<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996
COMMISSION FILE NUMBER: 0-22238
A+ NETWORK, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TENNESSEE 62-1225322
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
40 SOUTH PALAFOX STREET
PENSACOLA, FLORIDA 32501
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (615) 438-1653
A+ NETWORK, INC.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 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
----- -----
As of March 31, 1996, 10,263,255 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements
A+ NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
1996 1995
---------- ---------
<S> <C> <C>
REVENUES:
Mobile communication services $17,765,980 $ 9,226,793
Equipment sales 1,780,977 821,744
Telemessaging services 2,886,729 2,756,994
----------- -----------
Total revenues 22,433,686 12,805,531
Cost of equipment sales (2,218,712) (2,085,638)
----------- -----------
20,214,974 10,719,893
COSTS AND EXPENSES:
Operating expenses - exclusive of depreciation
and amortization 4,594,737 2,459,462
Depreciation and amortization 6,552,288 3,111,384
Selling 3,600,777 2,732,726
General and administrative 7,680,323 4,693,111
Restructuring charges 395,815 -
----------- -----------
22,823,940 12,996,683
OPERATING LOSS (2,608,966) (2,276,790)
INTEREST EXPENSE (3,671,305) (373,164)
INTEREST INCOME 565,346 -
----------- -----------
NET LOSS $(5,714,925) $(2,649,954)
=========== ===========
LOSS PER SHARE $ (0.56) $ (0.44)
=========== ===========
AVERAGE NUMBER OF SHARES
OUTSTANDING (in thousands) 10,263 5,972
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
A+ NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,437,138 $ 12,500,438
Short term investments $ 47,492,512 43,151,125
Accounts receivable - trade (net of allowance for doubtful accounts) 10,228,282 10,721,052
Inventory 7,527,039 4,164,077
Prepaid expenses 1,037,523 732,275
Other current assets 173,524 663,536
------------ ------------
Total current assets 67,896,018 71,932,503
EQUIPMENT AND FIXTURES - Net 51,331,501 48,325,727
EXCESS OF COST OVER FAIR VALUE OF
NET ASSETS ACQUIRED - Net 48,771,479 49,608,772
INTANGIBLE AND OTHER ASSETS - Net 40,239,671 41,145,669
------------ ------------
TOTAL $208,238,669 $211,012,671
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,052,817 $ 4,927,517
Accrued payroll related costs 3,177,516 1,911,730
Accrued liabilities 8,115,742 4,011,615
Deferred revenue and customer deposits 6,211,525 5,778,147
------------ ------------
Total current liabilities 19,557,600 16,629,009
LONG-TERM DEBT 124,113,705 124,101,373
DEFERRED TAXES 818,243 818,243
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; 1,500,000 shares authorized;
issued and outstanding, none - -
Common stock - $.01 par value; 30,000,000 shares authorized;
10,263,255 shares issued and outstanding
at March 31, 1996 and December 31, 1995, respectively 102,633 102,633
Additional paid-in capital 90,584,065 90,584,065
Accumulated deficit (26,937,577) (21,222,652)
------------ ------------
Total stockholders' equity 63,749,121 69,464,046
------------ ------------
TOTAL $208,238,669 $211,012,671
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
A+ NETWORK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------
1996 1995
----------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(5,714,925) $(2,649,954)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation and amortization 6,552,288 3,111,384
Provision for losses on accounts receivable 1,075,400 266,088
Amortization of debt discount 12,332 -
Changes in assets and liabilities:
Increase in accounts receivable (582,630) (117,282)
(Increase) decrease in inventory (3,362,962) 1,030,127
Increase in prepaid expenses (305,248) (161,354)
Decrease (increase) in other current assets 490,012 (4,147)
Increase in intangible and other assets (146,404) -
Decrease in accounts payable (2,874,700) (1,884,982)
Increase in accrued payroll related costs 1,265,786 234,648
Increase (decrease) in accrued liabilities 4,104,127 (224,704)
Increase in deferred revenue and customer deposits 433,378 669,657
----------- -----------
Net cash provided by operating activities 946,454 269,481
INVESTING ACTIVITIES:
Purchase of short-term investments (4,341,387) -
Purchase of South Central Bell paging assets - (1,232,061)
Purchase of equipment (7,668,367) (1,814,989)
Payment of intangible and other assets - (101,243)
----------- -----------
Net cash used in investing activities (12,009,754) (3,148,293)
FINANCING ACTIVITIES:
Proceeds of long-term debt - 8,875,000
Repayment of long-term debt - (5,699,829)
----------- -----------
Net cash provided by financing activities 0 3,175,171
----------- -----------
(Decrease) increase in cash and cash equivalents (11,063,300) 296,359
CASH AND CASH EQUIVALENTS, beginning of period 12,500,438 254,880
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,437,138 $ 551,239
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest $ 0 $ 350,074
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
A+ NETWORK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
UNAUDITED INTERIM INFORMATION. The unaudited interim consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments, which management considers necessary for a fair
presentation of the financial position and results of operations. The results
of operations for the three months ended March 31, 1996, are not necessarily
indicative of the results that may be expected for a full year.
CERTAIN RECLASSIFICATIONS. Certain amounts have been reclassified in the
consolidated statement of operations for the three months ended March 31, 1995
and the consolidated balance sheet as of December 31, 1995 to conform with the
presentation in 1996.
EMPLOYEE STOCK BASED TRANSACTIONS. The Company will not apply Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" and will continue to apply Accounting Principles Board Opinion
No. 25 for the measurement and recognition of employee stock based
transactions.
2. ACQUISITIONS
On October 24, 1995, the Company acquired Network Paging Corporation and its
wholly-owned subsidiaries ("Network") for approximately $12,000,000 in cash,
4,199,994 shares of restricted unregistered common stock valued at $50,801,100
and incurred related expenses of approximately $3,100,000. Liabilities assumed
in the merger included an additional $500,000 of merger expenses incurred by
Network. Concurrent with the merger of the two companies, the Company changed
its name to A+ Network, Inc., issued $125,000,000 of 11 7/8% Senior
Subordinated Notes due 2005 (see Note 3), redeemed existing preferred stock of
Network of $4,680,000 and retired existing indebtedness of Network and the
Company of approximately $12,200,000 and $23,000,000, respectively. The
acquisition was accounted for using the purchase method; accordingly, the
purchase price has been allocated to the assets purchased and the liabilities
assumed of the acquired entities based upon their estimated fair value at the
date of acquisition. The excess of purchase price over the estimated fair
value of the net assets acquired ("goodwill") of $50,237,595 is being amortized
on a straight-line basis over 15 years. Network's results of operations have
been included in the Consolidated Statements of Operations from the date of
acquisition.
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Current assets $ 7,802,095
Equipment and fixtures 14,327,677
Customer accounts and other intangibles 19,404,000
Goodwill 50,237,595
Liabilities assumed (21,154,663)
-----------
$70,616,704
===========
</TABLE>
5
<PAGE> 6
3. LONG-TERM DEBT
On October 24, 1995, the Company issued $125.0 million of 11 7/8% Senior
Subordinated Notes due 2005, priced at 99.274% to yield approximately 11.8%.
Interest on the Notes is payable semi-annually in May and November. The Notes
required the Company to purchase a portfolio of securities initially consisting
of U.S. government securities ("Pledged Securities") which are pledged as
security for payment of the first two scheduled interest payments due on the
Notes. The Notes are subordinated in right of payment to all of the Company's
existing and future Senior Debt as defined in the Indenture governing the
Notes. Such Indenture also contains certain covenants, including, but not
limited to, covenants with limitations and restrictions on the following: (i)
the incurrence of additional indebtedness; (ii) restricted payments; (iii)
asset dispositions; (iv) liens; (v) sale and leaseback transactions; (vi)
prohibition of dividends; (vii) prohibition of dividend and other payment
restrictions affecting certain subsidiaries; (viii) consolidation, merger or
sale of assets; (ix) investments; (x) incurrence of indebtedness ranking senior
to the Notes and junior to any Senior Debt; and (xi) transactions with related
parties. Additionally, the Notes are redeemable at the option of the Company,
in whole or part, at any time on or after November 1, 2000 at redemption prices
set forth in the Indenture. The Company used the net proceeds to retire all
the outstanding debt, to finance the acquisition of Network and to purchase the
Pledged Securities. The balance is available for general corporate purposes,
including possible future acquisitions.
4. REORGANIZATION EXPENSE
In the first quarter of 1996, the Company recorded restructuring charges of
$396,000, representing the expected costs of employee separations.
6
<PAGE> 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Total revenues increased 75.2% to $22.4 million in the three months ended March
31, 1996, as compared to $12.8 million for the same period in 1995. The revenue
increase primarily reflected increases in paging and voicemail units in service
as described below. Net revenues increased 88.6% to $20.2 million in the three
months ended March 31, 1996, as compared to $10.7 million for the same period
in 1995. Mobile communication revenues increased 92.5% to $17.8 million in
the three months ended March 31, 1996, as compared to $9.2 million for the
same period in 1995, while telemessaging revenues increased 4.7% to $2.9
million. The growth in mobile communication revenues reflected a 149.1%
increase in paging and voicemail units in service to 569,841 at March 31, 1996,
as compared to 228,733 at March 31, 1995.
The gross margin on sales of pager equipment was $148,000 for the three months
ended March 31, 1996, as compared to $8,000 for the same period in 1995. The
negative margin on equipment sales decreased to $390,000 for the three months
ended March 31, 1996, as compared to $1.0 million for the same period in 1995.
Due to competitive factors, cellular phones were sold at heavily discounted
prices or in many instances were given to customers through free phone
promotions resulting in negative gross margins on cellular equipment sales of
$538,000 and $1.0 million for the three months ended March 31, 1996 and March
31, 1995, respectively. However, it is customary to sell cellular phones at a
loss in order to earn the activation commission and expected monthly recurring
revenues from the cellular carrier.
Operating expenses increased 86.8% to $4.6 million (22.7% of net revenues)
during the three months ended March 31, 1996, from $2.5 million (22.9% of net
revenues) for the same period in 1995. The increase primarily reflects the
149.1% increase in paging and voicemail units in service at March 31, 1996 as
compared to March 31, 1995.
Selling expenses increased 31.8% to $3.6 million (17.8% of net revenues) during
the three months ended March 31, 1996, from $2.7 million (25.5% of net revenues)
for the same period in 1995. The increase is partially a result of the
additional sales and marketing costs associated with the 149.1% increase of
paging and voicemail units in service at March 31, 1996, as compared to March
31, 1995. Selling expenses
7
<PAGE> 8
declined as a percentage of net revenues primarily as a result of lower
advertising and commission costs.
General and administrative expenses increased 63.6% to $7.7 million (38.0% of
net revenues) during the three months ended March 31, 1996, from $4.7 million
(43.8% of net revenues) for the same period in 1995. The decline as a
percentage of net revenues is the result of a reduction in general and
administrative salaries and employee related costs related to the Merger.
Depreciation and amortization expense increased 110.6% to $6.6 million during
the three months ended March 31, 1996, from $3.1 million for the same period in
1995, which reflected increased depreciation and amortization expense from
equipment and intangible asset purchases and paging network equipment acquired
in the Merger.
The Company experienced an operating loss of $2.6 million during the three
months ended March 31, 1996, as compared to an operating loss of $2.3 million
during the same period in 1995. The increased operating losses related
primarily to the increase in depreciation and amortization expense and a
one-time reorganization charge of $396,000, offset by a decline in other costs
and expenses (Operating, Selling and General and administrative) from 92.2% of
net revenues in the three months ended March 31, 1995 to 78.5% of net revenues
in the three months ended March 31, 1996.
Net interest expense was $3.1 million for the three months ended March 31,
1996, as compared to net interest expense of $373,000 for the same period in
1995. The increase in net interest expense was due to the increase of the
Company's long-term debt from the issuance of the Notes.
The Company experienced a net loss in the three months ended March 31, 1996 of
$5.7 million, or $0.56 per share, as compared to a net loss of $2.6 million, or
$0.44 per share, during the same quarter in 1995.
Operating cash flow, or earnings before interest, income taxes, depreciation
and amortization (EBITDA), was $3.9 million in the three months ended March 31,
1996, as compared to $835,000 during the same period last year.
IMPACT OF STATEMENTS OF ACCOUNTING STANDARDS
As of January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 requires review of long-lived assets and certain identifiable
intangibles for impairment. Adoption of SFAS No. 121 did not have a
significant impact on the Company's financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires adoption of the
disclosure provisions no later than fiscal years beginning after December 15,
1995 and adoption of the recognition and measurement provisions for
8
<PAGE> 9
nonemployee transactions no later than fiscal years beginning after December
15, 1995. The new standard defines fair value method of accounting for stock
options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period.
Pursuant to the new standard, companies are encouraged, but are not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," but would be required to disclose in a note to the
financial statements pro forma net income and, if presented, earnings per share
as if the Company had applied the new method of accounting.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital have been cash flows from operations,
borrowings from its bank lenders, vendor financing, proceeds from the Company's
initial public offering of Common Stock in August 1993 and proceeds from the
sale of $125.0 million principal amount of its 11 7/8% Senior Subordinated
Notes due 2005 (the "Notes") in October 1995, further described below. Cash
flows from operations have historically been insufficient to fund operating
expenses, interest expenses and capital expenditures. During the three months
ended March 31, 1996, cash and cash equivalents decreased $11.1 million to $1.4
million primarily the result of purchases of equipment of $7.7 million and
purchases of short-term investments of $4.3 million. Net cash provided by
operating activities during the three months ended March 31, 1996 amounted to
$946,000.
The Company's paging operations require substantial capital investment to
procure pagers and paging network equipment to support the Company's growth.
By contrast, the Company's telemessaging operations will require relatively
little additional capital investment through 1995. Cash used in investing
activities amounted to $12.0 million and $3.1 million for the three months
ended March 31, 1996 and March 31, 1995, respectively.
No cash was provided by financing activities for the three months ended March
31, 1996 and $3.2 million was provided for the same period in 1995. The source
of cash from financing activities during the three months ended March 31, 1995
was bank borrowings.
On October 24, 1995, the Company sold the Notes to the public. The Notes will
mature on November 1, 2005 and the interest on the Notes is payable
semi-annually on May 1 and November 1 of each year, commencing on May 1, 1996.
The Notes will be redeemable by the Company in whole or in part at any time on
or after November 1, 2000 at certain designated redemption prices plus interest
accrued thereon to the redemption date. Upon a change in control, the Company
will be required to offer to purchase all outstanding Notes at 101% of the
principal amount thereof, plus interest accrued and unpaid thereon, to the
purchase date. The Notes are subordinated in right of payment to all of the
Company's existing and future senior debt, including any indebtedness that may
be incurred pursuant to the Company's New Credit Facility (as defined below).
Although the Company has no indebtedness outstanding which would be
subordinated to the Notes and currently has no plans to incur any such
subordinated indebtedness, the Notes will rank senior to any subordinated
indebtedness the Company may incur. The Indenture governing the Notes contains
customary affirmative and negative covenants.
Immediately following the sale of the Notes, Network Paging Corporation
("Network") was merged into the Company in a transaction accounted for as a
purchase (the "Merger"). The aggregate merger consideration, including the
redemption of preferred stock, was $16.7 million in cash, which was provided
from the net proceeds of $120.0 million from the sale of the Notes, and
4,200,000 shares of Common Stock of the Company. Of the balance of the
approximately $103.3 million net proceeds from the sale of the Notes, $35.2
million was used to retire outstanding debts of the Company and Network, $14.7
million was used to purchase
10
<PAGE> 11
government securities securing the payment of the first two interest payments
on the Notes and $3.6 million was used to pay the expenses of the Merger, the
sale of the Notes and the establishment of the New Credit Facility, as defined
below. The balance of approximately $49.8 million is to be used for general
corporate purposes, including possible acquisitions.
Also in connection with the Merger, the Company entered into a new credit
facility with The First National Bank of Chicago ("First Chicago") to provide
the new credit facility of $25.0 million (the "New Credit Facility"). The
$25.0 million facility is a secured two-year term loan, with quarterly
principal payments. The interest rate on the New Credit Facility is a base
rate, plus a margin fluctuating with the Company's ratio of total debt to net
operating cash flow. Borrowings under the New Credit Facility are secured by a
lien on all the assets of the Company, including the stock of its subsidiaries,
to the extent permissible under the rules of the Federal Communications
Commission. The loan documents contain customary affirmative and negative
covenants. In addition, the Company will be required to maintain specified
ratios of net operating cash flows to interest expense on total debt, ratios of
total debt to equity and other operating ratios. The availability of
borrowings under the New Credit Facility will be limited by certain of these
ratios. Until it has achieved a substantial improvement in its results of
operations or completed a significant acquisition of one or more other paging
providers on favorable terms, the Company does not anticipate being able to
borrow under the New Credit Facility.
On November 9, 1995, the Company entered into an agreement to purchase the
outstanding stock of Page East, Inc., a paging company operating in eastern
North Carolina. The purchase price will be $10.9 million subject to upward
adjustment up to a maximum of $14.9 million which will be payable, at the
discretion of the Seller in cash or in shares of Common Stock of the Company at
the discretion of the Seller. The Company has also entered into agreements to
purchase six additional paging companies for an aggregate consideration of
$17.8 million, which is payable in cash or a combination of cash and stock.
These acquisitions will be paid for with working capital, including remaining
proceeds from the sale of the Notes, and operating cash flows.
11
<PAGE> 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company has not filed any Current Reports on Form 8-K during
the first quarter of 1996.
12
<PAGE> 13
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
A+ NETWORK, INC.
By: /s/ Randy K. Schultz
-----------------------------
Randy K. Schultz
Vice-President of Finance and
Chief Financial Officer
(principal financial officer)
Date: May 15, 1996
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF A+ NETWORK FOR THE THREE MONTHS ENDED MARCH 31, 1996,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,437,138
<SECURITIES> 47,492,512
<RECEIVABLES> 11,776,178
<ALLOWANCES> 1,547,896
<INVENTORY> 7,527,039
<CURRENT-ASSETS> 67,896,018
<PP&E> 87,803,555
<DEPRECIATION> 36,472,054
<TOTAL-ASSETS> 208,238,669
<CURRENT-LIABILITIES> 19,557,600
<BONDS> 124,113,705
0
0
<COMMON> 102,633
<OTHER-SE> 63,646,488
<TOTAL-LIABILITY-AND-EQUITY> 208,238,669
<SALES> 1,780,977
<TOTAL-REVENUES> 22,433,686
<CGS> 2,218,712
<TOTAL-COSTS> 2,218,712
<OTHER-EXPENSES> 22,823,889
<LOSS-PROVISION> 1,075,400
<INTEREST-EXPENSE> 3,671,305
<INCOME-PRETAX> (5,714,925)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,714,925)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,714,925)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> (.56)
</TABLE>
