<PAGE>
<PAGE>
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): May 30, 1997
------------------------------
Audio Communications Network, Inc.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Florida 0-7762 59-0690530
- --------------------------------------------------------------------------------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
1000 Legion Place, Suite 1515, Orlando, Florida 32801
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 649-8877
----------------------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) (i) Financial Statements for SunCom Group, Inc. as of
December 31, 1993, 1994 and 1995 and for the years
then ended.
(ii) Financial Statements for Suncom Communications LLC as
of December 31, 1996 and for the year then ended and
for the Period from July 6, 1995 to December 31,
1995.
(b) (i) Pro-Forma Financial Statements for Audio
Communications Network, Inc. as of December 31, 1996
and for the year then ended.
(c) Exhibits.
2.1* Asset Purchase Agreement, dated as of November 19,
1996, by and between the Registrant and Suncom
Communications L.L.C.
99.1** Press release of the Registrant, dated May 30, 1997.
99.2** Note Assumption Agreement and Note, dated as of May
30, 1997, by and among the Registrant, Suncom, Inc.
and Midwest Mezzanine Fund, L.P.
99.3** Credit Agreement, dated as of May 30, 1997, by and
among the Registrant, PNC Bank, National Association
individually and as Agent, SunTrust Bank, Central
Florida, N.A. and Lehman Commercial Paper Inc.
---------------
* Incorporated by reference to the Registrant's Current Report on
Form 8-K dated November 19, 1996.
** Incorporated by reference to Amendment No. 1 the Registrant's
Current Report on Form 8-k dated May 30, 1997.
-2-
<PAGE>
<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 thereunto duly authorized.
Audio Communications Network, Inc.
Dated: July 31, 1997 By: /s/ David Unger
______________________________
David Unger
Executive Vice President
-3-
<PAGE>
<PAGE>
[LETTERHEAD OF BRESLOW STARLING FROST WARNER & BOGER, PLLC]
March 29, 1995
Independent Auditors' Report
----------------------------
To the Stockholders
SUNCOM GROUP, INC.
Charlotte, North Carolina
We have audited the accompanying balance sheet of SunCom Group, Inc. as of
December 31, 1994 and 1993 and the related statements of income and accumulated
deficit, and cash flows for the 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.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of SunCom Group, Inc.
as of December 31, 1994 and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
Our audits have been made primarily for the purpose of forming the
opinion stated in the preceding paragraph. The data contained in Schedule I of
this report, although not considered necessary for a fair presentation of
financial position, results of operations and cash flows, is presented as
supplementary information and has been subjected to the procedures applied
in the audit of the basic financial statements. In our opinion, this data
is fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
/s/ Breslow Starling Frost Warner & Boger, PLLC
-----------------------------------------------
Certified Public Accountants
<PAGE>
<PAGE>
SUNCOM GROUP, INC.
Balance Sheet
December 31, 1994
ASSETS
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Current Assets
Cash $ 36,140 $ 19,961
Accounts Receivable:
Trade, Net of an Allowance for Doubtful
Accounts of $32,000 in 1994 795,533 743,330
Employees 15,742 54,451
Note Receivable - Officer (NOTE 8) 101,877 88,001
Inventories (NOTE 1) 163,955 314,315
---------- ----------
TOTAL CURRENT ASSETS 1,113,247 1,220,058
---------- ----------
Property and Equipment (NOTES 1 and 2)
Equipment in Field 7,494,258 6,078,475
Computers, Office Equipment and Furniture 204,875 221,624
Vehicles 516,856 522,277
Other Equipment 134,816 124,986
Leasehold Improvements 14,177 6,865
---------- ----------
Total 8,364,982 6,954,227
Less: Accumulated Depreciation 5,079,638 4,080,892
---------- ----------
TOTAL PROPERTY AND EQUIPMENT 3,285,344 2,873,335
---------- ----------
Other Assets (NOTES 1 and 2)
Unamortized Customer List 161,505 252,339
Unamortized Muzak Contracts 629 4,003
Unamortized Loan Costs 222,262 262,672
Deposits 4,725 4,685
Reorganization Costs 7,825 7,825
---------- ----------
TOTAL OTHER ASSETS 396,946 531,524
---------- ----------
TOTAL ASSETS $4,795,537 $4,624,917
========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Current Liabilities
Current Maturities of Long-Term Debt (NOTE 3) $ 592,543 $ 551,973
Note Payable (NOTE 2) 250,000 -0-
Accounts Payable 496,079 617,035
Customer Prepayments 60,303 56,752
Accrued Expenses 133,322 132,508
---------- ----------
TOTAL CURRENT LIABILITIES 1,532,247 1,358,268
---------- ----------
Long-Term Liabilities
Long-Term Debt, Less Current Maturities (NOTE 3) 6,254,202 6,710,109
Note Payable to Officers (NOTE 4) 229,094 229,094
---------- ----------
TOTAL LONG-TERM LIABILITIES 6,483,296 6,939,203
---------- ----------
Stockholders' Equity
Common Stock (No Par Value, 1,000,000 Shares
Authorized; 720 Shares Issued and Outstanding) 235,200 235,200
Accumulated Deficit (3,455,206) (3,907,754)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY (3,220,006) (3,672,554)
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $4,795,537 $4,624,917
========== ==========
</TABLE>
<PAGE>
<PAGE>
SUNCOM GROUP, INC.
Statements of Income and Accumulated Deficit
For the Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Revenues
Service Revenues $ 5,872,119 $ 5,345,945
Sale of Equipment 1,674,255 1,323,362
Sale of Labor 1,217,011 940,635
----------- -----------
TOTAL REVENUES 8,763,385 7,609,942
----------- -----------
Operating Costs and Expenses
Cost of Equipment Sold and Installed 1,004,553 674,915
Amortization and Depreciation (NOTE 1) 1,247,708 1,145,523
Other Operating Expenses 5,468,022 4,725,085
----------- -----------
TOTAL OPERATING COSTS AND EXPENSES 7,720,283 6,545,523
----------- -----------
INCOME FROM OPERATIONS 1,043,102 1,064,419
Other Expenses
Interest Expense, Net of Income of $7,040
in 1994 and $8,000 in 1993 588,190 1,039,699
Loss on Disposal of Property and Equipment 2,364 -0-
----------- -----------
TOTAL OTHER EXPENSES 590,554 1,039,699
----------- -----------
NET INCOME 452,548 24,720
Accumulated Deficit, Beginning (3,907,754) (3,932,474)
----------- -----------
ACCUMULATED DEFICIT, ENDING $(3,455,206) $(3,907,754)
=========== ===========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
SUNCOM GROUP, INC.
Statements of Cash Flows
For the Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $ 452,548 $ 24,720
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,113,090 903,829
Amortization of Intangible Assets 134,618 241,694
Provision for Doubtful Accounts Receivable 32,000 -0-
Loss on Disposal of Property and Equipment 2,364 -0-
Change in Accounts Receivable (45,494) (69,279)
Change in Inventories 150,360 (134,981)
Change in Deposits (40) (424)
Change in Accounts Payable (120,956) 193,502
Change in Customer Prepayments 3,551 10,377
Change in Accrued Expenses 814 (28,074)
Change in Prepaid Expenses -0- 10,977
------------ -----------
Net Cash Provided by Operating Activities 1,722,855 1,152,341
------------ -----------
Cash Flows from Investing Activities
Purchase of Property, Plant and Equipment (1,527,463) (1,501,228)
Change in Loans to Officers (13,876) 2,100
Purchase of Intangible Assets -0- (1,663)
------------ -----------
Net Cash Used by Investing Activities (1,541,339) (1,500,791)
------------ -----------
Cash Flows from Financing Activities
Net Proceeds from Short-Term Note Payable 250,000 -0-
Proceeds from Long-Term Debt 176,893 7,393,122
Repayment of Long-Term Debt (592,230) (6,754,891)
Loan Origination Costs -0- (282,877)
------------ -----------
Net Cash Provided (Used) by Financing Activities (165,337) 355,354
------------ -----------
INCREASE IN CASH 16,179 6,904
CASH AT BEGINNING OF YEAR 19,961 13,057
------------ -----------
CASH AT END OF YEAR $ 36,140 $ 19,961
============ ===========
Supplemental Schedule of Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 596,563 $ 1,535,843
============ ===========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
SUNCOM GROUP, INC.
Notes to Financial Statements
December 31, 1994 and 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity - The Company is engaged in the business of selling and
renting music services and equipment related to the receiving and
distributing of these music services. The Company also services and
maintains the equipment that is installed at customer locations. The Company
is licensed to sell and rent music services in three geographic areas
that include portions of North Carolina, South Carolina and Arizona.
Revenue Recognition - Revenues from music services are recognized on a
straight-line basis over the term of the contracts. Contracts are typically
for a five-year period with renewal options for an additional five years. At
December 31, 1994 the Company has entered into contracts which, exclusive of
renewal options, represent approximately $18 million of future revenues.
Revenues for equipment sales and installations are recognized at the point
of sale.
Property and Equipment - Property and equipment is recorded at cost and
is being depreciated using straight-line accelerated rates for both
financial reporting and income tax purposes. The estimated useful lives
range from three to thirty-one-and-a-half years. Depreciation expense
amounted to $1,113,090 and $903,829 for the years ended December 31, 1994
and 1993, respectively.
Intangible Assets - Intangible assets include customer lists, MUZAK
contracts, loan origination costs, and non-compete agreements and are being
amortized using various methods over lives ranging from five to eleven
years. Amortization expense amounted to $134,618 and $241,694 for the years
ended December 31, 1994 and 1993, respectively.
Inventories - Inventories consist of musical equipment and supplies and
are stated at the lower of cost (determined on a first-in first-out basis)
or market.
NOTE 2 - NOTE PAYABLE
The Company has available with a bank a revolving line of credit. This
agreement provides for a maximum borrowing of $250,000 and is secured by certain
license agreements, other tangible and intangible assets and keyman life
insurance policies. Interest is payable monthly at the bank's prime rate plus
one percent (9.5% at December 31, 1994). The line of credit matures September
30, 1995. The Company has the options, subject to the bank's approval, to either
renew the agreement or convert it into a term loan. At December 31, 1994 neither
of these options had been exercised. The credit agreement contains certain
restrictive covenants all of which the Company was in compliance with at
December 31, 1994. Outstanding borrowings under this agreement were $250,000 at
December 31, 1994.
<PAGE>
<PAGE>
SUNCOM GROUP, INC.
Notes to Financial Statements
December 31, 1994 and 1993
NOTE 3 - LONG-TERM DEBT
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Note payable to a bank collateralized by the assignment of the MUZAK license
agreements, a first priority perfected security interest in all tangible and
intangible assets, the assignment of the officer's keyman life insurance policy
and a first priority perfected security interest in the Company's capital stock.
Principal is payable in monthly installments of $38,889 through June, 1998. A
final principal payment of approximately $4,955,549 is due July 1,
1998. Interest is paid monthly at 8.5%. $ 6,549,998 $7,016,666
Note payable to a corporation in monthly installments of $175; collateralized
by music contracts 525 2,625
Notes payable to a financing institution in aggregate
monthly installments of $4,824 including interest from
8% to 16%; collateralized by equipment 147,535 92,874
Notes payable to various financing institutions in aggregate monthly
installments of $8,321 including interest from 3%
to 10.25%; collateralized by vehicles 148,687 149,917
----------- ----------
Subtotal 6,846,745 7,262,082
Less current maturities 592,543 551,973
----------- ----------
Long-Term Debt $ 6,254,202 $6,710,109
=========== ==========
</TABLE>
Maturities of long-term debt subsequent to 1995 are as follows:
1996 $ 576,922
1997 526,794
1998 5,150,486
--------------
Total $ 6,254,202
==============
NOTE 4 - NOTE PAYABLE TO OFFICERS
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Note payable to officers due January 2, 1996 with interest payable monthly at
12%; unsecured and subordinated to senior debt $ 229,094 $ 229,094
========= =========
</TABLE>
<PAGE>
<PAGE>
SUNCOM GROUP, INC.
Notes to Financial Statements
December 31, 1994 and 1993
NOTE 5 - INCOME TAXES
The Company is taxed as a Small Business Corporation under Section 1372 of
the Internal Revenue Code. Accordingly, for federal and state income tax
purposes, its income and losses are passed through to the shareholders for
inclusion in their individual income tax returns.
NOTE 6 - LEASES
The Company leases office and warehouse facilities and certain equipment
under operating lease agreements. Rent expense amounted to $37,372 and $41,041
for the offices and warehouses and $74,489 and $98,143 for the equipment for
the years ended December 31, 1994 and 1993, respectively. The Company
leases additional office space from a related partnership as disclosed in
Note 8. Total rent expense including rents in Note 8 was $178,563 and $211,175
for the years ended December 31, 1994 and 1993, respectively.
Future lease commitments on office space, equipment and vehicles are as
follows:
1995 $ 82,342
1996 40,850
1997 35,425
1998 13,823
NOTE 7 - PROFIT-SHARING PLAN
The Company has a salary reduction/profit-sharing plan under the provisions
of Section 401(k) of the Internal Revenue Code. The plan covers all full-time
employees who have completed 90 days of service with the Company. Contributions
to the plan by the Company equal 50% of the salary reduction elected by each
employee up to a maximum reduction of 6% of annual salary. Employees, at their
option, may contribute up to a maximum of 15% of annual salary. The Company, at
its option, may contribute additional amounts to the plan. Company contributions
to the plan were $49,590 and $44,760 in 1994 and 1993, respectively.
NOTE 8 - RELATED PARTIES
The Company occupies an office that is leased from a related partnership
under an operating lease agreement expiring May 31, 2004. During the year ended
December 31, 1994 and 1993, rent paid to this partnership amounted to $63,250
and $62,000, respectively. Future rent is expected to be a minimum of
$69,000 per year for the next five years.
Note Receivable - Officer is an unsecured demand note due from a principal
stockholder and officer, with an annual interest rate of 8% on the outstanding
balance.
NOTE 9 - RECLASSIFICATION
Certain items in the 1993 financial statements have been reclassified to
conform with current year presentation.
<PAGE>
<PAGE>
SUNCOM GROUP, INC.
Notes to Financial Statements
December 31, 1994 and 1993
NOTE 10 - CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers and
generally requires no collateral from the customers. Management feels the
Company's credit risk is somewhat lessened due to its customers' being in a wide
range of industries. Financial instruments that potentially subject the Company
to concentrations of credit risk consist principally of cash deposits in excess
of federally insured limits. At December 31, 1994 the Company's deposits
exceeded the federally insured limit by approximately $200,000.
<PAGE>
<PAGE>
SUPPLEMENTARY INFORMATION
<PAGE>
<PAGE>
Schedule I
SUNCOM GROUP, INC.
Schedules of Operating Expenses
For the Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Salaries and Wages - Administrative and Clerical $1,143,215 $913,723
Salaries and Wages - Technical 897,139 588,977
Salaries and Wages - Sales 522,860 517,000
Advertising 10,525 4,483
Auto and Truck Expenses 110,685 109,983
Bad Debts and Allowances 94,817 62,815
Broadcasting Costs 331,036 368,151
Contributions 11,819 15,441
Contract Labor 93,044 66,661
Data Processing 15,714 12,338
Dues and Subscriptions 16,751 10,453
Employee Benefits 33,721 40,644
Travel and Entertainment 51,185 47,706
Freight 86,817 80,644
Rent 110,891 113,032
Insurance - General 79,202 90,933
Insurance - Group and Officer's Life 120,286 110,957
Legal and Accounting 70,378 49,609
Leased Equipment 50,694 66,732
Taxes and Licenses 64,563 37,134
Payroll Taxes 157,449 128,515
Office and Shop Supplies 55,273 54,485
Postage 27,501 28,504
Telephone 111,090 117,511
Phone Loops 4,512 6,254
Repairs 18,755 6,922
Retirement Plan Contibution 49,590 44,760
Royalties 945,310 846,119
Music Fees 100,094 90,040
Moving Expenses 18,942 29,638
Commissions and Sales Expenses 28,833 30,918
Utilities 13,683 14,791
Finance Charges 2,520 4,495
Training and Seminars 3,984 6,105
Collection Fees 1,112 1,778
Miscellaneous 14,032 6,834
---------- ----------
TOTAL OPERATING EXPENSES $5,468,022 $4,725,085
========== ==========
</TABLE>
<PAGE>
<PAGE>
SUNCOM GROUP, INC.
Charlotte, North Carolina
FINANCIAL STATEMENTS
December 31, 1995
<PAGE>
<PAGE>
[Breslow Starling Frost Warner & Boger, PLLC LETTERHEAD]
January 24, 1997
Independent Auditors' Report
To the Stockholders
SUNCOM GROUP, INC.
Charlotte, North Carolina
We have audited the accompanying balance sheet of SunCom Group, Inc. as
of December 31, 1995 and the related statements of income and retained earnings
and cash flows for the 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.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of SunCom Group, Inc.
as of December 31, 1995 and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ Breslow Starling Frost Warner & Boger, PLLC
-----------------------------------------------
Certified Public Accountants
<PAGE>
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Current Liabilities
Notes Payable (NOTE 4) $ 6,633,886
Accrued Interest 95,014
Other Accrued Expenses (NOTE 1) 149,917
-------------
TOTAL CURRENT LIABILITIES 6,878,817
-------------
Stockholders' Equity
Common Stock (No Par Value, 1,000,000 Shares
Authorized; 720 Shares Issued and Outstanding) 235,200
Retained Earnings 11,777,425
-------------
TOTAL STOCKHOLDERS' EQUITY 12,012,625
-------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 18,891,442
============
</TABLE>
<PAGE>
<PAGE>
SUNCOM GROUP, INC.
Statement of Income and Retained Earnings
For the Year Ended December 31, 1995
<TABLE>
<S> <C>
Revenues
Service Revenues $ 4,852,670
Sale of Equipment 1,212,578
Sale of Labor 813,738
------------
TOTAL REVENUES 6,878,986
------------
Operating Costs and Expenses
Cost of Equipment Sold and Installed 700,969
Amortization and Depreciation (NOTE 1) 821,860
Other Operating Expenses 4,351,833
------------
TOTAL OPERATING COSTS AND EXPENSES 5,874,662
------------
INCOME FROM OPERATIONS 1,004,324
Other Expenses
Interest Expense, Net of Income of $278,570 345,908
------------
NET INCOME FROM CONTINUING OPERATIONS 658,416
------------
Gain on Sale of Business (NOTE 1) 14,574,215
------------
NET INCOME 15,232,631
Accumulated Deficit, Beginning (3,455,206)
------------
RETAINED EARNINGS, ENDING $ 11,777,425
============
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
SUNCOM GROUP, INC.
Statement of Cash Flows
For the Year Ended December 31, 1995
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Net Income $ 15,232,631
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and Amortization 821,860
Gain on Sale of Business (14,574,215)
Change in Accounts Receivable 411,357
Change in Refundable Taxes (51,358)
Change in Inventories 118,834
Change in Accounts Payable (646,079)
Change in Customer Prepayments (60,303)
Change in Accrued Expenses 111,609
-------------
Net Cash Provided by Operating Activities 1,364,337
-------------
Cash Flows from Investing Activities
Purchase of Property and Equipment (363,822)
Loans to Officer (690,063)
-------------
Net Cash Used by Investing Activities (1,053,885)
-------------
Cash Flows from Financing Activities
Net Proceeds from Line of Credit 145,000
Repayment of Long-Term Debt (212,859)
-------------
Net Cash Used by Financing Activities (67,859)
-------------
INCREASE IN CASH 242,593
CASH AT BEGINNING OF YEAR 36,140
-------------
CASH AT END OF YEAR $ 278,733
=============
Supplemental Schedule of Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 579,503
=============
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
<PAGE>
SUNCOM GROUP, INC.
Notes to Financial Statements
December 31, 1995
NOTE 1 - DESCRIPTION OF BUSINESS
SunCom Group, Inc. ("the Company"), a North Carolina corporation, operated
MUZAK franchises providing background music programming and other related
services in certain areas of North Carolina, South Carolina and Arizona until
September 14, 1995 when it entered into an agreement to sell its franchise
rights and substantially all other assets to Suncom Communications, LLC, a
Delaware limited liability company.
The sales price was $20,606,687 resulting in a gain on disposal of the MUZAK
franchise rights and other related assets, net of expenses related to the sale,
of $14,574,215.
In accordance with the terms of the agreement, the Company accepted a
promissory note in the principal sum of $17,600,000 from Suncom Communications,
LLC. The promissory note was repaid January 3, 1996 with interest.
Also, in accordance with the agreement, the Company established an escrow
indemnification fund of $300,000 in favor of SunCom Communications, LLC. The
intent of the fund was to satisfy any claims of the seller funded by the buyer.
The escrow agreement specifies that all funds remaining on June 30, 1996, after
the payment of claims, were to be released to the Company. Subsequent to June
30, 1996, the Company received the remaining escrow funds of $150,083. The
portion of the escrow used to pay claims ($149,917) is included in the
calculation of the above referenced gain on sale of $14,574,215. Included in the
net gain on sale of business of $14,574,215 are bonuses and related payroll
taxes paid to certain employees of approximately $1,131,000. These bonuses are a
direct result of the sale of the business and are therefore excluded from income
from operations.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 Company, with the consent of its stockholders, has
elected under the Internal Revenue Code to be an S corporation. In lieu of
corporation income taxes, the stockholders of an S corporation are taxed on
the Company's taxable income. Therefore, no provision or liability for
federal or state income taxes has been included in these financial
statements.
(Continued)
<PAGE>
<PAGE>
SUNCOM GROUP, INC.
Notes to Financial Statements
December 31, 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition - Revenues from music services are recognized on a
straight-line basis over the term of the contracts. Revenues for equipment
sales and installations are recognized at the point of sale.
Property and Equipment - Property and equipment is recorded at cost and
is being depreciated using straight-line and accelerated methods for both
financial reporting and income tax purposes. The estimated useful lives of
the assets range from three to thirty-one-and-a-half years. Depreciation
expense was $278,387 for the year ended December 31, 1995.
NOTE 3 - NOTE RECEIVABLE OFFICER
Note receivable issued to president of the Company, repaid January 1996.
NOTE 4 - NOTES PAYABLE
<TABLE>
<S> <C>
Revolving line of credit payable to a bank, interest
payable monthly at a variable rate, secured by the
note receivable discussed in NOTE 1 $ 345,000
Note payable to a bank in monthly installments of
$38,889 plus interest at 8.5%, secured by the note
receivable discussed in NOTE 1 6,288,886
----------------
Total Notes Payable $ 6,633,886
================
</TABLE>
On January 3, 1996 the above notes were repaid in full.
NOTE 5 - PROFIT-SHARING PLAN
The Company has a salary reduction/profit-sharing plan under the provisions
of Section 401(k) of the Internal Revenue Code. The plan covers all full-time
employees who have completed 90 days of service with the Company. Contributions
to the plan by the Company equal 50% of the salary reduction elected by each
employee up to a maximum reduction of 6% of annual salary. Employees, at their
option, may contribute up to a maximum of 15% of annual salary. The Company, at
its option, may contribute additional amounts to the plan. Company contributions
to the plan were $89,929 in 1995.
<PAGE>
<PAGE>
SUNCOM GROUP, INC.
Notes to Financial Statements
December 31, 1995
NOTE 6 - LEASES
During 1995, the Company leased office from a related partnership. Rent paid
to this partnership in 1995 was approximately $60,000. Total rent expense in
1995 was $129,098.
NOTE 7 - SUBSEQUENT EVENT
During 1996, SunCom Group, Inc. liquidated all then remaining assets and
liabilities and terminated its corporate charter.
<PAGE>
<PAGE>
[DELOITTE & TOUCHE LLP LOGO]
SUNCOM COMMUNICATIONS LLC
Financial Statements for the Year Ended
December 31, 1996 and Period from July 6, 1995
(Date of Formation) to December 31, 1995 and
Independent Auditors' Report
[DELOITTE TOUCHE TOHMATSU INTERNATIONAL LOGO]
<PAGE>
<PAGE>
SUNCOM COMMUNICATIONS LLC
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Balance Sheets 2
Statements of Operations 3
Statements of Changes in Members' Capital 4
Statements of Cash Flows 5
Notes to Financial Statements 6-13
<PAGE>
<PAGE>
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Members of Suncom Communications LLC
We have audited the accompanying balance sheets of Suncom Communications LLC
(the "Company") as of December 31, 1996 and 1995 and the related statements of
operations, changes in members' capital and cash flows for the year ended
December 31, 1996 and for the period from July 6, 1995 (date of formation) to
December 31, 1995. 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 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.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1996 and 1995,
and the results of its operations and its cash flows for the year ended December
31, 1996 and for the period from July 6, 1995 (date of formation) to December
31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 11, the Company changed the estimated useful lives of
certain of its assets.
/s/ DELOITTE & TOUCHE LLP
March 14, 1997
[DELOITTE TOUCHE TOHMATSU INTERNATIONAL LOGO]
<PAGE>
<PAGE>
SUNCOM COMMUNICATIONS LLC
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 132,565 $ 800,256
Accounts receivable (less allowance for doubtful accounts of $105,797 in 1996 and
$150,232 in 1995) 839,442 654,721
Inventories 443,969 347,456
Prepaid expenses and other (Note 1) 124,372 293,988
----------- -----------
Total current assets 1,540,348 2,096,421
----------- -----------
PROPERTY -- At cost (Note 2):
Equipment 6,127,864 3,886,299
Automobiles and vehicles 523,188 381,570
Office furniture and equipment 122,647 34,972
Leasehold improvements 55,572 17,425
----------- -----------
Total property -- at cost 6,829,271 4,320,266
Less accumulated depreciation (920,839) (268,312)
----------- -----------
Property -- net 5,908,432 4,051,954
----------- -----------
OTHER ASSETS (Note 2):
Subscriber contract rights (net of accumulated amortization of $2,487,622 in 1996 and
$931,000 in 1995) 13,843,754 15,155,200
Noncompete agreements (net of accumulated amortization of $18,750) 116,250 --
Goodwill (net of accumulated amortization of $48,704 in 1996 and $13,657 in 1995) 653,666 436,308
Deferred financing costs (net of accumulated amortization of $94,834 in 1996 and
$21,448 in 1995) 464,038 533,673
Organization costs (net of accumulated amortization of $25,647 in 1996 and $5,793 in
1995) 73,633 93,488
Deferred commission expense (net of accumulated amortization of $51,156) 423,624 --
Deposits and other assets 80,349 4,725
----------- -----------
Total other assets 15,655,314 16,223,394
----------- -----------
TOTAL ASSETS $23,104,094 $22,371,769
----------- -----------
----------- -----------
LIABILITIES AND MEMBERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable (Note 1) $ 1,482,758 $ 812,231
Royalties payable (Note 6) -- 168,390
Accrued interest payable 90,514 229,151
Accrued liabilities (Note 9) 316,357 153,571
Current portion of obligations under capital leases (Note 3) 68,420 50,169
Current portion of long-term debt 1,400,000 --
----------- -----------
Total current liabilities 3,358,049 1,413,512
OBLIGATIONS UNDER CAPITAL LEASES (Note 3) 13,719 51,858
LONG-TERM DEBT (Note 4) 12,600,000 13,250,000
SUBORDINATED DEBT (Note 5) (principal due of $4,750,000 net of unamortized discount on
debt of $165,854 in 1996 and $187,124 in 1995) 4,584,146 4,562,876
----------- -----------
Total liabilities 20,555,914 19,278,246
----------- -----------
COMMITMENTS (Note 6)
MEMBERS' CAPITAL (Notes 5 and 7):
Investment 3,750,000 3,750,000
Contributed capital-preferred warrants 193,646 193,646
Cumulative undistributed deficit (1,395,466) (850,123)
----------- -----------
Total members' capital 2,548,180 3,093,523
----------- -----------
TOTAL LIABILITIES AND MEMBERS' CAPITAL $23,104,094 $22,371,769
----------- -----------
----------- -----------
</TABLE>
See notes to financial statements.
-2-
<PAGE>
<PAGE>
SUNCOM COMMUNICATIONS LLC
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 AND PERIOD FROM JULY 6, 1995
(DATE OF FORMATION) TO DECEMBER 31, 1995
________________________________________________________________________________
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
REVENUES $10,122,175 $ 2,969,787
----------- -----------
COSTS AND EXPENSES:
Cost of sales (Note 6) 3,412,161 1,055,604
Selling, general and administrative expenses (Notes 6 and 9) 2,984,414 963,415
Depreciation and amortization (Note 2) 2,356,185 1,240,210
----------- -----------
Total costs and expenses 8,752,760 3,259,229
----------- -----------
INCOME (LOSS) LOSS BEFORE OTHER INCOME (EXPENSE) 1,369,415 (289,442)
OTHER INCOME (EXPENSE):
Interest income 10,794 5,395
Interest expense (Notes 4 and 5) 1,925,552 566,076
----------- -----------
NET LOSS $ (545,343) $ (850,123)
----------- -----------
----------- -----------
</TABLE>
See notes to financial statements.
-3-
<PAGE>
<PAGE>
SUNCOM COMMUNICATIONS LLC
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
YEAR ENDED DECEMBER 31, 1996 AND PERIOD FROM JULY 6, 1995
(DATE OF FORMATION) TO DECEMBER 31, 1995
________________________________________________________________________________
<TABLE>
<CAPTION>
CONTRIBUTED
CAPITAL- CUMULATIVE
PREFERRED UNDISTRIBUTED
INVESTMENT WARRANTS DEFICIT TOTAL
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE, JULY 6, 1995 $ -- $ -- $ -- $ --
Members' capital contributions (Note 7) 3,750,000 -- -- 3,750,000
Issuance of preferred warrants -- 193,646 -- 193,646
Net loss -- -- (850,123) (850,123)
---------- -------- ----------- ----------
BALANCE, DECEMBER 31, 1995 3,750,000 193,646 (850,123) 3,093,523
Net loss -- -- (545,343) (545,343)
---------- -------- ----------- ----------
BALANCE, DECEMBER 31, 1996 $3,750,000 $193,646 $(1,395,466) $2,548,180
---------- -------- ----------- ----------
---------- -------- ----------- ----------
</TABLE>
See notes to financial statements.
-4-
<PAGE>
<PAGE>
SUNCOM COMMUNICATIONS LLC
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 AND PERIOD FROM JULY 6, 1995
(DATE OF FORMATION) TO DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (545,343) $ (850,123)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 2,407,341 1,240,210
Interest accrued to amortize discount on subordinated debt 21,270 6,522
Changes in operating assets and liabilities:
Increase in accounts receivable (184,720) (334,876)
Increase in inventories (1,065,402) (455,336)
Decrease (increase) in prepaid expenses and other 169,616 (270,484)
Increase in deferred commission expense (474,780) -
Increase in deposits (75,625) -
Increase in accounts payable 585,394 812,231
(Decrease) increase in royalties payable (83,257) 168,390
(Decrease) increase in accrued interest payable (138,637) 229,151
Increase in accrued liabilities 162,787 68,368
---------- -----------
Net cash provided by operating activities 778,644 614,053
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of certain assets and liabilities of Chambers,
Inc. and SunCom Group, Inc. (810,842) (20,606,687)
Capital expenditures (1,344,264) (294,050)
Organization costs - (99,281)
---------- -----------
Net cash used in investing activities (2,155,106) (21,000,018)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 750,000 13,250,000
Proceeds from subordinated debt - 4,750,000
Principal payments under capital lease obligations (37,478) (8,658)
Proceeds from capital contributions - 3,750,000
Debt issuance costs (3,750) (555,121)
---------- -----------
Net cash provided by financing activities 708,772 21,186,221
---------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (667,690) 800,256
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 800,256 -
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 132,566 $ 800,256
========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $2,064,190 $ 330,403
========== ===========
Income taxes (Note 2) $ - $ -
========== ===========
NONCASH INVESTING TRANSACTION -
Inventory leased to customers and reclassified to
property during the period $ 968,889 $ 232,410
========== ===========
</TABLE>
See notes to financial statements.
-5-
<PAGE>
<PAGE>
SUNCOM COMMUNICATIONS LLC
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996 AND PERIOD FROM JULY 6, 1995
(DATE OF FORMATION) TO DECEMBER 31, 1995
- --------------------------------------------------------------------------------
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
PREDECESSOR
Suncom Communications LLC, a Delaware limited liability company, was formed
on July 6, 1995 (date of formation), for the purpose of acquiring, owning
and operating MUZAK@ franchises to provide background music programming and
ancillary services to business locations.
Effective September 14, 1995 (the "Date of Acquisition"), the Company
consummated an acquisition in accordance with an asset purchase agreement
(the "Agreement") with Suncom Group, Inc., a North Carolina corporation
(the "Seller") which provided background music programming and ancillary
services to customers in large portions of North Carolina, South Carolina
and Arizona. The Agreement provided for the purchase (the "Acquisition") of
certain assets and liabilities of the Seller. The Company engaged in no
substantial business activity prior to the Acquisition.
The purchase price was $20,606,687 and was allocated principally to working
capital and intangible assets including subscriber contract rights and
goodwill.
The Acquisition has been accounted for by the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on their respective estimated
fair values at the Date of Acquisition. The excess of the purchase price
over the aggregate estimated fair values of the net tangible assets and
subscriber contract rights acquired has been recorded as goodwill, which is
being amortized over 15 years.
The purchase price was allocated in the following manner:
<TABLE>
<S> <C>
Assets purchased:
Accounts receivable $ 319,845
Inventory 124,528
Property 3,793,808
Other 28,229
Liabilities assumed:
Unearned revenue (66,074)
Vacation liability (19,129)
Capital lease obligations (110,685)
-----------
Net assets acquired 4,070,522
Intangible assets:
Subscriber contract rights 15,960,000
Goodwill 576,165
-----------
Total cash paid $20,606,687
===========
</TABLE>
-6-
<PAGE>
<PAGE>
The purchase price and additional working capital were financed by
$18,000,000 of debt (Notes 4 and 5) and $3,750,000 of capital contributed
by the members of the Company (Note 7).
Included in prepaid expenses and other current assets and accounts payable,
respectively, were $222,188 due from and $25,598 due to Suncom Group, Inc.
at December 31, 1995.
ACQUISITIONS
On July 31, 1996, the Company acquired certain assets and subscriber
contracts of Chambers, Inc., a former competitor with its principal
business operations in Arizona, for approximately $810,842. The purchase
price was financed through $750,000 additional borrowings under the term
loan notes and cash on hand. The purchase price has been allocated as
follows:
<TABLE>
<S> <C>
Equipment $150,000
Subscriber Contract Rights 525,842
Other Intangible assets 135,000
--------
Total Purchase Price $810,842
========
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include demand
deposits maintained in banks.
INVENTORIES - Inventories, which consist of equipment held for sale or
lease, are stated at the lower of cost or the net realizable value. Cost is
determined by the first-in, first-out method.
PROPERTY - Property is recorded at cost or, in the case of the assets
acquired in connection with the Acquisition, at estimated fair value.
Depreciation is provided on the straight-line method over estimated useful
lives of three to ten years. Included in property is approximately
$5,300,000 and $3,595,700 (net of accumulated depreciation of $734,000 and
$242,000) of equipment at December 31, 1996 and 1995, respectively which is
owned by the Company and leased to customers primarily under five-year
contracts (see revenue recognition). This property is depreciated over a
five-year period. Depreciation expense for this leased property of
approximately $492,000 and $242,000 is included with depreciation for all
other property for the year ended December 31, 1996 and for the period from
July 6, 1995. (See Note 11)
OTHER ASSETS - Subscriber contract rights, goodwill, deferred financing
costs, deferred commission expenses and organization costs are amortized
using the straight-line method over various periods as shown below:
<TABLE>
<S> <C>
Subscriber contract rights 10 years
Goodwill 15 years
Deferred financing costs 7-9 years
Deferred commission expense 5 years
Organization costs 5 years
</TABLE>
Commissions paid to sales personnel are amortized over the period of the
service contract with such amortization being included in cost of sales.
The deferred financing costs are being amortized over the terms of the
related financing agreements (Notes 4 and 5). Management evaluates the
recoverability of
-7-
<PAGE>
<PAGE>
subscriber contract rights and other intangible assets both quarterly and
annually. (See Asset Impairment below) (See Note 11)
REVENUE RECOGNITION - Revenues for equipment sales and installations are
recognized at the point of sale. Revenues from music services are
recognized on a straight-line basis over the term of the customer
contracts. Contracts are typically for a five-year period with renewal
options for an additional five years. At December 31, 1996, the Company has
entered into contracts which, exclusive of renewal options, represent
future revenue in the aggregate approximate amount of $20,489,000 to be
earned in varying amounts over the next five years subsequent to December
31, 1996.
INCOME TAXES - For Federal and state income tax purposes, income and losses
of the Company are passed through to the members of the Company for
inclusion in their income tax returns. Accordingly, no income tax liability
or provision was recorded by the Company at December 31, 1996 and 1995 or
for the year ended December 31, 1996 and for the period from July 6, 1995
to December 31, 1995.
USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of revenues, expenses, assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and during the reported period. Actual results could differ from those
estimates. Significant estimates made in connection with the December 31,
1996 and 1995 financial statements primarily include the allowance for
doubtful accounts receivable and the estimated useful lives of property and
certain other long-lived assets. (See Note 11.)
FAIR VALUE OF FINANCIAL INSTRUMENTS - The recorded face value of cash and
cash equivalents, accounts receivable, and accounts and other amounts
payable approximates fair value because of the immediate short term
maturity of these financial instruments. The recorded face value of
long-term debt and subordinated debt approximate the fair value which was
estimated based upon current rates available to the Company for debt with
similar remaining maturities of these financial instruments at December 31,
1996 and 1995.
ASSET IMPAIRMENT - The Company adopted Statement No. 121, Accounting for
the Impairment of Long-Lived Assets, of the Financial Accounting Standards
Board in 1995. This Statement requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amounts of an asset may not be recoverable. The adoption of the
Statement did not materially impact the Company's consolidated results of
operations, financial condition or cash flows.
CONCENTRATIONS OF CREDIT RISK - The Company performs ongoing credit
evaluations of its customers and generally requires no collateral from the
customers. Management feels that the Company's credit risk is somewhat
lessened due to the fact that its customers operate in a wide range of
industries.
There are no single customers that individually had billings greater than
5% of net operating revenues for the year ended December 31, 1996 and for
the period from July 6, 1995 to December 31, 1995.
RECLASSIFICATIONS - Certain reclassifications of prior year balances have
been made to conform with current year presentation.
-8-
<PAGE>
<PAGE>
3. OBLIGATIONS UNDER CAPITAL LEASES
The Company is obligated under various capital leases for certain field
equipment. The leases bear interest from 7.9% to 15.7% and generally
provide that the Company pay the taxes, insurance and maintenance expenses
relating to the leased assets. The net book value of the leased assets is
included in equipment at December 31, 1996 and 1995.
As of December 31, 1996 and 1995, minimum annual rental commitments under
capital lease obligations are as follows:
<TABLE>
<CAPTION>
1996
<S> <C>
1997 $68,420
1998 4,669
1999 5,455
2000 3,595
-------
Total 82,139
Less current portion 68,420
-------
Long-term obligations at December 31 $13,719
=======
</TABLE>
4. LONG-TERM DEBT
On September 14, 1995, the Company issued, to a financial institution (the
"lender"), term loan notes in the aggregate principal amount of
$13,250,000, which require successive quarterly principal payments
commencing with the quarter ending March 31, 1997. The term loan notes were
increased by $750,000 on July 30, 1996 for a total aggregate principal
amount of $14,000,000. The principal payments increase each successive
calendar year, as follows:
<TABLE>
<CAPTION>
Principal
Payment Total
Due Date Principal Due
<S> <C>
1997 $ 1,400,000
1998 2,000,000
1999 2,300,000
2000 2,900,000
2001 3,150,000
2002 2,250,000
-----------
14,000,000
Less current maturities 1,400,000
-----------
$12,600,000
===========
</TABLE>
-9-
<PAGE>
<PAGE>
Of the aggregate principal balance due at December 31, 1996 and 1995,
interest on $7,000,000 is payable at a rate equal to the sum of (i) the
weekly average yield on U.S. Treasury securities adjusted to a constant
maturity mutually agreed-upon between the financial institution and the
Company, subject to certain restrictions plus (ii) 3.5%. The interest rate
was 9.35% at December 31, 1996 and is subject to repricing on September 14,
1998. Payments of interest, due on a monthly basis, commenced in 1995 and
are to be paid through September 30, 2002, whereupon any unpaid interest
plus the remaining principal of the $7,000,000 is due.
Interest on $7,000,000 and $6,250,000 of the aggregate principal balance
due at December 31, 1996 and 1995, is payable at a rate equal to the sum of
(i) London interbank Eurodollar market rate, subject to certain adjustments
plus (ii) 4.0%. The interest rate was 9.38% at December 31, 1996 and is
subject to repricing every 30 days. Payments of interest, due every 30
days, commenced in 1995 and are to be paid through September 30, 2002,
whereupon any unpaid interest plus the remaining principal of the
$7,000,000 is due. Interest incurred on the term loan notes included in
interest expense for the year ended December 31, 1996 and the period from
September 14, 1995 to December 31, 1995 was $1,290,823 and $380,508,
respectively.
In addition, these term loan notes allow for the reduction of the
above-described interest rates if the Company meets certain debt coverage
ratios.
Mandatory prepayments of the term loan notes are required in certain
instances (depending primarily on earnings of the Company) on May 15, 1997
and every successive May 15 thereafter. No such mandatory prepayments are
due at May 15, 1997.
In conjunction with the above term loan notes, all of the Company's assets
are pledged as collateral to the lender. Additionally, the Company has
agreed to maintain certain ratios and comply with various restrictive
covenants as provided in the term loan agreement. At December 31, 1995 the
Company was in violation of two of the covenants in connection with this
term loan agreement. One of the violations relates to the submission, by
the Company to this lender, of the Company's December 31, 1995 audited
financial statements by a stipulated date while the other violation related
to a financial matter. However, subsequent to December 31, 1995, the
Company has obtained from this lender waivers with respect to such
violations. At December 31, 1996 the Company was in violation of two of the
covenants in connection with this term loan agreement. One of the
violations relates to the submission, by the Company to this lender, of the
Company's December 31, 1996 audited financial statements by a stipulated
date while the other violation related to a financial matter. However
subsequent to December 31, 1996, the Company has obtained from this lender
waivers with respect to such violations.
5. SUBORDINATED DEBT AND PREFERRED WARRANTS
On September 14, 1995, the Company issued to a limited partnership a
promissory note in the aggregate principal amount of $4,750,000, which
requires successive quarterly principal payments of $250,000 commencing
with January 1, 2000, with the entire outstanding principal balance due on
July 1, 2004. Payment under this promissory note is subordinate to all
obligations due under the term loan notes (Note 4). Interest on the unpaid
principal balance is payable quarterly at a per annum rate of 12.27%,
beginning on October 1, 1995 and continuing through July 1, 2004. Interest
incurred on the subordinated note included in interest expense was $604,093
for the year ended December 31, 1996 and $179,752 for the period from
September 14, 1995 to December 31, 1995 (including amortization of the
related discount on the note). The principal of the promissory note may be
subject to mandatory prepayments.
-10-
<PAGE>
<PAGE>
In addition to the promissory note issued, the Company also issued to the
limited partnership (the "holder") certain preferred warrants to purchase,
in the aggregate, 9.5 units in the Company. The preferred warrants provide
the holder the right to acquire units at an exercise price of approximately
$21,053 per unit for an aggregate maximum exercise price of $200,000. The
preferred warrants may be exercised at any time prior to September 14,
2005.
In conjunction with the above subordinated debt, the Company has agreed to
maintain certain ratios and comply with various restrictive covenants as
provided in the subordinated debt agreement. At December 31, 1995, the
Company was in violation of two of the covenants in connection with this
subordinated debt agreement. One of the violations relates to the
submission, by the Company to this limited partnership, of the Company's
December 31, 1995 audited financial statements by a stipulated date while
the other violation relates to a financial covenant. However, subsequent to
December 31, 1995, the Company has obtained from the limited partnership
waivers with respect to such violations. At December 31, 1996, the Company
was in violation of three of the covenants in connection with this
subordinated debt agreement. One of the violations relates to the
submission, by the Company to this limited partnership of the Company's
December 31, 1996 audited financial statements by a stipulated date while
the other violations relate to financial covenants. However, subsequent to
December 31, 1996 the Company has obtained from the limited partnership
waivers with respect to such violations.
The limited partnership is also a member in the Company and owned 12.5
units at December 31, 1996 and 1995 (Note 7).
6. COMMITMENTS
OPERATING LEASES - Certain equipment, office and warehouse facilities are
held under operating leases. Rent expense, included in selling, general and
administrative expense, was approximately $145,000 and $39,000 for the year
ended December 31, 1996 and for the period from July 6, 1995 to December
31, 1995.
Future minimum lease payments are as follows:
1997 $136,659
1998 124,284
1999 125,300
2000 127,700
2001 110,927
Thereafter 195,750
--------
Total minimum lease payments $820,620
========
BROADCASTING AGREEMENTS - The Company has entered into various agreements
with broadcasting companies in order to transmit music service to its
customers through the broadcasting companies' subchannels. The Company is
generally able to terminate these agreements if interruption or failure
occurs in the transmission of its subscription services. Certain of these
agreements contain escalation clauses which provide for increased payments
based on increases in the annual Consumer Price Index or other similar
index. Broadcasting expense incurred in relation to these agreements for
the year ended December 31, 1996 and for the period from July 6, 1995 to
December 31, 1995, included in cost of sales, was approximately $274,962
and $80,882, respectively.
-11-
<PAGE>
<PAGE>
Future minimum payments due under these agreements are as follows:
1997 $160,018
1998 40,800
1999 26,700
2000 11,500
--------
Total minimum payments $230,018
========
MUSIC SERVICE LICENSE AGREEMENTS - The Company has entered into various
agreements to license subscription music services from certain companies.
The terms of these agreements range from periods of approximately one year
to nine years and require payment by the Company of certain fees and
royalties. The basic royalty rates vary based on percentages of 2.25% to
10% of gross billings or, in certain instances, based on the number of
monthly music subscriptions billed by the Company to customers. The license
agreements are generally noncancelable by the Company.
Royalties incurred in relation to these agreements for the year ended
December 31, 1996 and for the period from July 6, 1995 to December 31,
1995, included in cost of sales, were approximately $1,039,000 and
$285,000, respectively.
7. MEMBERS' CAPITAL
Effective September 14, 1995, the members of the Company contributed
$3,750,000 of capital to the Company. A total of 47 units of the Company
were issued effective September 14, 1995, of which 37.5 units were
outstanding at December 31, 1996 and 1995 representing a $100,000
contribution per unit. The holder of the subordinated note (Note 5) also
holds certain preferred warrants, issued effective September 14, 1995, to
acquire the other 9.5 units of the Company.
8. DEFINED CONTRIBUTION 401(K) PROFIT-SHARING PLAN
Effective January 1, 1996, the Company instituted a profit-sharing plan
which covers all employees of the Company who have at least one-half year
of service. Contributions to the plan by employees may be at least 1% but
not more than 15% of annual salary, subject to certain restrictions.
Contributions by the Company to the plan are discretionary. Employees are
always 100% vested in employee contributions; no vesting in employer
contributions occurs prior to the first two years of service and 100%
vesting occurs after the third year of service. Contribution expense for
the year ended December 31, 1996 was $24,507.
9. MANAGEMENT AGREEMENT
The Company has a management agreement in which the Company agrees to pay
certain members of management a monthly fee of 1.75% - 3.5% of gross
operating revenues. The amount of the fee depends on the results of
operations as compared to projected cumulative results. In addition to
these fees, certain expenses incurred by management may be reimbursed by
the Company. Such reimbursements may not exceed .5% of the Company's gross
operating revenues for the period.
Total management fees included in selling, general and administrative
expense during the year ended December 31, 1996 and the period from July 6,
1995 to December 31, 1995 were approximately $440,000 and $125,000,
respectively, of which approximately $0 and $49,000 were accrued and
included in accrued liabilities at December 31, 1996 and 1995.
-12-
<PAGE>
<PAGE>
10. PENDING ACQUISITION
In November 1996, the Company agreed to sell its net assets to Audio
Communications Network, Inc. ("ACN"). In exchange for its net assets and a
$3.75 million payment to an ACN shareholder, the Company will receive 60%
of the outstanding common stock of ACN. This transaction is expected to
close in May 1997 and will be accounted for as a reverse acquisition.
11. CHANGE OF ESTIMATE
Management has re-evaluated the estimates for the useful lives of certain
of its assets to more accurately reflect their economic useful lives using
current information available, including industry practice and Company
specific issues. This change has been recorded effective January 1, 1996.
Such estimates related to the estimated useful lives of certain assets as
follows:
Estimated Useful
Lives in Months
--------------------
Previous Current
Subscriber contract rights 60 120
Automobiles and vehicles 60 36
Equipment 60 120
The effect of this change of estimate is to reduce depreciation and
amortization expense by $2,129,150 for the year ended December 31, 1996.
******
-13-
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) On May 30, 1997 Audio Communications Network, Inc purchased the assets of
Suncom Communications LLC in a reverse acquisition. At that date, the share
price of ACN's 2,333,191 shares was $3.25. This adjustment is to write up the
paid-in-capital to reflect this.
(2) At the date of the transaction, Audio Communications Network, Inc. had a
employment agreement with Al Schell, the President of the Company. Upon
consummation of this transaction, Mr. Schell is to receive three annual payments
of $500,000. This adjustment is to reflect the present value of this liability
assuming a 10% interest rate which approximates the company's cost of senior
bank funds.
(3) At the date of the transaction, Audio Communications Network, Inc. repaid
its existing debt as well as Suncom's senior debt signed a new credit facility
and borrowed additional funds.
(4) Represents additional amortization on goodwill resulting from adjustments
above.
(5) Represents additional interest expense for the period resulting from
adjustment (3) above.
<PAGE>
<PAGE>
AUDIO COMMUNICATIONS NETWORK, INC.
PRO-FORMA FINANCIAL STATEMENTS
BALANCE SHEET
AT MARCH 31, 1997
<TABLE>
<CAPTION>
Adjustments and Eliminations AUCM
ASSETS TOTAL Debit Credit Per 10Q SUNCOM
- ------ ----- ----- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents $1,213,844 $937,532 $276,312
Accounts Receivable $1,618,551 $871,828 $746,723
Inventory $898,022 $470,683 $427,339
Prepaid Expenses $569,392 $366,007 $203,385
Property Plant and Equipment $16,731,349 $9,333,525 $7,397,824
Less Accumulated Depreciation ($5,292,176) ($4,191,337) ($1,100,839)
----------- ----------- -----------
Property-net $11,439,173 $5,142,188 $6,296,985
OTHER ASSETS-NET OF AMORTIZATION
Subscriber Contracts Rights $18,527,518 $2,377,901 $16,149,617
Non-Compete Agreement $135,000 $0 $135,000
Goodwill $11,853,566 $3,921,748 (1) $4,339,273 $1,202,067
$1,243,426 (2)
$1,147,052 (3)
Deferred Finance Costs $558,871 $0 $558,871
Organization Costs $99,280 $0 $99,280
Deferred Commission Expense $225,511 $225,511 $0
Deposits and other Assets $0 $0 $0
Accumulated Amortization ($3,018,818) $0 ($3,018,818)
----------- -- -----------
TOTAL ASSETS $44,119,910 $14,730,923 $23,076,761
</TABLE>
<PAGE>
<PAGE>
LIABILITIES AND MEMBERS' CAPITAL
<TABLE>
<CAPTION>
ADJUSTMENTS AND ELIMINATIONS
TOTAL DEBIT CREDIT ACN SUNCOM
----- ----- ------ --- ------
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts Payable $2,641,464 $675,419 $1,966,045
Royalties Payable $157,760 $157,760 $0
Due to Al Schell $1,243,426 (2) $1,243,426 $0 $0
Accrued Liabilites $602,851 $133,727 $469,124
Current- Liab. capital leases $40,169 $0 $40,169
Current portion of long-term debt $0 $1,584,828 (3) $1,584,828 $0
-- ---------- --
Total Current liabilites $4,685,670 $2,551,734 $2,475,338
Capital Leases $60,685 $0 $60,685
Long-term Debt $25,250,000 (3) $2,731,880 $8,518,120 $14,000,000
Subordinated Debt $4,556,354 $0 $4,556,354
---------- -- ----------
TOTAL LIABILITIES $34,552,709 $11,069,854 $21,092,377
Stockholders Equity $1,108,298 $583,298 $525,000
Capital Contributed in excess of Par $10,418,165 (1) $3,921,748 $5,158,914 $3,418,646
$2,081,143 (7)
Accumulated Deficit ($1,959,202) (7) $2,081,143 ($2,081,143) ($1,959,262)
Total Stockholder's Equity $9,567,201
TOTAL LIABILITIES AND CAPITAL $44,119,910 $14,730,923 $23,076,761
----------- ----------- -----------
</TABLE>
<PAGE>
<PAGE>
AUDIO COMMUNICATIONS NETWORK, INC.
PRO-FORMA FINANCIAL STATEMENTS
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Adjustments and Eliminations
TOTAL Debit Credit ACN SUNCOM
----- ----- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Revenues $21,173,402 $11,051,227 $10,122,175
COSTS AND EXPENSES
Cost of Sales $8,130,666 $4,718,505 $3,412,161
Selling, General and Administrative $5,996,035 $3,011,621 $2,984,414
Depreciation and Amortization $4,280,666 $315,611 (4) $1,608,870 $2,356,185
---------- ---------- ----------
TOTAL COSTS AND EXPENSE $18,407,367 $9,338,996 $8,752,760
----------- ---------- ----------
INCOME (LOSS) LOSS BEFORE OTHER INCOME (EXP) $2,766,035 $1,712,231 $1,369,415
OTHER INCOME
Interest income $37,446 $26,652 $10,794
Interest expense ($3,172,862) $78,903 (5) ($1,044,063) ($1,925,552)
$124,344 (6)
Other $100,014 $100,014 $0
-------- -------- --
Income before Income taxes ($269,367) $794,834 ($545,343)
Provision for Income Taxes $95,400 $95,400 $0
------- ------- --
Net Income (Loss) ($364,767) $699,434 ($545,343)
Weighted Average Shares Outstanding 4,409,203
Earnings (Loss) Per Share ($0.08)
</TABLE>
<PAGE>
<PAGE>
AUDIO COMMUNICATIONS NETWORK, INC.
PRO-FORMA FINANCIAL STATEMENTS
INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Adjustments and Eliminations
TOTAL Debit Credit ACN SUNCOM
----- ----- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Revenues $5,081,760 $2,419,334 $2,662,426
COSTS AND EXPENSES
Cost of Sales $1,222,319 $983,598 $238,721
Selling, General and Administrative $2,183,890 $808,311 $1,375,579
Depreciation and Amortization $1,120,430 $78,903 (4) $410,180 $631,347
---------- -------- --------
TOTAL COSTS AND EXPENSE $4,526,639 $2,202,089 $2,245,647
INCOME (LOSS) LOSS BEFORE OTHER INCOME (EXP) $555,121 $217,245 $416,779
Other Income
Interest income $2,420 $2,420 $0
Interest expense ($775,714) $28,676 (5) ($235,378) ($480,574)
$31,086 (6)
Other $34,055 $34,055 $0
------- ------- --
Income before Income taxes ($184,118) $18,342 ($63,796)
Provision for Income Taxes $13,700 $13,700 $0
------- ------- --
Net Income (Loss) ($197,818) $4,642 ($63,796)
--------- ------ --------
Weighted Average Shares Outstanding 4,433,191
Earnings (Loss) Per Share ($0.04)
</TABLE>
<PAGE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) To record write up of AUCM's assets acquired and liabilities assumed in
connection with the transaction.
(2) To record additional liability relating to Al Schell's employment contract
payout.
(3) To record Audio Communications Network, Inc. repayment of its existing debt
as well as Suncom's senior debt and the recording of the debt relating to a new
credit facility.
(4) To record additional amortization expense related to the goodwill recorded
in connection with the transaction.
(5) To record additional interest expense related to the additional debt
incurred in connection with the transaction.
(6) To record additional interest expense related to Al Schell's payout.
(7) To adjust equity accounts for the effect of the transaction.
<PAGE>
