<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, 1998
--------------
(_) TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
EXCHANGE ACT
For the transition period from ______________ to _________________
Commission file number 0-7762
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
(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: 4,502,602
<PAGE>
PART I FINANCIAL INFORMATION
- ------
Item 1. Financial Statement
AUDIO COMMUNICATIONS NETWORK, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
First Quarter
------------------------------
For The Three Months Ended
------------------------------
REVENUES 3/31/98 3/31/97
- -------- ------------- -------------
<S> <C> <C>
Music Sales 4,068,608 1,905,852
Equipment Sales 886,258 389,397
Labor and Installation 710,684 311,733
Pro Sound Installation 651,372 -
Other 68,923 55,444
------------- -------------
Total Revenue 6,385,845 2,662,426
COST AND EXPENSES
- -----------------
Cost of Sales 2,184,921 722,125
Selling, General and
Administrative Expenses 2,253,462 782,398
Depreciation and Amortization 1,387,327 631,347
------------- -------------
Total Cost and Expenses 5,825,710 2,135,870
Income before Other Income
(Expense) and Income Taxes 560,135 526,556
OTHER INCOME (EXPENSE)
- ----------------------
Interest Income 842 -
Interest Expense (771,911) (480,574)
Other 4,380 (109,778)
------------- -------------
Other Income (Expense), net (766,689) (590,352)
Loss before Income Taxes (206,554) (63,796)
Provision for Income Taxes 2,000 -
------------- -------------
Net Loss (208,554) (63,796)
============= =============
Net Loss Per Common share (0.05) (0.01)
============= =============
Number of Common Shares 4,502,602 4,409,203
============= =============
</TABLE>
<PAGE>
AUDIO COMMUNICATIONS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
3/31/98 12/31/97
-------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents 1,152,452 680,195
Accounts Receivable 1,932,882 2,159,163
Inventories 1,582,098 1,150,133
Prepaid expenses and other assets 235,761 196,891
-------------- --------------
Total current assets 4,903,193 4,186,382
PROPERTY
Leasehold Improvements 108,263 79,459
Equipment 15,757,110 14,797,638
Furniture and fixtures 539,592 523,598
-------------- --------------
Total Property 16,404,965 15,400,695
Less: Accumulated Depreciation (2,833,076) (2,271,197)
-------------- --------------
PROPERTY, NET 13,571,889 13,129,498
OTHER ASSETS
Subscriber Contracts and other intangible assets 19,444,632 19,984,882
Goodwill 7,889,983 7,974,059
Deposits and other 30,295 30,819
-------------- --------------
Total 27,364,910 27,989,760
TOTAL ASSETS 45,839,992 45,305,640
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt 544,527 556,830
Accounts payable 2,132,114 1,739,800
Royalties payable 914,754 660,264
Accrued liabilities 895,371 1,775,590
-------------- --------------
4,486,766 4,732,484
LONG-TERM DEBT 33,384,001 32,395,375
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock, $.25 par value 1,125,534 1,125,534
Contributed capital in excess of par value 9,850,850 9,850,850
Investment - -
Contributed capital - preferred warrants - -
Accumulated deficit (3,007,159) (2,798,603)
-------------- --------------
7,969,225 8,177,781
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 45,839,992 45,305,640
============== ==============
</TABLE>
<PAGE>
AUDIO COMMUNICATIONS NETWORK, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
3/31/98 3/31/97
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss (208,554) (63,796)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,387,330 631,347
Deferred commissions (530,148) (50,498)
(Increase) decrease in operating assets and increase (decrease)
in operating liabilities
Accounts receivable 226,281 88,504
Inventories (1,016,978) (462,180)
Prepaid expenses and other assets 332,393 (79,013)
Accounts payable (120,382) (22,185)
Royalties payable 252,483 -
Accrued liabilities (192,408) (205,229)
Other, net (215,875) 128,444
------------ -----------
Net cash used in operating activities (85,858) (34,606)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - net (419,257) (89,743)
------------ -----------
Net cash used in investing activities (419,257) (89,743)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,500,000 805,848
Principal payments under capital lease obligations (22,628) (41,970)
Repayment of long-term debt (500,000) (500,000)
Proceeds from sale of stock - -
------------ -----------
Net cash provided by financing activities 977,372 263,878
NET INCREASE IN CASH AND CASH EQUIVALENTS 472,257 139,529
CASH, BEGINNING OF PERIOD 680,195 132,565
------------ -----------
CASH, END OF PERIOD 1,152,452 272,094
============ ===========
Cash Paid During the Period For Interest 808,439 516,048
Supplemental Schedule of Noncash Investing & Financing Activities:
- -----------------------------------------------------------------
Inventory Leased to Customer and Reclassified to Property 585,000 479,000
</TABLE>
<PAGE>
AUDIO COMMUNICATIONS NETWORK, INC. & SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principals have been omitted pursuant to such rules and regulations.
The accompanying unaudited interim financial statements and related notes should
be read in conjunction with the financial statements and related notes included
in the Company's 1997 Annual Report on Form 10-K. In the opinion of management,
all material adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation have been included in the
accompanying unaudited interim consolidated financial statements.
NOTE 2 - ACQUISITION
- --------------------
On May 30, 1997, the Company completed a business combination with Suncom
Communications L.L.C., a Delaware limited liability company ("Suncom"). Under
the terms of the agreement, the Company, through its wholly owned subsidiary,
Suncom, Inc., acquired the assets and business of Suncom, in exchange for which
the company issued 2.1 million Common Shares to Suncom, which represented
approximately 47.5% of the Company's outstanding Common Shares.
Also on May 30, 1997, Suncom consummated an agreement with A.J. Schell acquiring
substantially all of his equity position in the Company. As a result, Suncom is
the owner of 2,697,986 Common Shares, representing approximately 60.7% of the
outstanding Common Shares of the Company resulting in a reverse acquistion.
The transaction has been accounted for as a reverse acquisition therefore the
financial statements presented herein represent the historical results of Suncom
and the results of operation of Audio Communications Network, Inc. from the date
of acquisition.
Assuming the reverse acquisition had occurred on January 1, 1997 the Company's
first quarter 1997 (unaudited) net revenues, net income (loss) per share, and
earnings (loss) per share would have been approximately as follows:
<TABLE>
<CAPTION>
First quarter 1997
------------------
<S> <C>
Net Revenue 5,081,760
Net Income (Loss) (59,154)
Earnings (Loss) Per Share (0.01)
</TABLE>
<PAGE>
Item 2. 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 Operations expressed as a percentage of
operating revenues.
<TABLE>
<CAPTION>
3/31/98 3/31/97
------- -------
<S> <C> <C>
Revenues from Operations 100.00% 100.00%
Operating Costs and expenses (69.50) (56.50)
---------- ----------
Income from Operations before Depreciation and Amortization 30.50 43.50
Depreciation and Amortization (21.70) (23.70)
---------- ----------
Income before Other Income (Expense) and Income Taxes 8.80 19.80
Other Income (Expense), net (12.00) (22.22)
---------- ----------
Income before Income Taxes (3.20) (2.42)
Provision for Income Taxes - -
---------- ----------
Net Income (3.20) (2.42)
========== ==========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS
- ----------
On May 30, 1997, Audio Communications Network, Inc. (the "Company") acquired
the assets of Suncom Communications, L.L.C. ("Suncom") subject to the assumption
of $18.75 million of liabilities. In addition, the members of Suncom received
2,100,000 shares of the Company's common stock representing approximately 48% of
the shares on a fully diluted basis. In a separate transaction, the members of
Suncom purchased 597,698 shares of the Company's common stock from Al Schell,
President, CEO and Chairman of the Board. Suncom's franchise areas of operation
include specified areas in the states of North and South Carolina as well as
Arizona. Suncom will operate as a wholly owned subsidiary of the Company.
The transaction has been accounted for as a reverse acquisition therefore the
financial statements presented herein represent the historical results of Suncom
and the results of operation of the Company from the date of acquisition.
NET REVENUES
- ------------
Consolidated Net Revenues for the 1st Quarter of 1998 were $6,385,845 an
increase over the comparable period of 1997 of $3,723,419, or 140%. The
majority of the increase is attributable to the reverse acquisition of the
Company and the balance to the growth in the Suncom franchises.
COSTS AND EXPENSES
- ------------------
Costs and Expenses for the 1st Quarter of 1998 were $5,825,710 increasing over
the comparable period of 1997 by $3,689,840. The majority of the increase is
attributable to the reverse acquisition of the Company and the balance to the
growth in the Suncom franchises. Costs as a percentage of revenue is higher due
to the higher fixed cost structure of the smaller non-Suncom franchises. The
1st Quarter 1997 balances present only the results of the Suncom franchises.
OTHER INCOME AND EXPENSE (NET):
- -------------------------------
The increase in Other Income and Expense (Net) in the 1st Quarter of 1998 over
the comparable period in 1997 is due primarily to the additional debt resulting
from the reverse acquisition.
INCOME TAXES:
- -------------
At March 31, 1998, the Company had operating loss carryforwards for federal tax
purposes of approximately $3,200,000. Such loss carryforwards expire in 2002
through 2012.
<PAGE>
NET INCOME/LOSS:
- ---------------
Net Loss for the Company's 1st Quarter of 1998 was $208,554 compared to a loss
of $63,796 for the comparable period in 1997. The difference in operating
results is primarily attributable to the reverse acquisition of the Company.
LIQUIDITY AND CAPITAL RESOURCES:
- -------------------------------
Operating cash flows (computed as net income plus interest, taxes, depreciation
and amortization) for the 1st Quarter of 1998 increased to $1,947,462 from
$1,157,903 an increase of $789,559 or 68%.
On May 30, 1997, in conjunction with the Suncom transaction, the Company repaid
all its bank debt obligations to SunTrust Bank, Central Florida, N.A. as well as
$18.75 million of debt obligations of Suncom and entered into a $32 million
credit facility with PNC Bank with SunTrust and Lehman Brothers as participation
lenders in the facility. As of March 31, 1998, the company had an outstanding
loan balance of $28.2 million and an unused credit facility of $3.8 million.
The credit facility is subject to various covenants including: (1) Debt Service
Coverage Ratio; (2) Debt to Cash Flow Ratio; and (3) Debt to Minimum Monthly
Recurring Billing Required. In addition at that time, the Company and Midwest
Mezzanine Fund entered into a $4,750,000 subordinated debt agreement. The
agreement requires the Company to pay quarterly interest at a rate of 12.27%.
The Company was in compliance with all covenants at March 31, 1998. All
payments of interest and principal on loans outstanding and payments on lease
obligations have been made on a timely basis.
<PAGE>
AUDIO COMMUNICATIONS NETWORK, INC. AND 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 MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not Applicable
Item 5. OTHER INFORMATION
-----------------
None
Item 6. EXHIBITS & REPORTS ON FORM 8K
(a) (27) Financial Data Schedule
(b) Amendment No. 3 to Form 8K amending the Independent Auditors
Reports to include the city and state where issued was filed
with the SEC on January 9, 1998.
<PAGE>
FORM 10-QSB
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 5/19/98 /s/ David W. Unger
------------------------ -----------------------------
David W. Unger
Chief Financial Officer /
Executive Vice President
Date 5/19/98 /s/ Mitchell Kleinhandler
------------------------ -----------------------------
Mitchell Kleinhandler
President and
Chief Operating Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1ST QUARTER
10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,152,420
<SECURITIES> 0
<RECEIVABLES> 1,932,882
<ALLOWANCES> 0
<INVENTORY> 1,582,098
<CURRENT-ASSETS> 4,903,193
<PP&E> 16,404,965
<DEPRECIATION> 2,833,076
<TOTAL-ASSETS> 45,839,992
<CURRENT-LIABILITIES> 4,486,766
<BONDS> 0
0
0
<COMMON> 1,125,534
<OTHER-SE> 9,850,850
<TOTAL-LIABILITY-AND-EQUITY> 45,839,992
<SALES> 0
<TOTAL-REVENUES> 6,385,845
<CGS> 2,184,921
<TOTAL-COSTS> 3,640,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 771,911
<INCOME-PRETAX> (206,554)
<INCOME-TAX> 2,000
<INCOME-CONTINUING> (208,554)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (208,554)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0
</TABLE>
