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, 1996
------------------
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE
EXCHANGE ACT
For the transition period from ______________ to _________________
Commission file number 0-7762
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AUDIO COMMUNICATIONS NETWORK, INC.
------------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
FLORIDA 52-0690530
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1000 Legion Place, Suite 1515, Orlando, Fl. 32801
--------------------------------------------------
(Address of principal executive office)
(407) 649-8877
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(Issuer's telephone number)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
------ ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after distribution of
securities under a plan confirmed by court.
Yes No Not Applicable X
------ ------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS
------------------------------------
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 2,245,699
---------
AUDIO COMMUNICATIONS NETWORK, INC. AND SUBSIDIARIES
SECOND QUARTER
---------------------------
FOR THE 3 MONTHS ENDED
----------------------------
PART I - FINANCIAL INFORMATION 6/30/96 6/30/95
- ------------------------------ ----------- ----------
Music Sales .................. $1,811,931 $1,414,136
Installations ................ 245,065 284,973
Equipment Sales .............. 448,602 148,322
Labor & Service .............. 104,507 51,271
Pro Sound Installations....... 339,652 -0-
----------- -----------
TOTAL REVENUE................. 2,949,757 1,898,702
COST AND EXPENSES
- -----------------
Cost of Sales ................ 1,271,566 740,825
Selling, General and
Administrative Expenses ...... 728,779 567,993
Depreciation and Amortization 400,745 284,770
----------- -----------
TOTAL ........................ 2,401,090 1,593,588
----------- -----------
Income before Other Income
(Expense)and Income Taxes..... 548,667 305,114
OTHER INCOME (EXPENSE):
- ----------------------
Interest Income .............. 6,400 1,808
Interest Expense.............. (265,463) (131,481)
Other ........................ 32,626 19,124
----------- -----------
OTHER NET .................... (226,437) (110,549)
----------- -----------
Income before Income Taxes.... 322,230 194,565
Provision for Income Taxes ... 26,800 8,700
----------- -----------
Net Income.................... $ 295,430 $ 185,865
=========== ===========
Net Income Per Common Share $ .13 $ .08
- --------------------------- =========== ===========
Number of Common Shares ...... 2,263,519 2,233,360
=========== ===========
Dividends Per Share -0- -0-
=========== ===========
2
AUDIO COMMUNICATIONS NETWORK, INC. AND SUBSIDIARIES
UNAUDITED STATEMENT OF CONSOLIDATED OPERATIONS
FIRST SIX MONTHS
----------------------------
FOR THE 6 MONTHS ENDED
----------------------------
PART I - FINANCIAL INFORMATION 6/30/96 6/30/95
- ------------------------------ ----------- -----------
Music Sales ................... $3,640,069 $2,838,078
Installations ................. 428,707 518,981
Equipment Sales ............... 710,655 257,292
Labor & Service .............. 219,513 107,108
Pro Sound Installations........ 549,915 -0-
----------- -----------
TOTAL REVENUE.................. 5,548,859 3,721,459
COST AND EXPENSES
- -----------------
Cost of Sales ................. 2,346,428 1,480,479
Selling, General and
Administrative Expenses ....... 1,447,440 1,143,532
Depreciation and Amortization . 790,661 565,228
----------- -----------
TOTAL ......................... 4,584,529 3,189,239
----------- -----------
Income before Other Income
(Expense)and Income Taxes...... 964,330 532,220
OTHER INCOME (EXPENSE):
- ----------------------
Interest Income ............... 13,932 3,413
Interest Expense............... (537,314) (263,988)
Other ......................... 54,829 48,818
----------- -----------
OTHER NET ..................... (468,553) (211,757)
----------- -----------
Income before Income Taxes..... 495,777 320,463
Provision for Income Taxes .... 48,900 20,100
----------- -----------
Net Income..................... $ 446,877 $ 300,363
=========== ===========
Net Income Per Common Share $ .20 $ .13
- --------------------------- =========== ===========
Number of Common Shares ...... 2,262,270 2,233,360
=========== ===========
Dividends Per Share -0- -0-
=========== ===========
3
AUDIO COMMUNICATIONS NETWORK, INC, & SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
6/30/96 12/31/95
------------- ----------------
(Unaudited) (Condensed from
PART I - FINANCIAL INFORMATION Audited Financial
- ------------------------------ Statements)
ASSETS
Current Assets:
Cash & Cash Equivalents......... $ 1,097,047 $ 590,107
Accounts Receivable ............ 1,014,665 519,754
Inventories..................... 515,886 359,888
Prepaid Expenses & Other........ 160,389 33,416
------------ ------------
Total - Current Assets.......... 2,787,987 1,503,165
------------ ------------
Property - Net.................. 4,800,632 3,358,217
------------ ------------
Subscriber Contracts & Other
Intangibles..................... 2,717,723 1,541,922
Goodwill........................ 4,620,219 1,994,040
Deposits & Other................ 14,134 13,734
------------ ------------
Total Other Assets.............. 7,352,076 3,549,696
------------ ------------
TOTAL........................... $14,940,695 $ 8,411,078
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current - Long Term Debt........ $ 1,204,496 $ 923,697
Current Portion of Obligation
Under Capital Leases ........... 9,518 12,697
Accounts Payable................ 738,229 458,872
Accrued Liabilities............. 252,042 89,606
------------ ------------
Total Current Liabilities....... 2,204,285 1,484,872
------------ ------------
Long - Term Debt................ 9,427,887 4,089,019
------------ ------------
Obligations Under Capital
Leases.......................... 19,361 -0-
------------ ------------
Deferred Compensation........... 50,000 50,000
Stockholders' Equity: ------------ ------------
Common Stock, $.25 par value
8,000,000 shares, authorized,
2,243,821 shares in 1995 and
2,245,699 in 1996............... 561,425 560,955
Capital Contributed in Excess
of Par Value.................... 5,016,081 5,011,451
Accumulated Deficit............. (2,338,344) (2,785,219)
------------ ------------
Stockholders' Equity............ 3,239,162 2,787,187
------------ ------------
TOTAL........................... $14,940,695 $ 8,411,078
============ ============
4
PART I
- ------
AUDIO COMMUNICATIONS NETWORK, INC. & SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 6 MONTHS ENDED JUNE 30TH
--------------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- ------------------------------------
Cash Received From Customers............... $ 5,356,160 $ 3,764,120
Cash Paid To Suppliers & Employees......... (4,124,899) (3,345,692)
Interest Received.......................... 13,932 3,413
Interest Paid ............................. (494,011) (271,288)
Income Tax Paid ........................... (61,019) (46,780)
Other-Net.................................. 4,667 25,717
Net cash provided by ----------- ------------
Operating Activities....................... 694,830 129,490
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- ------------------------------------
From sale of equipment..................... 1,405 2,050
Capital Expenditures....................... (7,103) (7,875)
Purchase of Florida Sound Assets........... (5,750,000) -0-
Deferred Acquisition Costs................. (133,127) -0-
Deferred Charges........................... -0- (65,075)
Purchase of Subscription Contract Rights -0- (21,592)
----------- ------------
Net Cash used in Investing Activities.. (5,888,825) (92,492)
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Proceeds from issuance of long-term
debt....................................... 11,000,000 5,200,000
Principal payments under Capital lease
obligations ............................... (13,348) (39,807)
Repayments of Long-Term Debt............... (5,290,667) (5,148,301)
Proceeds from sale of stock to employees 4,950 -0-
Net Cash Provided By ----------- ------------
Financing Activities....................... 5,700,935 11,892
----------- ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS........................... 506,940 48,890
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR....................................... 590,107 509,064
----------- ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD..................................... $ 1,097,047 $ 557,954
============ ============
5
PART I
- ------
AUDIO COMMUNICATIONS NETWORK, INC. & SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
1996 1995
------------ ------------
RECONCILIATION OF NT INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net Income.............................. $ 446,877 $ 300,363
----------- -----------
Adjustments to Reconcile Net Income
To Net Cash Provided by Operating
Activities:
Depreciation and Amortization........... 824,497 567,109
Valuation Allowance..................... 34,000 3,000
Deferred Commission - Net............... (60,727) (27,417)
Gain on sale of equipment .............. (1,405) -0-
(Increase) decrease in operating assets
and increase (decrease) in operating
liabilities - net of business acquired:
Accounts Receivable..................... (528,911) 82,600
Prepaid and Other Current Assets........ (126,973) (121,876)
Inventories............................. (328,525) (528,794)
Other-Net............................... (5,796) (24,891)
Accounts Payable........................ 279,357 (110,905)
Accruals................................ 162,436 (9,699)
----------- -----------
Total Adjustments....................... 247,953 (170,873)
----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.............................. $ 694,830 $ 129,490
=========== ===========
Supplemental Schedule of Noncash Investing and Financial Activities:
During the 1st 6 months ending June 30th, 1996 and 1995, approximately
$849,669 and $507,000, respectively, of inventory was leased to
customers and reclassified to property and equipment.
Capital lease obligations of approximately $15,000 in 1996 and $18,000 in
1995 were incurred during the 1st. 6 months of each year respectively.
Loan obligations of approximately $104,000 were incurred during the 1st.
6 months of 1995 for service equipment vehicles.
6
PART I
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS & RESULTS OF OPERATIONS
SUMMARY
- -------
The following table sets forth for the periods indicated, certain items from the
Company's Consolidated Statement of Operations expressed as a percentage of
operating revenues .
RELATIONSHIP TO TOTAL REVENUES
---------------------------------
FOR THE PERIOD ENDING JUNE 30TH
--------------------------------
SECOND QUARTER FIRST SIX MONTHS
---------------- ----------------
1996 1995 1996 1995
------ ------ ------ ------
Revenues from Operations 100.0% 100.0% 100.0% 100.0%
Operating Costs and Expenses (67.8) (68.9) (68.4) (70.5)
------ ------ ------ ------
Income from Operations before
Depreciation and Amortization 32.2 31.1 31.6 29.5
Depreciation and Amortization (13.6) (15.0) (14.2) (15.2)
------ ------ ------ ------
Income before Other Income
(Expense), and Income Taxes 18.6 16.1 17.4 14.3
Other Income (Expense) Net (7.7) (5.8) (8.4) (5.7)
------ ------ ------ ------
Income before Income Taxes 10.9 10.3 9.0 8.6
Provision for Income Taxes (0.9) (0.5) (0.9) (0.5)
------ ------ ------ ------
Net Income 10.0 9.8 8.1 8.1
====== ====== ====== ======
7
PART I
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
NET REVENUES:
- -------------
Consolidated Net Revenues for the 2nd. Quarter of 1996 were $2,950,000
increasing over the comparable period of 1995 and the 1st. Quarter of '96 by
approximately $1,051,000 or 55% and $351,000 or 14% respectively. Ninety two
percent of the increase over '95 is attributable to the Jacksonville acquisition
and the balance to the Company's own continued growth. The increase over the
1st. Quarter of '96 is primarily in equipment, installation and Pro-Sound sales.
Overall, the Company's 1st. 6 months of '96 revenues of $5,549,000 as compared
to the 1st. 6 months of '95 revenues of $3,721,000 increased $1,828,000. Ninety
six percent of that increase is directly related to the Jacksonville
acquisition.
The Company is on target with its budget and it is expected to continue that
trend for the balance of the year.
COST AND EXPENSES:
- ------------------
There was a slight decrease in the 2nd. Quarter of '96 in Cost and Expenses as a
percentage of sales from the 1st. Quarter of '96, the like period of '95 and the
1st 6 months of '96 over the 1st. 6 months of '95 due to an increase in
installation and equipment sales. In many cases the installation revenue
required labor that was capitalized but it was offset by commission expense that
on other installment sales is a period cost whereas commissions on recurring
revenue is amortized over the life of the contract.
8
DEPRECIATION & AMORTIZATION:
- ----------------------------
The decrease in Depreciation and Amortization in the 2nd. Quarter of '96 and the
1st. 6 months of '96 over their like periods and the decrease over the 1st.
Quarter of '96 by the 2nd. Quarter of '96 is due not only to the increase in
installation and equipment sales but also due to the inclusion of Pro Sound
Sales. These installation equipment sales and Pro Sound revenue were outright
sales and were not leased equipment that are depreciable assets.
OTHER INCOME AND EXPENSE (NET):
- -------------------------------
Other Income and Expense (Net) increased as a percentage of sales in '96 over
the like periods of '95 (2nd. Quarter and 1st. 6 months) due primarily to the
increase in borrowings from $4,000,000 at March 31, 1995 to $11,000,000 on
January 2, 1996. Interest income increased in '96 for those same periods due to
Audio Communications Network, Inc. utilizing the SunTrust Capital Market
Investment program. The decrease as a percentage of sales over the 1st Quarter
of '96 is due primarily to the repayment of long-term debt which reduced Audio's
interest payments.
Other "Net" is an admixture of cancellation fees, bad debt recoveries,
commissions earned or allowed, and bank service charges.
INCOME TAXES:
- -------------
At June 30, 1996, the Company had net operating loss carryforwards for federal
tax purposes of approximately $2.2 million. Such loss carryforwards expire in
2002 through 2006.
9
NET INCOME:
- -----------
Net income for the 2nd. Quarter of '96 increased over the like period of '95 and
the 1st. Quarter of '96. Net income was $295,000 or $.13 per share as compared
to $186,000 or $.08 per share for the 2nd. Quarter of '95. This is an increase
of 59% or $109,000. Additionally, 2nd. Quarter '96 income increased over the
previous quarter by $144,000 or 95%; increasing earnings per share by $.06 or
86%.
Net income for the 1st. 6 months of '96 was $447,000 or $.20 per share as
compared to the 1st. 6 months of '95 of $300,000 or $.13 per share; an increase
of 49% or $147,000. The increase in per share earnings was 54% or $.07 per
share. Net income in '96 increased over the 2nd. Quarter and 1st. 6 months of
'95 even though there was an increase in amortization and depreciation expense
related to the Jacksonville acquisition. The increase over the previous periods
was due primarily to certain intangibles relative to previous acquisitions being
fully amortized at December 31, 1995.
During the 2nd. Quarter of '96 certain equipment that was previously leased to
customers that had been completely depreciated was sold. These sales had no
related costs resulting in additional income. Audio is ahead of budget at mid
year and the Company expects this trend to continue.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
Operating cash flows (computed as net income plus interest, taxes, depreciation
and amortization) have increased from $1,150,000 in '95 to $1,824,000 in '96 an
increase of $674,000 or 59%. On June 7, 1995, the Company and SunTrust entered
into a 7th Amendment to its then existing loan agreement. The new amendment was
for $5,200,000 and was called a "consolidated loan." It paid off the Company's
10
and American Music indebtedness of $4,899,000. The following covenants
superseded all other covenants: (1) Debt Service Coverage Ratio; (2) Debt to
Net Worth Ratio; and (3) a Minimum Monthly Recurring Billing Required.
On January 2, 1996, the Company and SunTrust entered into a Second Amended and
Restated Loan amendment to this existing loan agreement. This new amendment is
for $11,000,000 and is also called a "consolidated loan." It paid off the
Company's indebtedness of $4,810,000 at December 31, 1995 and gave the Company
the ability to purchase for cash the assets of the Muzak(R) franchise in
Jacksonville, Florida and to purchase additional inventory for the Pro Sound
Division acquired in the acquisition. In the new covenants, funded Debt to
EBITDA Ratio replaces the Debt to Net Worth Ratio. Audio Communications Network,
Inc. was in compliance with all covenants at June 30, 1996. All payments of
interest and principal on loans outstanding and payments on lease obligations
have been made on a timely basis.
ACQUISITION:
- ------------
On January 2, 1996 the Company acquired the assets of Florida Sound Engineering
Company holder of the Jacksonville, Florida Muzak(R) franchise. In addition to
the franchise, the Company also acquired the assets of Florida Sound's Pro
Sound Division (with its accounts receivable, inventory and other equipment)
enabling it to install complex and extensive communication systems. The area
of operations extends beyond Jacksonville to Gainesville, Ocala, St. Augustine,
and into southern Georgia, including Brunswick. The Jacksonville company's name
remained the same, and it operates as a wholly owned subsidiary of Audio
Communications Network, Inc. Traditionally Muzak(R) franchises generate
substantial and sufficient cash flow and the Company has no reason to believe
11
that the Florida franchise will not meet the Company's expectations. It already
has generated adequate cash flow to pay the principal and interest on that
portion of the loan required to purchase the Jacksonville franchise.
RECENTLY ISSUED ACCOUNTING STANDARDS:
- -------------------------------------
The Company adopted Statement of Financial Accounting Standards No. 121 ("FAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" in the first quarter of '96. The adoption of FAS 121
had no impact on the consolidated financial position or results of operations of
the Company.
The Company has chosen not to adopt Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" for employee stock-based
arrangements.
LEGAL PROCEEDINGS:
- ------------------
None
12
AUDIO COMMUNICATIONS NETWORK, INC. & SUBSIDIARIES
PART II OTHER INFORMATION
Item 2. Changes in Securities
---------------------
Not Applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
This item is not applicable. There have been
no defaults in any of the Company's securities.
Item 4. Submission of Matter To A Vote of Security
------------------------------------------
Holders
-------
Not Applicable
Item 5. Other Information
-----------------
None
Item 6. Exhibits & Reports on Form 8K (17 CFR 249.308)
---------------------------------------------
June 5, 1996 - Amended the Audio Communications Network, Inc.
Deferred Compensation Agreement dated January 5, 1983 with Doris K.
Krummenacker (incorporated herein by reference to Exhibit 10.5 to
Amendment No. 1 on Form 8 dated May 9, 1990, amending the Annual
Report on Form 10-K for the year ended December 31, 1989). *
Form S-8 filed July 5, 1996. Audio Communications Network, Inc.
approved a new Incentive Stock Option Plan effective February 28,
1996. The Plan is intended to replace the Company's prior Incentive
Stock Option Plan, under which no further Incentive Stock Options
will be granted.
(27) Financial Data Schedule
* Management contract or compensatory plan or arrangement.
13
FORM 10-QSB
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AUDIO COMMUNICATIONS NETWORK, INC.
(Registrant)
Date August 7, 1996 By: /s/ Doris K. Krummenacker
------------------- -------------------------
Doris K. Krummenacker
Vice President/Finance &
Treasurer
Date August 7, 1996 By: /s/ A. J. Schell
------------------ -----------------------
A. J. Schell
Chairman and
Chief Executive Officer
14