financial statements
and pro forma information provided by the Company in its Form 8-K/A for the
event dated December 31, 1998. These updated financial statements and pro forma
information are provided for incorporation into the Company's Registration
Statement on Form S-3 and were not required previously in the Company's Current
Report on Form 8-K for the event dated December 31, 1998, as amended on Form
8-K/A.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
Attached hereto are certain historical and pro forma combined financial
statements for Audio Book Club, Inc.
Index.
(a) Historical Financial Statements of the Business acquired (The Columbia
House Audiobook Club)
December 18, 1998
Independent Auditors' Report
Balance Sheet
Statement of Operation
Statement of Cash Flows
Notes to Financial Statements
(b) Pro-Forma Combined Financial Statements
Pro-Forma Combined Statement of Operations
Notes to Pro-Form Combined Statement of Operations
<PAGE>
- --------------------------------------------------------------------------------
The Columbia House
Audiobook Club
(A Division of The Columbia House Company)
Financial Statements for the Fiscal
Year Ended December 18, 1998 and
Independent Auditors' Report
<PAGE>
THE COLUMBIA HOUSE AUDIOBOOK CLUB
(A Division of The Columbia House Company)
TABLE OF CONTENTS
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Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR FISCAL THE YEAR ENDED
DECEMBER 18, 1998:
Balance Sheet 2
Statement of Operations 3
Statement of Cash Flows 4
Notes to Financial Statements 5-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Representatives of
The Columbia House Company
New York, New York
We have audited the accompanying balance sheet of The Columbia House Audiobook
Club, a division of The Columbia House Company, as of December 18, 1998 and the
related statements of operations and cash flows for the fiscal year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
The accompanying financial statements have been prepared from the separate
records maintained by The Columbia House Company and may not necessarily be
indicative of the conditions that would have existed or the results of
operations if The Columbia House Audiobook Club had been operated as an
unaffiliated company. Portions of certain assets, liabilities, income and
expenses represent allocations made from the home-office items applicable to the
company as a whole.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The Columbia House Audiobook Club as of
December 18, 1998, and the results of its operations and its cash flows for the
fiscal year then ended in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
March 18, 1999
1
<PAGE>
THE COLUMBIA HOUSE AUDIOBOOK CLUB
(A Division of The Columbia House Company)
BALANCE SHEET
DECEMBER 18, 1998
(Amounts in Thousands, except share and per-share data)
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ASSETS
CURRENT ASSETS:
Cash $ --
Accounts receivable, net (Note 3) 1,881
Inventory, net (Note 4) 581
Royalty advances 867
Prepaid expense and other current assets 42
------
Total current assets 3,371
LONG-TERM ASSETS
Deferred member acquisition costs (Note 5) 2,420
------
TOTAL ASSETS $5,791
======
LIABILITIES AND COLUMBIA HOUSE EQUITY INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 708
Accrued royalties 1,017
Accrued advertising 355
Other current liabilities 191
------
Total current liabilities 2,271
COMMITMENTS AND CONTINGENCIES (Note 8)
COLUMBIA HOUSE EQUITY INVESTMENT (Note 6) 3,520
------
TOTAL LIABILITIES AND COLUMBIA HOUSE
EQUITY INVESTMENT $5,791
======
See notes to financial statements.
2
<PAGE>
THE COLUMBIA HOUSE AUDIOBOOK CLUB
(A Division of The Columbia House Company)
STATEMENT OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 18, 1998
(Amounts in Thousands, except share and per-share data)
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NET SALES $ 14,387
--------
EXPENSES:
Cost of sales 6,118
Selling, general and administrative expenses 10,164
--------
Total expenses 16,282
--------
NET LOSS $ (1,895)
========
See notes to financial statements.
3
<PAGE>
THE COLUMBIA HOUSE AUDIOBOOK CLUB
(A Division of The Columbia House Company)
STATEMENT OF CASH FLOWS
FISCAL YEAR ENDED DECEMBER 18, 1998
(Amounts in Thousands, except share and per-share data)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,895)
-------
Adjustments to reconcile net loss to net cash used in operating activities:
Changes in assets and liabilities:
Decrease in accounts receivable 28
Decrease in inventory 215
Decrease in deferred member acquisition costs 561
Increase in royalty advances (380)
Increase in other assets (42)
Increase in accounts payable 352
Increase in accrued royalties 128
Decrease in accrued advertising (496)
Increase in other current liabilities 191
-------
Total adjustments 557
-------
Net cash used in operating activities (1,338)
-------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net distributions to Columbia House (1,314)
Amounts paid by Columbia House 2,652
-------
Net cash provided by financial activities 1,338
-------
NET CHANGE IN CASH --
CASH, BEGINNING OF YEAR --
CASH, END OF YEAR $ --
=======
See notes to financial statements.
4
<PAGE>
THE COLUMBIA HOUSE AUDIOBOOK CLUB
(A Division of The Columbia House Company)
NOTES TO FINANCIAL STATEMENTS
FISCAL YEAR ENDED DECEMBER 18, 1998
(Amounts in Thousands, except share and per-share data)
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1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The Columbia House Audiobook Club ("The Club"), a division of The Columbia
House Company ("Columbia House"), is a membership club which markets and
sells audio books by mail order in the United States. The Club commenced
operations during July 1994 and acquires members primarily through direct
mailings of member solicitation materials and advertisements in magazines,
newspapers and other publications. The Club does not maintain any full or
part-time employees as all operations of The Club are performed by
employees of Columbia House. As described in Note 7, Columbia House charges
The Club for all services rendered on behalf of The Club.
As described in Note 9 Columbia House sold The Club effective December 31,
1998.
2. SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year and Reporting Period - The Club's fiscal year consists of 52 or
53 weeks ending on the third Friday of December in each year. The fiscal
year ended December 18, 1998 included 52 weeks.
Basis of Presentation - The carve-out financial statements include the
accounts of The Club and reflect the carve-out historical results of
operations, financial position and cash flows of The Club.
As described in Note 7, because The Club operates as a division within
Columbia House, only those assets, liabilities, revenues and expenses of
Columbia House directly related to or allocated to The Club are in the
accompanying financial statements. Certain expenses of The Club reflected
in the accompanying financial statements included allocations of costs from
Columbia House for certain executive and administrative functions.
Allocations of certain assets, liabilities, and costs among Columbia House
divisions are based on revenues, personnel, space, estimates of usage or
time spent to provide services, or other appropriate bases. The
accompanying financial statements may not necessarily be indicative of the
financial position or results of operations if The Club had operated as an
unaffiliated company.
Columbia House funds the working capital requirements of its Club
businesses based upon a centralized cash management system. The Columbia
House Equity Investment (Note 6) includes an accumulated deficit as well as
payables and receivables due from Columbia House resulting from cash
transfers.
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 subsequently
differ from those estimates. The significant estimates that affect the
financial statements include, but are not limited to, audiobook returns,
doubtful accounts, inventory obsolescence, related party charges and the
recoverability of royalty advances to publishers and deferred member
acquisition costs.
5
<PAGE>
Revenue Recognition - The Club recognizes sales, which include amounts
charged to Club members for shipping and handling, upon shipment of
merchandise and simultaneous billing. Allowance for doubtful accounts and
future returns are based upon historical experience and evaluation of
current trends.
Inventory - Inventory, consisting primarily of audiobooks held for resale,
is valued at the lower of cost (weighted average cost method) or market.
Deferred Member Acquisition Costs - Member acquisition costs include direct
response advertising costs, consisting primarily of the cost of direct
mailings, magazine and newspaper advertising that include enrollment forms
for The Club's members.
Member's acquisition costs are deferred and amortized in relation to the
revenue stream estimated from the new Club members. The Club's estimate of
future revenues is based on historical experience and is limited to
revenues expected within two years of members joining The Club which
corresponds to the membership commitment period.
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 audiobook products are recorded as prepayments and
reflected in the cost of sales as royalty expense as the related sales are
made. An allowance is established for amounts considered recoupable. For
the fiscal year ended December 18, 1998, no writedown of royalty advances
were recorded.
Income Taxes - Columbia House is a United States partnership and,
therefore, not subject to federal or state income taxes. Accordingly, no
provision has been reflected in The Club's financial statements for federal
or state income taxes since The Columbia House partners are taxed thereon
directly.
3. ACCOUNTS RECEIVABLE
Accounts receivable, trade $2,764
Less:
Allowance for sales returns 301
Allowance for doubtful accounts 582
------
$1,881
======
The provision for doubtful accounts charged to expense was $869 for the
fiscal year ended December 18, 1998.
6
<PAGE>
4. INVENTORIES
Inventories consist of the following:
Accounts receivable consist of the following:
Raw materials $ 163
Finished goods 958
------
1,121
Less: allowance for obsolescence 540
------
$ 581
======
5. DEFERRED MEMBER ACQUISITION COSTS
Deferred member acquisition costs were $2,420 at December 18, 1998.
Advertising expense was $5,498 for the same period. Included in advertising
expense is $1,534 of deferred member acquisition costs that were written
down to net realizable value.
6. COLUMBIA HOUSE EQUITY INVESTMENT
An analysis of The Columbia House equity investment activity is as follows:
Balance at December 19, 1997 $ 4,077
Net loss (1,895)
Net cash distributions to Columbia House (1,314)
Allocated charges from Columbia House 2,652
-------
Balance at December 18, 1998 $ 3,520
=======
7. RELATED PARTY TRANSACTIONS
Columbia House provides The Club with warehousing, fulfillment, marketing
and customer service functions. For the fiscal year ended December 18,
1998, $1,164 of warehouse expenses is included as a component of costs of
sales and $402 represent allocated charges. Allocated charges during 1998
for fulfillment, marketing and customer service functioning which are
included as a component of selling, general and administrative were as
follows:
Fulfillment $1,123
Marketing and customer service 689
------
$1,812
======
Columbia House also provides The Club with all general and administrative
services, including insurance, legal, financial and other corporate
functions, including purchasing, accounting and systems technology support.
Such charges amounted to $438 for the fiscal year ended December 18, 1998.
7
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
The Club provides advances to publishers for the right to distribute
audiobook products. Such advances are recoupable against royalties earned
by publishers. Future advance payments required under existing contracts
are as follows as of December 18, 1998:
Year Ended Amount
1999 $325
Thereafter --
----
$325
====
9. SUBSEQUENT EVENT
On December 31, 1998, Columbia House entered into an agreement (the "Sales
Agreement") to sell The Club to The Audio Book Club, Inc. for (i) $30,750
in cash plus the first $2,000 in collection of accounts receivable; (ii)
325,000 shares of common stock of The Audio Book Club Inc.; and (iii) a
warrant to purchase 100,000 common shares of The Audio Book Club, Inc. at
an exercise price equal to $11.125 per share, exercisable during the period
from the closing date of the Sales Agreement to the fifth anniversary of
such date.
Under the Sales Agreement, effective December 31, 1998 Columbia House
agreed to provide certain warehousing, fulfillment, marketing and customer
service operations for The Audiobook Club, Inc. through June 30, 1999.
******
8
<PAGE>
The following pro forma presentation presents the pro forma effects for:
(1) The acquisition of Radio Spirits, Inc. on December 14, 1998 and
certain assets of an affiliated company, Buffalo Productions, Inc. and
a 50% interest in a joint venture owned by the principal of Radio
Spirits.
(2) the acquisition of substantially all of the assets used by Metacom,
Inc. in connection with its "Adventures in Cassettes" business on
December 14, 1998.
(3) the acquisition of substantially all of the assets used by Premier
Electronic Laboratories, Inc. in connection with its business of
licensing, producing, marketing and selling classic videos and radio
programs on December 14, 1998.
(4) the acquisition of substantially all of the assets used in the
audiobook club division (the "CH Audiobook Club") of The Columbia
House Company on December 31, 1998.
The pro forma presentation gives effect to the above transactions assuming the
transactions occurred January 1, 1998 and includes the results of operations for
Audio Book Club, Inc. for the year ended December 31, 1998; Radio Spirits, Inc.
and Adventures in Cassettes for the twelve months ended September 30, 1998;
Premier Electronics for the twelve months ended October 31, 1998; and the CH
Audiobook Club for the year ended December 18, 1998. The Consolidated Balance
Sheet of Audio Book Club, Inc. as reported on Form 10-KSB as of December 31,
1998 reflects the acquisitions and, accordingly, no pro forma balance sheet is
presented in this report on Form 8K. The pro forma adjustments give effect to
the events which are directly attributable to the transactions, factually
supportable and expected to have a continuing impact. Adjustments include
reductions in officer's salary and rent expense based on executed agreements
pursuant to the transactions, amortization of identifiable intangible assets and
goodwill arising from the transactions, and interest expense and amortization of
deferred financing fees arising from the financing of the transactions.
<PAGE>
Pro Forma Combined Statement of Operations
(000's) except earnings per share information
<TABLE>
<CAPTION>
(a) and
12/31/98 (b)
Audio Radio
Book Group
Club, Acquisi- Columbia Pro-Forma
Inc. tions Combined House Combined Adjustments Notes Adjusted
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $14,894 $11,079 $25,973 $14,387 $40,360 $40,360
Cost of
goods sold 9,452 4,859 14,311 6,118 20,429 20,429
-----------------------------------------------------------
Gross 5,442 6,220 11,662 8,269 19,931 19,931
profit
Advertising
and
promotion 8,910 1,969 10,879 8,857 19,736 19,736
General and
admini-
strative 3,697 3,003 6,700 1,307 8,007 (161) (1) 7,846
Amortization
of Identifiable
Intangibles
and
Goodwill 5,079 (2) 5,079
-------------------------------------------------------------------------- --------
Income
before
interest (7,165) 1,248 (5,917) (1,895) (7,812) (4,918) (12,730)
Interest
income
(expense) 180 180 180 (3,948) (3) (3,768)
-------------------------------------------------------------------------- --------
Net income $(6,985) 1,248 (5,737) (1,895) $(7,632) $(8,866) $(16,498)
(loss) ========================================================================= ========
Shares
outstanding 6,154 925 7,079
Earnings
per share
(basic and
diluted) $(1.13) $(2.33)
======== ========
</TABLE>
- ----------
(a) The Radio Group includes the acquisition of Radio Spirits, Inc. and its
affiliated company, Buffalo Productions, Inc. and the purchase of a 50%
interest in a joint venture engaged in producing, broadcasting, marketing
and distributing of a series of old-time radio programs; the acquisition of
the assets used by Metacom, Inc. in connection with its "Adventures in
Cassettes" business; and the assets used by Premier Electronics
Laboratories, Inc., in connection with its licensing, producing, marketing
and selling classic video and radio programs.
(b) Includes the results of operations for Radio Spirits, Inc. and the
Adventures in Cassettes business of Metacom, Inc. for the twelve months
ended September 30, 1998 and for Premier Electronics for the twelve months
ended October 31, 1998.
(1) Reduction in officer's salary and rent based on executed agreements
pursuant to the transactions.
<PAGE>
(2) Amortization of goodwill and identifiable intangible assets based on
estimated useful lifes for intangible assets and 20 years for goodwill as
follows:
Customer Lists 3 years
Convenant not to Compete 5 years
Mailing Agreements 7 years
(3) Interest expense and amortization of deferred financing fees.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUDIO BOOK CLUB INC.
By:/s/ John Levy
--------------------------
Executive Vice President and
Chief Financial Officer
Date: April 23, 199
