<PAGE>
FORM 10-QSB
(Adopted in Release No. 34-30968 (72,439), effective August 13, 1992, 57
F.R. 36442; and amended in Release No. 34-31326 ( 85,051), effective October
22, 1992, 57 F.R. 48276.)
U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
--------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
EXCHANGE ACT
For the transition period from ______________ to _________________
Commission file number 0-7762
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AUDIO COMMUNICATIONS NETWORK, INC.
---------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 52-0690530
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1000 Legion Place, Suite 1515, Orlando, Fl. 32801
--------------------------------------------------
(Address of principal executive office)
(407) 649-8877
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(Issuer's telephone number)
---------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after distribution of
securities under a plan confirmed by court.
Yes No Not Applicable X
--- --- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
------------------------------------
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 2,243,821
---------
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AUDIO COMMUNICATIONS NETWORK, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FIRST QUARTER
FOR THE 3 MONTHS ENDED
--------------------------
31-Mar-96 31-Mar-95
PART I - FINANCIAL INFORMATION ---------- ----------
Music Sales .................... $1,828,138 $1,423,942
Installations .................. 183,642 234,008
Equipment Sales ................ 262,053 108,970
Labor & Service ............... 115,006 55,837
Pro Sound Installations ........ 210,263 -0-
---------- ----------
TOTAL REVENUE................... 2,599,102 1,822,757
COST AND EXPENSES
Cost of Sales .................. 1,074,862 739,654
Selling, General and
Administrative Expenses ........ 718,661 575,539
Depreciation and Amortization .. 389,916 280,458
---------- ----------
TOTAL .......................... 2,183,439 1,595,651
---------- ----------
Income before Other Income
(Expense) and Income Taxes...... 415,663 227,106
OTHER INCOME (EXPENSE):
Interest Income ................ 7,532 1,605
Interest Expense................ (271,851) (132,507)
Other .......................... 22,203 29,694
---------- ----------
OTHER NET ...................... (242,116) (101,208)
---------- ----------
Income before Income Taxes...... 173,547 125,898
Provision for Income Taxes ..... 22,100 11,400
---------- ----------
Net Income...................... $ 151,447 $ 114,498
========== ==========
Net Income Per Common Share $ .07 $ .05
========== ==========
Number of Common and Commmon
Equivalent Shares............... 2,260,733 2,233,360
========== ==========
Dividends Per Share -0- -0-
========== ==========
2
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AUDIO COMMUNICATIONS NETWORK, INC, & SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
31-Mar-96 31-Dec-95
----------- ----------------
(Unaudited) (Condensed from
PART I - FINANCIAL INFORMATION Audited Financial
- ------------------------------ Statements)
ASSETS
Current Assets:
Cash & Cash Equivalents........... $ 1,040,991 $ 590,107
Accounts Receivable .............. 902,779 519,754
Inventories....................... 501,139 359,888
Prepaid Expenses & Other.......... 162,172 33,416
----------- -----------
Total - Current Assets....... .... 2,607,081 1,503,165
----------- -----------
Property - Net.................... 4,708,245 3,358,217
----------- -----------
Subscriber Contracts & Other
Intangibles....................... 2,801,324 1,541,922
Goodwill.......................... 4,691,171 1,994,040
Deposits & Other.................. 14,134 13,734
----------- -----------
Total Other Assets................ 7,506,629 3,549,696
----------- -----------
TOTAL............................. $14,821,955 $ 8,411,078
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current - Long Term Debt......... $ 1,172,157 $ 923,697
Current Portion of Obligation
Under Capital Leases ............ 15,402 12,697
Accounts Payable................. 548,765 458,872
Accrued Liabilities.............. 319,334 89,606
----------- -----------
Total Current Liabilities........ 2,055,658 1,484,872
----------- -----------
Long - Term Debt................. 9,756,721 4,089,019
----------- -----------
Obligations Under Capital Leases. 20,942 -0-
----------- -----------
Deferred Compensation............ 50,000 50,000
----------- -----------
Stockholders' Equity:
Common Stock, $.25 par value
8,000,000 shares, authorized,
2,243,821 shares issued and
outstanding in 1996 and 1995..... 560,955 560,955
Capital Contributed in Excess
of Par Value..................... 5,011,451 5,011,451
Accumulated Deficit.............. (2,633,772) (2,785,219)
----------- -----------
Stockholders' Equity............. 2,938,634 2,787,187
----------- -----------
TOTAL............................ $14,821,955 $ 8,411,078
=========== ===========
3
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PART I
AUDIO COMMUNICATIONS NETWORK, INC. & SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 3 MONTHS ENDED
----------------------
31-Mar-96 31-Mar-95
----------- -----------
CASH FLOWS FROM OPERATIONS ACTIVITIES:
- --------------------------------------
Cash Received From Customers........... $ 2,547,108 $ 1,856,236
Cash Paid To Suppliers & Employees..... (1,996,986) (1,617,621)
Interest Received...................... 7,532 1,605
Interest Paid ......................... (223,468) (130,638)
Income Tax Paid ....................... (19,519) (24,390)
Other-Net.............................. 8,060 21,025
----------- -----------
Net cash provided by (used in)
Operating Activities................... 322,727 106,217
----------- -----------
CASH FLOWS FROM INVESTMENTS ACTIVITIES:
- ---------------------------------------
Capital Expenditures................... (2,234) (7,875)
Purchase of Florida Sound Assets ...... (5,750,000) -0-
Deferred Contract Costs................ -0- (10,053)
Deferred Acquisition Costs............. (101,941) -0-
----------- -----------
Net Cash Provided by (used in)
Investing Activities................... (5,854,175) (17,928)
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Proceeds from issuance of long-term
debt................................... 11,000,000 -0-
Principal payments under Capital lease
obligations ........................... (10,505) (18,232)
Repayment of Long-Term Debt............ (5,007,163) (73,638)
----------- -----------
Net Cash Provided By (used in)
Financing Activities................... 5,982,332 (91,870)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS....................... 450,884 (3,581)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR................................... 590,107 509,064
----------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD................................. $ 1,040,991 $ 505,483
=========== ===========
4
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PART I
- ------
AUDIO COMMUNICATIONS NETWORK, INC. & SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
1996 1995
--------- ---------
RECONCILIATION OF NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net Income............................. $ 151,447 $ 114,498
--------- ---------
Adjustments to Reconcile Net Income
To Net Cash Provided by Operations:
Depreciation and Amortization.......... 408,206 292,926
Valuation Allowance.................... 16,098 (7,000)
Deferred Commissions................... (32,219) (12,092)
Gain on sale of equipment .............
Accounts Receivable.................... (51,994) 63,511
Inventories............................ (355,718) (271,929)
Prepaid and Other Current Assets ...... (128,756) (139,296)
Accounts Payable....................... 89,893 62,288
Accruals............................... 229,728 24,449
Other - Net............................ (3,958) (21,138)
--------- ---------
Total Adjustments...................... 171,280 (8,281)
--------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES............................. $ 322,727 $ 106,217
========= =========
Supplemental Schedule of Noncash Investing and Financial Activities:
During the quarters ending March 31, 1996 and 1995 approximately $554,000
and $313,000 respectively, of inventory was leased to customers and
reclassified to property equipment.
Capital lease obligations of approximately $15,000 were incurred in 1996.
Capital lease obligations of approximately $18,000 and loans of approximately
$67,000 for vehicles were incurred during 1995.
5
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PART I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS & RESULTS OF OPERATIONS
SUMMARY
- -------
The following table sets forth for the period indicated, certain items from the
Company's Consolidated Statements of Operating expressed as a percentage of
operating revenues.
RELATIONSHIP TO TOTAL REVENUES
1ST. QUARTER
-----------------------
FOR THE 3 MONTHS ENDED
-----------------------
3/31/96 3/31/95
--------- ---------
Revenues from Operations 100.00% 100.00%
Operating Costs and Expenses (69.0) (72.2)
------ ------
Income from Operations before
Depreciation and Amortization 31.0 27.8
Depreciation and Amortization (15.0) (15.4)
------ ------
Income before Other Income (Expense),
and Income Taxes 16.0 12.4
Other Income (Expense) Net (9.3) (5.5)
------ ------
Income before Income Taxes 6.7 6.9
Provision for Income Taxes 0.9 (0.6)
------ ------
Net Income 5.8 6.3
====== ======
6
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PART I
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- --------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
REVENUES:
- ----------
Consolidated net revenues for the 1st. Quarter of 1996 were $2,599,000 as
compared to $1,823,000 for the like period of 1995 an increase of $776,000 or
43%. The Jacksonville acquisition contributed 44% of the increase as there was
a 1% decrease in Audio's comparable 1996 revenues from the previous year. The
decrease was in Audio's 1996 music installation revenue as the 1st quarter 1995
had unusually large installation sales. Growth continued in 1996 in recurring
revenue and equipment sales.
COST AND EXPENSES:
- ------------------
Cost of sales increased as a percentage of sales in the 1st Quarter of '96 over
the like period of '95 due to the acquisition of the Pro Sound Division included
in the Jacksonville purchase. Whereas certain installations in the Muzak(R)
revenue did not require additional expense the Pro Sound's revenue required
labor, material and expenses. Operating expenses decreased as a percentage of
sales in '96 due again to the Florida acquisition. The recurring music revenue
base does not require additional selling expense other than royalties and
commissions (which are amortized over the life of the contract).
DEPRECIATION & AMORTIZATION:
- ----------------------------
Depreciation and amortization as a percentage of sales decreased slightly over
the 1st. Quarter of 1995 due to certain intangibles related to previous
acquisitions being fully amortized at year end.
7
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Though there was an increase in depreciation and amortization in the 1st Quarter
of '96 due to the Jacksonville acquisition the increase was offset by the fully
amortized intangibles.
OTHER INCOME AND EXPENSE:
- -------------------------
Other Income and Expense almost doubled at March 31, 1996 as a percentage of
sales from the 1st Quarter of '95 due primarily to the increase in borrowings
from $4,000,000 at March 31, 1995 to $11,000,000 on January 2, 1996. Interest
income increased from the prior period due to Audio's utilizing the SunTrust
Capital Market Investment program. Other "Net" is comprised of cancellation
fees, bad debt recoveries, commissions earned or allowed.
INCOME TAXES:
- -------------
At March 31, 1996, the Company had net operating loss carryforwards for federal
tax purposes of approximately 2.8 million. Such loss carryforwards expire in
2002 through 2006.
NET INCOME :
- ------------
Net income for the 1st. Quarter of '96 was $151,000 as compared to '95's 1st
Quarter of $114,000, an increase of 33% or $37,000. Earnings per share for '96
were $.07 as compared to '95's $.05 per share, an increase of 40% or $.02 per
share.
Net income in '96 increased over the 1st Quarter of '95 even though there was an
increase in amortization and depreciation expense incurred by the Jacksonville
acquisition. Income increased due to the continued growth in the recurring
revenue base and additional intangibles related to previous acquisitions being
fully amortized at December 31, 1995.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
Operating cash flows (computed as net income plus interest, taxes, depreciation
and amortization) have increased from $539,000 in '95 to $835,000 in '96 an
increase of $296,000 or 55%. On June 7, 1995, the Company and SunTrust entered
into a 7th Amendment to its then existing loan agreement. The new amendment was
for $5,200,000 and was called a "consolidated loan." It paid off the Company's
and American Music indebtedness of $4,899,000. The following covenants
superseded all other covenants: (1) Debt Service Coverage Ratio; (2) Debt to Net
Worth Ratio; and (3) a Minimum Monthly Recurring Billing Required.
On January 2, 1996, the Company and SunTrust entered into a Second Amended and
Restated Loan amendment to this existing loan agreement. This new amendment is
for $11,000,000 and is also called a "consolidated loan." It paid off the
Company's indebtedness of $4,810,000 at December 31, 1995 and gave the Company
the ability to purchase for cash the assets of the Muzak(R) franchise in
Jacksonville, Florida and to purchase additional inventory for the Pro Sound
Division acquired in the acquisition. In the new covenants, Funded Debt to
EBITDA Ratio replaces the Debt to Net Worth Ratio. All payments of interest and
principal on loans outstanding and payments on lease obligations have been made
on a timely basis.
ACQUISITION:
- ------------
On January 2, 1996 the Company acquired the assets of Florida Sound Engineering
Company holder of the Jacksonville, Florida Muzak(R) franchise. In addition to
the Muzak(R) franchise, the Company also acquired the assets of Florida Sound's
Pro Sound Division (with its accounts receivable, inventory and other equipment)
enabling it to install complex and extensive
9
<PAGE>
communication systems. The area of operations extends beyond Jacksonville to
Gainesville, Ocala, St. Augustine, and into southern Georgia, including
Brunswick. The Jacksonville company's name remained the same, and it operates as
a wholly owned subsidiary of Audio Communications Network, Inc. Traditionally
Muzak(R) franchises generate substantial and sufficient cash flow and the
Company has no reason to believe that the Florida franchise will not meet the
Company's expectations. It already has generated adequate cash flow to pay the
principal and interest on that portion of the loan required to purchase the
Jacksonville franchise.
RECENTLY ISSUED ACCOUNTING STANDARDS
- ------------------------------------
The Company adopted Statement of Financial Accounting Standards No. 121 ("FAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" in the first quarter of 1996. The adoption of FAS 121
had no impact on the consolidated financial position or results of operations of
the Company.
The Company has chosen not to adopt Statement of Financial Accounting Standards
No. 123, "Account for Stock-Based Compensation" for employee stock-based
arrangements.
LEGAL PROCEEDINGS:
- ------------------
Not applicable.
10
<PAGE>
AUDIO COMMUNICATIONS NETWORK, INC. & SUBSIDIARIES
PART II OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
---------------------
Not Applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
This item is not applicable. There have been
no defaults in any of the Company's securities.
Item 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
--------------------------------------------------
Not Applicable
Item 5. OTHER INFORMATION
-----------------
None
Item 6. EXHIBITS & REPORTS ON FORM 8K (17 CFR 249.308)
----------------------------------------------
March 18, 1996 - Acquired the assets of Florida Sound Engineering
Company of Jacksonville, Florida on January 2, 1996.
(27) Financial Data Schedule
11
<PAGE>
FORM 10-QSB
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AUDIO COMMUNICATIONS NETWORK, INC.
(Registrant)
Date May 10, 1996 /s/ Doris K. Krummenacker
------------------- ------------------------------------------
Doris K. Krummenacker
Vice President/Finance &
Treasurer
Date May 10, 1996 /s/ A. J. Schell
------------------- ------------------------------------------
A. J. Schell
Chairman and
Chief Executive Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1ST QTR.
1996 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,040,991
<SECURITIES> 0
<RECEIVABLES> 902,779
<ALLOWANCES> 0
<INVENTORY> 501,139
<CURRENT-ASSETS> 2,607,081
<PP&E> 4,708,245
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,821,955
<CURRENT-LIABILITIES> 2,055,658
<BONDS> 9,756,721
0
0
<COMMON> 560,955
<OTHER-SE> 2,377,679
<TOTAL-LIABILITY-AND-EQUITY> 14,821,955
<SALES> 0
<TOTAL-REVENUES> 2,599,102
<CGS> 1,074,862
<TOTAL-COSTS> 2,183,439
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 271,851
<INCOME-PRETAX> 173,547
<INCOME-TAX> 22,100
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151,447
<EPS-PRIMARY> .07
<EPS-DILUTED> 0
</TABLE>
