<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 June 30, 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 planconfirmed 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: 4,507,202
<PAGE>
AUDIO COMMUNICATIONS NETWORK, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Second Quarter
--------------------------
For The Three Months Ended
--------------------------
REVENUES 6/30/98 6/30/97
--------- ---------
Music Sales 4,073,059 2,483,173
Equipment Sales 830,225 453,835
Labor and Installation 619,552 461,609
Pro Sound Installation 493,622 72,811
Other 151,572 44,769
--------- ---------
Total Revenue 6,168,030 3,516,197
COST AND EXPENSES
Cost of Sales 2,608,889 1,070,510
Selling, General and
Administrative Expenses 2,010,051 1,257,591
Depreciation and Amortization 1,415,353 797,421
--------- ---------
Total Cost and Expenses 6,034,293 3,125,522
Income before Other Income
(Expense) and Income Taxes 133,737 390,675
OTHER INCOME (EXPENSE)
Interest Income 3,250 1,672
Interest Expense (843,832) (574,317)
Other (5,844) 2,410
--------- ---------
Other Income (Expense), net (846,426) (570,235)
Loss before Income Taxes (712,689) (179,560)
Provision for Income Taxes 3,000 4,600
--------- ---------
Net Loss (715,689) (184,160)
========= =========
Net Loss Per Common share (0.16) (0.04)
========= =========
Number of Common Shares 4,507,202 4,431,197
========= =========
<PAGE>
AUDIO COMMUNICATIONS NETWORK, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
First Six Months
------------------------
For The Six Months Ended
------------------------
REVENUES 6/30/98 6/30/97
---------- ----------
Music Sales 8,141,667 4,389,025
Equipment Sales 1,716,483 843,232
Labor and Installation 1,330,236 773,342
Pro Sound Installation 1,144,994 72,811
Other 220,495 100,213
---------- ----------
Total Revenue 12,553,875 6,178,623
COST AND EXPENSES
Cost of Sales 5,149,891 1,783,996
Selling, General and
Administrative Expenses 3,907,433 2,158,405
Depreciation and Amortization 2,802,680 1,428,770
---------- ----------
Total Cost and Expenses 11,860,004 5,371,171
Income before Other Income
(Expense) and Income Taxes 693,871 807,452
OTHER INCOME (EXPENSE)
Interest Income 4,092 1,672
Interest Expense (1,615,743) (1,054,890)
Other (1,464) 2,410
---------- ----------
Other Income (Expense), net (1,613,115) (1,050,808)
Loss before Income Taxes (919,244) (243,356)
Provision for Income Taxes 5,000 4,600
---------- ----------
Net Loss (924,244) (247,956)
========== ==========
Net Loss Per Common share (0.21) (0.06)
========== ==========
Number of Common Shares 4,507,202 4,431,197
========== ==========
<PAGE>
AUDIO COMMUNICATIONS NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
6/30/98 12/31/97
-------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents 193,401 680,195
Accounts Receivable 2,184,170 2,159,163
Inventories 1,572,151 1,150,133
Prepaid expenses and other assets 148,953 196,891
--------- ---------
Total current assets 4,098,675 4,186,382
PROPERTY
Leasehold Improvements 170,423 79,459
Equipment 16,479,238 14,797,638
Furniture and fixtures 720,256 523,598
--------- ----------
Total Property 17,369,917 15,400,695
Less: Accumulated Depreciation (3,434,162) (2,271,197)
---------- ----------
PROPERTY, NET 13,935,755 13,129,498
OTHER ASSETS
Subscriber Contracts and other intangible assets 18,907,162 19,984,882
Goodwill 7,771,556 7,974,059
Deposits and other 67,148 30,819
----------- ------------
Total 26,745,866 27,989,760
TOTAL ASSETS 44,780,296 45,305,640
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt 537,808 556,830
Accounts payable 1,476,083 1,739,800
Royalties payable 744,121 660,264
Accrued liabilities 1,389,059 1,775,590
------------ -----------
4,147,071 4,732,484
LONG-TERM DEBT 33,372,566 32,395,375
------------ -----------
STOCKHOLDERS' EQUITY
Common stock, $.25 par value 1,126,801 1,125,534
Contributed capital in excess of par value 9,856,708 9,850,850
Accumulated deficit (3,722,850) (2,798,603)
------------ --------------
7,260,659 8,177,781
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 44,780,296 45,305,640
=========== =============
</TABLE>
<PAGE>
AUDIO COMMUNICATIONS NETWORK, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
6/30/98 6/30/97
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss (924,244) (247,956)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,802,680 1,428,770
Deferred commissions (707,189) (100,996)
(Increase) decrease in operating assets and increase (decrease)
in operating liabilities
Accounts receivable (25,007) 222,580
Inventories (1,584,664) (531,142)
Prepaid expenses and other assets 419,199 (4,560)
Accounts payable (776,414) 573,466
Royalties payable 81,851 -
Accrued liabilities 138,416 278,128
Other, net (64,065) 34,166
---------- -----------
Net cash provided by (used in) operating activities (639,437) 1,652,456
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Certain Assets and
Liabilities of ACN - (2,130,889)
Capital expenditures - net (806,574) (738,328)
---------- -----------
Net cash used in operating activities (806,574) (2,869,217)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,500,000 26,493,426
Principal payments under capital lease obligations (40,783) (18,498)
Repayment of long-term debt (500,000) (23,755,000)
Proceeds from sale of stock - -
---------- -----------
Net cash provided by financing activities 959,217 2,719,928
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (486,794) 1,503,167
CASH, BEGINNING OF PERIOD 680,195 132,565
---------- -----------
CASH, END OF PERIOD 193,401 1,635,732
========== ===========
Cash Paid During the Period For Interest 1,437,167 1,137,826
Supplemental Schedule of Noncash Investing & Financing Activities:
Inventory Leased to Customer and Reclassified to Property 1,162,647 527,548
</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-KSB. 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 acquisition.
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
second quarter and six months ended June 30, 1997 (unaudited) net revenues, net
income (loss), and earnings (loss) per share would have been approximately as
follows:
Second quarter 1997 First Six Months 1997
-------------------- ----------------------
Net Revenue 5,269,441 10,351,201
Net Income (Loss) (872,941) (932,095)
Earnings (Loss) Per Share (0.19) (0.21)
<PAGE>
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 Operations expressed as a percentage of
operating revenues.
<TABLE>
<CAPTION>
RELATIONSHIP TO TOTAL REVENUES
FOR THE PERIOD ENDING JUNE 30TH
------------------------------------
SECOND QUARTER FIRST SIX MONTHS
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- ------
<S> <C> <C> <C> <C>
Revenues from Operations 100.0 100.0 100.0 100.0
Operating Costs and Expenses (74.9) (66.2) (72.1) (63.8)
----- ----- ----- -----
Income from Operations before
Depreciation and Amortization 25.1 33.8 27.9 36.2
Depreciation and Amortization (22.9) (22.7) (22.3) (23.1)
----- ----- ----- -----
Income before Other Income (Expense),
and Income Taxes 2.2 11.1 5.6 13.1
Other Income (Expense), net (13.7) (16.2) (12.8) (17.0)
----- ----- ----- -----
Income (Loss) before Income Taxes (11.5) (5.1) (7.2) (3.9)
Provision for Income Taxes (0.1) (0.1) (0.1) (0.1)
----- ----- ----- -----
Net Income (Loss) (11.6) (5.2) (7.3) (4.0)
===== ===== ===== =====
</TABLE>
<PAGE>
PART I
- ------
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.
On June 5, 1998, the Company entered into an agreement for the sale of the
Company. The transaction is expected to close in the third quarter of 1998 and
is subject to stockholder approval, regulatory approvals and other customary
conditions.
SIGNIFICANT EVENT EFFECTING SECOND QUARTER RESULTS
- --------------------------------------------------
On Tuesday, May 19, 1998 at approximately 6 PM EDT, the Galaxy IV satellite
malfunctioned and spun out of control disrupting communications for Muzak and
several other industries. On Wednesday, May 20, 1998 the communication
services for Muzak were transferred to the Galaxy III-R satellite. As a result,
the Company repositioned over 11,000 customer satellite dishes to access the
Galaxy III-R satellite.
The repositioning process was completed June 19, 1998 requiring full
mobilization of technical staff and the use of outside contractors. The Company
incurred approximately $314,000 of costs associated with the satellite
malfunction. Revenue was affected as technical staff was diverted from revenue
generating activities.
NET REVENUES
- ------------
Consolidated Net Revenues for the 2nd Quarter of 1998 were $6,168,030 an
increase over the comparable period of 1997 of $2,651,833 or 75.4%. Consolidated
Net Revenues for the first six months of 1998 were $12,553,875 an increase over
the comparable period of 1997 of $6,375,252 or 103.2%. The majority of the
increase is attributable to the reverse acquisition of the Company and the
balance to the growth in the franchises.
COSTS AND EXPENSES
- ------------------
Costs and Expenses for the 2nd Quarter of 1998 were $6,034,293 increasing over
the comparable period of 1997 by $2,908,771. Costs and Expenses for the first
six months of 1998 were $11,860,004 increasing over the comparable period of
1997 by $6,488,833. The
<PAGE>
majority of the increase is attributable to the reverse acquisition of the
Company, the aforementioned satellite malfunction 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.
OTHER INCOME AND EXPENSE (NET):
- -------------------------------
The increase in Other Income and Expense (Net) in the 2nd Quarter of 1998 and
the first six months of 1998 over the comparable periods in 1997 is due
primarily to the additional debt resulting from the reverse acquisition.
INCOME TAXES:
- -------------
At June 30, 1998, the Company had operating loss carryforwards for federal tax
purposes of approximately $4,100,000. Such loss carryforwards expire in 2002
through 2012.
NET INCOME/LOSS:
- ---------------
Net Loss for the Company's 2nd Quarter of 1998 was $715,689 compared to a loss
of $184,160 for the comparable period in 1997. Net Loss for the first six
months of 1998 was $924,244 as compared to a loss of $247,956 for the comparable
period in 1997. The difference in operating results is primarily attributable to
the reverse acquisition of the Company and the satellite malfunction.
LIQUIDITY AND CAPITAL RESOURCES:
- -------------------------------
Operating cash flows (computed as net income plus interest, taxes, depreciation
and amortization) for the 2nd Quarter of 1998 was $1,546,496 increasing over the
comparable period of 1997 by $354,318. The difference in operating cash flow is
primarily attributable to the reverse acquisition of the Company and the
satellite malfunction.
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 June 30, 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%.
Due to costs associated with the satellite malfunction, the Company was not in
compliance with all of its debt covenants at June 30, 1998. The Company has
obtained waivers for debt covenants that were not met. 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. The Company filed a Form 8-K on June 29, 1998 disclosing an
agreement for the sale of the company
<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 August 19, 1998 /s/ DAVID W. UNGER
------------------------ ----------------------------------
David W. Unger
Chief Financial Officer /
Executive Vice President
Date August 19, 1998 /s/ MITCHELL KLEINHANDLER
------------------------ ----------------------------------
Mitchell Kleinhandler
President and
Chief Operating Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM 2ND QUARTER 10-QSB AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 193,401
<SECURITIES> 0
<RECEIVABLES> 2,184,170
<ALLOWANCES> 0
<INVENTORY> 1,572,151
<CURRENT-ASSETS> 4,098,675
<PP&E> 21,713,987
<DEPRECIATION> (7,778,232)
<TOTAL-ASSETS> 44,780,296
<CURRENT-LIABILITIES> 4,147,071
<BONDS> 0
0
0
<COMMON> 1,126,801
<OTHER-SE> 9,856,708
<TOTAL-LIABILITY-AND-EQUITY> 44,780,296
<SALES> 0
<TOTAL-REVENUES> 12,553,875
<CGS> 5,149,891
<TOTAL-COSTS> 6,710,113
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,615,743
<INCOME-PRETAX> (919,244)
<INCOME-TAX> 5,000
<INCOME-CONTINUING> (924,244)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (924,244)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> 0
</TABLE>
