SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 2)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): December 31, 1998
AUDIO BOOK CLUB, INC.
(Exact name of registrant as specified in its charter)
Florida 1-13469 65-0429858
(State or other jurisdiction (Commission File (I.R.S. Employer
jurisdiction of incorporation) 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
Not Applicable
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 January 15, 1999, Audio Book Club, Inc. advised the
Securities and Exchange Commission ("the Commission") that it would file audited
financial statements relating to the acquisition described therein. Attached
hereto are the required financial statements.
INDEX:
(a) HISTORICAL FINANCIAL STATEMENTS OF THE BUSINESS ACQUIRED (THE COLUMBIA
HOUSE AUDIOBOOK CLUB)
Page
September 18, 1998
Carve-Out Balance Sheet
Carve-Out Statement of Income
Carve-Out Statement of Cash Flows
Carve-Out Notes to Financial Statements
September 19, 1997
Carve-out Statement of Income
Carve-Out Statement of Cash Flows
Carve-Out Notes to Financial Statements
December 19, 1997 and December 20, 1996
Independent Auditor's Report
Carve-Out Balance Sheets
Carve-Out Statements of Income
Carve-Out Statements of Cash Flows
Carve-Out Notes to Financial Statements
(b) PRO-FORMA COMBINED FINANCIAL INFORMATION
Introduction
Pro Forma Combined Balance Sheet at
September 30, 1998
Notes to Pro Forma Combined Balance Sheet at September 30, 1998
Pro Forma Combined Statement of Operations
for the Nine Months Ended September 30, 1998
Pro Forma Combined Statement of Operations
for the Twelve Months Ended December 31, 1997
Pro Forma Combined Statement of Operations
for the Twelve Months Ended December 31, 1996
Notes to Pro Forma Combined Statements of Operations
<PAGE>
THE COLUMBIA HOUSE AUDIO BOOK CLUB
CARVE-OUT BALANCE SHEET
(AMOUNTS IN THOUSANDS)
SEPT 18,
1998
UNAUDITED
---------
CASH $ 0
ACCOUNTS RECEIVABLE. NET 1,344
INVENTORY. NET 707
DEFERRED MEMBER ACQUISITION COSTS 1,644
ROYALTY ADVANCES 672
PREPAID EXP & OTHER CURRENT ASSETS 42
---------
TOTAL CURRENT ASSETS 4,409
=========
DEFERRED MEMBER ACQUISITION COSTS-LONG TERM 186
---------
TOTAL ASSETS $ 4,595
=========
ACCOUNTS PAYABLE $ 626
ACCRUED ROYALTIES 709
ACCRUED ADVERTISING 104
TOTAL CURRENT LIABILITIES 1,439
=========
COLUMBIA HOUSE EQUITY INVESTMENT 3,156
---------
TOTAL LIABILITIES AND EQUITY $ 4,595
=========
The accompanying notes are an integral part
of these carve-out financial statements.
<PAGE>
THE COLUMBIA HOUSE AUDIOBOOK CLUB
CARVE-OUT STATEMENT OF INCOME
(AMOUNTS IN THOUSANDS)
FOR THE 9 MONTHS ENDING
SEPT 18, SEPT 19,
1998 1997
UNAUDITED UNAUDITED
--------- ---------
Net Sales $ 10,758 $ 12,145
Expenses:
Cost of Sales 4,321 5,020
Selling, General and Administrative expenses 7,941 8,020
--------- ---------
Total expense 12,262 13,040
Operating (loss) (1,504) (895)
Other Income 53
(Benefit) provision for income taxes
--------- ---------
Net (loss) $ (1,504) $ (842)
========= =========
The accompanying notes are an integral part
of these carve-out financial statements.
<PAGE>
<TABLE>
<CAPTION>
THE COLUMBIA HOUSE AUDIOBOOK CLUB
CARVE-OUT STATEMENT OF CASH FLOWS
(Amounts In thousands)
FOR THE 9 MONTHS ENDING
SEPT 18, 1998 SEPT 18, 1997
UNAUDITED UNAUDITED
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,504) $ (842)
Adjustments to reconcile net (loss) Income to net
cash provided by operating activities:
Changes in assets and liabilities:
Decrease in accounts receivable 565 212
Decrease (Increase) in inventory 89 (243)
Decrease (Increase) in deferred member
acquisition costs 1,151 (183)
(Increase) Decrease in royalty advances (185) 500
(Increase) Decrease in other assets (42) 296
Increase (Decrease) in accounts payable 270 (302)
(Decrease) in accrued royalties (180) (520)
(Decrease) Increase in accrued advertising (747) 645
--------- ---------
Total adjustments 921 405
--------- ---------
Net cash flow from operating activities (583) (437)
--------- ---------
Financing activities:
Net distributions to Columbia House (1,476) (1,516)
Amounts paid by Columbia House 2,059 1,953
--------- ---------
Net cash flow from financing activities 583 437
Cash at beginning of period 0 0
--------- ---------
Cash at end of period $ 0 $ 0
--------- ---------
</TABLE>
The accompanying notes are an integral part
of these carve-out financial statements.
<PAGE>
The Columbia House Audiobook Club
Notes to Carve-Out Financial Statement
September 18, 1998 Unaudited
(Amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
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.
On December 30, 1998, Columbia House entered into an agreement (the "Sales
Agreement") to sell the Club to The Audio Book Club, Inc. for (i) $32,750
in cash; (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.
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 year ended December 19, 1997 included
52 weeks while the year ended December 20, 1996 included 53 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. 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.
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.
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.
<PAGE>
The Columbia House Audiobook Club 2
Notes to Carve-Out Financial Statement
September 18, 1998 Unaudited
(Amounts in thousands, except share data)
- --------------------------------------------------------------------------------
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, and the
cost of audiobook products provided to new members at a nominal price
(introductory product shipments) as incentives to join the Club.
Member 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 unrecoupable. For the years
ended December 19, 1997 and December 20, 1996 no writedown of royalty
advances were recorded.
Income taxes
Columbia House is a United States partnership not subject to federal or
state income tax. Accordingly, no (benefit) provision has been reflected in
the Club's financial statements for federal or state income taxes on Club
(loss) income since the Columbia House partners are taxed thereon directly.
Recent accounting pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 128, "Earnings per
Share" which establishes standards for computing and presenting earnings
per share and is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Given the nature of the
capital structure of the Club, earnings per share data has not been
presented
There are no other recently issued accounting pronouncements that are
expected to have a material impact on the Club.
<PAGE>
The Columbia House Audiobook Club
Notes to Carve-Out Financial Statement
September 18, 1998 Unaudited
(Amounts in thousands, except share data)
- --------------------------------------------------------------------------------
3. Accounts Receivable
Accounts receivable consists of the following:
September 18,
1998
(unaudited)
Accounts receivable, trade $ 2,265
less:
Allowance for sales return 186
Allowance for doubtful accounts 735
-------------
$ 1,344
The provision for doubtful accounts charged to expense was $735 for the
unaudited nine month period ended September 18, 1998.
4. Inventories
September 18,
1998
(unaudited)
Inventories consists of the following:
Raw materials $ 220
Finished goods 924
-------------
$ 1,144
less: allowance for obsolesence 437
-------------
$ 707
-------------
5. Deferred Member Acquisition Costs
September 18,
1998
(unaudited)
Deferred member acquisition costs consists
of the following:
Current
Advertising $ 1,489
Introductory product shipments 155
-------------
Total current $ 1,644
Non-current
Advertising $ 167
Introductory product shipments 19
-------------
Total non-current $ 185
Advertising expense was $4,413 for the unaudited nine month period ended
September 18, 1998. Advertising expense for the unaudited nine month period
ending September 18, 1998 includes $1,488 of deferred advertising expense
that was written down to net realisable value. Introductory product
shipment expense was $989 for the unaudited nine month period ended
September 18, 1998.
<PAGE>
The Columbia House Audiobook Club
Notes to Carve-Out Financial Statement
September 18, 1998 Unaudited
(Amounts in thousands, except share data)
- --------------------------------------------------------------------------------
6. Columbia House Equity Investment
September 18,
1998
(unaudited)
An analysis of the Columbia House equity
investment activity is as follows:
Balance as of the beginning of the year $ 4,077
Net (loss) income (1,504)
Net cash distributions to Columbia House (1,476)
Allocated charges from Columbia House 2,059
-------------
Balance as of the end of the year $ 3,156
7. Related Party Transactions
Columbia House provides the Club with warehousing, fulfillment, marketing
and customer service functions. For the unaudited period ending September
18, 1998, $810 of warehouse expenses is included as a component of costs of
sales and $283 are 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:
September 18,
1998
(unaudited)
Fulfillment $ 827
Marketing and customer service 514
-------------
$ 1,341
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 $329 for the unaudited nine month period ended
September 18, 1998.
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 September 18, 1998:
Fiscal years ended December
1999 $ 216
2000 250
thereafter --
-------------
$ 468
<PAGE>
The Columbia House
Audiobook Club
Carve-Out Financial Statements
December 19, 1997 and
December 20, 1996
<PAGE>
PricewaterhouseCoopers [logo]
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Telephone (212) 596-8000
Facsimile (212) 596-8910
Report of Independent Accountants
December 30, 1998
To the Board of Representatives of
The Columbia House Company
In our opinion, the accompanying carve-out balance sheets and the related
carve-out statements of operations arid of cash flows present fairly, in all
material respects, the financial position of The Columbia House Audiobook Club,
a division of The Columbia House Company (the "Company"), at December 19, 1997
and December 20, 1996, and the results of its operations and its cash flows for
each of the fiscal years then ended in conformity with generally accepted
accounting principles. 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 audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
<PAGE>
The Columbia House Audiobook Club
Carve-Out Balance Sheet
(Amounts in thousands)
- --------------------------------------------------------------------------------
December 19, December 20,
1997 1996
Assets
Current assets
Cash $ -- $ --
Accounts receivable, net (Note 3) 1,909 1,809
Inventories, net (Note 4) 796 826
Deferred member acquisition costs (Note 5) 2,632 2,685
Royalty advances 487 753
Prepaid expenses and other current assets -- 296
-------- --------
Total current assets 5,824 6,369
-------- --------
Long-term assets
Deferred member acquisition costs (Note 5) 349 414
-------- --------
Total assets $ 6,173 $ 6,783
-------- --------
Liabilities and Columbia House Equity Investment
Current liabilities
Accounts payable $ 356 $ 628
Accrued royalties 889 989
Accrued advertising 851 --
-------- --------
Total current liabilities 2,096 1,617
Commitments and contingencies (Note 8)
Columbia House Equity Investment (Note 6) 4,077 5,166
-------- --------
Total liabilities and Columbia House
Equity Investment $ 6,173 $ 6,783
-------- --------
The accompanying notes are an integral part of these
carve-out financial statements.
<PAGE>
The Columbia House Audiobook Club
Carve-Out Statement of Income
(Amounts in thousands)
- --------------------------------------------------------------------------------
Fiscal Year Ended
December 19, December 20,
1997 1996
Net sales $ 16,555 $ 15,188
Expenses
Cost of sales 7,019 5,862
Selling, general and administrative expenses 10,587 8,407
--------- ---------
Total expenses 17,606 14,269
--------- ---------
Operating (loss) income (1,051) 919
(Benefit) provision for income taxes (Note 2) -- --
--------- ---------
Net (loss) income $ (1,051) $ 919
--------- ---------
The accompanying notes are an integral part of these
carve-out financial statements.
<PAGE>
The Columbia House Audiobook Club
Carve-Out Statement of Cash Flows
(Amounts in thousands)
- --------------------------------------------------------------------------------
Fiscal Year Ended
December 19, December 20,
1997 1996
Cash flows from operating activities
Net (loss) income $ (1,051) $ 919
Adjustments to reconcile net (loss) income to
net cash from operating activities
Changes in assets and liabilities
Increase in accounts receivable (100) (250)
Decrease in inventories 30 319
Decrease (increase) in deferred member
acquisition costs 118 (814)
Decrease (increase) in royalty advances 266 (51l)
Decrease (increase) in other assets 296 (25)
Decrease in accounts payable (272) (677)
(Decrease) increase in accrued royalties (100) 412
Increase in accrued advertising 851
-------- --------
Net cash flow from operating activities 38 627
-------- --------
Financing activities
Net distributions to Columbia House (2,823) (1,920)
Amounts paid by Columbia House 2,785 2,547
-------- --------
Net cash flow from financing activities (38) 627
-------- --------
Net change in cash -- --
Cash at beginning of year -- --
-------- --------
Cash at end of year $ -- $ --
-------- --------
The accompanying notes are an integral part of these
carve-out financial statements.
<PAGE>
The Columbia House Audiobook Club
Notes to Carve-Out Financial Statements
December 19, 1997 and December 20, 1996
(Amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
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.
On December 30, 1998, Columbia House entered into an agreement (the "Sales
Agreement") to sell the Club to The Audio Book Club, Inc. for (i) $32,750
in cash: (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.
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 year ended December 19, 1997 included
52 weeks while the year ended December 20, 1996 included 53 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. 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.
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.
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.
<PAGE>
The Columbia House Audiobook Club 2
Notes to Carve-Out Financial Statements
December 19, 1997 and December 20, 1996
(Amounts in thousands, except share data)
- --------------------------------------------------------------------------------
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, and the
cost of audiobook products provided to new members at a nominal price
(introductory product shipments) as incentives to join the Club.
Member 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 unrecoupable. For the years
ended December 19, 1997 and December 20, 1996 no writedown of royalty
advances were recorded.
Income taxes
Columbia House is a United States partnership not subject to federal or
state income tax. Accordingly, no (benefit) provision has been reflected in
the Club's financial statements for federal or state income taxes on Club
(loss) income since the Columbia House partners are taxed thereon directly.
Recent accounting pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 128, "Earnings per
Share" which establishes standards for computing and presenting earnings
per share and is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Given the nature of the
capital structure of the Club, earnings per share data has not been
presented.
There are no other recently issued accounting pronouncements that are
expected to have a material impact on the Club.
<PAGE>
The Columbia House Audiobook Club 3
Notes to Carve-Out Financial Statements
December 19, 1997 and December 20, 1996
(Amounts in thousands, except share data)
- --------------------------------------------------------------------------------
3. Accounts Receivable
Accounts receivable consist of the following:
December 19, December 20,
1997 1998
Accounts receivable, trade $ 3,549 $ 3,337
Less:
Allowance for sales returns 599 543
Allowance for doubtful accounts 1,041 985
----------- -----------
$ 1,909 $ 1,809
----------- -----------
The provision for doubtful accounts charged to expense was $1,634 in 1997
and $1,538 in 1996. The Club has no significant concentrations of credit
risk with respect to trade receivables because of the large number of
customers spread across many domestic geographic areas.
4. Inventories
Inventories consist of the following:
December 19, December 20,
1997 1998
Raw materials $ 192 $ 94
Finished goods 1,014 807
----------- -----------
1,206 901
Less: allowance for obsolescence 410 75
----------- -----------
$ 796 $ 826
----------- -----------
<PAGE>
The Columbia House Audiobook Club 4
Notes to Carve-Out Financial Statements
December 19, 1997 and December 20, 1996
(Amounts in thousands, except share data)
- --------------------------------------------------------------------------------
5. Deferred Member Acquisition Costs
Deferred member acquisition costs consist of the following:
December 19, December 20,
1997 1998
Current
Advertising $ 2,428 $ 2,448
Introductory product shipments 204 237
---------- ----------
Total current $ 2,632 $ 2,685
---------- ----------
Non-current
Advertising 320 386
Introductory product shipments 29 28
---------- ----------
Total non-current $ 349 $ 414
---------- ----------
Advertising expense was $5,453 and $3,745 in 1997 and 1996, respectively.
Advertising expense for 1997 includes $504 of deferred advertising that was
written down to net realizable value. Introductory product shipment expense
was $1,642 and $l,643 in 1997 and 1996, respectively.
6. Columbia House-Equity investment
An analysis of the Columbia House equity investment activity is as follows:
Year Ended
December 19, December 20,
1997 1998
Balance as of the beginning of the year $ 5,166 $ 3,620
Net (loss) income (1,051) 919
Net cash distributions to Columbia House (2,823) (1,920)
Allocated charges from Columbia House 2,785 2,547
------- -------
Balance as of the end of the year $ 4,077 $ 5,166
------- -------
Columbia House funds the working capital requirements of its club
businesses based upon a centralized cash management system. The Columbia
House equity investment includes an accumulated deficit as well as payables
and receivables due to/from Columbia House resulting from cash transfers.
Columbia House does not charge the Club interest on intercompany balances.
<PAGE>
The Columbia House Audiobook Club 5
Notes to Carve-Out Financial Statements
December 19, 1997 and December 20, 1996
(Amounts in thousands, except share data)
- --------------------------------------------------------------------------------
7. Related Party Transactions
Columbia House provides the Club with fulfillment, marketing and customer
service and warehousing functions. Allocated charges for 1997 and 1996 for
fulfillment and marketing and customer service functions which are included
as a component of selling, general and administrative expenses were as
follows:
Year Ended
December 19, December 20,
1997 1996
Fulfillment $ 1,344 $ 1,251
Marketing and customer service 445 456
--------- ---------
$ 1,389 $ 1,707
--------- ---------
During 1997 and 1996, the Club incurred $1,364 and $1,291, respectively, of
warehousing expense that is included as a component of costs of sales. Of
such amounts, $513 and $447 represent allocated charges for warehousing
services provided by Columbia House for 1997 and 1996, respectively.
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 $483 and $393 for 1997 and 1996, respectively, and
are included in selling, general and administrative expenses. The cost of
financing activities and certain other corporate functions, which did not
benefit the Club, were absorbed by Columbia House.
Management believes that the methodologies used to allocate charges for the
services described above from Columbia House are reasonable.
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:
Fiscal years ended December
1998 $ 867
1999 250
Thereafter --
---------
$ 1,117
---------
<PAGE>
The Columbia House Audiobook Club 6
Notes to Carve-Out Financial Statements
December 19, 1997 and December 20, 1996
(Amounts in thousands, except share data)
- --------------------------------------------------------------------------------
Columbia House is involved in litigation that impacts its various club
businesses including the Club. Such litigation includes claims surrounding
Columbia House's shipping and handling practices that Columbia House
believes are customary in mail order retail marketing. Columbia House
believes the claims are without merit and intends to defend the claims
vigorously. In connection with the sale of the Club that is further
described in Note 1, Columbia House has agreed to indemnify The Audio Book
Club, Inc. from any ultimate liability arising since the inception of the
Club through the closing date of the Sales Agreement which may result from
these claims.
<PAGE>
PRO FORMA COMBINED FINANCIAL STATEMENTS
INTRODUCTION
(Unaudited)
The unaudited pro forma combined financial information presented herein gives
effect to the purchase of the Columbia House Audiobook Club from the Columbia
House Company by Audio Book Club, Inc. on December 31, 1998. The Columbia House
Audiobook Club's fiscal years ended on December 19,1997 and December 20, 1996
and Audio Book Club, Inc.'s fiscal years end on December 31.
The unaudited pro forma combined balance sheet data at September 30, 1998
combines the historical balance sheet of Audio Book Club, Inc. and its
subsidiary as of September 30, 1998 and The Columbia House Audiobook Club
carve-out balance sheet as of September 18, 1998. The pro forma adjustments to
the balance sheet assume that the acquisition was consummated at the end of the
period being presented.
The unaudited pro forma combined statement of operations data being presented
for the nine month period ended September 30, 1998 combines Audio Book Club,
Inc. nine months of operations ended September 30, 1998 with The Columbia House
Audiobook Club for the nine months of operations ended September 18, 1998. The
unaudited pro forma combined statements of operations data being presented for
the twelve month periods ended December 31, 1997 and 1996 combine Audio Book
Club, Inc.'s twelve months of operations ended December 31, 1997 and 1996 with
the operations of The Columbia House Audiobook Club for the twelve months ended
December 19, 1997 and December 20, 1996. The pro forma adjustments to the
statements of operations assume that the acquisition was consummated at the
beginning of the earliest period being presented.
Audio Book Club, Inc. expects to achieve certain increases in net revenues and
reductions in costs subsequent to the purchase of The Columbia House Audiobook
Club as a result of, among other factors, increased membership, increased volume
discounts, increased buying power and the elimination of duplicative ownership
efforts. To comply with the Commission's pro forma reporting rules, the cost
reductions reflected in the accompanying Unaudited Pro Forma Combined Statements
of Operations are directly attributable to the acquisition and are factually
supportable.
The unaudited pro forma combined financial statements are intended for
informational 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 acquisition taken place as of the date or
for the periods presented. These unaudited pro forma combined financial
statements and the accompanying notes should be read in conjunction with the
financial statements, including the accompanying notes, of The Columbia House
Audiobook Club which are attached and of Audio Book Club, Inc. which are
included in the Company's annual report on Form 10-K for the fiscal year ended
December 31, 1997.
In the opinion of management, all adjustments have been made that are necessary
to present fairly the pro forma data.
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
September 30, 1998
(Unaudited)
(In Thousands of Dollars)
September 30. 1998
<TABLE>
<CAPTION>
Pro-Forma Notes Pro-Forma
CH ABC Adjustments (1) Combined
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and short-term investments $ 2,770 $ 2,770
Accounts receivable $ 1,344 3,157 $ (1,344) (2) 3,157
Inventory 707 1,942 2,649
Deferred Member Acquisition Costs 1,644 (1,644) (3)
Royalty advances 672 674 1,346
Other current assets 42 656 (42) (3) 656
------------------------------------------ --------
Total Current Assets 4,409 9,199 (3,030) 10,578
Property, equipment, software and Internet
development - net 616 616
Other assets 186 190 (186) (3) 190
Goodwill and other identifiable intangibles 35,569 (4) 35,569
------------------------------------------ --------
Total assets $ 4,595 $ 10,005 $ 32,353 $ 46,953
========================================== ========
LIABILITIES
Accounts payable and accrued expenses $ 1,439 $ 4,066 $ (1,439) (5) $ 4,066
Due to Columbia House 656 (2) 656
------------------------------------------ --------
Total current liabilities 1,439 4,066 (783) 4,722
------------------------------------------ --------
Long term debt 30,750 (6) 30,750
------------------------------------------ --------
EQUITY
Common stock 26,406 5,542 (7) 31,948
Columbia House equity investment 3,156 (3,156) (8)
Retained earnings (20,467) (20,467)
------------------------------------------ --------
Total equity 3,156 5,939 5,542 14,637
------------------------------------------ --------
Liabilities and equity $ 4,595 $ 10,005 $ 32,353 $ 46,953
========================================== ========
</TABLE>
See notes to pro forma combined financial statements
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET
September 30, 1998
(Unaudited)
(1) Reflects the acquisition by Audio Book Club, Inc. at the end of the period
being presented.
(2) Reflects that Columbia House retained first $2,000,000 of receivable
collections.
(3) Reflects reduction for assets not acquired.
(4) Records goodwill and other identifiable intangible assets arising from the
acquisition.
(5) Reflects reduction for liabilities not assumed per agreement.
(6) Reflects debt incurred by Audio Book Club, Inc. in consummating the
acquisition.
(7) Reflects stock and options paid to The Columbia House Company and its
designees in the acquisition.
(8) Reflects elimination of Columbia House equity investment.
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(Unaudited)
(in Thousands of Dollars, Except Per Share Amounts)
For the Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Pro-Forma Notes Pro-Forma
CH ABC Adjustments (a) Combined
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 10,758 $ 11,535 $ 22,293
Cost of sales 4,321 7,558 11,879
---------------------- --------
Gross profit 6,437 3,977 10,414
Advertising 4,413 6,108 10,521
General and administrative expenses 3,528 2,111 $ (1,452) (b) 5,986
1,799 (c)
Interest expenses (income) (249) 1,960 (d) 1,711
---------------------------------- --------
Income before taxes (1,504) (3,993) (2,307) (7,804)
Income taxes -- -- --
---------------------------------------------------------
Net income $(1,504) $ (3,993) $ (2,307) $ (7,804)
=========================================================
(Loss) per share $ (0.65) $ (1.20)
Number of shares used in computation of per share
information: 6,153,920 6,478,920
=========================================================
</TABLE>
See notes to pro forma combined financial statements
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(Unaudited)
(in Thousands of Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Pro-Forma Notes Pro-Forma
CH ABC Adjustments (a) Combined
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 16,555 $ 10,078 $ 26,633
Cost of sales 7,019 5,495 12,514
--------------------- ---------
Gross profit 9,536 4,583 14,119
Advertising 5,453 6,843 12,296
General and administrative expenses 5,134 2,225 $ (1,711) (b) 8,046
2,398 (c)
Interest expenses 435 2,614 (d) 3,049
----------------------------------- ---------
Income before taxes (1,051) (4,920) (3,301) (9,272)
Income taxes -- --
--------------------------------------------------------
Net income $ (1,051) $ (4,920) $ (3,301) $ (9,272)
=================================== =========
(Loss) per share $ (1.29) $ (2.23)
========= =========
Number of shares used in computation of per share
information: 3,820,027 4,145,027
========= =========
</TABLE>
See notes to pro forma combined financial statements
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(Unaudited)
(in Thousands of Dollars Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 Pro-Forma Notes Pro-Forma
CH ABC Adjustments (a) Combined
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 15,188 $ 5,600 $ 20,788
Cost of sales 5,862 4,327 10,189
----------------------- ---------
Gross profit 9,326 1,273 10,599
Advertising 3,745 5,470 9,215
General and administrative expenses 4,662 2,053 $ (1,417) (b) 7,696
2,398 (c)
Interest expenses 211 2,614 (d) 2,825
--------------------------------------- ---------
Income before taxes 919 (6,461) (3,595) (9,137)
======================================= =========
Income taxes -- --
--------------------------------------- ---------
Net income $ 919 $ (6,461) $ (3,595) $ (9,137)
======================================= =========
(Loss) per share $ (1.95) $ (2.55)
========= =========
Number of shares used in computation of per share
information: 3,256,400 3,581,400
========= =========
</TABLE>
See notes to pro forma combined financial statements
<PAGE>
NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30. 1998
For the Twelve Months Ended December 31,1997
For the Twelve Months Ended December 31,1996
(Unaudited)
(a) Reflects the acquisition by Audio Book Club, Inc. as of January 1, 1996.
(b) Reflects the reduction in expenses including salaries and other costs
directly attributable to the acquisition and factually supportable.
(c) Reflects amortization of goodwill and other intangibles, assuming the
acquisition occurred as of the beginning of the earliest period presented.
(d) Reflects interest expense for the period presented on the long-term debt
incurred in the acquisition.
<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: April 16, 1999
Audio Book Club, Inc.
/S/ John F. Levy
----------------------------
Executive Vice President and
Chief Financial Officer
