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 September 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.
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(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
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(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: 2,246,540
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AUDIO COMMUNICATIONS NETWORK, INC. AND SUBSIDIARIES
THIRD QUARTER
----------------------------
FOR THE 3 MONTHS ENDED
----------------------------
9/30/96 9/30/95
----------- -----------
PART I - FINANCIAL INFORMATION
- ------------------------------
Music Sales ............................. $ 1,790,166 $ 1,412,296
Installations............................ 289,465 275,215
Equipment Sales.......................... 358,242 162,182
Labor & Service......................... 166,847 55,984
Pro Sound Installations.................. 159,536 -0-
----------- -----------
TOTAL REVENUE:........................... 2,764,256 1,905,677
COST AND EXPENSES
- -----------------
Cost of Sales ........................... 1,163,375 776,265
Selling, General and
Administrative Expenses.................. 754,680 537,736
Depreciation and Amortization............ 408,505 289,697
---------- ----------
TOTAL .................................... 2,326,560 1,603,698
---------- ----------
Income before Other Income
(Expense) and Income Taxes................ 437,696 301,979
OTHER INCOME (EXPENSE):
- ----------------------
Interest Income .......................... 6,672 2,414
Interest Expense.......................... (258,895) (140,369)
Other .................................... 14,782 13,789
---------- ----------
OTHER NET ................................ (237,441) (124,166)
---------- ----------
Income before Income Taxes................ 200,255 177,813
Provision for Income Taxes ............... 20,600 16,400
---------- ----------
Net Income................................ $ 179,655 $ 161,413
========== ==========
Net Income Per Common Share $ .08 $ .07
- --------------------------- ========== ==========
Number of Common Shares................... 2,267,804 2,239,446
========== ==========
Dividends Per Share -0- -0-
========== ==========
AUDIO COMMUNICATIONS NETWORK, INC. AND SUBSIDIARIES
UNAUDITED STATEMENT OF CONSOLIDATED OPERATIONS
FIRST NINE MONTHS
----------------------------
FOR THE 9 MONTHS ENDED
----------------------------
9/30/96 9/30/95
----------- -----------
PART I - FINANCIAL INFORMATION
- ------------------------------
Music Sales ............................. $ 5,430,235 $ 4,250,374
Installations............................ 718,172 794,196
Equipment Sales.......................... 1,068,897 419,474
Labor & Service......................... 386,360 163,092
Pro Sound Installations.................. 709,451 -0-
----------- -----------
TOTAL REVENUE:........................... 8,313,115 5,627,136
COST AND EXPENSES
- -----------------
Cost of Sales ........................... 3,509,803 2,256,744
Selling, General and
Administrative Expenses.................. 2,202,120 1,681,268
Depreciation and Amortization............ 1,199,166 854,925
---------- ----------
TOTAL .................................... 6,911,089 4,792,937
---------- ----------
Income before Other Income
(Expense) and Income Taxes................ 1,402,026 834,199
OTHER INCOME (EXPENSE):
- ----------------------
Interest Income .......................... 20,604 5,827
Interest Expense.......................... (796,209) (404,357)
Other .................................... 69,611 62,607
---------- ----------
OTHER NET ................................ (705,994) (335,923)
---------- ----------
Income before Income Taxes................ 696,032 498,276
Provision for Income Taxes ............... 69,500 36,500
---------- ----------
Net Income................................ $ 626,532 $ 461,776
========== ==========
Net Income Per Common Share $ .28 $ .21
- --------------------------- ========== ==========
Number of Common Shares................... 2,264,176 2,239,009
========== ==========
Dividends Per Share -0- -0-
========== ==========
AUDIO COMMUNICATIONS NETWORK, INC. & SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
9/30/96 12/31/95
------------ ---------------
(Unaudited) Condensed from
PART I - FINANCIAL INFORMATION Audited Financial
- ------------------------------ Statements)
ASSETS
Current Assets:
Cash & Cash Equivalents.................... $ 1,171,767 $ 590,107
Accounts Receivable ....................... 886,519 519,754
Inventories................................ 593,327 359,888
Prepaid Expenses & Other................... 132,846 33,416
----------- -----------
Total - Current Assets..................... 2,784,459 1,503,165
----------- -----------
Property - Net............................. 4,914,713 3,358,217
----------- -----------
Subscriber Contracts & Other
Intangibles................................ 2,608,577 1,541,922
Goodwill................................... 4,519,016 1,994,040
Deposits & Other........................... 17,484 13,734
----------- -----------
Total Other Assets......................... 7,145,077 3,549,696
----------- -----------
TOTAL...................................... $14,844,249 $ 8,411,078
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Current - Long Term Debt................... $ 1,236,840 $ 923,697
Current Portion of Obligation
Under Capital Leases ...................... 8,583 12,697
Accounts Payable........................... 683,174 458,872
Accrued Liabilities........................ 318,570 89,606
----------- -----------
Total Current Liabilities.................. 2,247,167 1,484,872
----------- -----------
Long - Term Debt........................... 9,111,418 4,089,019
----------- -----------
Obligations Under Capital Leases........... 14,324 -0-
----------- -----------
Deferred Compensation...................... 50,000 50,000
----------- -----------
Stockholders' Equity:
Common Stock, $.25 par value
8,000,000 shares, authorized,
2,243,821 shares issued and
outstanding in 1995 and 2,246,540
in 1996.................................... 561,635 560,955
Capital Contributed in Excess
of Par Value............................... 5,018,394 5,011,451
Accumulated Deficit........................ (2,158,689) (2,785,219)
----------- -----------
Stockholders' Equity....................... 3,421,340 2,787,187
----------- -----------
TOTAL...................................... $14,844,249 $ 8,411,078
=========== ===========
PART I
AUDIO COMMUNICATIONS NETWORK, INC. & SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 9 MONTHS ENDED SEPTEMBER 30TH
-------------------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATIONS ACTIVITIES:
- -------------------------------------
Cash Received From Customers....................$ 8,205,840 $ 5,590,384
Cash Paid To Suppliers & Employees.............. (6,322,992) (4,738,348)
Interest Received............................... 20,604 5,827
Interest Paid .................................. (757,184) (403,550)
Income Tax Paid ................................ (90,132) (54,545)
Other-Net....................................... 3,487 6,778
------------ ------------
Net cash provided by
Operating Activities............................ 1,059,623 406,546
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Proceeds from sale of equipment................. 1,405 2,050
Capital Expenditures............................ (7,103) (11,530)
Purchase of Florida Sound Assets................ (5,750,000) -0-
Deferred Acquisition Costs...................... (134,971) -0-
Deferred Charges................................ -0- (65,075)
Purchase of Subscription Contract Rights........ -0- (33,041)
------------ ------------
Net Cash used in Investing Activities........... (5,890,669) (107,596)
CASH FLOWS FROM FINANCING ACTIVITIES:
- ------------------------------------
Proceeds from issurance of long-term
debt........................................... 11,000,000 5,200,000
Principal payments under Capital lease
obligations ................................... (16,120) (56,967)
Repayment of Long-Term Debt.................... (5,578,797) (5,356,715)
Proceeds from Sale of Stock to Employees....... 7,623 3,047
------------ ------------
Net Cash Provided By
Financing Activities.......................... 5,412,706 (210,635)
------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS.............................. 581,660 88,315
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR.......................................... 590,107 509,064
------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD........................................ $ 1,171,767 $ 597,379
============ ============
PART I
AUDIO COMMUNICATIONS NETWORK, INC. & SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
1996 1995
---------- ----------
RECONCILIATION OF NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net Income.............................. $ 626,532 $ 461,776
---------- ----------
Adjustments to Reconcile Net Income
To Net Cash Provided by Operations:
Depreciation and Amortization........... 1,215,793 860,245
Valuation Allowance..................... 52,000 3,650
Deferred Commissions - Net.............. (62,073) (41,947)
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................. (58,765) 20,026
Prepaid and Other Current Assets...... (99,430) (93,482)
Inventories....................... (1,060,791) (806,004)
Other-Net............................ (5,504) -0-
Accounts Payable.................... 224,302 4,463
Accruals............................ 228,964 (2,181)
------------ ------------
Total Adjustments....................... 433,091 (55,230)
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES.............................. $ 1,059,623 $ 406,546
============ ============
Supplemental Schedule of Noncash Investing and Financial Activities:
During the 9 mos. ending September 30th, 1996 and 1995, approximately $1,167,352
and $695,000, 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 9 mos. of each year respectively.
Loan obligations of approximately $104,000 were incurred during the 9 mos.
of 1995 for service equipment vehicles.
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 statement of operations expressed as a percentage of
operating revenues.
RELATIONSHIP TO TOTAL REVENUES
------------------------------------
FOR THE PERIOD ENDING SEPTEMBER 30TH
------------------------------------
THIRD QUARTER FIRST NINE MONTHS
---------------- -----------------
1996 1995 1996 1995
------ ------ ------ ------
Revenues from Operations 100.00% 100.00% 100.00% 100.00%
Operating Costs and Expenses (69.4) (68.9) (68.7) (70.0)
------ ------ ------ --------
Income from Operations before
Depreciation and Amortization 30.6 31.1 31.3 30.0
Depreciation and Amortization (14.8) (15.2) (14.4) (15.2)
------ ------ ------ --------
Income before Other Income (Expense),
and Income Taxes 15.8 15.9 16.9 14.8
Other Income (Expense) Net (8.6) (6.5) (8.6) (6.0)
------ ------ ------ --------
Income before Income Taxes 7.2 9.4 8.3 8.8
Provision for Income Taxes (0.7) (0.9) (0.8) (0.6)
------ ------ ------ --------
Net Income 6.5 8.5 7.5 8.2
====== ====== ====== ========
PART I
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
NET REVENUES:
- -------------
Consolidated net revenues for the 3rd. Quarter of 1996 were $2,764,000 as
compared to $1,906,000 for the like period of 1995 an increase of $858,000 or
45%. The increase is due entirely to the Jacksonville acquisition as there was
a 3% reduction in the comparable revenues for the period. There were
significant installation sales in the 3rd. Quarter of 1995 that were not
available in the 3rd. Quarter of 1996 and the current quarter had a slight
reduction in recurring revenue due to consolidation and restructuring of various
national accounts.
Third Quarter revenues decreased over the previous quarter by 6% due to the
consolidation and restructuring of various accounts as explained above, a
reduction in Pro Sound installations, and a reduction in equipment sales.
The nine months of 1996 consolidated net revenues were $8,313,000 as compared to
last year's nine months revenue of $5,627,000 an increase of $2,686,000 or 48%.
With the exclusion of the Jacksonville acquisition revenues for the nine months
of 1996 are slightly ahead of last year's nine months revenues. There is every
indication that the 4th. Quarter will equal or exceed last year's comparable
revenues excluding Jacksonville's contribution.
COST AND EXPENSES:
- ------------------
There was an increase in the 3rd. Quarter of '96 cost and expenses as a
percentage of sales from the 3rd. Quarter of '95 and the 2nd. Quarter of '96 due
to a reduction in installation sales. In most music installations all labor is
capitalized; since there was a reduction in music installations there was also a
reduction in capitalized labor thereby increasing labor's period cost.
Additionally in the 2nd. Quarter of '96 certain fully depreciated equipment that
was previously leased to customers was sold. These sales had no related costs
thus the Company realized a reduced cost of sales in the 2nd. Quarter.
The nine months of '96 cost and expenses as a percentage of sales was lower than
the nine months of '95 due to an admixture of equipment sales with no related
costs as mentioned above and music installation sales.
DEPRECIATION & AMORTIZATION:
- ----------------------------
The increase in depreciation and amortization as a percentage of sales in the
3rd. Quarter of '96 over the 2nd. Quarter of '96 is due to exceptionally high
Pro Sound sales that occurred in the 2nd. Quarter of '96. The 3rd. Quarter and
nine months of '96 depreciation and amortization percentages of sales decreased
over the like periods of '95 is due primarily to certain intangibles and assets
being completely amortized and depreciated at the end of '95 that were not
offset by 1996's asset additions or intangibles.
OTHER INCOME AND EXPENSE (NET):
- -------------------------------
Other income and expense (net) increased as a percentage of sales in '96 over
the like periods of '95 (3rd. Quarter and 9 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 2nd. Quarter
of '96 is due primarily to "Other Net." In the 2nd. Quarter there were some
large purchases for the Pro Sound Division and Audio Communications Network,
Inc. received many large discounts on its purchases. There were other
miscellaneous income items that reduced the percentage of sales in the 2nd.
Quarter such as: miscellaneous rental income, cancellation fees, gain on sale
of assets, etc.
INCOME TAXES:
- -------------
At June 30, 1996, the Company had net operating loss carryforwards for
federal tax purposes of approximately $2.0 million. Such loss carryforwards
expire in 2002 through 2006.
NET INCOME:
- -----------
Net income for the 3rd. Quarter of '96 was $180,000 or $.08 per share compared
to the 3rd. Quarter of '95's $161,000 or $.07 per share.
Net income for the 3rd. Quarter of '96 decreased from the 2nd. Quarter of '96
due primarily to a reduction in Pro Sound installations and a reduction in
equipment sales. Also certain fully depreciated equipment that was previously
leased to customers was sold increasing income in the 2nd. Quarter.
Net income for the nine months of '96 was $627,000 or $.21 per share an increase
of $165,000 representing an increase in per share earnings of 33% or $.07 per
share. The increase in net income is due primarily to certain intangibles
relative to previous acquisitions being fully amortized at December 31, 1995
that more than offset the increase in amortization and depreciation expense that
was related to the Jacksonville acquisition.
The Company is ahead of budget and has exceeded its 1995 earnings at September
30, 1996 and is expected to have another record-breaking year.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
Operating cash flows (computed as net income plus interest, taxes, depreciation
and amortization) has increased from $1,758,000 in '95 to $2,691,000 in '96 an
increase of $933,000 or 53%. 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
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 September 30, 1996. Audio
Communications Network, Inc.'s interest rate was reduced from SunTrust Banks,
Inc.'s Prime Rate plus 1.50% to Prime plus 1.25% floating effective September 1,
1996. The rate reduction was based upon Audio's Funded Debt/EBITDA ratio which
was 2.92:1 for the six months ended 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
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
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. 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.
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 November 8, 1996 /s/ Doris K. Krummenacker
------------------ --------------------------------
Doris K. Krummenacker
Vice President/Finance &
Treasurer
Date November 8, 1996 /s/ A. J. Schell
------------------ -------------------------------
A. J. Schell
Chairman and
Chief Executive Officer