<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1996
REGISTRATION NO. 333-
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
MUZAK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7389 [ ]
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE NUMBERS)
ORGANIZATION)
---------------
2901 THIRD AVENUE, SUITE 400
SEATTLE, WA 98121
(206) 633-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
MR. JOHN R. JESTER
PRESIDENT
MUZAK, INC.
2901 THIRD AVENUE, SUITE 400
SEATTLE, WA 98121
(206) 633-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
STEPHEN H. COOPER, ESQ. LOUISA BARASH, ESQ. CHRISTOPHER J. BARRY, ESQ.
WEIL, GOTSHAL & HELLER, EHRMAN, BOGLE & GATES P.L.L.C.
MANGES LLP WHITE & MCAULIFFE TWO UNION SQUARE,
767 FIFTH AVENUE 701 FIFTH AVENUE, SUITE 6100 601 UNION STREET
NEW YORK, NY 10153 SEATTLE, WA 98104 SEATTLE, WA 98101
(212) 310-8000 (206) 447-0900 (206) 682-5151
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- - - -----------------------------------------------------------------------------------------
- - - -----------------------------------------------------------------------------------------
<CAPTION>
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- - - -----------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.01 par
value.................. $74,175,000 $25,578
- - - -----------------------------------------------------------------------------------------
- - - -----------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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- - - -------------------------------------------------------------------------------
<PAGE>
MUZAK, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
--------------------------------------- ----------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page;
Prospectus..................................... Available Information; Outside
Back Cover Page
3. Summary Information, Risk Factors and Ratio of Outside Front Cover Page;
Earnings to Fixed Charges...................... Prospectus Summary; Risk
Factors; The Company
4. Use of Proceeds................................. Prospectus Summary; The
Recapitalization; Use of
Proceeds
5. Determination of Offering Price................. Outside Front Cover Page; Risk
Factors; Underwriting
6. Dilution........................................ Risk Factors; Dilution
7. Selling Security Holders........................ Certain Relationships and Related
Transactions; Principal and
Selling Stockholders
8. Plan of Distribution............................ Outside Front Cover Page;
Underwriting
9. Description of Securities to be Registered...... Outside Front Cover Page;
Prospectus Summary; Dividend
Policy; Description of Capital
Stock
10. Interests of Named Experts and Counsel.......... Legal Matters
11. Information with Respect to the Registrant...... Outside Front Cover Page;
Prospectus Summary; Risk
Factors; The Company; Use of
Proceeds; Dividend Policy;
Dilution; Capitalization;
Selected Financial Data; Pro
Forma Financial Data;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Management; Certain
Relationships and Related
Transactions; Principal and
Selling Stockholders; Shares
Eligible for Future Sale;
Description of Capital Stock;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................... Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 14 , 1996
4,300,000 SHARES
[MUZAK LOGO]
COMMON STOCK
-----------
Of the 4,300,000 shares offered hereby, 3,941,577 shares will be sold by
Muzak, Inc. (the "Company") and 358,423 shares will be sold by Comcast Sound
Communications, Inc. or its affiliates ("Comcast"). The Company will not
receive any of the proceeds from the sale of shares by Comcast. See "Principal
and Selling Stockholders."
Prior to this offering (the "Offering"), there has been no public market for
the Company's Common Stock. It is currently anticipated that the initial public
offering price will be between $ and $ per share. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price.
Application will be made for listing of the Common Stock on the Nasdaq Stock
Market's National Market under the symbol "MUZK."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS FOR INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting Proceeds to
Discounts and Proceeds to Selling
Price to Public Commissions(1) Company(2) Stockholders
- - - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
- - - --------------------------------------------------------------------------------
Total.................. $ $ $ $
- - - --------------------------------------------------------------------------------
Total Assuming Full Ex-
ercise of Over-
Allotment Option(3)... $ $ $ $
</TABLE>
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- - - --------------------------------------------------------------------------------
(1) See "Underwriting."
(2) Before deducting expenses estimated at $ , which are payable by the
Company.
(3) Assuming exercise in full of the 30-day option granted by MLP Holdings L.P.
("MLP") to the Underwriters to purchase up to 645,000 additional shares, on
the same terms, solely to cover over-allotments. See "Underwriting." The
Company will not receive any of the proceeds from the sale of these shares.
-----------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part. It is expected
that delivery of the Common Stock will be made in New York City on or about
, 1996.
-----------
PAINEWEBBER INCORPORATED MONTGOMERY SECURITIES
-----------
The date of this Prospectus is , 1996.
<PAGE>
[GRAPHICS TO BE SUPPLIED]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, information in this
Prospectus assumes that the Underwriters' over-allotment option will not be
exercised. In addition, unless the context otherwise requires, information in
this Prospectus has been adjusted to give effect to the reorganization of Muzak
Limited Partnership, a Delaware limited partnership (the "Partnership"), into
Muzak Services, Inc. ("Muzak Services"), a Delaware corporation and a wholly-
owned subsidiary of Muzak, Inc., which will be consummated immediately prior to
the consummation of the Offering, and all references to the "Company" include
Muzak, Inc., Muzak Services and all other consolidated subsidiaries of Muzak,
Inc., as the successor to the Partnership. See "The Recapitalization."
Investors should carefully consider the information set forth under the heading
"Risk Factors" beginning on page 9 of this Prospectus.
THE COMPANY
The Company is the leading provider of business music in the United States.
The Company and its franchisees serve approximately 178,000 customer locations
in the United States, representing a market share of over 50% of the estimated
number of domestic locations currently served by business music providers and
approximately twice the estimated number of locations served by its nearest
competitor. Its customers, most of which are under long-term contracts, include
Taco Bell, McDonald's and Boston Market restaurants and Nordstrom, Crate &
Barrel, Kroger, Staples, Hallmark and Wal-Mart retail stores, as well as a
large number of local and regional accounts. Through a network of distributors,
the Company also provides business music to subscribers outside the United
States. The Company estimates that its business music is heard by more than 80
million listeners each day in the United States and abroad.
The Company also offers its customers a range of non-music services,
including broadcast data delivery, video, audio marketing and in-store
advertising services, and sells, installs and services related equipment. The
ability to deliver a package of music and non-music services over a common
transmission system has been a critical factor in enabling the Company to
generate incremental revenues from its customers at little or no additional
cost, gain new customers and protect existing customers from competitive
business music providers that do not offer such a broad array of services.
To achieve continued growth, the Company plans to exploit its well-
established Muzak(R) brand name and customer base, its extensive sales and
service network, new delivery technologies (including high-powered direct
broadcast satellite transmission and the Internet) and an expanded array of
music and non-music services. The Company's strategy includes the following key
elements: (i) increasing domestic market penetration by expanding its local and
national account sales force, offering a wider choice of music formats and
marketing additional services; (ii) pursuing strategic alliances, acquisitions
and joint ventures, such as the Company's recent alliance with EchoStar
Satellite Corporation ("EchoStar") and its 1994 acquisition of the assets of
Comcast, then the Company's largest franchisee; (iii) exploiting new market
opportunities, including the residential market through the alliance with
EchoStar, and the use of the Internet; (iv) expanding in foreign markets,
primarily through strategic alliances and joint ventures, such as Muzak Europe
B.V. ("Muzak Europe"), a joint venture formed in 1995 between the Company and
Alcas Holdings B.V. ("Alcas"); and (v) enhancing operating margins and reducing
capital requirements through continued centralization of operations and the
utilization of less costly transmission technologies.
The Company markets business music in a variety of formats, including its
proprietary Environmental Music(R) (or "background" music) and numerous
"foreground" music formats. Internal and independent studies have indicated
that properly programmed music can have a favorable impact on listeners in
business and retail environments. Environmental Music(R), which is principally
comprised of instrumental versions of popular songs that have been adapted and
rerecorded by the Company, is generally used in business offices and
manufacturing
3
<PAGE>
facilities to improve employee concentration and reduce stress. Foreground
music, consisting principally of original artist recordings, is most commonly
used in public areas, such as restaurants and retail establishments, primarily
as a sales enhancement tool. The Company currently programs over 100 different
music formats, ranging from top-of-the-charts hits to contemporary jazz,
country music and classical music, of which 30 are distributed by broadcast
media (principally direct broadcast satellite ("DBS") transmission) and the
balance are supplied to subscribers in the form of long-playing audio tapes.
The Company currently delivers its business music and other services to its
customers primarily through medium-powered DBS transmission, local radio
broadcast transmission and distribution of audio tapes. The Company believes
that its multiple delivery systems are a key feature of its marketing efforts
and enable it to effectively serve customers with either single or multiple
locations as well as those having varied music or service needs. The number of
domestic subscriber locations served by medium-powered DBS transmission has
grown from approximately 44,000 at the end of 1992 to approximately 113,000 at
March 31, 1996. In addition, as of March 31, 1996, 47,000 subscriber locations
were served by local broadcast technology and 18,000 were supplied with audio
tapes.
The Company's customers generally commit to a five-year subscription for
business music at rates varying between $35 and $75 per month per location,
depending on the type of service, and averaging approximately $45 per month in
revenue to the Company, net of applicable royalties and licensing fees. To
initiate its basic music service, the Company typically makes an investment per
subscriber location of approximately $950 for medium-powered DBS subscribers
and a substantially lower investment for local broadcast technology
subscribers. This investment includes sales costs and a standard package of
receiving and sound equipment. In addition, upon commencement of service, a new
business music subscriber typically reimburses the Company for the installation
costs of such equipment on its premises. For a subscription through a
franchisee, the franchisee receives the revenue, typically makes the initial
investment for new subscriber locations and owns the equipment, and pays
royalties to the Company.
In December 1995, the Company entered into a strategic alliance with
EchoStar, a provider of high-powered DBS television service, to furnish 30
channels of digital music programming, of which 27 channels have begun to be
distributed in stereo to EchoStar's residential subscribers, thus providing the
Company with access to the residential consumer market for the first time. The
launch of EchoStar's second high-powered satellite, currently anticipated for
late 1996, will give the Company the exclusive right to distribute
approximately 30 additional channels to business music subscribers. The Company
anticipates that its alliance with EchoStar will enable it to (i) attract
additional business music subscribers by offering an expanded array of DBS-
delivered music programming, (ii) deliver music services to residential
subscribers for the first time and (iii) deliver television programming, such
as CNN(R), MTV(R) and ESPN(R), to business music subscribers for whom
television is a desired additional service. In addition, the EchoStar alliance
provides the Company with high-powered DBS transmission capability to
supplement its existing medium-powered DBS system, reduced equipment
installation costs and an opportunity to shift certain equipment costs to the
subscriber.
The Company has developed and begun testing its Internet MusicServer(TM)
service, which permits real-time delivery of recorded music to selected sites
on the World Wide Web. The MusicServer(TM) permits a music retailer to offer
its customers access to digitized 30-second samples from the Company's library
of recorded music. This service, which permits the consumer to preview
recordings being offered for sale by the retailer, currently is being provided
to CDNow!, one of the nation's largest on-line retailers of compact discs and
audio cassettes. The Company is evaluating a separate service, to be known as
SiteSound(TM), that would provide real-time delivery of a continuous stream of
recorded music for use on customers' sites on the World Wide Web.
The Company believes that, together with its franchisees, it has the largest
network of customer sales and service offices among business music providers in
the United States. The Company has 35 domestic sales offices, covering
approximately 40% of the potential market for business music in the United
States and seven of the top ten U.S. markets (the greater metropolitan areas of
New York, Los Angeles, Chicago, San Francisco, Boston,
4
<PAGE>
Dallas and Detroit), based on the number of business locations. In addition,
the Company has 84 franchisees, whose sales territories cover the remaining 60%
of the potential market for business music in the United States, and 21
international distributors in 16 foreign countries.
1993 census data indicate that there are approximately 6.4 million business
locations in the United States, including approximately 1.1 million retail
outlets and 450,000 restaurant and other food service locations. Of the total
6.4 million business locations, only about 5% are currently believed by the
Company to subscribe to a business music service. The Company believes that
demand for business music services will grow, as awareness of the potential
benefits of business music increases and as new, less costly transmission
technologies enable business music providers, including the Company, to supply
businesses with a broader range of music formats and other services.
THE RECAPITALIZATION
The Offering is part of a recapitalization (the "Recapitalization") that is
designed to strengthen the Company's capital position, reduce its total
indebtedness and debt service costs and provide it with greater operating and
financial flexibility. The Recapitalization includes the conversion of the
Company's business from a limited partnership to a corporation (the
"Incorporation") through:
(i) the issuance of approximately 6,737,856 shares of Common Stock of
Muzak, Inc. in exchange for 15,707,080 units in the Partnership,
representing approximately 80.3% of the total equity interest in the
Partnership;
(ii) the retirement of the remaining 3,863,186 units in the Partnership
held by certain lenders, representing approximately 19.7% of the total
equity interest in the Partnership, and the creation of payment obligations
to the holders of such interests in the aggregate of approximately $23.1
million;
(iii) the conversion of a non-participating but accreting preferred
interest in the Partnership into a six-year 7% subordinated note in the
principal amount of approximately $10.3 million; and
(iv) the conversion of options to purchase an aggregate of 1,834,545
units in the Partnership to options to purchase an aggregate of 786,963
shares of Common Stock of Muzak, Inc. pursuant to the Company's Replacement
Stock Option Plan (the "Replacement Option Plan"). See "Management--
Replacement Stock Option Plan."
All of the foregoing references to dollar amounts and numbers of shares are
based upon the initial public offering price in the Offering (the "IPO Price"),
which is assumed to be $15 per share.
In addition to the Incorporation and the Offering, the principal elements of
the Recapitalization include the following:
(i) the retirement, for cash, of approximately $31.1 million of
outstanding indebtedness, including approximately $12.5 million of
subordinated indebtedness having an effective interest rate of 14.5% per
annum and approximately $18.6 million of variable rate senior secured
indebtedness having an annual interest rate at March 31, 1996 of 8.9%;
(ii) the payment of approximately $23.1 million in obligations to former
holders of the 3,863,186 units in the Partnership retired pursuant to the
Incorporation; and
(iii) the anticipated refinancing of all remaining secured indebtedness,
aggregating approximately $30.8 million at March 31, 1996, with borrowings
under a new $50.0 million seven-year senior secured credit facility.
All elements of the Recapitalization, including the Offering, are conditioned
upon each other and will be consummated concurrently.
5
<PAGE>
The following table sets forth a summary of the sources and uses of funds
associated with the Recapitalization:
<TABLE>
<CAPTION>
AMOUNT
--------------
SOURCES: (IN THOUSANDS)
<S> <C>
The Offering.............................................. $ 59,124
Issuance of new 7% subordinated note due 2002............. 10,300
Borrowings under new credit facility...................... 30,832
--------
Total sources........................................... $100,256
========
<CAPTION>
USES:
<S> <C>
Retirement of interests in the Partnership................ $ 23,118
Retirement of non-participating preferred interest in the
Partnership.............................................. 10,300
Retirement of outstanding subordinated indebtedness....... 12,500
Retirement of a portion of outstanding senior secured in-
debtedness............................................... 18,617
Refinancing of remaining senior secured indebtedness...... 30,832
Offering expenses (including underwriting discounts and
commissions)............................................. 4,889
--------
Total uses.............................................. $100,256
========
</TABLE>
THE OFFERING
Common Stock to be Offered by the
Company.................................... 3,941,577 shares
Common Stock to be Offered by Comcast...... 358,423 shares
Common Stock to be Outstanding after the 10,679,433 shares
Offering(1)................................
Use of Proceeds............................ The Company's share of the
net proceeds from the Offer-
ing will be used to implement
the Recapitalization. See
"The Recapitalization" and
"Use of Proceeds."
Proposed Nasdaq National Market Symbol..... MUZK
- - - --------
(1) Excludes 786,963 shares of Common Stock reserved for issuance upon the
exercise of outstanding employee stock options which have an average
exercise price of $2.61 per share, none of which are exercisable as of the
date of this Prospectus. Also excludes options with respect to 250,000
shares of Common Stock reserved for issuance under the Company's 1996 Stock
Option Plan, none of which have been granted. See "Management--Replacement
Stock Option Plan" and "--1996 Stock Option Plan" and Note 11 of Notes to
the Company's Financial Statements.
6
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------- -------------------------------
PRO FORMA PRO FORMA
(AS ADJUSTED) (AS ADJUSTED)
1993 1994(1) 1995 1995(2)(3) 1995 1996 1996(2)(3)
-------- -------- -------- ------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Music and other
business services..... $36,800 $50,410 $52,489 $52,489 $12,941 $13,306 $13,306
Equipment and related
services.............. 21,741 33,006 34,392 34,392 8,265 7,634 7,634
-------- -------- -------- ------- ------- ------- -------
Total revenues....... 58,541 83,416 86,881 86,881 21,206 20,940 20,940
-------- -------- -------- ------- ------- ------- -------
Cost of revenues:
Music and other
business services..... 10,611 13,685 14,465 14,465 3,518 3,708 3,708
Equipment and related
services.............. 16,756 23,413 23,895 23,895 5,720 5,254 5,254
-------- -------- -------- ------- ------- ------- -------
Total cost of
revenues............ 27,367 37,098 38,360 38,360 9,238 8,962 8,962
-------- -------- -------- ------- ------- ------- -------
Gross profit............ 31,174 46,318 48,521 48,521 11,968 11,978 11,978
Selling, general and
administrative
expenses............... 19,603 28,699 28,496 28,496 7,410 7,526 7,526
Depreciation............ 4,349 8,211 9,382 9,382 2,303 2,537 2,537
Amortization............ 6,942 9,622 8,909 8,909 2,196 2,137 2,137
-------- -------- -------- ------- ------- ------- -------
Operating income
(loss)................. 280 (214) 1,734 1,734 59 (222) (222)
Interest expense........ 3,785 6,990 7,483 3,784 1,901 1,798 874
Other (income) expense,
net.................... (30) (21) (35) (35) (32) 122 122
-------- -------- -------- ------- ------- ------- -------
Net loss................ ($3,475) ($7,183) ($5,714) ($2,015) ($1,810) ($2,142) ($1,218)
======== ======== ======== ======= ======= ======= =======
Pro forma net loss
attributable to common
stockholders (4)(5).... ($6,371) ($2,015) ($2,314) ($1,218)
======== ======= ======= =======
Pro forma net loss
attributable to common
stockholders per share
(6).................... ($0.89) ($0.18) ($0.32) ($0.11)
======== ======= ======= =======
Pro forma weighted
average shares
outstanding (6)........ 7,128 11,069 7,128 11,069
======== ======= ======= =======
OTHER INFORMATION:
EBITDA(7).............. $11,571 $17,619 $20,025 $20,025 $ 4,558 $ 4,452 $ 4,452
======== ======== ======== ======= ======= ======= =======
Estimated Number of
Domestic Customer
Locations:
Company.............. 33,000 56,000 60,000 57,000 61,000
Franchisees.......... 116,000 103,000 111,000 105,000 117,000
-------- -------- -------- ------- -------
Total............... 149,000 159,000 171,000 162,000 178,000
======== ======== ======== ======= =======
Estimated Number of
Domestic DBS Customer
Locations:
Company.............. 12,000 29,000 35,000 30,000 36,000
Franchisees.......... 49,000 55,000 72,000 59,000 77,000
-------- -------- -------- ------- -------
Total............... 61,000 84,000 107,000 89,000 113,000
======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1996
--------------------------------------
PRO PRO FORMA
ACTUAL FORMA(2) (AS ADJUSTED)(2)(3)
------- -------- -------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................... $94,358 $94,358 $90,798
Total long-term obligations............ 50,517 60,717 31,074
Redeemable preferred partnership
interests............................. 15,993 -- --
Ownership equity....................... (1,058) (18,383) 30,818
</TABLE>
footnotes on following page
7
<PAGE>
footnotes to table on preceding page
- - - --------
(1) Includes the acquisition of Comcast as of January 31, 1994. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) Adjusted to reflect the Incorporation. See "The Recapitalization," Note 3
of Notes to the Company's Financial Statements and Unaudited Pro Forma
Financial Statements.
(3) Gives effect to the issuance of 3,941,577 shares of Common Stock being
offered by the Company and the use of proceeds from the Offering to (i) pay
the payment obligations created in the Incorporation, (ii) repay the
subordinated debt and a portion of the senior variable rate secured
indebtedness. The reduction in indebtedness has the effect of reducing pro
forma interest expense. See "The Recapitalization," "Use of Proceeds" and
Unaudited Pro Forma Financial Statements.
Effect has not been given to the borrowing under the new credit facility
that is expected to be put in place in connection with the Recapitalization
and repayments of indebtedness with the proceeds thereof, as no definitive
arrangements have been entered into with respect to that facility. Effect
will be given to these transactions in the Unaudited Pro Forma Financial
Statements when definitive arrangements have been entered into with respect
to the new credit facility.
In the quarter in which the Company completes the Recapitalization, the
Company will incur certain non-cash charges, including the write-off of
deferred financing fees of approximately $2.6 million, unamortized debt
discount of approximately $1.4 million and unamortized organizational costs
of approximately $600,000. The Company will also record a non-cash charge of
at least $1.9 million in the same quarter and additional charges of at least
$300,000 during the remainder of 1996, $800,000 during 1997, and $200,000
during 1998 under the Company's Replacement Option Plan. No effect has been
given to the non-recurring charges and charges under the Replacement Option
Plan in the pro forma adjustments for the year ended December 31, 1995 and
the three-month period ended March 31, 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--General" and
Unaudited Pro Forma Financial Statements.
In addition, the Company will record a deferred tax asset of approximately
$9.0 million upon completion of the Incorporation. The Company will provide
a 100% valuation allowance for this tax benefit, as it has generated
insufficient levels of taxable income.
(4) For all periods presented, the Company was a limited partnership for
federal and state income tax purposes and, accordingly, was not subject to
corporate income taxes. Pro forma net loss attributable to common
stockholders was computed as if the Company were subject to federal and
state taxes at an assumed combined effective tax rate of 40% for all
periods presented. The Company has not recognized any benefit from the net
operating losses and has provided a 100% valuation allowance for the tax
benefit, as it has generated insufficient levels of taxable income.
(5) Includes adjustments for the year ended December 31, 1995 and the three
months ended March 31, 1996 for the preferred return attributable to the
partnership interest which will be converted to a 7% subordinated long-term
note upon completion of the Incorporation.
(6) Pro forma net loss attributable to common stockholders per share and pro
forma weighted average shares outstanding for the period presented
calculated pursuant to the treasury stock method at an assumed IPO Price of
$15 per share. Stock options outstanding as of the end of the period
presented and issued prior to twelve months before the end of the period
presented have been excluded from the calculation as they are anti-
dilutive.
(7) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization expense. EBITDA does not represent cash flows
as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows are sufficient to fund all of the
Company's cash needs. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from operating activities or other
measures of liquidity determined in accordance with generally accepted
accounting principles.
8
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other information contained in this Prospectus, before
deciding whether to make an investment in the Common Stock offered hereby.
NET LOSSES FROM OPERATIONS; PROSPECTIVE NON-CASH CHARGES. The Company had
net losses from operations of approximately $3.5 million, $7.2 million and
$5.7 million for the years ended December 31, 1993, 1994 and 1995,
respectively, and $1.8 million and $2.1 million for the three-month periods
ended March 31, 1995 and 1996, respectively. The Company anticipates a net
loss from operations for the year ended December 31, 1996. There can be no
assurance that the Company will not continue to incur net losses from
operations. In the quarter in which the Recapitalization is completed, the
Company will recognize non-cash charges of at least $1.9 million in connection
with stock compensation arrangements and approximately $4.6 million relating
to write-offs of deferred financing fees, unamortized debt discount and
organizational costs. The Company will incur additional future non-cash
charges to earnings in connection with its stock compensation arrangements
that will adversely affect results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--General."
DEPENDENCE ON SATELLITE DELIVERY CAPABILITIES. There are a limited number of
satellites with orbital positions suitable for DBS transmission of the
Company's signals and a limited number of available transponders on those
satellites. The Company leases transponder capacity from Microspace
Communications Corporation ("Microspace"), which also provides facilities for
uplink of the Company's medium-powered DBS signals to the transponders.
Microspace, in turn, leases its transponder capacity on satellites operated by
third parties, including the Galaxy IV satellite operated by Hughes
Communications Galaxy Inc. ("Hughes") through which a majority of the
Company's DBS signals are transmitted. The term of the Company's principal
transponder lease with Microspace for the Galaxy IV satellite runs through the
life of that satellite (which is expected to continue through 2004). Although
there has never been sustained interruption of the Company's DBS signals due
to transponder failure or satellite unavailability, failure or loss, no
assurance can be given that any such event will not occur in the future. If
such an event were to occur or if Microspace were unable to provide
transponder services to the Company, the Company would have to seek
alternative transponder or satellite facilities. However, alternative
facilities may not be available on a timely or cost-effective basis or may be
available only on a satellite that is not positioned as favorably as the
Company's current satellites and may require a change in the frequency
currently used to transmit the Company's signal. Any one or more of these
events would require the Company to incur additional expenditures and could
degrade the Company's ability to serve its customer base and have a material
adverse effect on the Company's financial condition and results of operations.
If the Company is required to enter into new transponder lease agreements, no
assurance can be given that it will be able to do so on terms as favorable as
those in its current agreements with Microspace. See "Business--Business Music
Services."
DEPENDENCE ON ECHOSTAR AND ITS SATELLITES. In December 1995, the Company
entered into a strategic alliance with EchoStar, a high-powered DBS home
television service provider. Through this alliance, the Company is furnishing
EchoStar with 30 channels of digital music programming, of which 27 channels
have begun to be distributed in stereo to EchoStar's residential subscribers.
The Company has only recently begun providing services via EchoStar. There can
be no assurance that either EchoStar's business or the Company's alliance with
EchoStar will be successful. In addition, the Company's ability to expand its
music services on the EchoStar satellite system is subject to EchoStar's
ability to launch a second high-powered direct broadcast satellite by December
31, 1997, or, if a second satellite is not launched by that date, EchoStar's
willingness to allocate transponder capacity to the Company on EchoStar's
first satellite. Launch of the second EchoStar satellite is currently
scheduled for late 1996, but there can be no assurance that this launch will
be timely or successful. Any business failure of EchoStar, or breach by
EchoStar of its agreements with the Company, or any loss, failure or
malfunction of the EchoStar satellite system could impair the Company's
ability to serve customers through the EchoStar system. See "Business--
EchoStar Alliance."
9
<PAGE>
NEW SERVICES. The Company's operating strategy includes developing new
services and technologies to complement and expand its existing technologies
and services. This strategy presents risks inherent in assessing the value,
strengths and weaknesses of development opportunities, in evaluating the costs
and uncertain returns of new services and in integrating and managing new
technologies. Within these new markets, the Company will encounter technical,
financial and operating challenges, including competition from a variety of
sources. There can be no assurance that the Company will successfully develop
new services or that any new service will achieve market acceptance and
generate additional revenues or earnings for the Company.
The Company has developed and begun testing its Internet MusicServer (TM)
service, which permits music retailers to offer their customers access to
digitized 30-second samples from recordings in the Company's library of
recorded songs. The Company is also separately evaluating its SiteSound (TM)
service, which would, if implemented, provide real-time delivery of a
continuous stream of recorded music to the Company's customers for use on
their sites on the World Wide Web. However, at present, the economic viability
of Internet-based technologies or the Company's Internet services cannot be
ascertained. The Company's Internet strategy is substantially dependent upon
the continued growth in the use of the Internet and the World Wide Web for
music sales and promotional applications and market acceptance of the
Company's Internet services. There can be no assurance that communication or
commerce over the Internet will become widespread, that extensive music-
related content and sales will be provided over the Internet or that the
Company's Internet services will achieve market acceptance or compete
effectively with other services. Accordingly, there can be no assurance that
the Company will generate significant revenues from its Internet services. See
"Business--Internet Services."
COMPETITION; TECHNOLOGICAL CHANGE. The Company competes in the business
music and business services markets with many competitors. In providing its
business services, such as broadcast data delivery, video, audio marketing and
in-store advertising services, the Company competes with numerous companies
using broadcast as well as other delivery systems to provide similar business
services. There are numerous methods by which programming, such as the
Company's business music, broadcast data delivery, video, audio marketing and
in-store advertising services, can be delivered by existing and future
competitors, including medium and high-powered DBS, wireless cable and fiber
optic cable and digital compression over existing telephone lines. Many
competitors or potential competitors with access to these delivery
technologies have substantially greater financial, technical, personnel and
other resources than the Company.
The communications, media and entertainment industries are undergoing
significant and rapid change, including strategic alliances and the
development of new services, delivery systems and interactive technologies.
Many other companies also offer DBS services and strategic alliances between
these companies and cable, telephone, media and other related businesses may
provide increased competition in the future using new systems and technologies
to deliver business music, business data and other similar services. In
addition, the recently enacted Telecommunications Act of 1996 may increase
competition in the markets in which the Company operates. No assurance can be
given that the Company will be able to compete successfully with existing or
potential new competitors using new delivery methods and technologies, or that
discoveries or improvements in the communications, media and entertainment
industries will not render obsolete some or all of the technologies or
delivery systems currently relied upon by the Company. See "Business--
Competition."
No assurance can be given that the Company will be able to compete
successfully with its existing or potential new competitors or maintain or
increase its current market share, that it will be able to use, or compete
effectively with competitors that adopt, new delivery methods and
technologies, or that discoveries or improvements in the communications, media
and entertainment industries will not render obsolete some or all of the
technologies or delivery systems currently relied upon by the Company.
DEPENDENCE ON LICENSED RIGHTS; RISK OF INCREASED FEES. The Company and other
business music providers license rights to rerecord and distribute music from
a variety of sources and pay royalties to songwriters and publishers through
contracts negotiated with performing rights societies such as the American
Society of Composers, Authors and Publishers ("ASCAP"), Broadcast Music, Inc.
("BMI") and the Society of European Stage Authors and Composers ("SESAC"). The
industry-wide agreement between business music providers (including the
Company) and ASCAP runs through 1999; agreements with BMI and SESAC have
expired and
10
<PAGE>
new agreements are being negotiated. In 1995, the fees paid by the Company to
ASCAP, BMI and SESAC were approximately $2.6 million, $946,000 and $7,000,
respectively. If the fees paid by the Company to these licensors increase, the
Company's operating margin could be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business--Music Licenses."
RESTRICTIONS ON DIVIDENDS. The Company has never paid any cash dividends on
its equity securities and does not intend to declare any cash dividends in the
foreseeable future. The Company's credit facilities currently prohibit the
payment of cash dividends. In addition, the Company is prohibited from paying
cash dividends on its equity securities until the Company's obligation with
respect to the Earn-Out Payments (as such term is defined in "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources") have been determined, and any obligations
arising therefrom (including any notes which may be issued in respect thereof)
have been satisfied. See "Dividend Policy."
RELIANCE ON KEY PERSONNEL. The Company is dependent on the continued
services of its senior management personnel. The loss of the services of
senior management personnel could have a material adverse effect upon the
Company. See "Management."
CONTROL BY EXISTING STOCKHOLDERS. Upon completion of the Offering, MLP and
its general partner, Centre Partners L.P. ("Centre Partners"), together with
management, will beneficially own approximately 57.2% of the Company's
outstanding Common Stock (51.2% if the Underwriters' overallotment option is
exercised in full). As a result, Centre Partners, together with management,
will be able to determine the outcome of most corporate actions requiring a
stockholder vote, including the election of directors. MLP, Centre Partners
and certain members of management, among others, are parties to a
stockholders' agreement pursuant to which they have agreed to vote all shares
beneficially owned by them in favor of the election of up to three directors
designated by MLP. It is expected that those designees will constitute half of
the Board of Directors of the Company. See "Certain Relationships and Related
Transactions" and "Principal and Selling Stockholders."
RISKS OF ADVERSE EFFECTS OF GOVERNMENT REGULATION. The Company is subject to
the regulatory authority of the United States government and the governments
of other countries in which it provides services to subscribers. The business
prospects of the Company could be adversely affected by the adoption of new
laws, policies or regulations that modify the present regulatory environment.
The Company currently provides music services in a few areas in the United
States through 928 to 960 megahertz radio broadcast frequencies, which are
transmission facilities licensed by the Federal Communications Commission
("FCC"). In connection with the Recapitalization, these FCC licenses, held by
an affiliate of the Partnership, will be transferred to a subsidiary of the
Company. Such transfer will require FCC approval, which approval may not be
obtained prior to completion of the Recapitalization. If for any reason the
Company were to lose these FCC licenses, it would incur the expense of
transferring up to 5,000 customer locations currently served over these
frequencies to different transmission systems. Additionally, the satellites on
which the Company transmits its DBS services in the United States are licensed
by the FCC. If the FCC authorizations for any of these satellites are revoked
or are not extended, the Company would be required to seek alternative
satellite facilities. Laws, regulations and policy, or changes therein, in
other countries could adversely affect the Company's existing services or
restrict the growth of the Company's business in these countries.
In addition, the transfer of shares of Common Stock may, in certain
circumstances, be subject to provisions of the Communications Act of 1934, as
amended, and rules and policies requiring prior FCC approval of the transfer
of control of radio broadcast and other licensees, restricting the percentage
of non-U.S. ownership of such licensees and establishing other licensee
qualifications. See "Business--Business Music Services--Distribution Systems"
and "--Government Regulation."
11
<PAGE>
ABSENCE OF PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to the Offering, there has been no public trading market for shares of the
Common Stock. There can be no assurance that an active trading market for the
Common Stock will develop or continue after the Offering. The IPO Price of the
Common Stock will be established by negotiation between the Company and the
representatives of the Underwriters. See "Underwriting." The market price of
the Common Stock may be highly volatile and could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or
its competitors, changes in financial estimates by securities analysts or
other events or factors. In addition, the financial markets have experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities of many companies in the communications
industry and that often have been unrelated to the operating performance of
these companies or have resulted from the failure of the operating results of
these companies to meet market expectations in a particular quarter. Broad
market fluctuations or any failure of the Company's operating results in a
particular quarter to meet market expectations may adversely affect the market
price of the Common Stock. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been instituted against such a company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's financial
condition and results of operations.
DILUTION. Purchasers of the Common Stock offered hereby will experience
immediate and substantial dilution in net tangible book value per share of
Common Stock from the IPO Price. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have outstanding an aggregate of 10,679,433 shares of Common
Stock. All the 4,300,000 shares sold in the Offering (plus an additional
645,000 shares if the over-allotment option granted to the Underwriters is
exercised in full) will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). Upon the expiration of lock-up agreements between each of the executive
officers, directors and existing stockholders and the Underwriters, 180 days
after the date of this Prospectus (or earlier upon the written consent of
PaineWebber Incorporated) 6,379,433 shares of Common Stock outstanding prior
to the Offering may be sold in the public market, subject to the limitations
and restrictions contained in Rule 144 under the Securities Act. None of these
shares will be eligible for resale in the public market pursuant to Rule 144,
as currently in effect, for two years after completion of the Offering. In
addition, options to purchase up to 786,963 shares of Common Stock will be
outstanding upon completion of the Offering and any shares of Common Stock
issuable upon the exercise of options will be eligible for sale either
pursuant to Rule 701 or such shares are registered on Form S-8 in the future.
Sales of substantial amounts of Common Stock, or the availability of
substantial amounts of Common Stock for future sale, could adversely affect
the prevailing market price of the Common Stock. Certain stockholders of the
Company have the right to require the Company to register their shares of
Common Stock under the Securities Act, and to include shares of Common Stock
in registrations proposed to be effected by the Company. Such stockholders
have agreed not to exercise their registration rights prior to 180 days from
the date of this Prospectus without the prior written consent of PaineWebber
Incorporated. See "Shares Eligible for Future Sale" and "Underwriting."
12
<PAGE>
THE COMPANY
The Company is the leading provider of business music in the United States.
The Company also offers its customers a range of non-music services, including
broadcast data delivery, video, audio marketing and in-store advertising
services, and sells, installs and services related equipment.
In September 1992, Centre Capital Investors L.P. ("CCI"), a private
investment partnership, of which Centre Partners is the general partner, and
the predecessor to MLP, and certain senior managers of the Company (the
"Management Investors"), acting through the Partnership, purchased
substantially all of the assets and business of the Company from a predecessor
entity (the "Predecessor") controlled by The Field Corporation ("Field") in a
leveraged buy-out transaction (the "1992 Acquisition").
The Company's business was founded in 1934 and, since September 1992, has
been conducted by the Partnership. The Company's principal executive offices
are located at 2901 Third Avenue, Suite 400, Seattle, Washington 98121, and
its telephone number is (206) 633-3000.
THE RECAPITALIZATION
The Offering is part of the Recapitalization that is designed to strengthen
the Company's capital position, reduce its total indebtedness and debt service
costs and provide it with greater operating and financial flexibility. The
Recapitalization will result in the conversion of the Company's business from
a limited partnership to a corporation (the "Incorporation") through:
(i) the issuance of approximately 6,737,856 shares of Common Stock of
Muzak, Inc. in exchange for 15,707,080 units in the Partnership,
representing approximately 80.3% of the total equity interest in the
Partnership;
(ii) the retirement of the remaining 3,863,186 units in the Partnership
held by certain lenders, representing approximately 19.7% of the total
equity interest in the Partnership and the creation of a payment obligation
to the holders of such interests in the aggregate of approximately $23.1
million;
(iii) the conversion of a non-participating but accreting preferred
interest in the Partnership into a six-year 7% subordinated note in the
principal amount of approximately $10.3 million; and
(iv) the conversion of options to purchase an aggregate of 1,834,545
units in the Partnership to options to purchase an aggregate of 786,963
shares of Common Stock of Muzak, Inc.
All of the foregoing references to dollar amounts and numbers of shares are
based upon an assumed IPO Price of $15 per share.
In addition to the Incorporation and the Offering, the principal elements of
the Recapitalization include the following:
(i) the retirement, for cash, of approximately $31.1 million of
outstanding indebtedness, including approximately $12.5 million of
subordinated indebtedness having an effective interest rate of 14.5% per
annum and approximately $18.6 million of variable rate senior secured
indebtedness having an annual interest rate at March 31, 1996 of 8.9%;
(ii) the payment of approximately $23.1 million in obligations to former
holders of the 3,863,186 units in the Partnership retired pursuant to the
Incorporation; and
(iii) the anticipated refinancing of all remaining secured indebtedness,
aggregating approximately $30.8 million at March 31, 1996, with borrowings
under a new $50.0 million seven-year senior secured credit facility.
13
<PAGE>
All elements of the Recapitalization, including the Offering, are
conditioned upon each other and will be consummated concurrently.
The following table sets forth a summary of the sources and uses of funds
associated with the Recapitalization:
<TABLE>
<CAPTION>
AMOUNT
------
SOURCES: (IN THOUSANDS)
<S> <C>
The Offering............................................. $ 59,124
Issuance of new 7% subordinated note due 2002............ 10,300
Borrowings under new credit facility..................... 30,832
--------
Total sources.......................................... $100,256
========
USES:
Retirement of interests in the Partnership............... $ 23,118
Retirement of non-participating preferred interest in the
Partnership............................................. 10,300
Retirement of outstanding subordinated indebtedness...... 12,500
Retirement of a portion of outstanding senior secured
indebtedness............................................ 18,617
Refinancing of remaining senior secured indebtedness..... 30,832
Offering expenses (including underwriting discounts and
commissions)............................................ 4,889
--------
Total uses............................................. $100,256
========
</TABLE>
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from its sale of shares in the Offering are
estimated to be approximately $54.2 million (based upon an assumed IPO Price
of $15 per share). The Company will not receive any proceeds from the sale of
Common Stock by selling stockholders, including any shares of Common Stock
sold upon the exercise of the Underwriters' over-allotment option.
Of such proceeds, approximately $23.1 million will be used to fund the
retirement of limited partnership interests representing approximately 19.7%
of the total equity interest in the Partnership prior to the Recapitalization,
approximately $12.5 million will be used to repay outstanding subordinated
indebtedness bearing interest at an effective rate of 14.5% per annum and due
in installments between September 2001 and September 2002 and the balance of
approximately $18.6 million will be used to repay a portion of outstanding
senior indebtedness payable in semi-annual installments through January 2001
and bearing interest at a variable rate (8.9% per annum at March 31, 1996).
See "The Recapitalization." The interests in the Partnership held by MLP,
certain of its affiliates, and the Management Investors are pledged to secure
the outstanding senior indebtedness. In the Recapitalization, the balance of
the Company's senior indebtedness will be repaid from other borrowings, these
partnership interests will be exchanged for Common Stock and the pledges will
be released. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Certain
Relationships and Related Transactions."
DIVIDEND POLICY
The Company intends to retain future earnings to finance its operations and
does not anticipate paying cash dividends in the foreseeable future. Payment
of cash dividends is restricted by covenants in the Company's credit facility
and subordinated debt instrument. In addition, the Company is prohibited from
paying any dividends or other distributions to the holders of its equity
securities until the Company's obligation with respect to the Earn-Out
Payments have been determined and any obligations arising therefrom (including
any notes issued to the Predecessor in respect of such payment) have been
satisfied. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
15
<PAGE>
DILUTION
After giving effect to the Incorporation, the pro forma net tangible book
value (total assets less deferred costs, intangible assets and total
liabilities) of the Company as of March 31, 1996 was a deficit of $53.9
million, or $8.00 per share. As used below, "net tangible book value per
share" represents the quotient obtained by dividing the pro forma net tangible
book value of the Company at March 31, 1996 by the total number of shares of
Common Stock that would have been outstanding at March 31, 1996 had the
Incorporation occurred on such date. After giving effect to the Offering and
the application of the estimated net proceeds to the Company (after deducting
underwriting discounts and commissions and estimated Offering expenses), the
net tangible book value of the Company at March 31, 1996 would have been a
deficit of $1.2 million, or $0.11 per share. This represents an immediate
increase in net tangible book value per share of $7.89 to existing holders of
Common Stock as a result of the Offering and an immediate dilution of net
tangible book value per share of $15.11 to new investors in the Offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price.................... $15.00
Pro forma net tangible book value before the Offering.. ($8.00)
Increase in pro forma net tangible book value attribut-
able
to new investors...................................... 7.89
------
Pro forma net tangible book value after the Offering..... (0.11)
------
Dilution in pro forma net tangible book value to new in-
vestors................................................. $15.11
======
</TABLE>
The following table sets forth, on a pro forma basis (after giving effect to
the Recapitalization) as of March 31, 1996, the total number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid by the existing stockholders and
by new investors (before deducting the estimated underwriting discounts and
commissions and Offering expenses payable by the Company). In the case of the
existing stockholders, the total consideration reflects consideration paid for
the partnership interests which were exchanged for Common Stock in the
Incorporation.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 6,379,433 59.7% $16,874,927 20.7% $ 2.65
New investors .......... 4,300,000 40.3 64,500,000 79.3 15.00
---------- ----- ----------- -----
Total................. 10,679,433 100.0% $81,374,927 100.0%
========== ===== =========== =====
</TABLE>
The foregoing tables exclude 786,963 shares of Common Stock reserved for
issuance upon the exercise of outstanding employee options which have an
average exercise price of $2.61 per share, none of which are exercisable as of
the date of this Prospectus. To the extent that such options are exercised,
there will be further dilution to new investors in the Offering. The foregoing
tables also exclude options with respect to 250,000 shares of Common Stock
reserved for issuance under the Company's 1996 Stock Option Plan, none of
which have been granted. To the extent such options are granted and exercised,
there will be further dilution to new investors in the Offering.
16
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company at March 31, 1996 and as adjusted to give pro forma effect to the
Recapitalization, including receipt and application by the Company of
estimated net proceeds of $54.2 million from the Offering (based upon an
assumed IPO Price of $15.00 per share). The information presented below should
be read in conjunction with the financial statements of the Company and the
historical and pro forma financial data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
----------------------
(IN THOUSANDS)
PRO FORMA
ACTUAL (AS ADJUSTED)
------- -------------
<S> <C> <C>
Short-term borrowings and current portion of long-term
debt................................................... $17,317 $17,317
------- -------
Long-term debt (excluding current portion):
Existing credit facility(1)........................... 32,519 13,902
New credit facility(1)................................ -- --
14.5% subordinated indebtedness (net of unamortized
discount of $1,474,000).............................. 11,026 --
7% subordinated note due 2002......................... -- 10,200
Other long-term debt.................................. 605 605
------- -------
Total long-term debt (excluding current portion).. 44,150 24,707
------- -------
Redeemable preferred partnership interests.............. 15,993 --
------- -------
Ownership equity (deficit):
Partners' capital..................................... (1,058) --
Stockholders' equity:
Preferred Stock, $0.01 par value; 10,000,000 shares
authorized; none issued
or outstanding..................................... -- --
Common Stock and additional paid in capital, $0.01
par value;
30,000,000 shares authorized; 10,679,433 shares
outstanding,
pro forma (as adjusted)(2)......................... -- 54,302
Accumulated deficit................................... -- (23,484)
------- -------
Total ownership equity................................ (1,058) 30,818
------- -------
Total short-term borrowings and capitalization.... $76,402 $72,842
======= =======
</TABLE>
- - - --------
(1) Effect has not been given to the borrowing under the long-term credit
facility that is expected to be put in place in connection with the
Recapitalization. See "The Recapitalization."
(2) Excludes 786,963 shares of Common Stock reserved for issuance upon the
exercise of outstanding employee options which have an average exercise
price of $2.61 per share, none of which are exercisable as of the date of
this Prospectus. Also excludes options with respect to 250,000 shares of
Common Stock reserved for issuance under the Company's 1996 Stock Option
Plan, none of which has been granted.
17
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain selected historical and pro forma
financial and operating data of the Company and the Predecessor as of the dates
and for the periods indicated. The following selected financial data are
qualified by reference to and should be read in conjunction with the financial
statements, related notes and other financial information included elsewhere in
this Prospectus as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The statements of operations data set
forth below for each of the three years in the period ended December 31, 1995
and the balance sheet data as of December 31, 1994, and 1995 are derived from
the financial statements of the Company audited by Deloitte & Touche LLP,
independent auditors, which are included elsewhere in this Prospectus.
The statements of operations data for the year ended December 31, 1991, the
eight-month period ended August 31, 1992 and the four-month period ended
December 31, 1992 and the balance sheet data as of December 31, 1991, August
31, 1992, and December 31, 1992 and 1993 are derived from audited financial
statements of the Predecessor and the Company, respectively, which are not
included herein.
The statements of operations data for the three-month periods ended March 31,
1995 and 1996 and the balance sheet data as of March 31, 1996 are derived from
unaudited financial statements of the Company that, in the opinion of
management, reflect all adjustments, which are of a normal recurring nature,
necessary to present fairly the information set forth therein. The results for
the three-month period ended March 31, 1996 are not necessarily indicative of
the results that may be expected for any other interim period or for the full
year.
The pro forma financial information is based on certain assumptions and
estimates that management believes are reasonable in the circumstances and does
not purport to be indicative of the results which actually would have been
attained had the above transactions occurred at the dates indicated or the
results which may be attained in the future.
18
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------------ ----------------------------------------------------------------------------------
THREE-MONTH PERIOD
EIGHT FOUR YEAR ENDED DECEMBER 31, ENDED MARCH 31,
YEAR MONTHS MONTHS ---------------------------------------- -------------------------------
ENDED ENDED ENDED PRO FORMA PRO FORMA
DEC. 31, AUG. 31, DEC. 31, (AS ADJUSTED) (AS ADJUSTED)
1991 1992 1992 1993 1994(1) 1995 1995(2)(3) 1995 1996 1996(2)(3)
-------- -------- -------- ------- ------- ------- ------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERA-
TIONS DATA:
Revenues:
Music and other
business servic-
es................. $36,689 $23,771 $12,039 $36,800 $50,410 $52,489 $52,489 $12,941 $13,306 $13,306
Equipment and re-
lated services..... 19,318 12,102 6,602 21,741 33,006 34,392 34,392 8,265 7,634 7,634
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues.... 56,007 35,873 18,641 58,541 83,416 86,881 86,881 21,206 20,940 20,940
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Music and other
business servic-
es................. 9,652 6,420 3,249 10,611 13,685 14,465 14,465 3,518 3,708 3,708
Equipment and re-
lated services..... 14,753 9,513 5,235 16,756 23,413 23,895 23,895 5,720 5,254 5,254
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of rev-
enues............ 24,405 15,933 8,484 27,367 37,098 38,360 38,360 9,238 8,962 8,962
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit......... 31,602 19,940 10,157 31,174 46,318 48,521 48,521 11,968 11,978 11,978
Selling, general and
administrative
expenses............ 19,009 14,230 5,846 19,603 28,699 28,496 28,496 7,410 7,526 7,526
Depreciation......... 8,187 3,990 1,349 4,349 8,211 9,382 9,382 2,303 2,537 2,537
Amortization ........ 6,936 5,005 2,259 6,942 9,622 8,909 8,909 2,196 2,137 2,137
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss).............. (2,530) (3,285) 703 280 (214) 1,734 1,734 59 (222) (222)
Interest expense..... 7,514 3,639 1,228 3,785 6,990 7,483 3,784 1,901 1,798 874
Other (income) ex-
pense, net.......... (539) (949) (57) (30) (21) (35) (35) (32) 122 122
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss before pro
forma income tax
benefit............. ($9,505) ($5,975) (468) (3,475) (7,183) (5,714) (2,015) (1,810) (2,142) (1,218)
======= =======
Pro forma income tax
benefit (4)......... 0 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- ------- -------
Pro forma net loss... ($468) ($3,475) ($7,183) (5,714) ($2,015) ($1,810) (2,142) ($1,218)
======= ======= ======= ======= ======= =======
Redeemable preferred
return (5).......... (657) (172)
------- -------
Pro forma net loss
attributable to com-
mon stockholders (6) ($6,371) ($2,015) ($2,314) ($1,218)
======= ======= ======= =======
Pro forma net loss
attributable to com-
mon stockholders per
share (6)........... ($0.89) ($0.18) ($0.32) ($0.11)
======= ======= ======= =======
Pro forma weighted
average shares out-
standing (6)........ 7,128 11,069 7,128 11,069
======= ======= ======= =======
OTHER INFORMATION:
EBITDA (7).......... $12,593 $5,710 $4,311 $11,571 $17,619 $20,025 $20,025 $ 4,558 $ 4,452 $ 4,452
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Estimated Number of
Domestic Customer
Locations:
Company........... 32,000 32,000 32,000 33,000 56,000 60,000 57,000 61,000
Franchisees....... 102,000 104,000 112,000 116,000 103,000 111,000 105,000 117,000
------- ------- ------- ------- ------- ------- ------- -------
Total........... 134,000 136,000 144,000 149,000 159,000 171,000 162,000 178,000
======= ======= ======= ======= ======= ======= ======= =======
Estimated Number of
Domestic DBS
Customer Locations:
Company........... 5,000 7,000 8,000 12,000 29,000 35,000 30,000 36,000
Franchisees....... 21,000 31,000 36,000 49,000 55,000 72,000 59,000 77,000
------- ------- ------- ------- ------- ------- ------- -------
Total........... 26,000 38,000 44,000 61,000 84,000 107,000 89,000 113,000
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
----------------- ---------------------------------------------------------------------------
AT DECEMBER 31, AS OF MARCH 31, 1996
AT AT AT ------------------------ -----------------------------------------
DEC. 31, AUG. 31, DEC. 31, PRO FORMA
1991 1992 1992 1993 1994 1995 ACTUAL PRO FORMA(2) (AS ADJUSTED)(2)(3)
-------- -------- -------- ------- -------- ------- ------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $62,939 $58,837 $66,598 $66,294 $103,092 $96,439 $94,358 $94,358 $90,798
Total long-term obliga-
tions.................. 39,111 37,889 36,218 35,022 56,833 53,005 50,517 60,717 31,074
Redeemable preferred in-
terests................ -- -- 8,188 8,760 14,693 15,722 15,993 -- --
Ownership equity........ 11,259 7,284 12,199 8,047 7,943 1,373 (1,058) (18,383) 30,818
</TABLE>
footnotes on following page
19
<PAGE>
footnotes to table on preceding page
- - - -------
(1) Includes the acquisition of Comcast as of January 31, 1994. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
(2) Adjusted to reflect the Incorporation. See "The Recapitalization," Note 3
of Notes to the Company's Financial Statements and Unaudited Pro Forma
Financial Statements.
(3) Gives effect to the issuance of 3,941,577 shares of Common Stock being
offered by the Company and the use of proceeds from the Offering to (i)
pay the payment obligations created in the Incorporation, (ii) repay the
subordinated debt and a portion of the senior variable rate secured
indebtedness. The reduction in indebtedness has the effect of reducing pro
forma interest expense. See "The Recapitalization," "Use of Proceeds" and
Unaudited Pro Forma Financial Statements.
Effect has not been given to the borrowing under the new credit facility
that is expected to be put in place in connection with the Recapitalization
and repayments of indebtedness with the proceeds thereof, as no definitive
arrangements have been entered into with respect to that facility. Effect
will be given to these transactions in the Unaudited Pro Forma Financial
Statements when definitive arrangements have been entered into with respect
to the new credit facility.
In the quarter in which the Company completes the Recapitalization, the
Company will incur certain non-cash charges, including the write-off of
deferred financing fees of approximately $2.6 million, unamortized debt
discount of approximately $1.4 million and unamortized organizational costs
of approximately $600,000. The Company will also record a non-cash charge of
at least $1.9 million in the same quarter and additional charges of at least
$300,000 during the remainder of 1996, $800,000 during 1997, and $200,000
during 1998 under the Company's Replacement Option Plan. No effect has been
given to the non-recurring charges and charges under the Replacement Option
Plan in the pro forma adjustments for the year ended December 31, 1995 and
the three-month period ended March 31, 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--General" and
Unaudited Pro Forma Financial Statements.
In addition, the Company will record a deferred tax asset of approximately
$9.0 million upon completion of the Incorporation. The Company will provide
a 100% valuation allowance for this tax benefit, as it has generated
insufficient levels of taxable income.
(4) For all periods presented, the Company was a limited partnership for
federal and state income tax purposes and, accordingly, was not subject to
corporate income taxes. Pro forma net loss was computed as if the Company
were subject to federal and state taxes at an assumed combined effective
tax rate of 40% for all periods presented. The Company has not recognized
any benefit from the net operating losses and has provided a 100%
valuation allowance for the tax benefit, as it has generated insufficient
levels of taxable income.
(5) Includes adjustments for the year ended December 31, 1995 and the three
months ended March 31, 1996 for the preferred return attributable to the
partnership interest which will be converted to a 7% subordinated long-
term note upon completion of the Incorporation.
(6) Pro forma net loss attributable to common stockholders per share and pro
forma weighted average shares outstanding for the period presented
calculated pursuant to the treasury stock method at an assumed IPO Price
of $15 per share. Stock options outstanding as of the end of the period
presented and issued prior to twelve months before the end of the period
presented have been excluded from the calculation as they are anti-
dilutive.
(7) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization expense. EBITDA does not represent cash
flows as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows are sufficient to fund all the
Company's cash needs. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from operating activities or other
measures of liquidity determined in accordance with generally accepted
accounting principles.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
For all periods presented, the Company operated as a limited partnership. As
such, the income tax effects of all earnings or losses of the Company were
passed directly to the partners and no provision for income taxes was
required. See "The Recapitalization."
In January 1994, the Partnership acquired the assets of its largest
franchisee, Comcast, for approximately $33 million (the "Comcast
Acquisition"). Operating results in 1994 include 11 months of Comcast
operations, while operating results in 1995 include a full year of Comcast
operations. The former Comcast operations represented approximately 25% of the
Company's revenues in 1995. Following the Comcast Acquisition, the Company
eliminated redundant administrative and field operations, resulting in an
annualized savings of approximately $1.8 million from the Comcast operations,
the majority of which was realized immediately.
The Company derives revenues from its business services and from the sale,
installation and servicing of customer premises equipment. The Company's
principal business services include broadcast music services, on-premise
tapes, on-premise music video, audio marketing and in-store advertising.
Business services represented approximately 60% of total revenues in 1995.
Equipment and related revenues accounted for the remaining 40% of 1995
revenues. A large majority of the Company's broadcast and on-premise tape
revenues are generated from subscribers who typically execute five-year
contracts at rates ranging from $35 to $75 per month. These subscription rates
typically include the provision of the Company's equipment for use at the
subscriber's location. Royalties received from franchisees and international
distributors are included in broadcast music revenues and represented
approximately 7.9% of total revenues in 1995. The Company's franchisees pay
royalties to the Company based generally on 10% to 11.5% of adjusted music
revenues, which are broadcast music revenues less licensing payments and bad
debt write-offs. In-store advertising revenues are generated from the sale of
advertising for delivery to certain subscribers. On-premise music video
revenues are derived from the sale of specialized on-premise music videos
targeted for certain segments of the market place. Audio marketing revenues
are generated primarily from the sale of customized audio messages for use
with "on-hold" telephone systems. The Company also provides other broadcast
business services, including AdParting(R), data delivery services, custom
business television and other music-related services.
Equipment revenues are derived from the sale or lease of audio system-
related products, principally sound systems and intercoms, to its business
music subscribers and other customers. The Company also sells electronic
equipment, principally DBS receivers and dishes as well as proprietary tape
playback equipment, audio and video equipment to its franchisees to support
their business music services. Installation, service and repair revenues
consist principally of revenues from the installation of sound systems and
other equipment that is not expressly part of a business music contract, such
as paging, security and drive-through systems. These revenues also include
revenue from the installation, service and repair of equipment installed under
a business music contract. Music contract installation revenues are deferred
and recognized over the term of the respective contracts.
Cost of revenues for business services consists primarily of broadcast,
delivery, manufacturing, licensing and research costs associated with
providing music and other business services to a subscriber or a franchisee.
Cost of revenues for equipment represents the purchase cost plus handling,
shipping and warranty expenses. Cost of revenues for installation, service and
repair consists primarily of service and repair labor and labor for
installation that is not associated with new business music subscribers.
Installation costs associated with new business music subscribers are
capitalized and charged to depreciation expense over ten years.
Selling, general and administrative expenses include salaries, benefits,
commissions, travel, marketing materials, training and occupancy costs
associated with staffing and operating local and national sales offices. Such
expenses also include personnel and other costs in connection with the
Company's headquarters functions.
21
<PAGE>
A significant portion of commissions and certain other selling costs are
capitalized on a successful-efforts basis and charged as amortization expense
over the average contract term of five years and, accordingly, are not
reflected in selling, general and administrative expenses. The Company
capitalized $1.3 million, $2.8 million and $3.2 million of such costs in 1993,
1994 and 1995, respectively.
The Company amortizes leasehold improvements over the shorter of the lease
term or five years and deferred costs and intangible assets over lives ranging
from two and one-half to ten years. These deferred costs and intangible assets
consist of the costs associated with subscriber contracts acquired from third
parties (typically amortized on an accelerated basis over eight years),
commissions and certain other sales related expenses (five years), the
acquisition and production costs of a music library (typically five years),
organizational expenses related to acquiring certain franchise operations
(five years) and capitalized financing costs (over life of the loans).
As part of the Recapitalization, the Company will adopt a performance-based
Replacement Option Plan that replaces an option plan implemented in connection
with the 1992 Acquisition. The options granted under the Replacement Option
Plan represent the same proportionate equity interest and carry equivalent
exercise prices as the options granted under the original plan, as adjusted
for the Incorporation and prior to the Offering. The Replacement Option Plan
will result in non-cash compensation expense being recorded and a significant
reduction in reported EBITDA and operating results in the future. The Company
has not been required to record non-cash compensation expense for the previous
management stock option plan because those options were not deemed
exercisable. Non-cash compensation expense will be determined with respect to
options under the Replacement Option Plan based on the difference between the
exercise price and the fair market value of the Common Stock and recognition
of the expense will begin when it is deemed that the options are, in the
judgment of management, likely to become exercisable. Such expense will be
recognized from that date to the date the options actually become exercisable
and will appear in the Company's Statement of Operations as part of operating
income (loss) on a separate line item entitled "Non-cash incentive
compensation expense."
The Replacement Option Plan provides for the granting of options to purchase
an aggregate of 786,963 shares of common stock at an average exercise price of
$2.61 per share, divided into three equal groups for vesting and exercise
purposes. One-half of the first group of options vests immediately upon the
effectiveness of the Registration Statement of which this Prospectus is a part
(the "Effective Date") and the remainder of the first group vests in equal
installments on the first and second anniversaries of the Effective Date. Once
vested, such options become exercisable upon the earlier of (i) such date that
the average reported daily sales price (the "Sales Price") of the Common Stock
for any 80 days during any one-year period subsequent to the respective
vesting dates (the "Performance Period"), is $14 per share or greater or (ii)
the period 30 days prior to the seventh anniversary of the Effective Date. The
second and third groups of options vest in equal 20% increments on the first
through the fifth anniversaries of the Effective Date. When vested, the second
group of options becomes exercisable only when the Sales Price is $21 per
share or greater for the Performance Period, and when vested, the third group
of options becomes exercisable when the Sales Price is $28 per share or
greater for the Performance Period. Upon the occurrence of certain change of
control events, each option granted is subject to accelerated vesting and may
become exercisable at lower Sales Price hurdles.
In connection with the first group of options, the Company will record non-
cash incentive compensation expense of at least $1.9 million in the quarter in
which the Recapitalization is completed and at least $300,000 during the
remainder of 1996, $800,000 during 1997 and $200,000 in 1998 (based upon an
assumed IPO Price of $15 per share and an average exercise price of $2.61 per
share). The Company will record additional non-cash incentive compensation
expense related to the second and third groups of options if the market price
of the Common Stock appreciates substantially enough and for a sufficient
period of time that management deems the exercisability of such options to be
likely.
In the quarter that the Company completes the Recapitalization, the Company
will incur certain other non-cash charges, including the write-off of deferred
financing fees of approximately $2.6 million, unamortized debt discount of
approximately $1.4 million and unamortized organizational costs of
approximately $600,000.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial information for the periods
presented and should be read in conjunction with the Company's Financial
Statements, including the Notes thereto, appearing elsewhere in this
Prospectus:
<TABLE>
<CAPTION>
THREE-MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, MARCH 31, PERCENTAGE CHANGE
------------------------- ---------------- --------------------------------
FIRST QUARTER
1996 VS.
1994 VS. 1995 VS. FIRST QUARTER
1993 1994 1995 1995 1996 1993 1994 1995
------- ------- ------- ------- ------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Business services:
Broadcast music........ $28,023 $39,519 $40,664 $10,119 $10,258 41.0 % 2.9 % 1.4 %
On-premise tapes....... 5,067 5,434 4,895 1,247 1,128 7.2 % (9.9)% (9.5)%
Other broadcast........ 950 1,227 1,403 333 357 29.2 % 14.3 % 7.2 %
On-premise music vid-
eo.................... 1,010 1,257 1,741 294 513 24.5 % 38.5 % 74.5 %
Audio marketing........ 769 1,615 2,027 451 567 110.0 % 25.5 % 25.7 %
In-store advertising... 306 814 913 337 175 166.0 % 12.2 % (48.1)%
Other.................. 675 544 846 160 308 (19.4)% 55.5 % 92.5 %
------- ------- ------- ------- -------
Total music and other
business services... 36,800 50,410 52,489 12,941 13,306 37.0 % 4.1 % 2.8 %
------- ------- ------- ------- -------
Equipment.............. 15,885 23,060 23,901 5,771 5,283 45.2 % 3.6 % (8.5)%
Installation, service
and
repair................ 5,856 9,946 10,491 2,494 2,351 69.8 % 5.5 % (5.7)%
------- ------- ------- ------- -------
Total equipment and
related services.... 21,741 33,006 34,392 8,265 7,634 51.8 % 4.2 % (7.6)%
------- ------- ------- ------- -------
Total revenues....... 58,541 83,416 86,881 21,206 20,940 42.5 % 4.2 % (1.3)%
Gross profit:
Business services...... 26,188 36,725 38,024 9,423 9,597 40.2 % 3.5 % 1.8 %
Equipment.............. 5,139 9,596 10,450 2,564 2,492 86.7 % 8.9 % (2.8)%
Installation, service
and
repair................ (153) (3) 47 (19) (111) * * *
------- ------- ------- ------- -------
Total gross profit... 31,174 46,318 48,521 11,968 11,978 48.6 % 4.8 % 0.1 %
Gross profit margin(1).. 53.3% 55.5% 55.8% 56.4% 57.2%
Selling, general and
administrative ex-
penses................. $19,603 $28,699 $28,496 $7,410 $7,526 46.4 % (0.7)% 1.6 %
S,G&A margin(2)......... 33.5% 34.4% 32.8% 34.9% 35.9%
EBITDA(3)............... $11,571 $17,619 $20,025 $4,558 $4,452 52.3 % 13.7 % (2.3)%
EBITDA margin(4)........ 19.8% 21.1% 23.0% 21.5% 21.3%
Net loss................ ($3,475) ($7,183) ($5,714) ($1,810) ($2,142) * * *
</TABLE>
- - - --------
* Not meaningful.
(1) Gross profit margin represents gross profit as a percentage of total
revenues.
(2) S,G&A margin represents selling, general and administrative expenses as a
percentage of total revenues.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization expense. EBITDA does not represent cash
flows as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows are sufficient to fund all the
Company's cash needs. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from operating activities or other
measures of liquidity determined in accordance with generally accepted
accounting principles.
(4) EBITDA margin represents EBITDA as a percentage of total revenues.
23
<PAGE>
THREE-MONTH PERIOD ENDED MARCH 31, 1996 COMPARED TO THREE-MONTH PERIOD ENDED
MARCH 31, 1995
Revenues. Total revenues decreased 1.3% from $21.2 million in the first
quarter of 1995 to $20.9 million in the first quarter of 1996 as a result of a
7.6% decrease in equipment and related services revenues that was partially
offset by a 2.8% increase in business services revenues. Equipment sales
decreased 8.5% as the Company maintained its focus on higher margin sales and
reduced its participation in lower margin competitively bid equipment sales
proposals. Starting in late 1995, the Company also began to deemphasize the
sale of equipment which is not integral to the Company's business services.
Installation, service and repair revenues decreased from the strong levels
generated in the 1995 period due to fewer installations of large equipment
jobs in the 1996 period. Broadcast music revenues grew 1.4% in the 1996 period
due to increased demand and the conversion of on-premise tape subscribers to
broadcast music services, which was offset in part by the cancellation of two
national broadcast accounts during the 1996 period. On-premise tape revenues
continued to decline principally due to the Company's conversion of many of
these customers to broadcast services. On-premise music video, audio marketing
and other broadcast services revenues continued to benefit from growing demand
for these services. In-store advertising revenues declined 48.1% due to sales
to a single customer in the first quarter of 1995 that did not continue into
the last three quarters of 1995 or the first quarter of 1996. Other business
services revenues increased as a result of an increase in reimbursable
satellite fee revenue and the one-time sale of proprietary software and other
rights to Muzak Europe.
Gross Profit. Total gross profit was essentially unchanged, while the gross
profit margin increased from 56.4% in the first quarter of 1995 to 57.2% in
the first quarter of 1996. This improvement was principally due to an
improvement in equipment sales gross profit margin from 44.4% in the 1995
period to 47.2% in the 1996 period reflecting sales of higher margin
equipment. This improvement was partially offset by a 0.7% decline in the
business services gross profit margin primarily due to lower in-store
advertising and on-premise tape revenues and a decrease in on-premise music
video gross profit margin, combined with higher compensation, satellite and
licensing costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 1.6% from $7.4 million in the first quarter
of 1995 to $7.5 million in the first quarter of 1996 and increased as a
percentage of total revenues from 34.9% to 35.9%. Selling and marketing
expenses decreased 4.0% from $2.7 million in the 1995 period to $2.6 million
in the 1996 period. This decrease is attributable to a decrease in non-
capitalized selling costs and reduced consulting expenses incurred in the 1995
period primarily related to the development of specialized broadcast video
which was partially offset by higher expenses in connection with the addition
of 16 salespersons during the 1996 period. General and administrative expenses
increased 4.8% from $4.7 million in the 1995 period to $4.9 million in the
1996 period as a result of an increase in relocation expenses, consulting and
legal expenses related to the EchoStar alliance and the Internet
MusicServer(TM) project, communication costs related to the Internet
MusicServer(TM) project and national account rollouts, the continued
centralization of data and collection systems, higher personal property taxes
and increased bad debt expenses.
Depreciation Expense. Depreciation expense increased 10.2% from $2.3 million
in the first quarter of 1995 to $2.5 million in the first quarter of 1996 due
to an increase in fixed assets of $7.9 million primarily related to an
increased investment in equipment for business service customers, computer and
other equipment for video production and systems upgrade and development and
new service and delivery vehicles.
Amortization Expense. Amortization expense decreased 2.7% from $2.2 million
in the first quarter of 1995 to $2.1 million in the first quarter of 1996 as a
result of the final amortization in the 1995 period of the music purchased as
part of the 1992 Acquisition.
Interest Expense. Interest expense decreased 5.4% from $1.9 million in the
first quarter of 1995 to $1.8 million in the first quarter of 1996 principally
due to a $2.5 million paydown of the Company's term loan in July 1995 and a
$2.5 million paydown of the term loan in January 1996, and a reduction in the
effective weighted average interest rate under the term loan and revolving
credit facility from 11.2% for the 1995 period to 10.6% for the 1996 period.
24
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Total revenues increased 4.2% from $83.4 million in 1994 to $86.9
million in 1995 principally as a result of a 4.1% increase in business
services revenues and a 4.2% increase in equipment and related revenues.
Business services revenues increased due to an increase in the number of
broadcast music subscribers, offset partially by a reduction in the royalty
surcharges paid by franchisees for DBS services. Other business services
revenues, with the exception of on-premise tape sales, increased at more rapid
rates than broadcast music revenues due to the increased marketing of, and
increasing customer demand for, video, audio messaging, and AdParting(R)
services, among others. On-premise tape revenues declined due to the Company's
conversion of such customers to broadcast services, primarily DBS
transmission. Royalties and other fees from franchisees and international
distributors (included in broadcast music revenues) accounted for $6.9 million
or 7.9% of the Company's revenues in 1995, compared with $6.8 million or 8.2%
of the Company's revenues in 1994 due to growth in the number of customer
locations being served, partially offset by a planned reduction in DBS
surcharges. Equipment revenues increased 3.6% as a result of an increase in
leased equipment subscribers. Installation, service and repair revenues
increased 5.5% primarily related to large job revenue increases. In-store
advertising revenues increased 12.2%, principally due to sales to a single
customer in the first quarter of 1995, which did not continue into the last
three quarters of the year.
Gross Profit. Total gross profit increased 4.8% from $46.3 million in 1994
to $48.5 million in 1995. As a percentage of total revenues, gross profit
increased slightly from 55.5% in 1994 to 55.8% in 1995. The improvement in the
gross profit percentage in 1995 was due to growth in higher margin business
services, such as broadcast music, audio marketing and on-premise music video
services, and improved equipment margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 0.7% from $28.7 million in 1994 to $28.5
million in 1995. As a percentage of total revenues, selling, general and
administrative expenses declined from 34.4% in 1994 to 32.8% in 1995. Selling
and marketing expenses declined 5.1% from $11.3 million in 1994 to $10.7
million in 1995. This decline was primarily attributable to a reduction in
local sales offices' administrative and operating support personnel, reduced
costs of new product and service research, a decrease in promotional expenses
and lower sales award costs, offset somewhat by higher non-capitalized selling
costs. General and administrative costs increased 2.1% from $17.4 million in
1994 to $17.8 million in 1995, primarily due to relocation and expansion of
the headquarters office, additional personnel to support centralization of
local and national sales office services, higher bad debt expense and
consulting expenses for the Internet MusicServer(TM) and EchoStar projects.
These increased expenses were partially offset by a decrease in bonuses
accrued and expenses incurred in 1994 in connection with an unconsummated
financing.
Depreciation Expense. Depreciation expense increased 14.3% from $8.2 million
in 1994 to $9.4 million in 1995, principally as a result of an increased
investment in equipment installed at customers' premises due to an expanded
customer base, and twelve months of depreciation of the assets acquired in the
Comcast Acquisition in 1995 compared to eleven months in 1994.
Amortization Expense. Amortization expense decreased 7.4% from $9.6 million
in 1994 to $8.9 million in 1995. The decline in amortization expense was due
to the final amortization in early 1995 of music acquired in the 1992
Acquisition.
Interest Expense. Total interest expense increased 7.1% from $7.0 million in
1994 to $7.5 million in 1995. The increase in interest expense in 1995 as
compared to 1994 was the result of increased borrowing as well as an increase
in the effective weighted average interest rate under the term loan and
revolving credit facility from 10.0% in 1994 to 11.2% in 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues. Total revenues increased 42.5% from $58.5 million in 1993 to $83.4
million in 1994 primarily as a result of the Comcast Acquisition. Business
services revenues increased 37.0% from $36.8 million to $50.4 million from
1993 to 1994. Equipment revenues increased 45.2% as a result of the Comcast
Acquisition, resulting in higher sales of DBS equipment, sound system
equipment and leased drive-thru equipment. Installation, service and repair
revenues increased 69.8% from 1993 to 1994 also as a result of the Comcast
Acquisition. Video revenues increased 24.5% in 1994 as compared to 1993 due to
the acquisition of an on-
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premises music video operation as of February 28, 1994 that significantly
expanded the Company's base of video customers and its capability to service a
larger customer base. In-store advertising revenues increased 166.0% due to
increased efforts in marketing this service.
Gross Profit. Total gross profit increased 48.6% from $31.2 million in 1993
to $46.3 million in 1994 primarily as a result of the Comcast Acquisition. As
a percentage of total revenues, gross profit increased from 53.3% in 1993 to
55.5% in 1994. The improvement in the gross profit percentage in 1994 was
principally due to improved profit margins on equipment revenues and business
services revenues. The significant improvement in equipment profit margin from
32.4% in 1993 to 41.6% in 1994 was due to a greater proportion of higher
margin equipment lease revenues and more selective bidding of competitive
equipment contracts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 46.4% from $19.6 million in 1993 to $28.7
million in 1994. As a percentage of total revenues, selling, general and
administrative expenses increased from 33.5% in 1993 to 34.4% in 1994. Selling
and marketing expenses increased 44.7% from $7.8 million in 1993 to $11.3
million in 1994. This increase was attributable to the Comcast Acquisition,
and the acquisition of the video operation as well as an increase in research
and development. General and administrative expenses increased 47.6% from
$11.8 million in 1993 to $17.4 million in 1994, primarily due to the new
locations and facilities acquired from Comcast and legal expenses incurred in
connection with an unconsummated financing.
Depreciation Expense. Depreciation expense increased 88.8% from $4.3 million
in 1993 to $8.2 million in 1994. The significant increase in 1994 as compared
to 1993 is attributable to the acquisition of approximately $16.0 million in
tangible assets in the Comcast Acquisition.
Amortization Expense. Amortization expense increased 38.6% from $6.9 million
in 1993 to $9.6 million in 1994. The significant increase in 1994 as compared
to 1993 is attributable to the acquisition of approximately $14.0 million of
intangible assets related to the Comcast Acquisition.
Interest Expense. Total interest expense increased 84.7% from $3.8 million
in 1993 to $7.0 million in 1994 as a result of additional borrowings and an
effective weighted average interest rate under the term loan and revolving
credit facility of 10.0% in 1994 as compared to 9.1% in 1993. The additional
borrowings in 1994 were a result of the Comcast Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs have been primarily for capital expenditures,
business acquisitions, debt service and working capital. As of March 31, 1996,
the Company had a working capital deficit of $11.0 million compared with a
working capital deficit of $5.3 million as of March 31, 1995. The increase in
the deficit for this period was due principally to an increase in short-term
debt, utilized primarily to fund capital expenditures and repay term debt.
The Company's investing activities, excluding the Comcast Acquisition, have
historically included the purchase of on-premise customer equipment (such as
satellite dishes and receivers) and certain capitalized deferred costs related
to business acquisitions, obtaining customer contracts and creating master
recordings. Capital expenditures were $4.5 million in 1993, $9.5 million in
1994, $8.1 million in 1995, $1.8 million in the first quarter of 1995 and $2.6
million in the first quarter of 1996. Additions to deferred costs were $3.7
million in 1993, $4.3 million in 1994, $4.6 million in 1995, $1.2 million in
the first quarter of 1995 and $1.2 million in the first quarter of 1996. The
Company believes that its future investing activities will include strategic
acquisitions in addition to these capital expenditures and deferred customer
and music acquisition costs.
The Company's primary sources of liquidity have been cash flows from
operations and bank borrowings. Net cash provided by operating activities for
the first quarter of 1996 was $5.3 million as compared to $4.1 million for the
comparable 1995 period. This increase was due to an increase in cash from
operating assets and liabilities, primarily payables and accruals. Net cash
provided by operating activities for the year ended December 31, 1995 was
$14.2 million as compared to $15.7 million in 1994. Cash provided by the
Company's operations, adjusted for the effect of non-cash items, totaled $14.7
million in 1995, an increase of $2.3 million over the $12.4 million provided
in 1994, due primarily to a reduction in the Company's net loss through
improved operating performance. Net changes in the operating assets and
liabilities utilized cash of $500,000 in
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1995 as compared to providing cash of $3.3 million in 1994. The change in
operating assets and liabilities was primarily attributable to a reduction in
accounts payable and accrued expenses.
The Company has a term loan ($38.5 million outstanding as of March 31, 1996)
and a $13.0 million revolving credit facility ($11.0 million outstanding as of
March 31, 1996) provided by Union Bank of Switzerland, New York Branch ("UBS")
and other lenders. Substantially all of the Company's assets and the interests
in the Partnership held by MLP, certain of its affiliates and the Management
Investors are pledged as collateral under the UBS term loan and credit
facility. The revolving credit facility is available for, among other things,
ongoing working capital needs and letters of credit. This credit facility
terminates on January 15, 2001. Interest accrues on the outstanding principal
amounts of the term loan and the revolving credit facility at an interest rate
based on UBS's announced base rate plus 1.75% or LIBOR plus 3.00%. The Company
intends to repay the outstanding amounts under the UBS term loan and revolving
credit facility with the proceeds of the Recapitalization. See "The
Recapitalization" and "Use of Proceeds." As of March 31, 1996, aggregate
maturities of the Company's term loan were $3.0 million in 1996, $7.0 million
in 1997, $8.0 million in 1998, $8.0 million in 1999, $8.3 million in 2000 and
$4.2 million in 2001.
The Company has received a proposal for a new revolving and term credit
facility in connection with the Recapitalization that maintains the Company's
current borrowing capacity, reduces its principal payments over the next five
to seven years and is substantially less restrictive in terms of financial
covenants than the existing UBS credit facility.
In the Recapitalization, the Company will be converting a non-participating
but accreting preferred interest in the Partnership into a six-year 7%
subordinated note in the principal amount of approximately $10.3 million due
2002.
The Company leases certain facilities under both operating and capital
leases. Minimum lease payments for 1996 under noncancelable leases are $6.3
million.
The Company anticipates capital expenditures of between $8.0 and $8.5
million in 1996 and additions to deferred costs and intangible assets of
between $4.3 and $4.7 million in 1996. The level of capital expenditures and
additions to deferred costs and intangible assets are subject to a variety of
factors which may cause these expenditures to exceed the ranges set forth
above.
The Company believes that subsequent to the Offering, its cash flows from
operations and borrowing availability will be adequate to support currently
planned business operations, capital expenditures and debt service
requirements at least through December 31, 1996. If the Company engages in one
or more material acquisitions, joint ventures or alliances or other major
business initiatives requiring significant cash commitments, or incurs
unanticipated expenses, additional financing could be required.
The 1992 Acquisition of the business of the Predecessor by CCI and the
Management Investors provides for contingent earn-out payments ("Earn-Out
Payments") of between $5.0 million to $24.0 million to the Predecessor if
certain performance measures are achieved in the five years following the
transaction. The minimum performance requirement for the $5.0 million Earn-Out
Payment requires the Company to achieve a cumulative performance target (as
defined in the acquisition documents) over the five-year period ending August
31, 1997. The Company believes that the minimum performance target triggering
an Earn-Out Payment will not be reached.
The Washington State Department of Revenue has levied an assessment against
the Predecessor for $1.7 million in sales and use and business and occupation
taxes for the period from 1987 through September 1992. Under successor
liability statutes in the state of Washington, the Company could, if the
Predecessor fails to pay its tax obligation, become liable for the assessment.
The assessment is under appeal by the Predecessor. Under the terms of the 1992
Acquisition, the Company has the right of offset against any future payments
from the Company to the Predecessor if the Predecessor fails to pay its tax
obligation. The Company's management does not believe that this assessment
will have any adverse effect on the Company's financial condition or results
of operations.
INFLATION AND CHANGING PRICES
Management does not believe that inflation and other changing prices have
had a significant impact on the Company's operations.
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BUSINESS
GENERAL
The Company is the leading provider of business music in the United States.
The Company and its franchisees serve approximately 178,000 customer locations
in the United States, including retailers, restaurants, offices and
manufacturing facilities. Through a network of distributors, the Company also
provides business music to subscribers outside the United States. The Company
estimates that its business music is heard by more than 80 million listeners
each day throughout the United States and abroad. The Company also offers its
customers a range of non-music services, including broadcast data delivery,
video, audio marketing and in-store advertising services. The Company's
ability to offer a package of music and non-music services over a common
transmission system has been a critical factor in enabling it to generate
additional incremental revenues from its existing customers at little or no
additional cost, gain new customers and protect its existing customer base
from competing providers that do not offer such a broad array of services.
OPERATING STRATEGY
The Company believes its competitive strengths include (i) the widespread
recognition of the Muzak(R) brand name, (ii) the Company's nationwide sales
and service infrastructure, (iii) its substantial base of customers under
long-term contracts that generate a stable revenue stream, (iv) the quality
and variety of its music programming; and (v) its multiple delivery systems
and increasing use of new delivery technologies, such as high-powered DBS and
the Internet, which facilitate its ability to market and distribute an
expanded array of services.
The Company believes it has opportunities to achieve growth in revenues and
cash flow by:
. Increasing U.S. Market Penetration. The Company intends to increase its
penetration of the U.S. market by expanding its local and national
account sales force, offering more music formats (including up to 60
broadcast formats with the EchoStar alliance), the development of sales
strategies focused on underserved market segments and aggressive
marketing of the Company's services as part of a bundled package. These
services include, in addition to business music, data delivery, on-
premise music video and in-store advertising services, among others.
. Pursuing Strategic Alliances and Acquisitions. The Company intends to
pursue additional strategic alliances, acquisitions and joint ventures,
such as the 1995 alliance with EchoStar and the 1994 acquisition of
Comcast.
. Exploiting New Market Opportunities. With the commencement of its
alliance with EchoStar, the Company has begun to generate revenues from
the residential marketplace. The Company has also developed and is
currently testing its proprietary MusicServer (TM), which permits real-
time delivery over the Internet of digitized song samples to music
retailers (such as CDNow!) that require access to a large library of
recorded music.
. Expanding in International Markets. The Company plans to continue its
expansion in Europe through Muzak Europe. This joint venture couples the
Company's broadcast technology skills with Alcas's market knowledge and
marketing expertise. The Company also plans to expand into Latin America
and Asia by establishing similar strategic relationships in those
markets.
. Enhancing Operating Margins. The Company seeks to enhance operating
margins through continued centralization of operations and leveraging
fixed expenses over a wider customer base. The Company strives to
exploit less costly transmission technologies and to reduce the capital
required to initiate service to a customer.
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BUSINESS MUSIC SERVICES
MUSIC FORMATS
The Company conducts on-going research into the effects of music on human
behavior. This research has shown that certain types of music may reduce
employee stress and improve worker performance by counteracting the fatigue
cycles that affect workers, particularly those involved in repetitive work.
This research also has shown that, in retail environments, certain types of
music may induce consumers to purchase more and may help the retailer in its
efforts to project a particular image of a store. The Company uses its
research to create proprietary music program formats that will have a
favorable impact on listeners. In addition, the Company's sales staff uses the
results of its research to explain to prospective subscribers the benefits of
business music and to assist each subscriber in choosing a music format which
will further the subscriber's desired business goal. These music formats cover
a wide range of musical tastes.
The Company's best-selling format, Environmental Music(R), is a unique blend
of completely instrumental music that is distributed to subscribers via DBS
transmission and local broadcast technology. Environmental Music(R) is
principally comprised of instrumental versions of popular songs that have been
adapted and rerecorded by the Company ("covers"), instrumentals that have been
composed and recorded exclusively for inclusion in the Environmental Music(R)
program ("originals"), and some commercially available instrumental
recordings, and is generally used in business offices and manufacturing
facilities to improve employee concentration and reduce stress. The
Environmental Music(R) library consists of over 50,000 recordings owned by the
Company, of which approximately 5,000 are actively used at any given time. The
library includes the instrumental recordings of titles made popular by a wide
variety of artists and composers, ranging from George Gershwin to Elvis
Presley, Boyz II Men and Toad the Wet Sprocket. The Company spends
approximately $500,000 annually to update the library and adds approximately
1,000 new selections each year. In 1993, in order to improve the quality of
its active Environmental Music(R) library, the Company digitally remastered
all of its recordings on compact discs.
Foreground music, consisting principally of original artist recordings, is
most commonly used in public areas, such as restaurants and retail
establishments, primarily as a sales enhancement tool. The Company's most
popular foreground music product, FM-1(R), features moderate tempo, original
artist recordings of familiar adult contemporary favorites. Like Environmental
Music(R), FM-1(R) has been developed for distribution to subscribers via DBS
transmission and local broadcast technology. With its broad appeal, FM-1(R) is
second to the Environmental Music(R) channel in the total number of subscriber
locations served and is the Company's most widely-used format in the
restaurant and retail markets. FM-1(R) features a broad range of popular
artists from the last 30 years, with an emphasis on current popular music. FM-
1(R) artists include Sting, Celine Dion, Elton John and Bonnie Raitt, among
others.
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In addition to FM-1(R), foreground music formats developed by the Company for
DBS or local broadcast transmission include:
HITLINE(R) ADULT CONTEMPORARY
An up-to-the-minute mix of top chart A more consumer-oriented version of
hits. FM-1(R) with higher repetition of
current hits.
COUNTRY CURRENTS(R)
An upbeat mix of current and recent ADULT ALTERNATIVE
country music hits. An eclectic mix of artists and
styles with a progressive edge.
JUKEBOX GOLD(R)
Rock 'n' roll hits of the '50s, '60s NON-STOP HIP HOP
and early '70s. The hottest new music from the
streets.
'70S SONGBOOK(SM)
A mix of familiar hits spanning the POWERROCK
late '60s to early '80s. Hard-edged hits and heavy metal
album tracks.
URBAN BEAT(SM)
The best of contemporary urban hits THE EDGE
from today's hottest artists. A mix of top hits and album tracks
from the college and alternative
music charts.
CONTEMPORARY JAZZ FLAVORS(SM)
Today's light contemporary jazz,
mainstream jazz and soft vocals. CLASSIC ROCK
A non-stop collection of the best
rock "n' roll tunes of all time.
LIGHT CLASSICAL
An artful blend of chamber and small
orchestral pieces from the Baroque NEW COUNTRY
and Romantic periods. An upbeat mix of top chart hits from
today's country superstars.
EXPRESSIONS(R)
Light hits from yesterday and today COUNTRY CLASSICS
plus instrumental versions of hit A blend of classic Country hits from
songs, easy jazz and acoustic music. the 1950s', '60s and '70s.
CONTEMPORARY INSTRUMENTALS CONCERT CLASSICS
Smart contemporary instrumentals for The most renowned classical
businesses where vocals are symphonies.
inappropriate.
JAZZ TRADITIONS
HOT FM(SM) The more traditional, acoustic side
The upbeat side of current Adult of the jazz genre.
Contemporary music.
BIG BAND ERA
EUROSTYLE(SM) A blend of the best known standards
Dance and Top 40 tracks hot off the and hits from vocalists and
European music charts. instrumental artists from the 30's,
40's, and 50's.
LATIN STYLES
A smooth blend of today's Spanish- EASY INSTRUMENTALS
language hits and Salsa rhythms. A mix of lush and soothing
instrumental favorites.
FIESTA MEXICANA(SM)
An upbeat blend of Mexican regional CONTEMPORARY CHRISTIAN
styles including Mariachi, Nortena The very best from the top artists
and Tejano. of contemporary Christian popular
music.
HOLIDAY
From November 1st through December KIDZONE
31st the Holiday Channel features a A bright, upbeat mix of sing alongs,
blend of traditional and folk songs, soundtracks and pop hits
contemporary holiday music. targeted to kids ages 3-10.
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The Company has also developed approximately 80 different tape-based formats
of foreground music targeted to the specialized business needs of subscribers
with more focused customer demographics. Among the formats offered are
contemporary jazz, chamber music, reggae, hard rock, German music, Chinese
music and seasonal (holiday) music. These music programs are distributed to
subscribers in the form of long-playing audio tapes that are replayed by the
subscriber on its own premises using specially-designed equipment that has
been installed by the Company. Subscribers typically receive an initial tape
library of approximately 40 hours of music programming and are allowed
unlimited exchanges of tapes during their first 30 days of service, thereby
enabling them to fine-tune their format selections to their individual
preferences and requirements. New tapes are generally sent to subscribers on a
fixed schedule (30, 60 or 90 days), as selected by the subscriber, although
subscribers can elect unlimited exchange privileges. In all cases, subscribers
are required to return old tapes upon receipt of new tapes, and pricing varies
with the frequency of exchange. As of March 31, 1996, the Company and its
franchisees had approximately 18,000 subscribers for taped-based services.
DISTRIBUTION SYSTEMS
The Company's Environmental Music(R) and FM-1(R) programs are distributed to
subscribers either through the Company's medium-powered DBS system or by local
broadcast technology. The Company also uses its medium-powered DBS system to
distribute these programs to its franchisees for local broadcasting to the
franchisees' subscribers. At March 31, 1996, approximately 113,000 subscriber
locations were served by its medium-powered DBS transmission and approximately
47,000 locations were served by local broadcast technology. In addition, at
that date, on-premise tape programs were being distributed to approximately
18,000 subscriber locations.
Satellite transmission has become the Company's primary delivery medium for
its business music programs and most of its newest program formats are
generally available only via satellite. The Company's proprietary Music
Plus(R) service permits its medium-powered DBS subscribers to choose the
traditional Environmental Music(R) and FM-1(R) formats as well as up to
fourteen other foreground music formats from a single satellite transmission
signal. In addition, its proprietary DayParting(R) and WeekParting(R) services
enable a subscriber to arrange for automatic switching from one music format
to another on a predetermined schedule to adjust to changing customer
demographic patterns.
The Company leases substantially all of its transponder capacity from
Microspace, which also provides facilities for the uplink of the Company's
signals to Microspace's transponder. Microspace, in turn, leases its
transponder capacity on satellites operated by third parties, including the
Galaxy IV satellite operated by Hughes, on which a majority of the Company's
DBS signals are transmitted. The term of the Company's principal transponder
lease with Microspace for the Galaxy IV satellite runs through the life of
that satellite (which is expected to continue through 2004). Microspace may
terminate its agreements with the Company if the Company materially breaches
its obligations thereunder or if any governmental restriction results in a
sustained interruption of the Company's performance thereunder. Microspace
also is entitled to terminate its agreements with the Company immediately upon
termination of its underlying agreement with Hughes. See "Risk Factors--
Dependence on Satellite Delivery Capabilities."
The Company has begun offering high-powered DBS transmission service through
the EchoStar satellite system, as more fully described below under "--EchoStar
Alliance." The Company's ability to expand its music services on the EchoStar
satellite system is subject to EchoStar's ability to launch a second high-
powered direct broadcast satellite by December 31, 1997, or, if a second
satellite is not launched by December 31, 1997, EchoStar's willingness to
allocate additional transponder capacity to the Company on EchoStar's first
satellite. See "Risk Factors--Dependence on EchoStar and its Satellites" and
"--EchoStar Alliance."
Local broadcast transmission is used by the Company and its franchisees to
distribute business music in localized metropolitan areas where the
concentration of subscriber locations is sufficiently large to justify the
cost. Local area FM broadcasting is primarily made via commercial FM radio
station subcarriers and requires the use of a separate subcarrier and on-
premises subscriber receiver for each program format being distributed.
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Accordingly, local broadcasting is not cost-effective for delivery of more
than two formats to a particular area and is generally limited to the
Company's most popular program formats, Environmental Music(R) and FM-1(R).
OTHER SERVICES
NON-MUSIC BROADCAST SERVICES
The Company offers a variety of non-music services to its medium-powered DBS
business music subscribers that complement its music services. These services
are generally "bundled" and marketed in conjunction with the Company's
business music services. As a result, these services serve to stimulate sales
of music services to new customers. In addition to providing incremental
revenue, these services enable the Company to maintain strong relationships
with its business music subscribers. These non-music services generally carry
higher margins, since they require low incremental costs and when the
associated revenue is shared by the Company and its franchisees, the Company
receives 50% or 60% of these revenues in lieu of royalty payments.
The Company currently offers the following non-music business services to
its medium-powered DBS subscribers:
. AdParting(R). AdParting(R) permits the subscriber to receive customized
audio messages ("spots") interspersed in its business music service and to
control the message content of the spot. This service is used by retailers
ranging from supermarkets and convenience stores, to fast food restaurants
and fashion retailers. At March 31, 1996, the Company was providing
AdParting(R) to approximately 12,000 subscriber locations.
. Broadcast Data Delivery. The Company's broadcast data delivery service
provides point-to-multipoint electronic mail as well as computer to
computer bulk data transfer. This service provides the subscriber with a
low cost alternative to two-way data transmission systems. For example,
fast food chains use this service to deliver software and other data
updates to in-store computers at their outlets, while wholesale grocery
distributors use it to provide price, inventory, product recall and
delivery information to their network retailers. At March 31, 1996, the
Company was providing broadcast data delivery services to approximately
5,200 subscriber locations.
. Custom Business Television. The Company takes advantage of the
availability of occasional use video transponder space to offer its
customers the opportunity to broadcast private customer-specific video
programming. At March 31, 1996, the Company was providing custom business
television services to approximately 600 subscriber locations.
ON-PREMISE MUSIC VIDEO--ZTV(R)
The Company programs, duplicates on videotape and sells its proprietary
ZTV(R) on-premise music video service to subscribers wishing to increase the
impact of music through video. The Company's on-premise video programs allow
subscribers to create an "MTV(R)-type" environment for their customers through
specially programmed, long-playing videotapes. The ZTV(R) taped music videos
are produced and shipped directly from the Company's production facilities to
more than 3,000 viewing locations. Subscribers currently using the ZTV(R)
service include Macy's, Bloomingdale's, Lord & Taylor, Filene's Basement,
Oshman's Sporting Goods and Rent-A-Center.
ZTV(R) offerings are available in the following categories, each consisting
of multiple long-playing programs that are supplied to subscribers on a 30, 60
or 90 day rotation:
. Music and Entertainment Programs. Programs produced for a variety of
retailing environments, such as department stores, specialty shops,
athletic footwear stores, children's apparel stores, sporting goods
stores, toy and hobby stores, drug stores and appliance stores. These
programs include licensed music video elements in addition to sports
clips, cartoon and fashion segments and other elements appropriate
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to the demographics of a particular customer or application. These
targeted programs are produced monthly and are supplied in four-hour
tapes.
. Music Video Programs. These are segued music video programs, representing
a style and tempo of music applicable to particular business environments,
and are produced monthly in two-hour and four-hour lengths.
. VeeJay Programs. These monthly programs are produced exclusively for
nightclubs and dance clubs and are furnished in one-hour lengths.
AUDIO MARKETING
The Company creates, produces and records spoken messages for use with "on-
hold" business telephone systems, AdParting(R) broadcasts and other forms of
in-store messaging and advertising.
IN-STORE ADVERTISING
The Company markets in-store "point of purchase" audio advertising and
merchandising services for transmission through its medium-powered DBS system.
The Company has established an industry-specific network (SuperLink(R)) of
grocery wholesalers and wholesaler-supplied retailers and sells time on the
network to advertisers seeking to deliver a message simultaneously to multiple
locations in the network.
ECHOSTAR ALLIANCE
Through its strategic alliance with EchoStar, the Company has begun providing
30 channels of digital music programming, of which 27 channels are being
distributed in stereo to EchoStar's residential customers, thus providing the
Company with access to the residential consumer market for the first time. The
launch of EchoStar's second high-powered satellite, currently anticipated for
late 1996, will give the Company the exclusive right to distribute
approximately 30 additional channels to business music subscribers. However,
there can be no assurance that the launch of the second satellite will be
successful or timely.
The music services offered through EchoStar contain much of the Company's
Music Plus(R) programming but are broadcast in digital stereo to appeal to
residential customers instead of the monophonic format used in the Company's
medium-powered DBS transmission system, which is more appropriate to business
music applications. The Company's Environmental Music(R) and FM-1(R) channels
are transmitted in the monophonic format over the EchoStar System to appeal to
business music subscribers.
The EchoStar alliance will allow the Company to expand the range of music
that can be made available to businesses. It also provides the Company with
access to a family of television programming services that the Company believes
can be sold in several critical market segments, such as the hospitality and
retailing markets. The availability of these television services is expected to
allow the Company to penetrate commercial market segments and reach new
customers that have traditionally been outside of its core subscriber base. The
Company believes that EchoStar's high-powered DBS delivery technology also
provides the Company with the opportunity to realize significant cost savings
in furnishing music services to business subscribers. EchoStar's receiving
equipment is smaller, lighter in weight, and simpler to install than the
Company's medium-powered DBS receiving equipment, and as DBS television service
increases in popularity, this equipment is expected to be mass manufactured and
marketed, thus reducing its cost. In addition, the EchoStar receiving equipment
generally is not proprietary and has uses and applications beyond commercial
business music. Accordingly, the Company believes that subscribers to business
music services through the EchoStar system may be more likely to purchase the
necessary receiving equipment rather than rely on Company-provided equipment,
as has generally been the case to date, thus permitting the Company to reduce
its per-subscriber capital investment with only a limited reduction in the
monthly subscription charge.
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The EchoStar alliance also provides the Company with a vehicle to expand
services into the residential marketplace as a content provider. EchoStar, as
part of its overall sales activities, will brand and market to its residential
customers 27 channels of music programming provided by the Company and
currently plans to package these channels as an automatic inclusion in the
majority of its service packages. The Company will receive a fee for every
residential subscriber who receives the EchoStar music services.
EchoStar has agreed that it will not (i) provide transponder space to, (ii)
enter into or maintain distributor agreements or relationships with, (iii)
enter into or maintain distributor agreements or relationships with or (iv)
enter into any agreements for the programming or delivery of any audio
services via DBS frequencies with, a specified group of the Company's
competitors. The Company has agreed it will not (i) secure transponder space
for, (ii) enter into or maintain distributor agreements or relationships with,
(iii) enter into or maintain distributor agreements or relationships with or
(iv) enter into any agreement for the programming or delivery of any of the
Company's services with any competitor of EchoStar via DBS frequencies or with
specified competitors of EchoStar via K-band frequencies.
The Company may terminate its agreements with EchoStar if EchoStar is unable
to launch its second satellite by December 31, 1997, unless EchoStar allocates
2.4 megahertz of transponder capacity on the EchoStar-I satellite for the
Company's exclusive use.
EchoStar may cancel the terms of the EchoStar agreements related to the
provision of residential music channels at any time. Upon such cancellation,
EchoStar is required to pay to the Company the depreciated book value of the
Company's capital investment in equipment to support residential music
channels and to continue to provide 2.4 megahertz of transponder capacity for
use by the Company. The Company and its franchisees also would be permitted to
continue to market and sell the video services carried on the EchoStar system.
The EchoStar alliance is still in its formative stage and there can be no
assurance that the benefits anticipated by the Company will be realized. See
"Risk Factors--Dependance on EchoStar and its Satellites."
INTERNET SERVICES
The Company has begun the development of certain Internet music services
under the umbrella of the "Enso Audio Imaging Division"
(http://www.muzak.com).
The Company is seeking to exploit recent software developments in real-time
delivery of audio via low-cost, high-speed modems to provide access to
digitized samples of recordings in its library to businesses having
informational or retailing sites on the Internet. The design of the Company's
Internet MusicServer(TM) service allows the Company to use a hardware and
software server system to supply services to many different Internet-based
retailers and thus provide music samples to many retailers more economically
than those retailers could provide themselves. The Company is currently
providing its MusicServer(TM) service to CDNow!, one of the nation's largest
on-line retailers of compact discs and audio cassettes. The MusicServer(TM)
service permits music retailers to offer their customers access to digitized
30-second samples from recordings in the Company's library of recorded music,
thus allowing consumers who visit the CDNow! Website the opportunity to listen
to recordings being considered for purchase.
In addition, the Company is separately evaluating its proprietary
SiteSound(TM) business music service that would provide real-time delivery of
a continuous stream of recorded music for use on customers' sites on the World
Wide Web.
The Company's Internet services are in trial and evaluation stages, and
there can be no assurance that these services will be economically viable or
generate significant revenue for the Company. See "Risk Factors--New
Services."
EQUIPMENT AND RELATED SERVICES
The Company sells or leases various audio system-related products,
principally sound systems and intercoms to its business music subscribers and
other customers. The Company also sells electronic equipment, principally DBS
receivers and dishes as well as proprietary tape playback equipment, to its
franchisees to support their business music services business. All the
equipment is manufactured by third parties, although some items
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bear the Muzak(R) brand name. Revenues from equipment and related services
accounted for 40% of the Company's revenues in 1995 and 36% of such revenues
during the first quarter of 1996.
The Company and its franchisees also sell, install and maintain non-music
related equipment, such as intercoms and paging systems, for use by their
business music subscribers and other customers. Although the maintenance of
program receiving equipment provided to business music subscribers is
typically included as part of the overall music subscription fee, installation
and maintenance of audio or other equipment not directly related to reception
of the Company's business music service is provided on a contractual or time-
and-materials basis. Labor rates and charges for installation and service vary
by location and are determined by the Company or its franchisee. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MARKETING
COMPANY SALES OFFICES
The Company has 35 domestic sales offices covering approximately 40% of the
potential market for business music in the United States and seven of the top
ten domestic markets (the greater metropolitan areas of New York, Los Angeles,
Chicago, San Francisco, Boston, Dallas and Detroit) based on the number of
business locations. These offices accounted for approximately 72% of the
Company's revenues in 1995 and approximately 71% of such revenues during the
first three months of 1996.
The following are the locations of the Company's local sales offices (major
offices are shown in boldface in order of market size):
NEW YORK, NY (LONG ISLAND CITY) SEATTLE/TACOMA, WA
Hicksville, NY Spokane, WA
LOS ANGELES, CA (BURBANK) MINNEAPOLIS, MN
Tustin, CA
DENVER, CO
CHICAGO, IL Colorado Springs, CO
Peoria, IL
Milwaukee, WI ORLANDO, FL
Moline, IL
Springfield, IL PORTLAND, OR
Medford, OR
SAN FRANCISCO, CA
Sacramento, CA SAN DIEGO, CA
San Jose, CA
INDIANAPOLIS, IN
BOSTON, MA Ft. Wayne, IN
Providence, RI
Exeter, NH HARTFORD, CT
DALLAS, TX CINCINNATI, OH
Tyler, TX Columbus, OH
DETROIT, MI BUFFALO, NY
SCRANTON, PA
Holidaysburg, PA
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FRANCHISEES
The Company has 84 domestic franchisees serving 138 separate territories.
The territories served by the largest franchisee covers approximately 5% of
the potential domestic market for business music (based on customer locations)
and the largest ten represent approximately 30% of the potential market.
The Company's relationships with its franchisees have been very stable.
Nearly 70% of its franchisees have been affiliated with the Company for over
20 years and, during the last ten years, the Company has terminated relations
with only one franchisee. Each franchisee has exclusive responsibility for
sales in its territory, except for sales to national accounts and sales of in-
store advertising services. All marketing literature, customer and training
videos and sales materials are designed and produced by the Company and made
available to its franchisees. The Company also conducts sales training for its
franchisees' sales personnel.
The Company currently has a standard form of franchise agreement in effect
for 132 of 138 of its franchised territories. The standard form of agreement
has a renewable ten-year term, and grants to the franchisee an exclusive
license to offer and sell specified business music services and certain non-
music broadcast services and to use certain of the Company's registered marks
within a defined territory. The agreement also prohibits franchisees from
marketing or selling competing products. The agreement includes provisions
relating to distribution of services via the Company's medium-powered DBS
system and via EchoStar, and establishes terms for the provision of services
to "national accounts" on a unified basis.
Under the standard form of agreement, franchisees pay the Company (i) a
monthly fee based on the number of business locations within the specified
territory, (ii) a monthly royalty equal to 10% of billings for broadcast
business music services (subject to certain deductions and adjustments) and
(iii) additional amounts for non-music broadcast services and on-premise tape
services. In addition, franchisees have paid a variable surcharge of billings
to customers for eight years following the commencement of medium-powered DBS
services in the franchisee's territory. As a result of their agreement to
participate in the delivery of services via the EchoStar satellite system,
franchisees also pay a surcharge of monthly recurring billings in
consideration of the Company's development and implementation of services for
delivery over the EchoStar satellite system. Franchisees are also responsible
for paying performing rights fees in connection with the provision of services
in their territories.
Revenues from the sale of other broadcast business services are shared
between the Company and its franchisees and the Company receives 50% or 60% of
these revenues in lieu of royalty payments. Franchisees generally pay a
monthly fee for use of various medium-powered DBS-delivered business music
services offered by the Company, such as Dayparting(R) and Weekparting(R).
NATIONAL SALES PROGRAM
The Company has established a national sales program to market its services
more effectively to subscribers with numerous locations in various
territories, including those served by franchisees, and to address the needs
of these subscribers for uniform service and centralized billing for all of
their locations. Subscribers with 50 or more locations operating in four or
more territories are deemed to be "national accounts." The national sales
program includes a committee of representatives of the Company and its
franchisees that oversees the pricing and other material terms for national
account subscriber contracts. The Company, through its Seattle headquarters,
coordinates the servicing of national accounts by its franchisees and
allocates revenues from national accounts among the participating franchisees.
The national sales office is comprised of 10 salespeople and is supported by
additional customer service personnel. At March 31, 1996, the Company and its
franchisees had national accounts representing over 65,000 subscriber
locations (of which approximately 40,000 were franchisee subscriber
locations), including those of Taco Bell, McDonald's, Burger King, Bob Evans,
Boston Markets, Crate & Barrel, Kroger, Staples, Hallmark and Wal-Mart.
INTERNATIONAL SALES
The Company has agreements with 16 international distributors and
franchisees in 11 countries outside the United States, including Canada,
Mexico, Japan, Argentina and Australia. These distributors and franchisees
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either pay royalties to the Company based on their sales of business music
services or a flat fee based on the number of subscribers they serve.
Royalties and other fees from international sales accounted for approximately
2% of the Company's revenues in 1995.
In addition, in August 1995, the Company formed the Muzak Europe joint
venture with Alcas to more aggressively market the Company's services in
Europe. The joint venture, which is headquartered in Hilversum, The
Netherlands, has been offering business music and non-music services via
satellite transmission since January 1996 and is seeking to establish
relationships with key distributors throughout Europe. As of March 31, 1996,
Muzak Europe had entered into agreements with distributors in Ireland, the
United Kingdom, Holland and Belgium. In addition, it recently acquired the
Company's German distributor. As of March 31, 1996, Muzak Europe was providing
services to approximately 3,500 subscriber locations throughout Europe.
The Company plans to expand into Latin America and Asia by establishing
similar strategic relationships in those markets.
Until recently, the Company has not aggressively pursued the development of
its international business. However, the Company believes that the
international market offers significant growth potential. Although the Company
is now pursuing this market, no assurance can be given that the Company will
achieve significant growth in the international market.
COMPETITION
The Company's principal direct competitors in providing business music
services are AEI Music Network, Inc. ("AEI") of Seattle, Washington, and 3M
Sound and Communications, an affiliate of Minnesota Mining and Manufacturing
Corporation. In addition, the Company competes with a number of local
independent providers of business music. DMX, Inc. and Digital Cable Radio
Associates L.P. market and sell commercial-free music programming over cable
to residential cable television subscribers and have launched DBS services
aimed at business users. No assurance can be given that such competition will
not attract customers to whom the Company markets its services, including its
existing customers. In broadcast data delivery, video, audio marketing and in-
store advertising services, the Company faces competition from numerous
companies using broadcast as well as other delivery systems to provide similar
business services.
There are numerous methods by which programming, such as the Company's
business music services, broadcast data delivery, video, audio marketing and
in-store advertising services, can be delivered by existing and future
competitors, including various forms of DBS services, wireless cable and fiber
optic cable and digital compression over existing telephone lines. Many
competitors or potential competitors with access to these delivery
technologies have substantially greater financial, technical, personnel and
other resources than the Company. In addition, the larger communications
industry of which the Company is a part is undergoing significant and rapid
change, including the development of new services, delivery systems and
interactive technologies. In addition, the recently enacted Telecommunications
Act of 1996 (the "Telecommunications Act") may increase competition in the
markets in which the Company operates. The Telecommunications Act will result
in comprehensive changes to the regulatory environment for the
telecommunications industry as a whole. The legislation will permit telephone
companies to enter certain broadcast services businesses. The entry of
telephone companies into such businesses, with greater access to capital and
other resources, could provide significant competition to the Company. In
addition, the legislation will afford relief to DBS transmission providers by
exempting them from local restrictions on small-size reception antennae and
preempting the authority of local governments to impose certain taxes. The
Company cannot reasonably predict the substance of rules and policies to be
adopted by the FCC in implementing the provisions of the Telecommunications
Act, or their effect on competition in the market for the Company's services.
The Company competes internationally with AEI and a number of regional
business music providers, some of whom have substantially greater financial,
technical, personnel and other resources than the Company.
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The Company competes on the basis of service and system quality, versatility
and flexibility, the variety of its music formats, the availability of its
broadcast data and other non-music services and, to a lesser extent, price.
Even though it is seldom the lowest-priced provider of business music in any
territory, the Company believes that it can compete effectively on all these
bases due to the widespread recognition of the Muzak(R) name, its nationwide
sales and service infrastructure, the quality and variety of its music
programming and its multiple delivery systems. However, no assurance can be
given that the Company will be able to compete successfully with its existing
or potential new competitors or maintain or increase its current market share,
that it will be able to use, or compete effectively with competitors that
adopt, new delivery methods and technologies, or that discoveries or
improvements in the communications, media and entertainment industries will
not render obsolete some or all of the technologies or delivery systems
currently relied upon by the Company.
MUSIC LICENSES
Most music is copyrighted and the Company is required to enter into license
agreements to rerecord and play music in public spaces. The Company has
various types of licensing agreements and arrangements with major rights
owners and organizations to permit the production and distribution of its
business music, including (i) master performance licensing agreements with
ASCAP, BMI and SESAC that permit public performance of copyrighted music in a
customer's location, (ii) mechanical licensing agreements under which the
Company receives rights to rerecord and make copies of copyrighted music and
(iii) licensing agreements with record companies that allow the Company to
produce, advertise and distribute to its on-premise tape subscribers audio
tapes containing original artist recordings.
The Company's agreement with ASCAP expires on May 31, 1999. During 1995, the
Company paid ASCAP fees aggregating approximately $2.6 million. Agreements
with BMI and SESAC have expired. The Company has entered into an interim fee
structure with BMI and SESAC and is in negotiations with respect to new
agreements. During 1995, the Company paid BMI and SESAC fees aggregating
approximately $946,000 and $7,000, respectively. The Company's total fees for
mechanical licenses and original artist recording licenses and licensing
agreements with record companies have not been material.
The Digital Recordings Act of 1995 ("The Digital Recordings Act") was
enacted into law on November 1, 1995. The Digital Recordings Act amends U.S.
copyright law to provide sound recording owners with an exclusive performance
right in sound recordings that are performed through digital transmissions.
The legislation was drafted to protect performers and copyright owners
potentially disadvantaged by the emergence of digital subscription services.
The Digital Recordings Act provides a compulsory license for non-interactive
subscription services, but does not provide a compulsory license for
interactive services (where the listener selects a musical piece based upon a
menu or schedule). As music services to or within a business are specifically
exempted from the provisions of the Digital Recordings Act, the digital
performance right does not apply to the Company's traditional business music
services (whether analog or digital). However, to the extent the Company
provides digital music services to residential customers, via satellite or
other broadcast delivery or via the Internet or other digital means, the
Digital Recordings Act would require the payment of additional royalties.
GOVERNMENT REGULATION
The Company is subject to the regulatory authority of the United States
government and the governments of other countries in which it provides
services to subscribers. The business prospects of the Company could be
adversely affected by the adoption of new laws, policies or regulations that
modify the present regulatory environment. The Company currently provides
music services in a few areas in the United States through 928 to 960
megahertz radio broadcast frequencies, which are transmission facilities
licensed by the FCC. In connection with the Recapitalization, these FCC
licenses, held by an affiliate of the Partnership, will be transferred to a
subsidiary of the Company. Such transfer will require FCC approval, which
approval may not be obtained prior to completion of the Recapitalization. If
for any reason the Company were to lose these FCC licenses, it would incur the
expense of relocating up to 5,000 customer locations currently served over
these frequencies to different
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transmission systems. Additionally, the satellites on which the Company
transmits its DBS services in the United States are licensed by the FCC. If
the FCC authorizations for any of these satellites are revoked or are not
extended, the Company would be required to seek alternative satellite
facilities. Laws, regulations and policy, or changes therein, in other
countries could adversely affect the Company's existing services or restrict
the growth of the Company's business in these countries.
In addition, the transfer of shares of Common Stock may, in certain
circumstances, be subject to provisions of the Communications Act of 1934, as
amended, and rules and policies requiring prior FCC approval of the transfer
of control of radio broadcast and other licensees, restricting the percentage
of non-U.S. ownership of such licensees and establishing other licensee
qualifications. See "--Business Music Services--Distribution Systems."
PROPERTIES
The Company's headquarters in Seattle, Washington, consisting of
approximately 43,300 square feet, its 35 local and two national sales offices,
which occupy an aggregate of approximately 150,000 square feet, as well as
office and satellite uplink facilities at Raleigh, North Carolina and
Cheyenne, Wyoming and two warehouses in Seattle, are leased. The Company's
total lease payments during 1995 were approximately $1.5 million. In addition,
the Company owns office and warehouse facilities, aggregating approximately
21,000 square feet, in Buffalo, New York, Irving, Texas and Peoria, Illinois.
The Company considers its office and warehouse facilities to be adequate to
meet its current and reasonably foreseeable needs.
EMPLOYEES
At March 31, 1996, the Company had 715 full-time employees, of whom 197 held
sales and marketing positions, 190 held administrative positions and 328 held
technical and service positions. Seventy-four of the Company's technical and
service personnel are covered by union contracts with the International
Brotherhood of Electrical Workers ("IBEW"). The Company believes its
relationships with its employees and the IBEW are good.
LEGAL PROCEEDINGS
The Company is subject to various proceedings arising in the ordinary course
of business, none of which, individually or in the aggregate, is expected to
have a material adverse effect on the Company's financial condition or results
of operations.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER SENIOR MANAGEMENT PERSONNEL
Certain information concerning directors, executive officers and other
members of senior management of the Company is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Directors and Executive Officers:
<S> <C> <C>
John R. Jester.......... 55 Chairman, President and Chief Executive Officer
James F. Harrison....... 49 Senior Vice President, Sales and Marketing
Kirk A. Collamer........ 43 Vice President and Chief Financial Officer
Thomas J. Gentry........ 60 Vice President and General Manager, DBS Division
John A. Neal............ 60 Vice President, Owned Operations
Paul F. Balser.......... 54 Director
Mark E. Jennings........ 34 Director
Bruce G. Pollack........ 37 Director
Other Senior Management Personnel:
Wallace R. Borgeson..... 51 Vice President, Centralized Operations
Bruce B. Funkhouser..... 47 Vice President, Programming and Licensing
L. Dale Stewart......... 49 Vice President, Operations and Engineering
Jack D. Craig........... 61 Vice President, Affiliate Sales and Development
Richard Chaffee......... 52 Vice President, Owned Affiliate Operations
Roger C. Fairchild...... 47 Vice President, Owned Affiliate Sales and Market Development
J. Gary Henderson....... 42 President, In-Store Marketing Group
</TABLE>
John R. Jester has been a Director of the general partner of the managing
general partner of the Partnership since September 1992, and has been
President and Chief Executive Officer of the Partnership and its predecessors
since January 1988. Upon completion of the Recapitalization, Mr. Jester will
be Chairman, President and Chief Executive Officer of the Company. Prior to
joining a predecessor of the Partnership, Mr. Jester served from 1985 to 1987
as President of US West Information Systems. From 1983 to 1985, Mr. Jester was
President of Executone Inc. Prior to that, Mr. Jester held various financial
and management positions with Contel Corporation, ITT Corporation and C & P of
Maryland, Inc. Mr. Jester currently serves as a director of Montana Power
Company.
James F. Harrison has been Senior Vice President for Sales and Marketing of
the Partnership and its predecessors since March 1988 and will continue in
this position with the Company. Prior to joining a predecessor to the
Partnership, Mr. Harrison served from 1986 to 1987 as President of Telegence
Corporation, a start-up data communications manufacturer. From 1985 to 1986,
Mr. Harrison was Vice President of Marketing with US West Information Systems.
From 1983 to 1984, Mr. Harrison was Vice President of Business Market
Development for Contel Corporation's unregulated businesses. From 1981 to
1982, he was head of Communications Marketing Division at Wang Laboratories,
Inc., and from 1976 to 1980, Mr. Harrison was PBX Systems Engineering and
Development Supervisor and Member of the Technical Staff for Human Factors
Research with Bell Laboratories, Inc.
Kirk A. Collamer, a certified public accountant, has been Vice President of
Finance and Administration and Chief Financial Officer of the Partnership
since August 1995 and will continue in this position with the Company. Prior
to joining the Partnership, Mr. Collamer served from July 1990 to July 1995 as
Vice President of Finance at Ameritech Corporation for its Enhanced Business
Services division and Chief Financial Officer of its New Zealand subsidiary.
Prior to that time, Mr. Collamer held a variety of financial and accounting
positions with Jack Daniel Distillery/Brown-Forman Corporation, Aladdin
Industries, Inc. and Arthur Andersen LLP.
Thomas J. Gentry has been Vice President and General Manager of the DBS
Division of the Partnership and its predecessors since June 1988 and will
continue in this position with the Company. Prior to joining a
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predecessor to the Partnership, Mr. Gentry served from 1985 to 1987 as
President and Chief Executive Officer of SkySwitch Satellite Communications.
Mr. Gentry has over 30 years of experience in telecommunications and satellite
communications with Westinghouse Defense Group, COMSAT Corporation, Western
Union and Contel A.S.C.
John A. Neal has been Vice President, Owned Operations of the Partnership
and its predecessors since January 1991 and will continue in this position
with the Company. From October 1988 to December 1990, Mr. Neal served as Vice
President of National Sales for a predecessor to the Partnership. From 1987 to
1988, Mr. Neal was Vice President and Chief Operating Officer of Executone
Telecommunications, Rochester, New York. From 1979 to 1987, he was Vice
President of Sales for Contel Executone, where he developed and managed
Executone's National Account program.
Paul F. Balser has been a Director of the general partner of the managing
general partner of the Partnership since September 1992 and, upon completion
of the Recapitalization, will be a Director of the Company. Mr. Balser was a
partner of Centre Partners from 1986 until August 1995. In August 1995, Mr.
Balser resigned as an officer of the managing general partner of Centre
Partners to become a founding partner of Generation Capital Partners L.P., a
newly organized private investment partnership. From 1982 to 1986, Mr. Balser
was a Managing Director and a member of the Board of Directors of J. Henry
Schroeder Corp. Mr. Balser currently serves as a director of Kansas City
Southern Industries, Inc. (NYSE), The Carbide/Graphite Group, Inc. (Nasdaq),
The Quarton Group--Publishers, Inc., Jungle Jim's Playlands, Inc., Scientific
Games Holdings Corp. (Nasdaq) and Victory Holdings Corp.
Mark E. Jennings has been a Director of the general partner of the managing
general partner of the Partnership since September 1992 and, upon completion
of the Recapitalization, will be a Director of the Company. Through August
1995, Mr. Jennings was a partner of Centre Partners where he has been employed
since 1987. In August 1995, Mr. Jennings resigned as an officer of the
managing general partner of Centre Partners to become a founding partner of
Generation Capital Partners L.P. From 1986 to 1987, Mr. Jennings was employed
at Goldman Sachs & Co. in its Corporate Finance Department. Mr. Jennings
currently serves as a director of The Carbide/Graphite Group, Inc. (Nasdaq),
Jungle Jim's Playlands, Inc., Scientific Games Holdings Corp. (Nasdaq) and
Johnny Rockets Group, Inc.
Bruce G. Pollack has been a Director of the general partner of the managing
general partner of the Partnership since September 1995 and, upon completion
of the Recapitalization, will be a Director of the Company. Mr. Pollack is a
partner of Centre Partners, which he joined in January 1991, and is a Managing
Director of Centre Partners Management LLC, which was formed in December 1995
to manage investments on behalf of Centre Capital Investors II, L.P. and
affiliated entities. From 1988 to June 1991, Mr. Pollack was an officer and
director of RSG Partners, Inc. and its predecessors, and from 1985 to 1988,
Mr. Pollack was an officer of TSG Holdings, Inc. Mr. Pollack currently serves
as a director of Johnny Rockets Group, Inc., The Quarton Group--Publishers,
Inc., Jungle Jim's Playlands, Inc., Drake Holdings Limited and Victory
Holdings Corp.
Wallace R. Borgeson has been Vice President of Centralized Operations of the
Partnership since August 1995 and will continue in this position with the
Company. From April 1990 to August 1995, Mr. Borgeson served as Vice President
of Finance and Administration of the Partnership and its predecessors. From
1988 to 1990, Mr. Borgeson was the Chief Financial Officer of Hickory Farms,
Inc., and from 1971 to 1988, he served in various capacities with Wurlitzer
Company, most recently as Chief Financial Officer.
Bruce B. Funkhouser has been Vice President of Programming and Licensing of
the Partnership and its predecessors since October 1987 and will continue in
this position with the Company. From 1983 to 1987, Mr. Funkhouser served as
Programming and Production Manager for YesCo, Inc., which was merged with a
predecessor to the Partnership in 1986. Prior to 1983, Mr. Funkhouser was a
record company owner and producer, former broadcasting manager and on-air
talent and Professor of Communications at Bellevue
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Community College. He is a member of The American Federation of Television and
Radio Artists and The National Academy of Recording Arts and Sciences.
L. Dale Stewart has been Vice President of Operations and Engineering of the
Partnership and its predecessors since November 1987 and will continue in this
position with the Company. From 1986 to 1987, Mr. Stewart was Acting General
Manager and Operations Manager at the predecessor's New York City office. From
1984 to 1986, Mr. Stewart was General Manager of the Corpus Christi, Texas
franchise, and prior to that he worked for the franchisee in San Antonio,
Texas.
Jack D. Craig has been Vice President, Affiliate Sales and Development of
the Partnership and its predecessors since September 1988 and will continue in
this position with the Company. From 1983 to 1988, Mr. Craig was Vice
President Dealer Sales for AEI. From 1979 to 1983, Mr. Craig was
Marketing/Sales Manager for Aiphone Corporation, a leading intercom
manufacturer. Prior to joining Aiphone Corporation, Mr. Craig served as Vice
President/Account Supervisor for 11 years with J. Walter Thompson Advertising.
Richard Chaffee has been Vice President, Owned Affiliate Operations of the
Partnership and its predecessors since July 1987 and will continue in this
position with the Company. Since joining a predecessor to the Partnership in
1968, Mr. Chaffee has served in both local sales offices and franchisee
operations in New York, Boston, Chicago, Minneapolis and Charlotte, primarily
as Chief Engineer and Operations Manager.
Roger C. Fairchild has been Vice President, Owned Affiliate Sales and Market
Development of the Partnership since December 1993 and will continue in this
position with the Company. From January 1991 to December 1993, Mr. Fairchild
provided consulting services to the Partnership and its predecessors through
Strategic Growth Advisory, a marketing and business development consultancy.
From 1989 to 1991, Mr. Fairchild was President of a start-up voice processing
equipment manufacturer. From 1988 to 1989, Mr. Fairchild was Director of
Marketing for ADC Telecommunications, Inc., a $175 million growth-stage
telecommunications manufacturer. From 1983 to 1988, Mr. Fairchild served as a
vice president of operations and marketing for a US West Information Systems
subsidiary.
J. Gary Henderson has been President of the In-Store Marketing Group of the
Partnership since December 1993 and will continue in this position with the
Company. From April 1991 to November 1993, Mr. Henderson was a private
investor. From 1986 to April 1991, Mr. Henderson was Executive Vice President
and Chief Marketing Officer of POP Radio Corporation. From 1982 to 1986, Mr.
Henderson was Account Director for Actmedia, Inc.
There are no family relationships among the directors and executive officers
of the Company.
On December 28, 1992, a petition under chapter 11 of the Federal bankruptcy
code was filed by SC Corporation and its operating subsidiaries, of which Mr.
Pollack, a director of the Company, served as a vice president until January
1991. Mr. Pollack is also a director of, and prior to October 4, 1994 was a
vice president of, Victory Markets Inc. and New Almacs Inc., operating
subsidiaries of Victory Holdings Corp. that filed petitions under chapter 11
on September 20, 1995.
BOARD OF DIRECTORS; COMMITTEES
After completion of the Offering, the Company intends to elect two
additional persons as directors who will not be officers or employees of the
Company or partners, officers or employees of Centre Partners or any of their
respective affiliates.
Pursuant to the Certificate of Incorporation and By-Laws of the Company, the
Board shall consist of such number of directors as the Board of Directors
shall determine from time to time. The Board has initially set the number of
directors at six. Currently, the Board consists of four directors, and the two
vacancies will be filled with two disinterested directors as described above.
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Officers are elected by
and serve at the discretion of the Board.
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Pursuant to a stockholders' agreement, MLP, Centre Partners and the
Management Investors have agreed to vote all shares beneficially owned by them
in favor of the election of three directors designated by MLP. See "Certain
Relationships and Related Transactions" and "Principal and Selling
Stockholders."
Following the Recapitalization, the Board of Directors will form an Audit
Committee and a Compensation Committee. The functions of the Audit Committee
will be to recommend to the Board independent auditors for the Company, to
analyze the reports and recommendations of such auditors and to review
internal audit procedures and controls. The functions of the Compensation
Committee will be to review compensation of the Chairman of the Board, and
employee benefit and incentive plans and to present recommendations thereon to
the Board. The Compensation Committee will also administer the Company's
Replacement Option Plan and 1996 Stock Option Plan. The Compensation Committee
will be composed of three directors, two of whom will be "disinterested" (as
defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")).
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
the Company's Chief Executive Officer and to each of the Company's four other
most highly compensated executive officers (together with the Chief Executive
Officer, the "Named Executive Officers") for services in all capacities
rendered to the Company and its subsidiaries in 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION COMPENSATION(2)
- - - ------------------ -------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
John R. Jester, $213,725 -- -- $2,310
President and Chief Executive
Officer
James F. Harrison, $172,750 -- -- $2,310
Senior Vice President, Sales &
Marketing
J. Gary Henderson, $161,009 -- -- $1,157
General Manager,
In-Store Marketing Group
John A. Neal, $155,000 -- -- $1,744
Vice President, Owned
Operations
Thomas J. Gentry, $152,000 -- -- $1,995
Vice President, DBS Division
</TABLE>
- - - --------
(1) Bonuses in respect of services rendered in 1994 were determined and paid
in 1995 ($20,000 for Mr. Harrison, $30,000 for Mr. Henderson, $25,000 for
Mr. Neal and $18,000 for Mr. Gentry). No bonuses were awarded to Named
Executive Officers with respect to services rendered in 1995.
(2) Consists of contributions by the Company to a defined contribution 401(k)
plan.
No restricted stock awards, stock appreciation rights or long-term incentive
plan awards were awarded to, earned by or paid to the Named Executive Officers
during the fiscal year ended December 31, 1995. Pursuant to the Incorporation,
the Named Executive Officers will be granted options to purchase Common Stock
in substitution for outstanding options to purchase Partnership interests. See
"--Replacement Stock Option Plan."
DIRECTORS' COMPENSATION
Directors who are also employees of the Company receive no remuneration for
services as a member of the Board or any committee of the Board. Directors who
are not employed by the Company receive an annual retainer of $20,000 plus
$3,000 for each meeting of the Board that he attends commencing, in the case
of the Centre Partners designees, in 1997. See "Certain Relationships and
Related Transactions." In addition, the 1996
43
<PAGE>
Stock Option Plan provides for the grant to each non-employee director of
options to purchase 6,000 shares of Common Stock upon the later of (i) the
consummation of the Offering and (ii) the initial election of such director to
the Board, and automatically grants options to purchase 3,000 shares of Common
Stock on the date on which the annual meeting of the Company's stockholders is
held each year. The purchase price of the Common Stock covered by such options
is the fair market value of such Common Stock on the date of grant. These
options become exercisable at the rate of one-third per year commencing one
year after the date of grant.
CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
Effective August 31, 1992, the Company entered into five-year employment
agreements with each of John R. Jester, President and Chief Executive Officer
of the Company, and James F. Harrison, Senior Vice President of the Company.
Under his employment agreement, Mr. Jester currently receives an annual base
salary of $220,000, subject to cost of living adjustments. Under his
employment agreement, Mr. Harrison currently receives an annual base salary of
$178,000, subject to cost of living adjustments. Mr. Jester will receive a
bonus equal to 50% of his annual base salary if the Company achieves a
specified performance target for the 12 months ended December 31, 1996, which
target the Company believes will not be reached. If the target is not reached,
the Board of Directors may nonetheless award Mr. Jester a bonus in an amount
and on the terms determined by the Board of Directors (which amount shall not
exceed 50% of his annual base salary). Each of the agreements also provides
for a severance payment equal to the annual base salary and pro rata bonus in
the event of termination due to disability or death during the term of
employment. Both employment agreements also contain confidentiality covenants
and non-solicitation covenants which extend for five and two years,
respectively, beyond the term of the agreements. The Company can terminate
either agreement without further liability in case of the officer's fraud
against, or embezzlement from, the Company, indictment or conviction of a
felony or misdemeanor having a material adverse effect on the Company or
material failure to discharge his duties. In addition, the Company can
terminate the agreements if there is a material uncured default under the
Company's credit agreements or if the Company's cumulative performance level
is less than 80% of the cumulative target projected for any month; provided
that in either such case the Company is required to pay a severance payment
equal to, in the case of Mr. Jester, his annual base salary plus a pro-rated
bonus, or, in the case of Mr. Harrison, his annual base salary. The Company
may otherwise terminate the agreements for any reason during their terms by
paying a severance payment equal to the lesser of (i) two times the then-
effective annual base salary and (ii) the amount of compensation to which Mr.
Jester or Mr. Harrison, as the case may be, would be entitled to receive
between the date of termination and the fifth anniversary of the employment
agreement had the agreement in question not been terminated; but in no event
less than one year's annual base salary at the then effective rate. Mr. Jester
would also be entitled to receive a pro-rated bonus if cumulative performance
targets exceed projections for the twelve-month period preceding such
termination.
Pursuant to a letter dated July 7, 1995, Kirk A. Collamer, Vice President
and Chief Financial Officer of the Company, receives an annual salary of
$160,000 and is eligible for discretionary bonuses. In addition, Mr. Collamer
was entitled to purchase up to 150,000 units of partnership interests, of
which 60,000 units (which are exchangeable for 25,738 shares of Common Stock
as part of the Incorporation) were subscribed for at $1.75 per unit and the
remainder forfeited. Mr. Collamer will pay, prior to completion of the
Recapitalization, the full purchase price for his units upon receipt of the
Partnership interest certificate and the Company obtaining appropriate waivers
and consents under the UBS term loan and credit facility. Mr. Collamer was
granted options to purchase 150,000 additional units of partnership interests
at $1.75 per unit, conditional upon the performance of the Company which will
be replaced with options to purchase 64,345 shares of Common Stock at $4.08
per share under the Replacement Option Plan. See "--Replacement Stock Option
Plan." Mr. Collamer also received $120,000 relating to the sale of his home in
Chicago and his relocation to Seattle.
REPLACEMENT STOCK OPTION PLAN
In August 1992, the Partnership adopted, and issued options under, the
Partnership's Management Option Plan (the "Partnership Option Plan"). As part
of the Recapitalization, the Company will adopt the Replacement Option Plan to
replace the Partnership Option Plan. Outstanding options granted under the
Partnership Option
44
<PAGE>
Plan will be replaced with options under the Replacement Option Plan, and the
Partnership Option Plan will be terminated, in each case effective upon
consummation of the Offering.
The Replacement Option Plan provides for the granting of options to purchase
an aggregate of 786,963 shares of Common Stock (subject to adjustment in the
event of stock dividends, stock splits and other contingencies), which will be
granted to 26 existing senior management members at an average exercise price
of $2.61 per share in substitution for the outstanding options held by such
senior management members under the Partnership Option Plan. Options granted
under the Replacement Option Plan are not intended to qualify as "incentive
stock options" within the meaning of Section 422A of the Internal Revenue Code
of 1986, as amended (the "Code"). The Replacement Option Plan is qualified
under Rule 16b-3 under the Exchange Act.
The Replacement Option Plan requires the Board of Directors to designate an
option committee (the "Committee") to administer the Replacement Option Plan,
consisting of no fewer than two directors who are "disinterested persons"
within the meaning of Rule 16b-3 under the Exchange Act (or any successor rule
or regulation). The Board of Directors may at any time remove members from and
may fill any vacancy on the Committee. The Committee has the authority, in its
discretion and subject to the express provisions of the Replacement Option
Plan to determine, among other things, the persons to receive options, the
date of grant of such options, the number of shares to be subject to each
option, and the purchase price of each share subject to such options. The
Company will receive no monetary consideration for the granting of options
under the Replacement Option Plan.
The purchase price of shares of Common Stock issuable upon exercise of each
option granted pursuant to the Replacement Option Plan will be the same as the
exercise prices of the options granted under the Partnership Option Plan,
adjusted to reflect the conversion of units of partnership interest into
shares of Common Stock in the Recapitalization. Options granted under the
Replacement Option Plan expire seven years from the date of grant.
Options granted pursuant to the Replacement Option Plan are divided into
three groups for vesting purposes, each comprised of one-third of the options
granted to each optionholder. One-half of the first group of options vests
immediately upon the Effective Date and the remainder of the first group vests
in equal installments on the first and second anniversaries of the Effective
Date. Once vested, such options become exercisable if the Sales Price during
the Performance Period is $14 per share or greater.
The second and third groups of options vest in equal 20% increments on the
first through fifth anniversaries of the Effective Date. When vested, the
second group of options becomes exercisable only when the Sales Price is $21
per share or greater for the Performance Period (the "Second Group
Exercisability Threshold"), and when vested, the third group of options
becomes exercisable when the Sales Price is $28 per share or greater for the
Performance Period (the "Third Group Exercisability Threshold").
In the event of any change in the outstanding shares of Common Stock through
reorganization, stock dividend, subdivision or combination of shares, or other
like change in capital structure of the Company, appropriate adjustments will
be made by the Committee to each outstanding option under the Replacement
Option Plan and to the maximum number of shares of Common Stock which may be
acquired pursuant to the exercise of options, and the price per share subject
to outstanding options shall be proportionately adjusted.
In the event of (i) a "change in control" of the Company, as defined in the
Replacement Option Plan, or (ii) the consummation of a public offering of
shares of Common Stock by MLP and/or Centre Partners for an aggregate gross
sales price of not less than $50 million pursuant to a request for
registration under the Stockholders' Agreement (as defined under "Certain
Relationships and Related Transactions"), in each case within the first two
years following the effective date of the plan, for purposes of determining
whether the options shall become exercisable the Sales Price used in
determining the Second Group Exercisability Threshold will be reduced to
$18.62 per share and the Sales Price used in determining the Third Group
Exercisability Threshold will be reduced to $23.38 per share. See "Certain
Relationships and Related Transactions." The Committee, in its sole
discretion, may determine that, upon the occurrence of a change in control,
each option then outstanding
45
<PAGE>
will terminate within a specified number of days after notice to the holder,
and such holder will receive, with respect to each share subject to such
option, cash in an amount equal to the excess of the fair market value of such
share immediately prior to the occurrence of such transaction over the
exercise price per share of such option. The provisions described in the
preceding sentence will be inapplicable to an option granted within six (6)
months before the occurrence of a transaction described above if the holder of
such option is subject to the reporting requirements of Section 16(a) of the
Exchange Act.
Options granted under the Replacement Stock Option Plan are non-
transferable, except by will, the laws of descent and distribution, or
pursuant to a qualified domestic relations order. As a condition to the
exercise of any option under the Replacement Option Plan, the optionee is
required to become party to the Stockholders' Agreement. See "Certain
Relationships and Related Transactions."
Under the Replacement Option Plan, John R. Jester will receive options to
purchase 139,415 shares for $2.33 per share; James F. Harrison will receive
options to purchase 87,939 shares for $2.33 per share; J. Gary Henderson will
receive options to purchase 42,897 shares for $3.50 per share; John A. Neal
will receive options to purchase 60,056 shares for $2.33 per share; and Thomas
J. Gentry will receive options to purchase 60,056 shares for $2.33 per share.
1996 STOCK OPTION PLAN
As part of the Recapitalization, the Board of Directors of the Company will
adopt a stock option plan (the "1996 Stock Option Plan"). The 1996 Stock
Option Plan is intended to afford certain key employees and outside directors
of the Company who are responsible for the continued growth of the Company an
opportunity to acquire a proprietary interest in the Company.
The 1996 Stock Option Plan provides for the granting of options to purchase
an aggregate of 250,000 shares of Common Stock (subject to adjustment in the
event of stock dividends, stock splits and other contingencies). Options
granted under the 1996 Stock Option Plan are not intended to qualify as
"incentive stock options" within the meaning of Section 422A of the Code. The
1996 Stock Option Plan is qualified under Rule 16b-3 under the Exchange Act.
The 1996 Stock Option Plan requires the Board of Directors to designate an
option committee to administer the 1996 Stock Option Plan, consisting of no
fewer than two directors who are "disinterested persons" within the meaning of
Rule 16b-3 under the Exchange Act (or any successor rule or regulation). The
Board of Directors may at any time remove members from and may fill any
vacancy on the Committee. The Committee has the authority, in its discretion
and subject to the express provisions of the 1996 Stock Option Plan to
determine, among other things, the persons to receive options, the date of
grant of such options, the number of shares to be subject to each option, and
the purchase price of each share subject to such options. The Company will
receive no monetary consideration for granting options under the 1996 Stock
Option Plan.
The 1996 Stock Option Plan also provides for the grant to each non-employee
director of the Company of options to purchase 6,000 shares of Common Stock
upon the later of (i) the consummation of the Offering and (ii) the initial
election of such director to the Board, and automatically grants options to
purchase 3,000 shares of Common Stock on the date on which the annual meeting
of the Company's stockholders is held each year. See "--Directors'
Compensation."
The purchase price of shares of Common Stock issuable upon exercise of each
option granted pursuant to the 1996 Stock Option Plan will be the fair market
value of the shares on the date of grant. Options granted under the 1996 Stock
Option Plan expire seven years from the date of grant. Options granted
pursuant to the 1996 Stock Option Plan will vest in three equal installments
over three years commencing one year after the date of grant, and are
exercisable when vested.
In the event of any change in the outstanding shares of Common Stock of the
Company through reorganization, stock dividend, subdivision or combination of
shares, or other like change in capital structure of
46
<PAGE>
the Company, appropriate adjustments will be made by the Committee to each
outstanding option under the 1996 Stock Option Plan and to the maximum number
of shares of Common Stock which may be acquired pursuant to the exercise of
options, and the price per share subject to outstanding options shall be
proportionately adjusted.
In the event of a "change in control" of the Company as defined in the 1996
Stock Option Plan, all then outstanding options shall immediately become
exercisable. The Committee, in its sole discretion, may determine that, upon
the occurrence of a change in control, each option then outstanding will
terminate within a specified number of days after notice to the holder, and
such holder will receive, with respect to each share subject to such option,
cash in an amount equal to the excess of the fair market value of such share
immediately prior to the occurrence of such transaction over the exercise
price per share of such option. The provisions described in the preceding
sentence will be inapplicable to an option granted within six (6) months
before the occurrence of a transaction described above if the holder of such
option is subject to the reporting requirements of Section 16(a) of the
Exchange Act.
Options granted under the 1996 Stock Option Plan are non-transferable,
except by will, the laws of descent and distribution, or pursuant to a
qualified domestic relations order. As a condition to the exercise of any
option under the Replacement Option Plan, the optionee is required to become
privy to the Stockholders' Agreement. See "Certain Relationships and Related
Transactions."
SENIOR MANAGEMENT INCENTIVE PLAN
In January 1996, the Company adopted the Senior Management Incentive Plan
(the "Incentive Plan"), to provide for annual incentive awards to senior
executives of the Company.
The Incentive Plan will be administered by the Compensation Committee.
Initially, there will be eleven participants in the Incentive Plan, including
Messrs. Jester, Harrison, Henderson, Neal and Gentry.
Annual incentive awards under the Incentive Plan will be based on the
achievement by the Company of target levels of three distinct measures,
EBITDA, operating cash flow (as defined in the Incentive Plan) and revenue
growth in a calendar year. The annual incentives for participants may range
from no award (if minimum target levels are not reached) to a maximum of 43%
(if maximum target levels are reached) of base salary in effect at the end of
a plan year. No awards will be made under the Incentive Plan unless the
minimum target level for EBITDA is reached, regardless of the performance
levels for the other measurements. The Incentive Plan will first be effective
for the 1996 plan year.
If a participant's employment is terminated during a plan year, a pro-rated
bonus may be awarded at the discretion of the Compensation Committee.
Performance target levels may be modified, at the discretion of the
Compensation Committee, for significant transactions, such as acquisitions,
divestitures or development projects.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Recapitalization, there has been no Compensation Committee of
the Board of Directors. During fiscal 1995, executive compensation decisions
were made by the Board of Directors of the general partner of the managing
general partner of the Partnership, which consisted of Messrs. Balser,
Jennings, Jester and Pollack.
BENEFIT PLAN
The Company maintains a 401(k) defined contribution savings and retirement
plan (the "Benefit Plan") that covers substantially all of the Company's
employees, including certain Named Executive Officers. Under the Benefit
Plan's savings portion, eligible employees may contribute from 2% to 14% of
their compensation per year, subject to certain tax law restrictions. The
Company may make a matching contribution of up to a maximum of 100% of the
first 2% and 50% of the next 4%, up to 6% of the total base salary contributed
by the employee each year. The Company's contributions under the retirement
portion of the Benefit Plan are determined annually by the Company, but may
not exceed 3% of the eligible employee's annual compensation. Benefit Plan
participants are immediately vested in their contributions as well as the
Company's contributions.
47
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law (the
"DGCL"), the Company has adopted provisions in its Certificate of
Incorporation which provide that directors of the Company shall not be
personally liable for monetary damages to the Company or its stockholders for
a breach of fiduciary duty as a director, except for liability as a result of
(i) a breach of the director's duty of loyalty to the Company or its
stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) an act related to
the unlawful stock repurchase or payment of a dividend under Section 174 of
the DGCL; and (iv) transactions from which the director derived an improper
personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the fullest extent permitted under DGCL. The Company has entered
into separate indemnification agreements with its directors and officers which
are, in some cases, broader than the specific indemnification provisions
contained in the DGCL. The indemnification agreements require the Company,
among other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors
or officers (other than liabilities arising from willful misconduct of a
culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Company as to which
indemnification is being sought, nor is the Company aware of any pending or
threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
48
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Recapitalization, Music Holdings Corp., MLP, the
Management Investors, Comcast, UBS, Barclays Bank PLC, New York Branch
("Barclays"), Exeter Venture Lenders, L.P. ("Exeter") and Internationale
Nederlanden Finance Corp. ("ING"), among others, entered into an Exchange and
Transfer Agreement, dated as of May 10, 1996, with the Company, pursuant to
which, effective upon completion of the Offering, these parties will convey
their interests in the Partnership to the Company in exchange for (i) Common
Stock of the Company, in the case of MLP, the Management Investors, Comcast
and certain other partners, and (ii) cash, in the case of UBS, Barclays,
Exeter and ING, to be paid upon closing of the Offering with proceeds of the
Offering. See "The Recapitalization," "Use of Proceeds" and "Principal and
Selling Stockholders."
In January 1994, the Company purchased substantially all of the assets of
Comcast in the Comcast Acquisition for total consideration of approximately
$33.0 million, $28.0 million of which was paid in cash and the balance of
which was paid with a $5.0 million 7% preferred limited partnership interest
of the Partnership. In connection with the Recapitalization, Comcast's
interest in the Partnership will be converted into 609,294 shares of Common
Stock.
In order to finance the Comcast Acquisition, the Company's secured term loan
and revolving credit facility, in respect of which UBS acts as agent bank and
is a lender, were increased. In addition, the Company borrowed $10.0 million
from UBS (in its individual capacity and not as agent) on an unsecured basis
(the "UBS Loan"). In November 1994, the UBS Loan was repaid in full with
proceeds from a subordinated financing involving the sale of $7.0 million in
additional preferred partnership interests to existing investors, including
MLP and the Management Investors, with a pledge of the limited partnership
interests to the lenders under the term loan and revolving credit facility,
and an increase in a subordinated debt facility provided by Barclays and other
lenders. Barclays was also granted the right to purchase for nominal
consideration additional units of Partnership interests representing
approximately 2.8% of the Partnership's equity.
In the Recapitalization, units in the Partnership owned by UBS representing
approximately 8.9% of the Partnership's equity will be conveyed to the Company
for cash in an amount to be determined on the basis of the IPO Price, that
would be equal to $10.5 million assuming an IPO Price of $15 per share, and
rights to purchase units in the Partnership held by Barclays, representing
6.9% of the Partnership's equity, will be purchased by the Company for an
amount to be determined on the basis of the IPO Price, that would be equal to
$8.1 million assuming an IPO Price of $15 per share. Subordinated indebtedness
in the amount of $12.5 million and bearing interest at an effective rate of
14.5% provided by Barclays and other lenders will be repaid in the
Recapitalization. See "The Recapitalization," "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Centre Partners was paid (i) $324,000 for its efforts in initiating,
structuring and consummating the Comcast Acquisition and (ii) $150,000 as
consideration for the guarantees by MLP and CCI of the UBS Loan. In addition,
the Company agreed to pay Centre Partners $300,000 if any amounts were
required to be paid under either the MLP or CCI guarantee. Such guarantees
have been discharged and no payments were required to be made thereunder.
The interests in the Partnership held by MLP, certain of its affiliates and
the Management Investors are pledged to secure the outstanding indebtedness
under the UBS term loan and revolving credit facility. Upon completion of the
Recapitalization, these interests will be exchanged for Common Stock, the
indebtedness will be repaid and the pledges will be released. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
During the years ended December 31, 1993, 1994 and 1995, and three-month
periods ended March 31, 1995 and 1996, the Company incurred interest expense
of approximately $3.7 million, $6.9 million, $7.4 million, $1.9 million and
$1.8 million, respectively, in connection with the UBS term loan and revolving
credit facility and
49
<PAGE>
the Barclays subordinated debt facility. In addition, in 1993, 1994 and 1995,
the Company paid an aggregate of $250,000, $1.9 million and $122,000,
respectively, in fees to UBS and Barclays in connection with increases in the
Company's term loan and establishment of and increases in the revolving credit
facility and the subordinated debt facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
During each of 1992, 1993 and 1994, the Company paid to Centre Partners the
aggregate amount of $100,000 for the services of the Centre Partners designees
as directors of the general partner of the managing general partner of the
Partnership for the subsequent calendar year. In 1996, the Company will pay to
Centre Partners $162,500 for services provided by the Centre Partners
designees during 1995 and 1996.
Upon consummation of the Offering, the Company will pay Centre Partners a
one-time fee of $250,000 for financial advisory services in connection with
the Recapitalization.
In connection with the Recapitalization, MLP, Centre Partners, Comcast, the
Named Executive Officers and other members of senior management and the
Company, among others, entered into a Stockholders' Agreement dated as of May
10, 1996 (the "Stockholders' Agreement"), pursuant to which the parties agreed
(i) that the stockholder parties will vote their Common Stock to cause the
Board of Directors of the Company to consist of six directors, (A) three of
which shall be designated by MLP and Centre Partners (the "Centre Holders") so
long as the Centre Holders own more than 30% of the outstanding shares of
Common Stock, two of which shall be designated by the Centre Holders so long
as the Centre Holders own less than 30% of the outstanding shares but more
than 15% of the outstanding shares, and one of which shall be designated by
the Centre Holders in the event the Centre Holders own less than 15% of the
outstanding shares so long as the Centre Holders own any shares, (B) one of
which shall be the Chief Executive Officer of the Company, and (C) two of
which shall be independent directors and (ii) that the stockholders party
thereto will have the right to have the Common Stock of the Company that they
hold registered under the Securities Act (x) in the event that the Company
undertakes the registration of the Company's Common Stock subsequent to the
Offering or (y) upon the written requests (not to exceed three) of the Centre
Holders. In the event that the number of securities that the Centre Holders
and the Management Investors desire to include in any offering, combined with
the number of shares to be included in the offering by the Company (if the
offering is being done pursuant to the Company's undertaking), exceeds the
amount of securities that can be sold in an orderly fashion within a price
range acceptable to the Company, the stockholders party thereto other than the
Management Investors shall have priority and can participate in that offering
to the fullest extent possible prior to any participation by the Management
Investors. In addition, the Management Investors agreed in the Stockholders'
Agreement (i) not to include any shares in the first registration of Common
Stock following the Offering initiated at the request of the Centre Holders
and (ii) not to sell, transfer, assign or encumber any shares of Common Stock
prior to the consummation of the first registered offering of Common Stock
following the Offering that is initiated at the request of the Centre Holders
or in any shelf registration statement filed pursuant to a request by the
Centre Holders under the Stockholders' Agreement.
J. Gary Henderson borrowed funds in two loans from the Company in connection
with purchases of units of partnership interest. As of March 31, 1996, the
outstanding balances of these loans were $50,000 and $10,000, for a total of
$60,000. The maximum amount of such indebtedness outstanding at any time since
the beginning of 1995 was $93,158. Interest accrues at a rate of 10.0% per
annum for the $50,000 loan, which is payable on March 1, 1998, and interest
accrues at a rate of 8.0% for the $10,000 loan, payable on August 31, 1997.
Such indebtedness is secured by pledges of the units purchased with the
proceeds of such indebtedness.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of the date hereof (after giving
effect to the Incorporation) and as adjusted to reflect the sale of the Common
Stock offered hereby, by (i) Comcast, (ii) each stockholder known by the
Company to beneficially own more than five percent of the Common Stock, (iii)
each director of the Company, (iv) the Named Executive Officers and (v) all
directors and executive officers of the Company as a group. Except pursuant to
applicable community property laws or as otherwise noted below, each of the
stockholders identified in the table has sole voting and investment power with
respect to the shares beneficially owned by such person.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP PRIOR OWNERSHIP AFTER
TO OFFERING OFFERING
-------------------- --------------------
NAME AND ADDRESS OF NUMBER OF SHARES TO BE SOLD NUMBER OF
BENEFICIAL OWNER SHARES PERCENT IN THE OFFERING SHARES PERCENT
------------------- --------- ------- ----------------- --------- -------
<S> <C> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS,
DIRECTORS AND EXECUTIVE
OFFICERS:
Centre Partners 5,246,285 62.5% -- 5,246,285(2) 49.1%(2)
L.P.(1)................
30 Rockefeller Plaza
Suite 5050
New York, New York
10020
John R. Jester.......... 157,493 1.9% -- 157,493 1.5%
James F. Harrison....... 93,148 1.1% -- 93,148 0.9%
Thomas J. Gentry........ 68,022 0.8% -- 68,022 0.6%
John A. Neal............ 75,070 0.9% -- 75,070 0.7%
J. Gary Henderson....... 47,800 0.6% -- 47,800 0.4%
Paul F. Balser.......... -- (3) -- (3) -- -- (3) -- (3)
Mark E. Jennings........ -- (3) -- (3) -- -- (3) -- (3)
Bruce G. Pollack........ -- (4) -- (4) -- -- (4) -- (4)
All directors and
executive officers as
a group (8 persons).... 441,533(5) 5.3%(5) -- 441,533(5) 4.1%(5)
SELLING STOCKHOLDER:
Comcast Sound
Communications, Inc. .. 609,294 7.3% 358,423 250,871 2.3%
1500 Market Street
Philadelphia, PA 19102
</TABLE>
- - - --------
(1) Includes shares held by MLP, of which Centre Partners is the general
partner. Centre Partners may be deemed to be indirectly controlled,
through Park Road Corporation, the managing general partner of Centre
Partners, by Lester Pollack, a managing director of Lazard Freres & Co.
LLC.
(2) Assumes that the over-allotment option to purchase 645,000 shares of
Common Stock granted to the Underwriters by MLP is not exercised.
(3) Excludes shares held by Centre Partners and MLP. Messrs. Balser and
Jennings are limited partners of MLP and prior to August 1995 were
officers of the managing general partner of Centre Partners. Each
disclaims beneficial ownership of such shares.
(4) Excludes shares held by Centre Partners and MLP. Mr. Pollack is a limited
partner of MLP and is an officer and director of the managing general
partner of Centre Partners. He disclaims beneficial ownership of such
shares.
(5) Excludes shares held by Centre Partners and MLP.
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 10,679,433 shares of
Common Stock outstanding. Of the shares of Common Stock that will be
outstanding after completion of the Offering, 4,300,000 shares (plus an
additional 645,000 shares if the over-allotment option granted to the
Underwriters is exercised in full) will be freely tradeable by persons other
than "affiliates" as defined in Rule 144 under the Securities Act (the
"Affiliates") of the Company, without restriction or further registration
under the Securities Act.
The remaining 6,379,433 shares of Common Stock (assuming no exercise of the
over-allotment option granted to the Underwriters) will be deemed "restricted
securities" as defined in Rule 144 and may not be sold in the absence of
registration under the Securities Act or pursuant to an exemption from such
registration, including exemptions provided by Rule 144. Even if such
exemptions are available, all of the holders of Common Stock or any securities
convertible into or exercisable or exchangeable therefor, as well as all
holders of options to purchase Common Stock, have agreed, subject to certain
exceptions, not to, directly or indirectly, offer, sell or otherwise dispose
of such shares for a period of 180 days after the date of this Prospectus,
without the prior written consent of PaineWebber Incorporated. See
"Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years (including the holding period of any prior owner except
an Affiliate) may sell within any three-month period a number of such
restricted shares that does not exceed the greater of one percent of the then
outstanding shares of Common Stock and the reported average weekly trading
volume on the Nasdaq National Market of the Common Stock during the four
calendar weeks preceding such sale. The Commission has proposed certain
amendments to Rule 144 that would reduce the requisite holding period from two
years to one year. Sales under Rule 144 are also subject to certain manner-of-
sale provisions, notice requirements and the availability of current public
information about the Company. A person who is not deemed to have been an
Affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned restricted securities for at least three years, may
sell such shares under Rule 144 without regard to the volume limitations,
manner-of-sale provisions, current public information requirements or notice
requirements. Under Rule 144 as currently in effect, none of the restricted
securities will be eligible for public sale pursuant to Rule 144 until at
least two years after the date of the Recapitalization.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701 under
the Securities Act. Rule 701 permits Affiliates to sell their Rule 701 shares
under Rule 144 without complying with the holding period requirements of Rule
144. Rule 701 further provides that non-Affiliates may sell such shares in
reliance on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders
of Rule 701 shares are required to wait until 90 days after the date of this
Prospectus before selling such shares.
The Company may in the future file a registration statement on Form S-8
covering all shares of Common Stock issuable under the Company's stock option
plans in effect on the date of this Prospectus. The Company has outstanding
stock options and options available for future grant with respect to an
aggregate of approximately 1,036,963 shares of Common Stock as of the date of
this Prospectus. It is a condition to the exercise of options under the
Company's stock option plans that the optionee agree to become a party to the
Stockholders' Agreement which provides among other things that such holder
shall not sell, transfer, assign or encumber any shares of Common Stock prior
to the consummation of the first registered offering of Common Stock following
the Offering initiated at the request of the Centre Holders or in any shelf
registration statement filed pursuant to a request by the Centre Holders under
the Stockholders' Agreement. See "Certain Relationships and Related
Transactions."
Under either Rule 701 or Form S-8, upon lapse of the foregoing restrictions,
up to an aggregate of 786,963 shares issuable upon the exercise of outstanding
options under the Replacement Option Plan will be eligible for sale in the
public markets if and when the options are exercised.
52
<PAGE>
The Company has also agreed, subject to limited exceptions, not to, directly
or indirectly, offer, sell or otherwise dispose of any shares of Common Stock
or any securities convertible into or exercisable or exchangeable therefor for
a period of 180 days after the date of this Prospectus, without the prior
written consent of PaineWebber Incorporated. See "Underwriting."
Prior to the Offering, there has been no market for the Common Stock and no
predictions can be made as to the effect, if any, that sales of shares of
Common Stock or the availability of shares of Common Stock for sale will have
on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public market, or the
perception that such sales could occur, could have an adverse impact on the
market price of Common Stock.
Pursuant to the Stockholders' Agreement, MLP and Centre Partners have
certain rights to include any or all of the shares owned by them in a
registration undertaken by the Company, or, in certain cases, to require
registration of such shares upon written requests (not to exceed three). In
addition, the Management Investors and certain other stockholders partly to
the Stockholders' Agreement currently have certain piggy-back registration
rights with respect to registrations of securities undertaken by the Company
on its behalf as well as in secondary registrations requested by the Centre
Holders, subject to reduction in specified circumstances. See "Certain
Relationships and Related Transactions."
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions the Company's Certificate of Incorporation (the "Certificate") and
its By-Laws (the "By-Laws") is a summary and is qualified in its entirety by
reference to the provisions of the Certificate and the By-Laws, copies of
which have been filed with the Securities and Exchange Commission as exhibits
to the Company's Registration Statement of which this Prospectus is a part.
The authorized capital stock of the Company consists of (i) 30,000,000
shares of Common Stock and (ii) 10,000,000 shares of preferred stock, par
value $0.01 per share ("Preferred Stock").
COMMON STOCK
As of the date of this Prospectus and after giving effect to the
Incorporation, there are 24 holders of record of Common Stock and 6,737,856
shares of Common Stock were issued and outstanding. The holders of the Common
Stock are entitled to one vote per share on all matters on which the holders
of Common Stock are entitled to vote. The holders of the outstanding shares of
Common Stock are entitled to receive dividends as and when declared by the
Board of Directors out of funds legally available therefor after the payment
of any dividends declared but unpaid on any shares of Preferred Stock then
outstanding. See "Dividend Policy." The holders of the Common Stock have no
cumulative voting rights, no pre-emptive rights and no rights to convert their
shares of Common Stock into any other securities. Because holders of Common
Stock do not have cumulative voting rights, the holders of the majority of the
shares of Common Stock represented at the meeting can elect all the directors.
All of the outstanding shares of the Common Stock are, and the shares of
Common Stock being offered by the Company hereby will be, fully paid and
nonassessable. On liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive pro rata the net assets of the
Company remaining after preferential distribution to holders of Preferred
Stock, the payment of all creditors and liquidation preferences, if any.
MLP, Centre Partners, the Named Executive Officers and certain other
stockholders have entered into the Stockholders' Agreement with the Company
with respect to the Common Stock held by them. See "Certain Relationships and
Related Transactions."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
PREFERRED STOCK
The Board of Directors is authorized, without any action of the
stockholders, to provide for the issuance of one or more series of Preferred
Stock and to fix the designation, preferences, powers and relative,
participating, optional and other rights, qualifications, limitations and
restrictions thereof including, without limitation, the dividend rate, voting
rights, conversion rights, redemption price and liquidation preference per
series of Preferred Stock. Any series of Preferred Stock so issued may rank
senior to the Common Stock with respect to the payment of dividends or amounts
to be distributed upon liquidation, dissolution or winding up. There are no
agreements or understandings for the issuance of Preferred Stock, and the
Board of Directors has no present intent to issue any Preferred Stock. The
existence of authorized but unissued Preferred Stock may enable the Board of
Directors to render more difficult or to discourage an attempt to obtain
control of the Company by means of a merger, tender offer, proxy contest or
otherwise. For example, if in the due exercise of its fiduciary obligations,
the Board of Directors were to determine that a takeover proposal is not in
the Company's best interests, the Board of Directors could cause shares of
Preferred Stock to be issued without stockholder approval in one or more
private offerings or other transactions that might dilute the voting or other
rights of the proposed acquirer or insurgent stockholder or stockholder group.
The issuance of shares of Preferred Stock pursuant to the Board of Directors'
authority described above could decrease the amount of earnings and assets
available for distribution to holders
54
<PAGE>
of Common Stock and adversely affect the rights and powers, including voting
rights, of such holders and may have the effect of delaying, deferring or
preventing a change in control of the Company.
DELAWARE BUSINESS COMBINATION STATUTE
Upon consummation of the Offering, the Company will be subject to Section
203 of the DGCL. In general, subject to certain exceptions, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder,
unless (i) prior to such date the board of directors of the corporation
approved either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder, (ii) upon the consummation
of the transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced
(excluding for purposes of determining the number of shares outstanding those
shares owned by (x) persons who are directors and also officers and (y)
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer) or (iii) on or subsequent to such date
the business combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders, not by written consent, by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. Section 203 defines a "business
combination" to include certain mergers, consolidations, asset sales and stock
issuances and certain other transactions resulting in a financial benefit to
an "interested stockholder." In addition, Section 203 defines an "interested
stockholder" to include any entity or person beneficially owning 15% or more
of the outstanding voting stock of the corporation and any entity or person
affiliated with such an entity or person.
55
<PAGE>
UNDERWRITING
The underwriters named below, acting through PaineWebber Incorporated and
Montgomery Securities (the "Representatives"), have severally agreed, subject
to the terms and conditions set forth in the Underwriting Agreement by and
among the Company, Comcast, MLP and the Representatives (the "Underwriting
Agreement"), to purchase from the Company and Comcast, and the Company and
Comcast have severally agreed to sell to the Underwriters, respectively,
3,941,577 shares and 358,423 shares of the Company's Common Stock, which in
the aggregate equals the number of shares of Common Stock set forth opposite
the name of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
PaineWebber Incorporated.......................................
Montgomery Securities..........................................
---------
Total........................................................ 4,300,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the shares of Common Stock listed above are subject to certain
conditions. The Underwriting Agreement also provides that the Underwriters are
committed to purchase, and the Company and Comcast are obligated to sell, all
of the shares of Common Stock offered by this Prospectus, if any of the shares
of Common Stock being sold pursuant to the Underwriting Agreement are
purchased (without consideration of any shares that may be purchased through
the exercise of the Underwriters' overallotment option).
The Representatives have advised the Company and Comcast that the
Underwriters propose to offer the shares of Common Stock to the public
initially at the public offering price set forth on the cover of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession to other dealers not in excess of $ per share. After
the initial public offering of the Common Stock, the public offering price,
the concessions to selected dealers and reallowance to other dealers may be
changed by the Representatives.
MLP has granted to the Underwriters an option, exercisable during the 30-day
period after the date of this Prospectus, to purchase up to an additional
645,000 shares of Common Stock at the initial public offering price set forth
on the cover page of this Prospectus, less the underwriting discounts and
commissions. To the extent the Underwriters exercise the over allotment
option, each of the Underwriters will become obligated, subject to certain
conditions, to purchase such percentage of such additional shares of Common
Stock as is approximately equal to the percentage of shares of Common Stock
that each is obligated to purchase as shown in the table set forth above. The
Underwriters may exercise such option only to cover over-allotments, if any,
incurred in the sales of shares of Common Stock.
The Company, Comcast and MLP have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act,
or to contribute to payments that the Underwriters may be required to make in
respect thereof.
56
<PAGE>
The Company and each of its stockholders and holders of options to purchase
Common Stock have agreed not to offer, sell, contract to sell, or grant any
option to purchase or otherwise dispose of any shares of Common Stock owned by
any of them prior to the expiration of 180 days from the date of this
Prospectus, except (i) for shares of Common Stock offered hereby, (ii) with
the prior written consent of PaineWebber Incorporated, (iii) in the case of
any stockholder of the Company, gifts or transfers to (or to a trust
exclusively for the benefit of) members of the family, or one or more
beneficial owners, of such stockholder or their successors, subsidiaries or
controlled or controlling entities, in each case who agree to the terms of
such "lock-up" agreement and (iv) in the case of the Company, for the issuance
of shares of Common Stock upon the exercise of options, or the grant of
options to purchase shares of Common Stock, under the Replacement Option Plan
and the 1996 Stock Option Plan.
Prior to this Offering, there has been no public market for the Common Stock
of the Company. The IPO Price of the Common Stock will be established through
negotiations between the Company, the Underwriters and the Representatives.
Among the factors to be considered in determining the IPO Price, in addition
to prevailing market conditions, will be certain financial information of the
Company, the history of, and the prospects for, the Company and the industry
in which it competes, an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present state of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. The IPO Price set forth on the
cover page of this Prospectus should not, however, be considered an indication
of the actual value of the Common Stock. Such price is subject to change as a
result of market conditions and other factors. There can be no assurance that
an active trading market will develop for the Common Stock or that the Common
Stock will trade in the public market subsequent to this Offering at or above
the IPO Price.
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company and the selling stockholders by
Weil, Gotshal & Manges LLP, New York, New York. Certain legal matters in
connection with the offering of the Common Stock will be passed upon for the
Underwriters by Bogle & Gates P.L.L.C., Seattle, Washington.
EXPERTS
The financial statements of Muzak Limited Partnership included in this
Prospectus and the related financial statement schedule included elsewhere in
the Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and
elsewhere in the Registration Statement. These financial statements and the
financial statement schedule have been included herein and elsewhere in the
Registration Statement in reliance upon the reports of said firm given upon
their authority as experts in accounting and auditing.
The financial statements of Comcast Sound Communications, Inc. and
subsidiaries for the year ended December 31, 1993, included in this
Prospectus, have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report appearing herein (which report expresses an
unqualified opinion and includes an explanatory paragraph referring to
allocated management fees and costs), and have been so included in reliance
upon the report of said firm given upon their authority as experts in
accounting and auditing.
57
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") pursuant to the Securities Act, covering the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other document are
summaries of the material terms of such contract, agreement or document. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibits for a more
complete description of the matter involved. The Registration Statement
(including the exhibits and schedules thereto) filed with the Commission by
the Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained at prescribed rates from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company is not currently subject to the informational requirements of
the Exchange Act. As a result of the Offering, the Company will become subject
to the informational requirements of the Exchange Act. The Company will
fulfill its obligations with respect to such requirements by filing periodic
reports with the Commission. In addition, the Company intends to furnish to
its stockholders annual reports containing audited financial statements
certified by its independent auditors and quarterly reports containing
unaudited financial information for the first three quarters of each fiscal
year.
58
<PAGE>
MUZAK, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Balance Sheet as of March 31, 1996.................. F-3
Unaudited Pro Forma Statement of Operations for the three-month period
ended March 31, 1996................................................... F-4
Unaudited Pro Forma Statement of Operations for the year ended December
31, 1995............................................................... F-5
Notes to Unaudited Pro Forma Financial Statements....................... F-6
MUZAK LIMITED PARTNERSHIP
Independent Auditors' Report............................................ F-7
Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996...... F-8
Statements of Operations for the years ended December 31, 1993, 1994,
and 1995 and the three-month periods ended March 31, 1995 and 1996..... F-9
Statements of Partners' Capital for the years ended December 31, 1993,
1994, and 1995 and the three-month period ended March 31, 1996......... F-10
Statements of Cash Flows for the years ended December 31, 1993, 1994,
and 1995 and the three-month periods ended March 31, 1995 and 1996..... F-11
Notes to Financial Statements........................................... F-12
COMCAST SOUND COMMUNICATIONS, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................ F-23
Statement of Operations for the year ended December 31, 1993............ F-24
Statement of Cash Flows for the year ended December 31, 1993............ F-25
Notes to Financial Statements........................................... F-26
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following pro forma financial information sets forth historical
information which has been adjusted to reflect a recapitalization (the
"Recapitalization") which includes, among other things, (i) certain
transactions associated with the conversion of the Company into a corporate
form (the "Incorporation"), (ii) the income tax effects of the Incorporation
assuming the Incorporation occurred on September 1, 1992, (iii) the issuance
by the Company of 3,941,577 shares of Common Stock at an assumed offering
price of $15 per share in an initial public offering, net of related fees and
expenses, (iv) the application of the net proceeds to pay short-term
obligations established as part of the Incorporation, repayment of the
$12,500,000 of subordinated debt, and a reduction of the principal balance due
under the variable rate senior secured indebtedness, and (v) a reduction in
interest expense from the application of proceeds to reduce the Company's
long-term obligations.
Effect has not been given to the borrowing under the new credit facility
anticipated to be put in place at the completion of the Recapitalization, as
no definitive arrangements have been entered into with respect to that
facility. Non-recurring expenses for the year ended December 31, 1995 and
three-month period ended March 31, 1996 for (i) the write-off of $3,056,000
and $2,814,000, respectively, of deferred financing costs, (ii) the write-off
of $1,536,000 and $1,474,000, respectively, of unamortized discount associated
with long-term obligations expected to be repaid with the offering proceeds,
and (iii) the write-off of $878,000 and $746,000, respectively, of
organizational costs associated with the limited partnership structure have
not been reflected in the Pro Forma Statements of Operations. Similarly, non-
cash stock-based incentive compensation expenses under a compensatory stock
option plan adopted concurrently with the Recapitalization ("Replacement
Option Plan") have not been reflected in the Unaudited Pro Forma Statements of
Operations.
The Unaudited Pro Forma Statements of Operations assume the Recapitalization
took place at the beginning of the periods presented. The Unaudited Pro Forma
Balance Sheet assumes the Recapitalization took place on the date presented.
See "Notes to Unaudited Pro Forma Financial Statements." The pro forma
information is based on certain assumptions and estimates that management
believes are reasonable in the circumstances and does not purport to be
indicative of the results which actually would have been attained had the
above transactions occurred at the dates indicated or the results which may be
attained in the future. This information should be read in conjunction with
the Company's audited financial statements and related notes included
elsewhere in this Prospectus.
F-2
<PAGE>
MUZAK, INC.
UNAUDITED PRO FORMA BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
MUZAK INCORPORATION RECAPITALIZATION MUZAK, INC.
LIMITED PRO FORMA MUZAK, INC. PRO FORMA PRO FORMA
PARTNERSHIP ADJUSTMENTS PRO FORMA ADJUSTMENTS (AS ADJUSTED)
----------- ------------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equiva-
lents................ $ 1,770 $ 1,770 $ 1,770
Accounts receivable,
net of allowance
for doubtful accounts
of $654.............. 14,534 14,534 14,534
Inventories........... 3,081 3,081 3,081
Prepaid expenses...... 1,559 1,559 1,559
Other................. 327 327 327
------- -------- --------
Total current as-
sets............... 21,271 21,271 21,271
Property and equipment,
net.................... 36,543 36,543 36,543
Deferred costs and in-
tangible assets, net... 35,551 35,551 ($3,560)(5) 31,991
Other................... 993 993 993
------- -------- --------
Total................. $94,358 $ 94,358 $ 90,798
======= ======== ========
LIABILITIES AND OWNERSHIP EQUITY
Current Liabilities:
Revolving credit fa-
cility............... $10,950 $ 10,950 $ 10,950
Accounts payable...... 6,609 6,609 6,609
Advance billings...... 3,603 3,603 3,603
Accrued expenses...... 4,708 4,708 4,708
Repurchase obliga-
tions................ $23,118(3) 23,118 (23,118)(6)
Current portion of
long-term
obligations.......... 6,367 6,367 6,367
------- -------- --------
Total current lia-
bilities........... 32,237 55,355 32,237
Long-term obligations,
net of current
portion................ 44,150 10,200(1) 54,350 (18,617)(6) 24,707
1,474 (5)
(12,500)(6)
Unearned installation
income................. 3,036 3,036 3,036
Redeemable preferred
partnership interests.. 15,993 (10,200)(1)
(5,793)(2)
Ownership Equity
Partners' capital (def-
icit):
Limited partners' in-
terests.............. 4,875
(23,118)(3)
18,243 (4)
General partners' in-
terests.............. (5,933) 5,933 (4)
------- -------- --------
Total partners' cap-
ital (deficit)..... (1,058)
Stockholders' equity:
Common stock and paid
in capital........... 67 (4) 67 54,235 (6) 54,302
Accumulated deficit... (18,310)(4) (18,450) (5,034)(5) (23,484)
(5,933)(4)
5,793 (2)
------- -------- --------
Total stockholders'
equity............. (18,383) 30,818
------- -------- --------
Total ownership equity.. (1,058) (18,383) 30,818
------- -------- --------
Total................... $94,358 $ 94,358 $ 90,798
======= ======== ========
</TABLE>
F-3
<PAGE>
MUZAK, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OTHER
MUZAK INCORPORATION RECAPITALIZATION MUZAK, INC.
LIMITED PRO FORMA MUZAK, INC. PRO FORMA PRO FORMA
PARTNERSHIP ADJUSTMENTS PRO FORMA ADJUSTMENTS (AS ADJUSTED)
----------- ------------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Music and other
business services..... $13,306 $13,306 $13,306
Equipment and related
services.............. 7,634 7,634 7,634
------- ------- -------
Total revenues........ 20,940 20,940 20,940
------- ------- -------
Cost of revenues:
Music and other
business services..... 3,708 3,708 3,708
Equipment and related
services.............. 5,254 5,254 5,254
------- ------- -------
Total cost of
revenues............. 8,962 8,962 8,962
------- ------- -------
Gross profit.......... 11,978 11,978 11,978
Selling, general and
administrative
expenses............... 7,526 7,526 7,526
Depreciation............ 2,537 2,537 2,537
Amortization............ 2,137 2,137 2,137
------- ------- -------
Operating loss........ (222) (222) (222)
Interest expense........ 1,798 $176(7) 1,974 ($1,100)(9) 874
Other expense, net...... 122 122 122
------- ------- -------
Net loss before pro
forma income tax
benefit................ (2,142) (2,318) (1,218)
Pro forma income tax
benefit................ 0(8) 0(8)
------- ------- -------
Pro forma net loss...... (2,142) (2,318) (1,218)
Redeemable preferred
return................. (172) 172(7)
------- ------- -------
Pro forma net loss
attributable to common
stockholders........... ($2,314) ($2,318) ($1,218)
======= ======= =======
Pro forma net loss
attributable to common
stockholders per
share.................. ($0.32) ($0.11)
======= =======
Pro forma weighted
average shares
outstanding............ 7,128 11,069
======= =======
</TABLE>
F-4
<PAGE>
MUZAK, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OTHER
MUZAK INCORPORATION RECAPITALIZATION MUZAK, INC.
LIMITED PRO FORMA MUZAK, INC. PRO FORMA PRO FORMA
PARTNERSHIP ADJUSTMENTS PRO FORMA ADJUSTMENTS (AS ADJUSTED)
----------- ------------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Music and other
business services..... $52,489 $52,489 $52,489
Equipment and related
services.............. 34,392 34,392 34,392
------- ------- -------
Total revenues........ 86,881 86,881 86,881
------- ------- -------
Cost of revenues:
Music and other
business services..... 14,465 14,465 14,465
Equipment and related
services.............. 23,895 23,895 23,895
------- ------- -------
Total cost of
revenues............. 38,360 38,360 38,360
------- ------- -------
Gross profit.......... 48,521 48,521 48,521
Selling, general and
administrative
expenses............... 28,496 28,496 28,496
Depreciation............ 9,382 9,382 9,382
Amortization............ 8,909 8,909 8,909
------- ------- -------
Operating income...... 1,734 1,734 1,734
Interest expense........ 7,483 $702(7) 8,185 ($4,401)(9) 3,784
Other income, net....... (35) (35) (35)
------- ------- -------
Net loss before pro
forma income tax
benefit................ (5,714) (6,416) (2,015)
Pro forma income tax
benefit................ 0(8) 0 (8)
------- ------- -------
Pro forma net loss...... (5,714) (6,416) (2,015)
Redeemable preferred
return................. (657) 657(7)
------- ------- -------
Pro forma net loss
attributable to common
stockholders........... ($6,371) ($6,416) ($2,015)
======= ======= =======
Pro forma net loss
attributable to common
stockholders per
share.................. ($0.89) ($0.18)
======= =======
Pro forma weighted
average shares
outstanding............ 7,128 11,069
======= =======
</TABLE>
F-5
<PAGE>
MUZAK, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(1) Adjustment to reflect the conversion of a non-participating, but accreting
preferred partnership interest into a 7% subordinated long-term note as
part of the Incorporation.
(2) Adjustment to reflect the conversion of a non-participating, but accreting
preferred partnership interest into Common Stock as part of the
Incorporation.
(3) Adjustment to reflect the conversion of certain minority interests into
payment obligations as part of the Incorporation.
(4) Adjustment to reflect the exchange of the general and certain limited
partnership interests for Common Stock as part of the Incorporation.
(5) Adjustment to record the write-off of the unamortized debt discount and
deferred financing costs associated with the early extinguishment of debt
through the application of net proceeds and write-off of organizational
costs associated with the limited partnership.
(6) Adjustment to give effect to the use of proceeds from the issuance of
3,941,577 shares of Common Stock being offered by the Company to fund the
payment of (i) the payment obligations created in the Incorporation, (ii)
the subordinated debt, and (iii) a portion of the senior variable rate
notes.
(7) Adjustment to record interest on the 7% subordinated long-term note issued
as a result of the conversion of a non-participating, but accreting
preferred partnership interest as part of the Incorporation.
(8) Adjustment to reflect an income tax benefit and related 100% valuation
allowance (assuming an effective tax rate of 40%) as if the Company had
operated in a corporate form from the beginning of the period and been
subject to federal and state income taxes.
(9) Adjustment to reduce interest expense as a result of the paydown of debt
from the application of net proceeds of the offering.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
General and Limited Partners
Muzak Limited Partnership
Seattle, Washington
We have audited the accompanying balance sheets of Muzak Limited Partnership
(the "Company") as of December 31, 1995 and 1994, and the related statements
of operations, partners' capital, and cash flows for each of the three years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Muzak Limited Partnership as of December
31, 1995 and 1994, and the results of operations and its cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
March 6, 1996
(May 10, 1996, as to Notes 3 and 11)
F-7
<PAGE>
MUZAK LIMITED PARTNERSHIP
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1994 1995 1996
-------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................... $ 1,445 $ 1,115 $ 1,770
Accounts receivable, net of allowance for
doubtful accounts
of $736, $632 and $654........................ 15,868 15,534 14,534
Inventories.................................... 4,070 3,473 3,081
Prepaid expenses............................... 1,462 1,543 1,559
Other.......................................... 491 357 327
-------- ------- -------
Total current assets......................... 23,336 22,022 21,271
Property and equipment, net...................... 37,588 36,586 36,543
Deferred costs and intangible assets, net........ 41,435 36,706 35,551
Other............................................ 733 1,125 993
-------- ------- -------
Total assets................................. $103,092 $96,439 $94,358
======== ======= =======
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Revolving credit facility...................... $ 6,000 $ 9,300 $10,950
Accounts payable............................... 8,085 6,818 6,609
Advance billings............................... 4,337 4,533 3,603
Accrued expenses............................... 3,525 2,902 4,708
Current portion of long-term obligations....... 4,455 5,911 6,367
-------- ------- -------
Total current liabilities.................... 26,402 29,464 32,237
Long-term obligations, net of current portion.... 52,378 47,094 44,150
Unearned installation income..................... 1,676 2,786 3,036
Commitments and contingencies (Note 8)...........
Redeemable preferred partnership interests....... 14,693 15,722 15,993
PARTNERS' CAPITAL (DEFICIT):
Limited partners' interests.................... 7,368 5,637 4,875
General partners' interests.................... 575 (4,264) (5,933)
-------- ------- -------
Total partners' capital (deficit)............ 7,943 1,373 (1,058)
-------- ------- -------
Total liabilities and partners' capital...... $103,092 $96,439 $94,358
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
MUZAK LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-
MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Music and other business
services....................... $36,800 $50,410 $52,489 $12,941 $13,306
Equipment and related services.. 21,741 33,006 34,392 8,265 7,634
------- ------- ------- ------- -------
Total revenues................ 58,541 83,416 86,881 21,206 20,940
------- ------- ------- ------- -------
Cost of revenues:
Music and other business
services....................... 10,611 13,685 14,465 3,518 3,708
Equipment and related services.. 16,756 23,413 23,895 5,720 5,254
------- ------- ------- ------- -------
Total cost of revenues........ 27,367 37,098 38,360 9,238 8,962
------- ------- ------- ------- -------
Gross profit...................... 31,174 46,318 48,521 11,968 11,978
Selling, general and
administrative expenses.......... 19,603 28,699 28,496 7,410 7,526
Depreciation...................... 4,349 8,211 9,382 2,303 2,537
Amortization...................... 6,942 9,622 8,909 2,196 2,137
------- ------- ------- ------- -------
Operating income (loss)......... 280 (214) 1,734 59 (222)
Interest expense.................. 3,785 6,990 7,483 1,901 1,798
Other (income) expense, net....... (30) (21) (35) (32) 122
------- ------- ------- ------- -------
Net loss before pro forma income
tax benefit.................... (3,475) (7,183) (5,714) (1,810) (2,142)
Unaudited pro forma information
(Note 3):
Pro forma income tax benefit.... -- -- -- -- --
------- ------- ------- ------- -------
Pro forma net loss.............. ($3,475) ($7,183) (5,714) ($1,810) (2,142)
======= ======= =======
Class C redeemable preferred
return......................... (657) (172)
------- -------
Pro forma net loss attributable
to common stockholders......... ($6,371) ($2,314)
======= =======
Pro forma net loss attributable
to common stockholders per
share ......................... ($0.89) ($0.32)
======= =======
Pro forma weighted average
shares outstanding............. 7,128 7,128
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
MUZAK LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE UNAUDITED THREE-
MONTH PERIOD ENDED MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS B
CLASS A CLASS B LIMITED PREFERRED TOTAL
GENERAL LIMITED CLASS A LIMITED PARTNERS' LIMITED LIMITED
PARTNERS' PARTNERS' PUT/CALL PARTNERS' SUBSCRIPTIONS PARTNERS' PARTNERS'
INTERESTS INTERESTS OPTIONS INTERESTS RECEIVABLE INTERESTS INTERESTS TOTAL
--------- --------- -------- --------- ------------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1993................... $ 8,921 $ 1,315 $ 927 $1,628 ($ 592) $ -- $ 3,278 $12,199
Net loss............... (2,422) (360) (255) (438) (1,053) (3,475)
Payment of foreign
income taxes.......... (56) (8) (6) (10) (24) (80)
Preferred return on
redeemable preferred
interests............. (399) (59) (42) (72) (173) (572)
Redemption of Class B
limited partnership
interest.............. (50) 25 (25) (25)
------- ------- ------ ------ ------ ------ ------- -------
Balance, December 31,
1993................... 6,044 888 624 1,058 (567) -- 2,003 8,047
Net loss............... (4,802) (887) (561) (933) (2,381) (7,183)
Payment of foreign
income taxes.......... (43) (8) (5) (8) (21) (64)
Preferred return on
redeemable preferred
interests............. (624) (115) (73) (121) (309) (933)
Contributions by
partners.............. 967 175 (246) 7,000 7,896 7,896
Principal payments on
subscriptions
receivable............ 180 180 180
------- ------- ------ ------ ------ ------ ------- -------
Balance, December 31,
1994................... 575 (122) 952 171 (633) 7,000 7,368 7,943
Net loss............... (3,690) (682) (621) (721) (2,024) (5,714)
Payment of foreign
income taxes.......... (51) (14) (9) (12) (35) (86)
Preferred return on
redeemable preferred
interests............. (665) (123) (112) (129) (364) (1,029)
Preferred return on
preferred limited
partners' interests... (433) (80) (73) (85) 671 433 --
Principal payments on
subscriptions
receivable............ 259 259 259
------- ------- ------ ------ ------ ------ ------- -------
Balance, December 31,
1995................... (4,264) (1,021) 137 (776) (374) 7,671 5,637 1,373
Net loss............... (1,383) (256) (233) (270) (759) (2,142)
Payment of foreign
income taxes.......... (12) (2) (2) (2) (6) (18)
Preferred return on
redeemable preferred
interests............. (175) (32) (30) (34) (96) (271)
Preferred return on
preferred limited
partners' interests... (99) (18) (17) (19) 153 99 --
Contribution by
Partner............... 105 (105) -- --
------- ------- ------ ------ ------ ------ ------- -------
Balance, March 31,
1996................... ($5,933) ($1,329) ($ 145) ($996) ($ 479) $7,824 $ 4,875 ($1,058)
======= ======= ====== ====== ====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
MUZAK LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE-
MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................ ($3,475) ($7,183) ($5,714) ($1,810) ($2,142)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Provision for doubtful
accounts..................... 464 610 810 156 173
Depreciation.................. 4,349 8,211 9,382 2,303 2,537
Amortization, net of deferred
financing costs.............. 6,942 9,622 8,909 2,196 2,137
Deferred financing cost
amortization................. 529 1,159 1,310 333 304
Loss in equity of joint
venture...................... -- -- -- -- 43
Changes in operating assets and
liabilities:
Accounts receivable........... (3,442) (1,890) (476) 1,841 916
Inventories................... (476) (259) 597 848 393
Accounts payable.............. 1,137 1,970 (1,267) (1,152) (209)
Accrued expenses.............. (840) 1,198 (623) (913) 701
Advance billings.............. 507 1,200 194 84 175
Unearned installation income.. 577 1,099 1,110 273 250
Other, net.................... 154 (79) (35) (27) 10
------- ------- ------- ------- -------
Net cash provided by operating
activities................... 6,426 15,658 14,197 4,132 5,288
------- ------- ------- ------- -------
INVESTING ACTIVITIES
Additions to property and
equipment...................... (4,537) (9,531) (8,116) (1,803) (2,552)
Additions to deferred costs and
intangible assets.............. (3,698) (4,273) (4,641) (1,173) (1,224)
Acquisitions of businesses and
ventures, net of cash
acquired....................... -- (33,294) (557) -- --
Other, net...................... 42 52 3 26 60
------- ------- ------- ------- -------
Net cash used in investing
activities................... (8,193) (47,046) (13,311) (2,950) (3,716)
------- ------- ------- ------- -------
FINANCING ACTIVITIES
Borrowings under revolving notes
payable, net................... 3,250 2,250 3,300 750 1,650
Borrowings on term debt......... -- 34,034 -- -- --
Principal payments on term
debt........................... (900) (11,500) (4,111) (1,500) (2,490)
Payments on other long-term
debt........................... -- (986) (30) 45 (45)
Payments under capital leases... (484) (413) (432) (112) (15)
Contributions by partners....... -- 8,076 259 25 --
Other, net...................... (104) (64) (202) (9) (17)
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities......... 1,762 31,397 (1,216) (801) (917)
------- ------- ------- ------- -------
Net increase (decrease) in
cash and cash equivalents.... (5) 9 (330) 381 655
CASH AND CASH EQUIVALENTS,
beginning of period.............. 1,441 1,436 1,445 1,445 1,115
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period........................... $ 1,436 $ 1,445 $ 1,115 $ 1,826 $ 1,770
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1995 AND
1996 IS UNAUDITED.)
1. THE COMPANY AND ITS BUSINESS:
Muzak Limited Partnership (the "Company") provides business music services
and also produces, markets and sells broadcast data delivery, video, audio
marketing and in-store advertising services through a network of domestic and
international franchises and owned operations. The franchisees are charged a
fee based on their revenues, as well as certain other fees, in exchange for
broadcast music, marketing, technical and administrative support. The Company
and its franchisees also sell, install and maintain electronic equipment
related to the Company's business.
The Company develops and uses proprietary techniques for blending music into
programs which have a measurable and predictable effect on listeners. The
Company's music is primarily sold for use in public areas, such as retail
establishments and restaurants, and work areas, such as business offices and
manufacturing facilities. Services are distributed through direct broadcast
satellite transmission, local broadcast transmissions and pre-recorded tapes
played on the customers' premises.
The Company is subject to certain business risks which could affect future
operations and financial performance. These risks include rapid technological
change, competitive pricing, concentrations in and dependence on satellite
delivery capabilities, and development of new services.
Business Acquisitions
As of September 1, 1992, the Company commenced operations in its current
form (the "Partnership") through an acquisition (the "1992 Acquisition") of
substantially all of the assets, including the right to operate under its
current name, from a predecessor partnership (the "Seller"). The acquisition
was accounted for as a purchase with the purchase price allocated to the
individual assets, based on their estimated fair values at the date of
acquisition.
On January 31, 1994, the Company acquired substantially all the net assets
of Comcast Sound Communications, Inc. ("Comcast"), previously the Company's
largest franchisee. The net assets were acquired for approximately $33
million, including a $5 million redeemable preferred partnership interest
issued to Comcast and closing costs. The acquisition was financed through
additional bank borrowings and the contribution of certain assets by Comcast
in exchange for a redeemable preferred partnership interest. The transaction
was accounted for as a purchase with the purchase price allocated to the
individual assets based on the fair values at the date of acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial information, as of and for the three-month periods
ended March 31, 1995 and 1996, was prepared by the Company in a manner
consistent with the audited financial statements and pursuant to the rules and
requirements of the Securities and Exchange Commission. The unaudited
information, in management's opinion, reflects all adjustments which are of a
normal recurring nature and which are necessary to present fairly the results
of the periods presented. The results of operations for the three month period
ended March 31, 1996, are not necessarily indicative of the results to be
expected for the entire year.
Cash Equivalents
Short-term investments with maturities at the date of purchase of ninety
days or less are considered cash equivalents. Their recorded amount
approximates fair value.
F-12
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
Inventories
Inventories consist primarily of electronic equipment and are recorded at
the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment consist primarily of equipment provided to
subscribers and machinery and equipment, recorded at cost. Major renewals and
betterments are capitalized to the property accounts while replacements,
maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed.
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the related assets, ranging from five to forty
years. Assets acquired under capital leases and leasehold improvements are
amortized on a straight-line basis over the shorter of their estimated useful
lives or the term of the related leases.
Deferred Costs and Intangible Assets
Income producing contracts, acquired through acquisitions, are being charged
to amortization expense on an accelerated method over their period of expected
benefit of eight years. Deferred financing costs are being charged to interest
expense on the effective interest method over the term of the related
agreements. Other deferred costs and intangible assets are recorded at cost
and are being charged to amortization expense over their estimated useful
lives or their period of expected benefit ranging from two and one-half to ten
years.
The carrying value of long lived assets is reviewed on a regular basis for
the existence of facts or circumstances that may indicate that the carrying
amount is not recoverable. To date, no impairment has been indicated. Should
there be an impairment in the future, the Company will measure the impairment
based on the discounted expected future cash flows from the impaired assets.
Revenue Recognition
Revenues are recognized in the month that the services are provided. Fees
from franchisees are recognized as music revenues in the month that the
franchisee generates its revenues. Equipment and related services revenues are
recorded in the period that the installation is completed.
Advance Billings
The Company bills certain customers in advance for contracted music and
other business services. Amounts billed in advance of the service period are
deferred when billed and recognized as revenue in the period earned.
Unearned Installation Income
The Company defers recognition of income from the installation of equipment
provided to subscribers and recognizes these amounts as revenue on a straight-
line basis over the average subscriber service period.
Income Taxes
The income tax effects of all earnings or losses of the Company are passed
directly to the partners. Payment of foreign income taxes is reflected as a
reduction to the partners' capital accounts. Thus, no provision or benefit for
federal, state, local or foreign income taxes is required.
F-13
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standard ("SFAS") Number 123, "Accounting
for Stock-Based Compensation" was recently issued and is effective for the
Company beginning January 1, 1996. SFAS Number 123 requires expanded
disclosures of equity-based compensation arrangements with employees and does
not require, but encourages compensation cost to be measured based on fair
value of the equity instrument when awarded. The Company, as allowed, intends
to continue to measure equity-based compensation using its current method of
accounting prescribed by Accounting Principles Board Opinion Number 25 that
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will be required to disclose certain
additional information related to its stock-based compensation; however,
management believes the impact to the financial statements, as a whole, will
not be material.
3. UNAUDITED PRO FORMA INFORMATION:
Statements of Operations
The Company has operated as a partnership since the 1992 Acquisition, and
accordingly, has not recorded any provision or benefit for federal and state
income taxes, nor any related assets or liabilities. Prior to the closing of
the proposed public offering the Company will change its structure to a
corporate form, as described in Note 11. The objective of the pro forma
information is to show what the effects on historical financial statements
might have been for the years ended December 31, 1993, 1994 and 1995 and
three-month periods ended March 31, 1995 and 1996 had the Company operated in
the corporate form since inception. These pro forma adjustments reflect a tax
benefit for state and federal income taxes based upon an estimated effective
rate of 40%, as if the Company was subject to such taxes. A 100% valuation
allowance has been recorded, based on the Company's insufficient levels of
taxable income available to recognize benefits of the net operating loss
carryforwards.
The pro forma adjustments also include the preferred return attributable to
the Class C Preferred Limited Partnership interest which will be converted
into a 7% subordinated long-term note upon completion of the Reorganization.
Net Loss Attributable to Common Stockholders
Pro forma net loss attributable to common stockholders per share is based on
the weighted average number of shares outstanding, and after consideration of
the dilutive effect of stock options granted, using the treasury stock method.
Pursuant to rules of the Securities and Exchange Commission, all stock options
granted at a price less than the initial public offering price during the
twelve months preceding the Offering date have been included as common stock
equivalents in the calculation of weighted average shares outstanding for all
periods presented. All other common stock equivalents are excluded from the
calculation of weighted average shares outstanding, as they are anti-dilutive.
F-14
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT, NET:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Equipment provided to subscribers............ $ 37,305 $ 42,847 $ 44,273
Machinery and equipment...................... 6,469 7,628 8,378
Vehicles..................................... 2,403 2,872 2,856
Furniture and fixtures....................... 1,948 2,133 2,170
Land and buildings........................... 1,001 858 858
Leasehold improvements....................... 710 833 848
-------- -------- --------
Total property and equipment............... 49,836 57,171 59,383
Less--accumulated depreciation and amortiza-
tion........................................ (12,248) (20,585) (22,840)
-------- -------- --------
$ 37,588 $ 36,586 $ 36,543
======== ======== ========
</TABLE>
5. DEFERRED COSTS AND INTANGIBLE ASSETS, NET:
Deferred costs and intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Income producing contracts................... $ 39,676 $ 39,826 $ 39,826
Deferred subscriber acquisition costs........ 4,604 7,784 8,570
Master recording rights and deferred
production costs............................ 6,310 7,770 8,184
Deferred financing costs..................... 5,661 5,783 5,783
Organization costs........................... 4,202 4,454 4,471
Non-compete agreements....................... 846 846 846
Other........................................ 634 702 710
-------- -------- --------
Total deferred costs and intangible
assets.................................... 61,933 67,165 68,390
Less--accumulated amortization............... (20,498) (30,459) (32,839)
-------- -------- --------
$ 41,435 $ 36,706 $ 35,551
======== ======== ========
</TABLE>
6. LONG-TERM OBLIGATIONS:
Long-term obligations are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1994 1995 1996
------- ------- ---------
<S> <C> <C> <C>
Variable rate senior term loan.................. $45,100 $40,989 $38,499
Fixed rate subordinated note, net of unamortized
discount
of $1,792, $1,536 and $1,474................... 10,708 10,964 11,026
Capital lease obligations....................... 705 762 748
Other........................................... 320 290 244
------- ------- -------
Total long-term obligations................... 56,833 53,005 50,517
Less--current portion........................... ( 4,455) ( 5,911) (6,367)
------- ------- -------
$52,378 $47,094 $44,150
======= ======= =======
</TABLE>
F-15
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG- TERM OBLIGATIONS, (CONTINUED)
Credit Agreements
The variable rate senior term loan is a $46,600,000 term loan (the "Credit
Agreement") with a group of banks for which Union Bank of Switzerland (the
"Agent Bank"), an affiliate of a limited partner, is acting as agent. The
Credit Agreement also includes a $13,000,000 revolving credit facility. The
terms of the Credit Agreement, as amended, require the Company to meet certain
financial ratios and performance criteria and impose restrictions on capital
spending, the incurrence of additional debt, and distributions to partners,
among other things. Distributions to partners are limited to distributions
that offset tax liabilities to the partners resulting from the Company's
taxable income. Substantially all of the Company's assets and proceeds from
certain insurance policies are pledged as collateral under the Credit
Agreement.
The fixed rate subordinated note (the "Subordinated Note") was obtained from
a group of banks that were issued options to purchase Class A limited
partnership units (the "Put/Call Units") in connection with this credit
arrangement. The value of these Put/Call Units has been accounted for as debt
discount and amortized on the effective interest method over the term of this
note. The Subordinated Note requires the Company to maintain certain
performance criteria and covenants, similar to, but less restrictive than the
Credit Agreement. Substantially all of the Company's assets and proceeds from
certain insurance policies are pledged as collateral under this agreement.
Interest Rates and Payments
Interest under the Credit Agreement is paid at an interest rate based on the
Agent Bank's prime rate or LIBOR in quarterly installments. During the years
ended December 31, 1993, 1994 and 1995, the effective weighted average
interest rates on borrowings under the Credit Agreement were 9.1%, 10.0% and
11.2%, and for the three-month periods ended March 31, 1995 and 1996 were
11.2% and 10.6%, respectively, including the effects of the interest rate swap
agreement described below. Interest under the Subordinated Note is paid in
semi-annual installments at a rate of 12.5%, an effective rate of 14.5%, after
amortization of the debt discount. The capital lease obligations require
monthly installments of interest at a weighted average interest rate of
approximately 10.0%. Total cash paid for interest on long-term obligations was
approximately $3,340,000, $5,460,000 and $5,760,000 for the years ended
December 31, 1993, 1994 and 1995, and for the three-month periods ended March
31, 1995 and 1996 were $2,009,000 and $1,944,000, respectively.
Future Maturities
The variable rate senior term loan under the Credit Agreement requires semi-
annual principal installments through 2001. The Subordinated Note payable is
due in semi-annual installments in 2001 and 2002. The lease obligations are
due in monthly installments through 1999. The revolving credit facility
terminates and requires final payment on January 15, 2001. Total future
maturities of long-term obligations, for the five years following December 31,
1995 are: $5,911,000 in 1996; $7,323,000 in 1997; $8,139,000 in 1998;
$8,064,000 in 1999; and $8,297,000 in 2000.
Interest Rate Hedging
The Company has entered into an interest rate swap agreement with the Agent
Bank that effectively fixed the rate on $10,000,000 of the debt under the
Credit Agreement at December 31, 1995 and March 31, 1996. Net settlements are
recorded in interest expense. The risk of credit loss in the event of non-
performance by the counterparty to the swap agreement is considered by
management to be minimal.
F-16
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM OBLIGATIONS, (CONTINUED)
Financing Costs Paid to Related Parties
As of December 31, 1995 and March 31, 1996, the Agent Bank was an affiliate
of a Class A limited partner. In addition, the Subordinated Note holder held
the Put/Call Units. During the years ended December 31, 1993, 1994 and 1995,
and three-month periods ended March 31, 1995 and 1996, the Company incurred
interest expense related to these credit facilities of $3,670,000, $6,888,000,
$7,367,000, $1,868,000 and $1,770,000, respectively. Of these amounts,
$1,046,000, $1,336,000 and $905,000 are included in accrued expenses at
December 31, 1994 and 1995 and March 31, 1996, respectively. In addition, the
Company paid fees to the holders of the senior and subordinated notes payable
of $250,000, $1,943,000 and $122,000 in 1993, 1994 and 1995, respectively,
related to amendments to the Credit Agreement and the subordinated note
agreement. During the year ended December 31, 1994, the Company paid the
general partner $474,000 for its efforts related to obtaining the Company's
credit facilities and acquiring Comcast.
Fair Value
The recorded amount of the Company's long-term debt and related deferred
financing costs approximate current market prices for the same or similar
issues available to the Company for debt with similar remaining maturities.
7. BENEFIT PLANS:
Defined Contribution Plan
The Company maintains a defined contribution savings and retirement plan
(the "Benefit Plan") that covers substantially all employees. Under the
savings portion of the Benefit Plan, eligible employees may contribute from 2%
to 14% of their compensation, subject to Internal Revenue Code limitations.
The Company, at its discretion, may contribute a matching amount of up to 50%
of the first 6% contributed by the employee. Employees are 100% vested in
their contribution at all times and vest 100% in the Company portion at
December 31, of the year of the contribution. The Company recorded
contribution expense for the savings portion of the Benefit Plan of
approximately $114,000, $170,000 and $181,000 for the years ended December 31,
1993, 1994 and 1995 and $44,000 and $46,000 for the three-month periods ended
March 31, 1995 and 1996, respectively.
The retirement portion of the Benefit Plan is determined annually by the
Company at its discretion, but may not exceed 3% of the eligible employee's
compensation. The employees vest in the retirement portion of the Benefit Plan
ratably over five years, but become fully vested in the event of death,
disability or the attainment of the age of 65. The Company accrued $180,000
and $260,000 for the retirement portion of the Benefit Plan for the years
ended December 31, 1993 and 1994, respectively. No amounts were accrued for
the year ending December 31, 1995, or the three-month periods ended March 31,
1995 and 1996.
Multi-Employer Defined Contribution Plans
The Company participates in several multi-employer defined contribution
benefit plans that provide benefits to employees covered by certain labor
union contracts. The amount of expense related to contributions to these plans
was approximately $83,000, $110,000 and $108,000 for the years ended December
31, 1993, 1994 and 1995 and approximately $27,000 and $30,000 for the three-
month periods ended March 31, 1995 and 1996, respectively. These amounts were
determined by union contract and the Company does not administer or control
the funds.
F-17
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases certain facilities and equipment under both operating and
capital leases. In addition, the Company has entered into agreements to obtain
satellite channel capacity and subsidiary communication authorization rights
for the transmission of programs to the Company's customers. Total rental
expense under operating leases was approximately $5,590,000, $6,384,000 and
$7,698,000 for the years ended December 31, 1993, 1994 and 1995 and $1,873,000
and $1,588,000 for the three-month periods ended March 31, 1995 and 1996,
respectively.
Future annual minimum lease payments under noncancelable leases for the
years ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996................................................... $338 $ 6,011
1997................................................... 275 4,842
1998................................................... 147 3,955
1999................................................... 67 3,202
2000................................................... 2,765
Thereafter............................................. 6,208
---- -------
Total minimum lease payments........................... 827 $26,983
=======
Less amount representing interest...................... (65)
----
Present value of future minimum capital lease payments
included in long-term obligations..................... $762
====
</TABLE>
Assets acquired under capital leases were $135,000, $460,000 and $489,000
for the years ended December 31, 1993, 1994 and 1995, respectively. Assets
recorded under capital leases were $1,294,000, $1,141,000 and $1,198,000 with
accumulated amortization of $428,000, $307,000 and $358,000 as of December 31,
1994 and 1995 and March 31, 1996, respectively.
Contingent Purchase Consideration
The 1992 Asset Purchase Agreement, as amended ("Purchase Agreement"),
provides for contingent payments to the Seller if certain performance levels
are achieved in the five years following the closing of the 1992 Acquisition.
If the performance levels are achieved the Company will owe the Seller
additional purchase price of $5 million to $24 million. Any such payments, if
earned, will be allocated to the assets acquired or, if applicable, recorded
as additional purchased assets. No amounts have been paid or accrued as of
December 31, 1995 or March 31, 1996 pursuant to this provision, as the
possibility of obtaining the required performance objectives has been deemed
remote by management.
Taxes
An assessment was made against the Seller resulting from an audit performed
by the Washington State Department of Revenue for sales and use and business
and occupation taxes paid for the period from 1987 through September 1992.
Under successor liability statutes in the state of Washington, the Company
could, if the Seller fails to pay its tax obligation, become liable for the
assessment outstanding against the Seller of approximately $1,700,000.
This assessment is under appeal by the Seller, who under the Purchase
Agreement is liable for the entire assessment. Under the terms of the Purchase
Agreement, the Company has the right of offset against any future
F-18
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES, (CONTINUED)
payments from the Company to the Seller if the Seller fails to pay its tax
obligation. The Company's management does not believe that this assessment
will have any adverse effect on the Company's financial condition or results
of operations.
Employment Agreements
The Company has five-year employment agreements with certain senior
executive officers. These five-year agreements, expiring August 31, 1997,
provide certain benefits to the officers if involuntarily terminated by the
Company. As of December 31, 1994 and 1995 and March 31, 1996 no amounts have
been accrued related to these agreements.
Legal Proceedings
The Company is subject to various legal proceedings which arise in the
ordinary course of business. Company management believes none of these
proceedings, individually or in the aggregate, will have a material adverse
effect on the financial condition or results of operations of the Company.
9. REDEEMABLE PREFERRED PARTNERSHIP INTERESTS:
The redeemable preferred partnership interests are comprised of a Class C
and a C-1 preferred partnership interest. Both are non-voting interests that
do not participate in the Company's profits or losses. A summary of these
interests and their accumulated returns by period are as follows:
<TABLE>
<CAPTION>
CLASS C CLASS C-1 TOTAL
------- --------- -------
<S> <C> <C> <C>
Balance, January 1, 1993.......................... $ 8,188 $ -- $ 8,188
Preferred return................................. 572 -- 572
------- ------ -------
Balance, December 31, 1993........................ 8,760 -- 8,760
Class C-1 contribution........................... -- 5,000 5,000
Preferred return................................. 613 320 933
------- ------ -------
Balance, December 31, 1994........................ 9,373 5,320 14,693
Preferred return................................. 657 372 1,029
------- ------ -------
Balance, December 31, 1995........................ 10,030 5,692 15,722
Preferred return................................. 172 99 271
------- ------ -------
Balance, March 31, 1996........................... $10,202 $5,791 $15,993
======= ====== =======
</TABLE>
Class C Interest
The Class C limited partner is entitled to receive the amount of its initial
contribution of $8,000,000, plus a return of 7% compounded annually, through
November 30, 2002, the date of redemption. The Class C limited partner is
entitled to a preference in liquidation equal to its contribution plus
accumulated return. A general partner may, at its sole discretion, require the
Class C limited partner to exchange its interest for a note equal its then
aggregate liquidation preference amount. If the Class C limited partnership
units remain outstanding on November 30, 2002 the Company is required to
redeem such units for an amount equal to the Class C contribution plus
accumulated return.
Class C-1 Interest
The Class C-1 limited partner is entitled to receive the amount of its
initial contribution of $5,000,000, plus a return of 7% compounded annually,
through January 31, 2004, the date of redemption. The Class C-1 limited
partner may become, at its option, a participating partner. Upon becoming a
participating partner, the Class C-1
F-19
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. REDEEMABLE PREFERRED PARTNERSHIP INTERESTS, (CONTINUED)
limited partner will forfeit any accrued portion of the return. If it has not
previously become a participating partner, the Class C-1 limited partner is
entitled to a preference in liquidation equal to its contribution plus
accumulated return. Unless the Class C-1 interest becomes a participating
interest, a general partner may, at its sole discretion, require the Class C-1
limited partner to exchange its interest for a note equal to its then
aggregate liquidation preference amount. If such exchange occurs prior to the
time the Class C-1 limited partner has the opportunity to obtain participation
status, the Class C-1 limited partner will also be issued an option to acquire
the participating interest on substantially the same terms as if such exchange
had not occurred. If the Class C-1 limited partner has not obtained
participation status, or has not exchanged such units for notes, on or prior
to January 31, 2004, the Company is required to redeem such units for an
amount equal to the Class C-1 contribution plus accumulated return.
10. PARTNERS' CAPITAL:
Partners' capital is comprised of two general partners ("General Partners'
Interests"); Class A limited partners and Class B limited partners ("Limited
Partners' Interests"); Put/Call Units, and; preferred limited partners'
interests.
Put/Call Units
In connection with obtaining the fixed rate subordinated note payable, the
Company issued a lender an option to purchase 1,529,898 units of Class A
limited partnership interests, for an aggregate exercise price of $10. These
units are currently exercisable. The estimated value of the Put/Call Units was
recorded as a debt discount and is being amortized as an adjustment to
interest expense over the life of the related debt obligation.
Subscriptions Receivable
Officers and key employees of the Company have acquired limited partnership
interests, a portion of which were financed with subscription notes. As of
December 31, 1994 and 1995 and March 31, 1996, the Class B limited partners'
capital accounts were reduced by subscription notes receivable. Interest
income on the subscriptions receivable totaled $51,000 and $49,000 for the
years ended December 31, 1994 and 1995, and $14,000 and $8,000 for the three-
month periods ended March 31, 1995 and 1996.
Preferred Limited Partners' Interests
The preferred limited partners' interests, which were issued on November 4,
1994, do not participate in the Company's profits or losses. Such limited
partners are entitled to receive an 8% return, compounded quarterly, on the
amount of their initial contribution and are generally entitled to a priority
on distributions from the Company. At December 31, 1995 and March 31, 1996,
the return was credited to the preferred limited partners. These limited
partners are also entitled to a preference in liquidation equal to their
initial contribution plus accumulated and unpaid return. Upon the occurrence
of certain events, the units may, at the option of the Company, be redeemed by
the Company for an amount equal to the then aggregate liquidation preference
amount. The units (and any accrued and unpaid return) may, at the option of
the holder, be converted into units of Class B limited partnership interest at
any time.
Option Plan
Certain limited partners and key employees of the Company have the ability,
under certain conditions, as defined in the Management Option Plan (the
"Option Plan"), to exercise options to purchase partnership units. These
options vest at a rate of 20% per year, however, the scheduled vesting rate of
the options will be delayed
F-20
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. PARTNERS' CAPITAL, (CONTINUED)
and exercise precluded, if the Company fails to meet certain performance
standards, similar to those described in Note 8.
Activity under this plan and option price information is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ------------
<S> <C> <C>
Balance, January 1, 1993............................... 1,704,545 $1.00
Options granted....................................... -- --
Options canceled...................................... (70,000) 1.00
--------- ------------
Balance, December 31, 1993............................. 1,634,545 1.00
Options granted....................................... 165,000 1.50 - 1.75
Options canceled...................................... (85,000) 1.00
--------- ------------
Balance, December 31, 1994............................. 1,714,545 1.00 - 1.75
Options granted....................................... 150,000 1.75
Options canceled...................................... (30,000) 1.00
--------- ------------
Balance, December 31, 1995............................. 1,834,545 1.00 - 1.75
--------- ------------
Options granted....................................... -- --
Options canceled...................................... -- --
--------- ------------
Balance, March 31, 1996................................ 1,834,545 $1.00 - 1.75
========= ============
</TABLE>
Non-cash compensation expense resulting from this plan, if any, will be
charged to operations over the periods subject to these conditions when
management determines that it is probable that these performance objectives
will occur. From the inception of the Management Option Plan through March 31,
1996, no options have become exercisable. As the possibility of obtaining the
required performance objectives has been deemed remote by management, no
compensation expense has been recorded.
Put Option
After September 4, 1998, a general partner and certain of the Class A
limited partners can require the Company to purchase limited partnership units
held by them at fair market value. However, such right may not be exercised if
the purchase of units would have a material adverse effect on the Company or
would be in contravention of any then existing agreement to which the Company
is a party.
Allocation of Profits and Losses
Losses are allocated among the general partners and Class A and B limited
partners based upon the total of the interests held by each individual,
including the Put/Call Units under option, as a percentage of the total of all
such interests.
11. SUBSEQUENT EVENTS:
Incorporation and Public Offering
In April 1996, the general and limited partners authorized a plan to
establish the Company in corporate form (the "Incorporation") and also
authorized the filing of a Registration Statement for the initial underwritten
public offering of its common stock. The offering is expected to close in July
1996. The Incorporation will include the exchange of partnership units for
shares of common stock in a newly formed corporation.
F-21
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS, (CONTINUED)
A summary of this anticipated exchange of Partnership units for the common
stock of the new corporation is as follows:
<TABLE>
<CAPTION>
NUMBER
OF
NUMBER OF SHARES
UNITS AS OF OF COMMON
MARCH 31, 1996 STOCK
-------------- ---------
<S> <C> <C>
General Partners..................................... 9,100,585 3,903,869
Class A limited partnership.......................... 34,900 14,971
Class B limited partnership.......................... 1,836,953 787,996
Preferred limited partnership........................ 3,314,287 1,421,726
Class C-1 redeemable preferred partnership........... 1,420,368 609,294
---------- ---------
15,707,093 6,737,856
========== =========
</TABLE>
The Class C interests are anticipated to be converted into a 7% subordinated
note due in 2002. The Put/Call Units and a portion of the Class A interests
will be exchanged by the Company for short-term obligations to be paid from
proceeds of the public offering. A portion of the shares of common stock
received in exchange for Class C-1 interests will also be included in the
public offering.
Refinancing
In May 1996 the Company initiated plans to refinance debt under the Credit
Agreement. Based on current proposals under consideration, the terms of this
refinancing will likely involve a reduction in the principal payments over the
next five years and less restrictive financial covenants while maintaining the
Company's current borrowing capacity.
Option Plans
Upon the Incorporation, the Company intends to adopt a performance based
option plan (the "Replacement Option Plan") that replaces the Management
Option Plan. This Plan provides for the granting of options to purchase an
aggregate of 786,963 shares of common stock at an average exercise price of
$2.61 per share, divided into three equal groups for vesting and exercise
purposes. Non-cash compensation expense will be recorded with respect to
options under this option plan based on the difference between the exercise
price and the fair market value of the common stock beginning on such date
that it is deemed that the options are, in the judgment of management, likely
to become exercisable. Such non-cash expense will be recorded from such date
to the date the options become exercisable.
Additionally in 1996, the Company intends to adopt another option plan (the
"1996 Option Plan") principally to provide incentives to key employees and
directors not included in the Replacement Option Plan. The purchase price of
shares of common stock issuable upon exercise of each option granted pursuant
to the 1996 Option Plan will be the fair market value of the shares on the
date of grant. Options to be granted will expire seven years from the date of
grant, will vest in three equal installments over three years, and will be
exercisable when vested. An option committee will administer the Plan and
determine, among other things, the persons to receive options, the date of
grant of such options, the number of shares to be subject to each option, and
the purchase price of each share subject to such options.
F-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Comcast Corporation
Philadelphia, Pennsylvania
General and Limited Partners
Muzak Limited Partnership
Seattle, Washington
We have audited the accompanying consolidated statements of operations and
retained earnings and cash flows of Comcast Sound Communications, Inc. (a
wholly owned subsidiary of Comcast Corporation) and subsidiaries (the
"Company") for the year ended December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Comcast Sound Communications, Inc. and subsidiaries for the year
ended December 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for postretirement benefits other than
pensions effective January 1, 1993, to conform with Statement of Financial
Accounting Standards No. 106.
As discussed in Note 5 to the consolidated financial statements, Comcast
Corporation provided financing, allocated management fees and costs, and
conducted certain other business transactions with the Company. The
accompanying consolidated financial statements may not necessarily be
indicative of the conditions that would have existed or the results of
operations if Comcast Sound Communications, Inc. and subsidiaries had been
unaffiliated with Comcast Corporation.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 10, 1994
F-23
<PAGE>
COMCAST SOUND COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
Revenues:
Music and other business services................................ $16,710,062
Equipment and related services................................... 9,410,707
-----------
Total revenue................................................... 26,120,769
Cost of revenues.................................................. 10,255,239
-----------
Gross profit.................................................... 15,865,530
Selling, general and administrative expenses...................... 12,338,877
Depreciation and amortization..................................... 3,078,293
-----------
Operating income................................................ 448,360
Interest expense.................................................. 443,201
Other income...................................................... (70,866)
-----------
Income before income taxes and cumulative effect of accounting
change......................................................... 76,025
Income taxes...................................................... (152,000)
-----------
Loss before cumulative effect of accounting change................ (75,975)
Cumulative effect of accounting change............................ (405,000)
-----------
Net loss........................................................ (480,975)
Retained earnings, beginning of year.............................. 9,060,949
-----------
Retained earnings, end of year.................................... $ 8,579,974
===========
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE>
COMCAST SOUND COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss........................................................ ($ 480,975)
Noncash items included in net loss:
Cumulative effect of accounting change......................... 405,000
Depreciation and amortization.................................. 3,078,293
Deferred income taxes.......................................... 242,000
-----------
3,244,318
Adjustments to reconcile net income to net cash provided by op-
erating activities:
Increase in accounts receivable, inventories, and prepaid
charges and other assets...................................... (1,515,717)
Increase in accounts payable and accrued expenses, state income
and other taxes,
and deferred revenue.......................................... 327,118
-----------
Net cash provided by operating activities...................... 2,055,719
-----------
FINANCING ACTIVITIES
Repayment of long-term debt..................................... (11,929)
Proceeds from note payable...................................... 121,235
Net transactions with Comcast and affiliates.................... 1,668,899
-----------
Net cash provided by financing activities...................... 1,778,205
-----------
INVESTING ACTIVITIES
Additions to property and equipment............................. (4,389,710)
Deferred charges and other...................................... (221,938)
-----------
Net cash used in investing activities.......................... (4,611,648)
-----------
Net decrease in cash and cash equivalents...................... (777,724)
CASH AND CASH EQUIVALENTS, beginning of year...................... 1,397,347
-----------
CASH AND CASH EQUIVALENTS, end of year............................ $ 619,623
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid................................................... $ 445,000
Income taxes paid............................................... 483,000
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE>
COMCAST SOUND COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Comcast Sound
Communications, Inc. and its subsidiaries (the "Company"). The Company
provides sound communication services in the following states: California,
Colorado, Connecticut, Florida, Illinois, Indiana, Michigan, New York,
Pennsylvania and Texas. All significant intercompany accounts and transactions
among the consolidated entities have been eliminated. Through January 31,
1994, the Company was a wholly owned subsidiary of Comcast Corporation
("Comcast") (See Note 6).
Cash and cash equivalents includes cash on deposit and overnight investments
at a financial institution.
Depreciation of property and equipment is provided by the straight-line
method over estimated useful lives of 3-25 years.
Deferred charges and other assets include contract acquisition costs and
non-compete covenants and are being amortized over estimated useful lives
ranging from 5-10 years.
Excess of costs over net assets acquired is being amortized over 40 years
except for costs arising prior to November 1, 1970 of approximately $441,000,
which are not being amortized.
Revenues from the sale, service and installation of equipment are recognized
at the time the customer receives the product or service. Revenue for audio
services to customers under five-year contracts is recognized over the
contract period when earned.
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes" (see Note 2), and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (see Note 5).
2. INCOME TAXES
The Company joins with Comcast in filing a consolidated federal income tax
return. Effective January 1, 1993, Comcast and the Company adopted SFAS No.
109. SFAS No. 109 generally provides that deferred tax assets and liabilities
be recognized for temporary differences between the financial reporting basis
and the tax basis of the Company's assets and liabilities and expected
benefits utilizing net operating loss ("NOL") carryforwards. The impact on
deferred taxes of changes in tax rates and laws, if any, applied to the years
during which temporary differences are expected to be settled is reflected in
the financial statements in the period of enactment.
Pursuant to the deferred method under Accounting Principles Board Opinion
No. 11, "Accounting for Income Taxes," which was applied in 1992 and prior
years, deferred income taxes were recognized for income and expense items that
were reported in different years for financial reporting purposes and income
tax purposes using the tax rate applicable for the year of the calculation.
Under the deferred method, deferred taxes were not adjusted for subsequent
changes in tax rates.
In 1992 and prior years, under a tax sharing arrangement between the Company
and Comcast, income taxes were computed based upon book income and were
recorded as due to Comcast and affiliates. This tax sharing arrangement was
amended with the adoption of SFAS No. 109 to require the Company to pay to
Comcast taxes currently payable as if the Company was filing separate tax
returns.
F-26
<PAGE>
COMCAST SOUND COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has determined the amount of its deferred tax liability balance
at January 1, 1993, computed on a separate return basis, using Comcast's
effective tax rate, and has adjusted the due to Comcast and affiliate to
separately report this amount as a deferred tax liability, computed under SFAS
No. 109. The cumulative effect of adopting SFAS No. 109 is not material to the
Company's results of operations. Income tax expense consists of the following
components:
<TABLE>
<CAPTION>
1993
---------
<S> <C>
Current expense (benefit):
Federal......................................................... ($174,000)
State........................................................... 84,000
---------
(90,000)
---------
Deferred expense:
Federal......................................................... 222,000
State........................................................... 20,000
---------
242,000
---------
Income tax expense............................................... $152,000
=========
The effective income tax expense of the Company differs from the statutory
amount because of the effect of the following items:
<CAPTION>
1993
---------
<S> <C>
Federal tax at statutory rate ................................... $ 26,600
State income taxes, (net federal benefit)........................ 67,600
Increase in corporate federal income tax rate from 34% to 35%.... 43,000
Other............................................................ 14,800
---------
Income tax expense............................................... $152,000
=========
</TABLE>
3. COMMITMENTS
The Company and its subsidiaries lease office, warehouse and distribution
space and other equipment under various noncancellable operating leases.
Certain of the lease agreements contain renewal options.
At December 31, 1993, minimum annual commitments for rentals under
noncancellable leases are:
<TABLE>
<S> <C>
1994.............................................................. $1,066,779
1995.............................................................. 853,741
1996.............................................................. 651,311
1997.............................................................. 469,926
1998.............................................................. 303,615
Thereafter........................................................ 488,176
----------
$3,833,548
==========
</TABLE>
Rental expense (including amounts charged by Comcast) was approximately
$1,399,000 in 1993.
4. RELATED PARTY TRANSACTIONS
Management fees are charged by Comcast based on the Company's recurring and
nonrecurring revenues in 1993. Under these policies, management fees of
approximately $2,601,000 were charged to the Company and recorded in selling,
general and administrative expense in 1993. The 1993 management fee included
charges to
F-27
<PAGE>
COMCAST SOUND COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company of approximately $2,000,000 for salary continuation, closing
bonuses and legal fees associated with, but not contingent upon, the
subsequent sale of certain assets and liabilities of the Company (see Note 6).
The Company has entered into cost sharing arrangements with Comcast for
certain services, including insurance, rent and employee benefits. Under these
arrangements, the Company was charged approximately $1,682,000 in 1993.
The Company incurred $428,000 of interest expense related to a note payable
of $9,500,000, bearing an interest rate of 4.5%, to an affiliate (see Note 6).
See Note 2--Income Taxes.
See Note 3--Commitments.
See Note 5--Postretirement Benefits Other than Pensions.
5. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Certain employees of the Company are participants in Comcast's
postretirement benefit plans other than pensions. Effective January 1, 1993,
the Company adopted SFAS No. 106. This statement requires the Company to
accrue the estimated cost of retiree benefits earned during the years the
employee provides services. The Company previously expensed the cost of these
benefits as claims were incurred.
The Company's allocation from Comcast for the cumulative effect as of
January 1, 1993 of the adoption of SFAS No. 106 was to increase the Company's
amount due to Comcast and affiliate by approximately $675,000 and net loss by
approximately $405,000 (net of tax). The effect of SFAS No. 106 on loss before
the cumulative effect of accounting change was not significant to the
Company's 1993 results of operations.
6. SUBSEQUENT EVENT
On January 31, 1994, Comcast sold substantially all of the Company's assets
and liabilities to Muzak Limited Partnership. In connection with this sale,
the Company's $9.5 million long-term debt payable to an affiliate of Comcast
has been forgiven.
F-28
<PAGE>
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR THE UN-
DERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN-
DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OF-
FER OR SOLICITATION IS UNLAWFUL.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
The Company.............................................................. 13
The Recapitalization..................................................... 13
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Dilution................................................................. 16
Capitalization........................................................... 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 28
Management............................................................... 40
Certain Relationships and Related Transactions........................... 49
Principal and Selling Stockholders....................................... 51
Shares Eligible for Future Sale.......................................... 52
Description of Capital Stock............................................. 54
Underwriting............................................................. 56
Legal Matters............................................................ 57
Experts.................................................................. 57
Available Information.................................................... 58
Index to Financial Statements............................................ F-1
</TABLE>
----------------
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECU-
RITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
4,300,000 SHARES
[MUZAK LOGO]
COMMON STOCK
----------------
PROSPECTUS
----------------
PAINEWEBBER INCORPORATED
MONTGOMERY SECURITIES
----------------
, 1996
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the Registrant's estimated expenses in
connection with the issuance of the securities being registered, other than
underwriting discounts and commissions.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............. $ 25,578
NASD Filing Fee................................................. 7,918
Printing and Engraving Expenses................................. *
Counsel Fees and Expenses....................................... *
Financial Advisory Fee.......................................... $250,000
Accountants' Fees and Expenses.................................. *
Blue Sky Fees and Expenses...................................... *
Transfer Agent and Registrar Fees and Expenses.................. *
Nasdaq National Market Listing Fee.............................. *
Director and Officer Insurance Premiums......................... *
Miscellaneous................................................... *
--------
Total......................................................... $ *
========
</TABLE>
- - - --------
* To be filed by amendment
All such fees and expenses have been or will be paid by the Registrant.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL"), the law of the state in which the Registrant is incorporated,
empowers a corporation within certain limitations to indemnify a director,
officer, employee or agent of the corporation and certain other persons
serving at the request of the corporation in related capacities against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonable incurred by him in connection with any
action, suit or proceeding to which he is or was threatened to be a party
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, as long as he acted in good faith
and in a manner which he reasonably believed to be in, or not opposed to, the
best interests of the corporation. With respect to any criminal proceeding, he
must have had no reasonable cause to believe his conduct was unlawful. No such
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the Court in which such action or suit was brought shall determine
upon application that despite the adjudication of liability but in view of all
of the circumstances of the case such person is fairly and reasonably entitled
to indemnity for such expenses which the Court of Chancery of the State of
Delaware or such other court shall deem proper.
The Certificate of Incorporation of the Registrant provides that any person
may be indemnified against all expenses and liabilities to the fullest extent
permitted by the DGCL. The By-Laws allow the Registrant to advance or
reimburse litigation expenses upon submission by the director, officer or
employee of an undertaking to repay such advances or reimbursements if it is
ultimately determined that indemnification is not available to such director,
officer or employee and allow the Registrant to purchase and maintain
insurance for its directors and officers against liability asserted against
them in such capacity whether or not the Registrant would have the power to
indemnify them against such liability. The Registrant intends to acquire
directors' and officers' liability insurance.
II-1
<PAGE>
As permitted by Section 102 of the DGCL, the Certificate of Incorporation of
the Registrant provides that no director shall be liable to the Registrant or
its stockholders for monetary damages for breach of fiduciary duty as a
director other than (i) for breaches of the director's duty of loyalty to the
Registrant and its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
for the unlawful payment of dividends or unlawful stock purchases or
redemptions under Section 174 of the DGCL and (iv) for any transaction from
which the director derived an improper personal benefit.
The Underwriting Agreement being filed as Exhibit 1 hereto provides for
indemnification of directors and officers of the Registrant under certain
circumstances, including for liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the closing of the acquisition of the franchises of
Comcast Sound Communications, Inc. ("Comcast"), on January 31, 1994, the
Registrant issued a $5.0 million 7% preferred limited partnership interest of
the Partnership to Comcast. This transaction was exempt from registration
under Section 4(2) of the Securities Act as not involving a public offering.
No underwriter was involved in the transaction.
In November 1994, the Registrant amended its senior credit facility whereby
the Company's $10.0 million loan from Union Bank of Switzerland, New York
Branch, was repaid in full with proceeds from a subordinated financing
involving the sale of $7.0 million additional preferred partnership interests
to existing investors, including MLP Holdings L.P. and certain senior managers
of the Registrant, with a pledge of the limited partnership interests to the
lenders under the senior credit facility and an increase in the number of
units subject to the option agreement of Barclays Bank PLC, New York Branch.
This transaction was exempt from registration under Section 4(2) of the
Securities Act as not involving a public offering. No underwriter was involved
in the transaction.
In May 1996, prior to the filing of the Registration Statement, the general
and limited partners of the Partnership agreed to exchange the outstanding
partnership interests in the Partnership for cash and shares of Common Stock
pursuant to the Exchange and Transfer Agreement as part of the
Recapitalization described under "The Recapitalization" in the Prospectus.
This transaction was exempt from registration under Section 4(2) of the
Securities Act as not involving a public offering. No underwriter was involved
in the transaction.
In addition, as part of the Recapitalization, options to purchase
partnership interests outstanding under the Partnership's Management Option
Plan will be replaced with options to purchase shares of Common Stock under
the Company's Replacement Stock Option Plan. To the extent such transaction
constitutes an offer and sale of securities, such transaction is exempt from
registration under Section 4(2) of the Securities Act as not involving a
public offering and/or Rule 701 under the Securities Act. No underwriter is
involved in the transaction.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Registration Statement:
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
* 1 --Form of Underwriting Agreement
2 --Exchange and Transfer Agreement dated as of May 10, 1996, among
Muzak, Inc., Music Holdings Corp., the holders of partnership
interests of Muzak Limited Partnership, Barclays Bank PLC and
Exeter Venture Lenders, L.P.
3.1 --Certificate of Incorporation of the Registrant
3.2 --By-Laws of the Registrant
4.1 --Stockholders' Agreement of the Registrant
* 5 --Opinion of Weil, Gotshal & Manges LLP
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*10.1 --Asset Purchase Agreement dated as of March 11, 1992, among Muzak
Limited Partnership, Field/Muzak Inc., The Field Corporation and MLP
Operating, L.P., as amended by Muzak Limited Partnership's letters
dated April 22, 1992, August 6, 1992 and August 20, 1992, Amendment
No. 1 dated as of June 26, 1992, Amendment No. 2, dated July 31, 1992
and Amendment No. 3, dated as of August 26, 1992
*10.2 --Asset Purchase Agreement and Contribution Agreement dated as of
November 24, 1993 among Comcast Corporation, et al. and Muzak Limited
Partnership
*10.3 --Amended and Restated Credit Agreement dated as of September 4, 1992,
as amended as of October 22, 1992 and as of December 15, 1993; and as
amended and restated as of January 31, 1994 among Muzak Limited
Partnership, Union Bank of Switzerland, New York Branch,
Internationale Nederlanden (U.S.) Capital Corporation and the other
Lenders parties thereto and Union Bank of Switzerland, New York
Branch, as Agent; as amended by Waiver and Agreement dated as of
February 10, 1994; Waiver and Amendment No. 1 dated as of October 31,
1994; Waiver and Amendment No. 2 dated as of November 2, 1994;
Amendment No. 3 and Consent dated as of November 4, 1994; Amendment
No. 4 to Amended and Restated Credit Agreement dated as of November
17, 1994; Waiver dated January 10, 1995; Waiver dated as of July 31,
1995; Amendment No. 5 to Amended and Restated Credit Agreement dated
as of November 7, 1995; and Waiver dated as of April 1, 1996
*10.4 --Amended and Restated Term Notes issued as of September 4, 1992,
amended and restated as of January 31, 1994
*10.5 --Subordinated Loan Agreement dated as of September 4, 1992, as
amended, between Muzak Limited Partnership and Barclays Bank PLC, New
York Branch
*10.6 --Option Agreement dated as of September 4, 1992 between Muzak Limited
Partnership and Barclays Bank PLC, New York Branch
*10.7 --Uplink Facility Agreement dated as of December 28, 1995 between
EchoStar Satellite Corporation and Muzak Limited Partnership
*10.8 --DBS Programming Affiliation Agreement dated as of December 28, 1995
between EchoStar Satellite Corporation and Muzak Limited Partnership
*10.9 --Video Programming Sales Agent Agreement dated as of December 28,
1995 between EchoStar Satellite Corporation and Muzak Limited
Partnership
*10.10 --Form of Muzak(R) Participating Affiliate Agreement
*10.11 --Third and Broad Office Lease dated June 8, 1994, between Martin
Selig and Muzak Limited Partnership
*10.12 --ASCAP License
*10.13 --Joint Venture Agreement dated August 2, 1995 between Muzak Limited
Partnership and Alcas Holdings B.V.
*10.14 --Muzak(R) Master Affiliate Agreement (Mexico) dated March 1, 1992
between Muzak Limited Partnership and Audioplan S.A.
*10.15 --Muzak(R) Master Affiliate Agreement (Canada) dated August 30, 1990
between Muzak Limited Partnership and Chum Limited, as amended--Form
of Underwriting Agreement
*10.16 --FCC Licenses
*10.17 --Form of License Agreement (New Franchise Agreement), as amended
*10.18 --Form of Music Services Agreement
*10.19 --Form of Multi-Territory Account Service Agreement
*10.20 --Form of Sales of Adjunct Services and Form of Muzak Adjunct Services
Subscriber Agreement
*10.21 --Transponder Lease Agreement dated December 9, 1993 between
Microspace Communications Corporation and Muzak Limited Partnership
*10.22 --Transmission Lease Agreement dated January 31, 1995 between
Microspace Communications Corporation and Muzak Limited Partnership
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*10.23 --Transponder Lease Agreement dated January 31, 1995 between
Microspace Communications Corporation and Muzak Limited Partnership
*10.24 --Transponder Lease Agreement dated April 27, 1995 between Microspace
Communications Corporation and Muzak Limited Partnership
*10.25 --Transponder Lease Agreement dated July 5, 1995 between Microspace
Communications Corporation and Muzak Limited Partnership
*10.26 --Transponder Lease Agreement dated April 29, 1996 between Microspace
Communications Corporation and Muzak Limited Partnership
*10.27 --Agreement to Provide Telecommunications Service dated August 8 and
9, 1995 between Keystone Communications Corporation and Muzak Limited
Partnership
*10.28 --Sales Agreement and License dated September 28, 1995 between
Mainstream Data, Inc. and Muzak Limited Partnership
*10.29 --Muzak Limited Partnership Tempo Savings and Retirement Plan
*10.30 --Muzak Limited Partnership Tempo Savings and Retirement Trust
*10.31 --Muzak Limited Partnership Management Incentive Plan
*10.32 --Muzak Limited Partnership Management Option Plan
*10.33 --Muzak, Inc. Senior Management Stock Option Plan
*10.34 --Muzak, Inc. 1996 Employee Stock Option Plan
*10.35 --Employment Agreement dated August 31, 1992 of John R. Jester
*10.36 --Employment Agreement dated August 31, 1992 of James F. Harrison
*10.37 --Employment Letter dated July 7, 1995 of Kirk A. Collamer
11 --Calculations of pro forma net loss attributable to common
stockholders per share and supplemental pro forma net loss
attributable to common stockholders per share
21 --List of Subsidiaries of the Registrant
23.1 --Consent of Deloitte & Touche LLP and Report on Financial Statement
Schedule of Muzak Limited Partnership
23.2 --Consent of Deloitte & Touche LLP
*23.3 --Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5)
24 --Power of Attorney (included on the signature page to this
Registration Statement)
27 --Financial Data Schedules
</TABLE>
- - - --------
* To be filed by amendment
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts and Reserves
All other Schedules have been omitted because the information is not
applicable or is presented in the financial statements or the notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant under the General Corporation Law of the
State of Delaware or pursuant to the Registrant's Certificate of Incorporation
or By-Laws or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Seattle, State of
Washington, on May 14, 1996.
MUZAK, INC.
(Registrant)
/s/ John R. Jester
By __________________________________
John R. Jester
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of John R. Jester and Kirk A. Collamer, or
any of them, each acting alone, his true and lawful attorney-in-fact and agent
with full powers of substitution and resubstitution, for such person and in
his name, place and stead, in any and all capacities, in connection with the
Registrant's Registration Statement on Form S-1 under the Securities Act of
1933, including to sign the Registration Statement and any and all amendments
or supplements to the Registration Statement, including any and all stickers
and post-effective amendments to the Registration Statement and to sign any
and all additional registration statements relating to the same offering of
securities as those that are covered by the Registration Statement that are
filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and any applicable
securities exchange or securities self-regulatory body, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully, to all intents and purposes, as he might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ John R. Jester Chairman, President and May 14, 1996
_____________________________________ Chief Executive Officer
JOHN R. JESTER (Principal Executive
Officer)
/s/ Kirk A. Collamer Vice President and Chief May 14, 1996
_____________________________________ Financial Officer
KIRK A. COLLAMER (Principal Financial
Officer and Principal
Accounting Officer)
/s/ Bruce G. Pollack Director May 14, 1996
_____________________________________
BRUCE G. POLLACK
/s/ Paul F. Balser Director May 14, 1996
_____________________________________
PAUL F. BALSER
/s/ Mark E. Jennings Director May 14, 1996
_____________________________________
MARK E. JENNINGS
II-6
<PAGE>
MUZAK LIMITED PARTNERSHIP
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II (REG 210.12-09)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
--------------------- ----------
WRITE-
BALANCE AT CHARGED TO CHARGED TO OFFS, NET BALANCE
BEGINNING COSTS AND OTHER OF AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RECOVERIES PERIOD
----------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1995
Allowance for Doubtful
Accounts............... $736,000 $810,000 ($914,000) $632,000
======== ======== ========= ========
YEAR ENDED DECEMBER 31,
1994
Allowance for Doubtful
Accounts............... $558,000 $610,000 $359,000(a) ($791,000) $736,000
======== ======== ======== ========= ========
YEAR ENDED DECEMBER 31,
1993
Allowance for Doubtful
Accounts............... $648,000 $464,000 ($554,000) $558,000
======== ======== ========= ========
</TABLE>
- - - --------
(a) Comcast Acquisition as of January 31, 1994.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
* 1 --Form of Underwriting Agreement
2 --Exchange and Transfer Agreement dated as of May 10, 1996,
among Muzak, Inc., Music Holdings Corp., the holders of
partnership interests of Muzak Limited Partnership, Barclays
Bank PLC and Exeter Venture Lenders, L.P.
3.1 --Certificate of Incorporation of the Registrant
3.2 --By-Laws of the Registrant
4.1 --Stockholders' Agreement of the Registrant
* 5 --Opinion of Weil, Gotshal & Manges LLP
*10.1 --Asset Purchase Agreement dated as of March 11, 1992, among
Muzak Limited Partnership, Field/Muzak Inc., The Field
Corporation and MLP Operating, L.P., as amended by Muzak
Limited Partnership's letters dated April 22, 1992, August 6,
1992 and August 20, 1992, Amendment No. 1 dated as of June 26,
1992, Amendment No. 2, dated July 31, 1992 and Amendment No. 3,
dated as of August 26, 1992
*10.2 --Asset Purchase Agreement and Contribution Agreement dated as
of November 24, 1993 among Comcast Corporation, et al. and
Muzak Limited Partnership
*10.3 --Amended and Restated Credit Agreement dated as of September 4,
1992, as amended as of October 22, 1992 and as of December 15,
1993; and as amended and restated as of January 31, 1994 among
Muzak Limited Partnership, Union Bank of Switzerland, New York
Branch, Internationale Nederlanden (U.S.) Capital Corporation
and the other Lenders parties thereto and Union Bank of
Switzerland, New York Branch, as Agent; as amended by Waiver
and Agreement dated as of February 10, 1994; Waiver and
Amendment No. 1 dated as of October 31, 1994; Waiver and
Amendment No. 2 dated as of November 2, 1994; Amendment No. 3
and Consent dated as of November 4, 1994; Amendment No. 4 to
Amended and Restated Credit Agreement dated as of November 17,
1994; Waiver dated January 10, 1995; Waiver dated as of July
31, 1995; Amendment No. 5 to Amended and Restated Credit
Agreement dated as of November 7, 1995; and Waiver dated as of
April 1, 1996
*10.4 --Amended and Restated Term Notes issued as of September 4,
1992, amended and restated as of January 31, 1994
*10.5 --Subordinated Loan Agreement dated as of September 4, 1992, as
amended, between Muzak Limited Partnership and Barclays Bank
PLC, New York Branch
*10.6 --Option Agreement dated as of September 4, 1992 between Muzak
Limited Partnership and Barclays Bank PLC, New York Branch
*10.7 --Uplink Facility Agreement dated as of December 28, 1995
between EchoStar Satellite Corporation and Muzak Limited
Partnership
*10.8 --DBS Programming Affiliation Agreement dated as of December 28,
1995 between EchoStar Satellite Corporation and Muzak Limited
Partnership
*10.9 --Video Programming Sales Agent Agreement dated as of December
28, 1995 between EchoStar Satellite Corporation and Muzak
Limited Partnership
*10.10 --Form of Muzak(R) Participating Affiliate Agreement
*10.11 --Third and Broad Office Lease dated June 8, 1994, between
Martin Selig and Muzak Limited Partnership
*10.12 --ASCAP License
*10.13 --Joint Venture Agreement dated August 2, 1995 between Muzak
Limited Partnership and Alcas Holdings B.V.
*10.14 --Muzak(R) Master Affiliate Agreement (Mexico) dated March 1,
1992 between Muzak Limited Partnership and Audioplan S.A.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*10.15 --Muzak(R) Master Affiliate Agreement (Canada) dated August 30,
1990 between Muzak Limited Partnership and Chum Limited, as
amended--Form of Underwriting Agreement
*10.16 --FCC Licenses
*10.17 --Form of License Agreement (New Franchise Agreement), as
amended
*10.18 --Form of Music Services Agreement
*10.19 --Form of Multi-Territory Account Service Agreement
*10.20 --Form of Sales of Adjunct Services and Form of Muzak Adjunct
Services Subscriber Agreement
*10.21 --Transponder Lease Agreement dated December 9, 1993 between
Microspace Communications Corporation and Muzak Limited
Partnership
*10.22 --Transmission Lease Agreement dated January 31, 1995 between
Microspace Communications Corporation and Muzak Limited
Partnership
*10.23 --Transponder Lease Agreement dated January 31, 1995 between
Microspace Communications Corporation and Muzak Limited
Partnership
*10.24 --Transponder Lease Agreement dated April 27, 1995 between
Microspace Communications Corporation and Muzak Limited
Partnership
*10.25 --Transponder Lease Agreement dated July 5, 1995 between
Microspace Communications Corporation and Muzak Limited
Partnership
*10.26 --Transponder Lease Agreement dated April 29, 1996 between
Microspace Communications Corporation and Muzak Limited
Partnership
*10.27 --Agreement to Provide Telecommunications Service dated August 8
and 9, 1995 between Keystone Communications Corporation and
Muzak Limited Partnership
*10.28 --Sales Agreement and License dated September 28, 1995 between
Mainstream Data, Inc. and Muzak Limited Partnership
*10.29 --Muzak Limited Partnership Tempo Savings and Retirement Plan
*10.30 --Muzak Limited Partnership Tempo Savings and Retirement Trust
*10.31 --Muzak Limited Partnership Management Incentive Plan
*10.32 --Muzak Limited Partnership Management Option Plan
*10.33 --Muzak, Inc. Senior Management Stock Option Plan
*10.34 --Muzak, Inc. 1996 Employee Stock Option Plan
*10.35 --Employment Agreement dated August 31, 1992 of John R. Jester
*10.36 --Employment Agreement dated August 31, 1992 of James F.
Harrison
*10.37 --Employment Letter dated July 7, 1995 of Kirk A. Collamer
11 --Calculations of pro forma net loss attributable to common
stockholders per share and supplemental pro forma net loss
attributable to common stockholders per share
21 --List of Subsidiaries of the Registrant
23.1 --Consent of Deloitte & Touche LLP and Report on Financial
Statement Schedule of Muzak Limited Partnership
23.2 --Consent of Deloitte & Touche LLP
*23.3 --Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5)
24 --Power of Attorney (included on the signature page to this
Registration Statement)
27 --Financial Data Schedules
</TABLE>
- - - -------
* To be filed by amendment
<PAGE>
EXHIBIT 2
EXCHANGE AND TRANSFER AGREEMENT
EXCHANGE AND TRANSFER AGREEMENT dated as of May 10, 1996 among Muzak,
Inc., a Delaware corporation (the "Corporation"), Music Holdings Corp., a
-----------
Delaware corporation ("Music Holdings"), and the holders of the partnership
--------------
interests or, in the case of Barclays Bank PLC and Exeter Venture Lenders, L.P.,
options to purchase partnership interests (collectively, the "Partner
-------
Interests"), of Muzak Limited Partnership, a Delaware limited partnership (the
- - - ---------
"Partnership"), listed on Schedule I hereto.
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Partnership is organized and existing pursuant to a Third
Amended and Restated Agreement of Limited Partnership dated as of November 4,
1994, as amended (the "Partnership Agreement"; terms defined therein and not
---------------------
otherwise defined herein being used herein with the meanings as so defined),
among MLP Acquisition, L.P., a Delaware limited partnership ("MLP Acquisition"),
---------------
as managing general partner, MLP Administration Corp., a Delaware corporation
("MLP Administration"), as administrative general partner, and the Limited
- - - --------------------
Partners party thereto;
WHEREAS, the Corporation was formed on May 8, 1996 for the purpose of
acquiring all of the Partner Interests in the Partnership (other than the Class
C Limited Partner Interests), in exchange for cash and shares of common stock of
the Corporation, par value $0.01 per share (the "Common Stock"), which shares,
------------
together with the Initial Stock (as defined below) and the shares issued in the
Offering (as defined below), shall constitute all of the issued and outstanding
shares of Common Stock on the Closing Date (as defined below); and
WHEREAS, substantially concurrently with the acquisition of the
Partner Interests and as part of a single overall plan of incorporation under
Section 351 of the Internal Revenue Code of 1986, as amended, the Corporation
will be offering for sale additional shares of Common Stock in the Offering;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties agree as follows:
<PAGE>
Section 1. Transfer of Partner Interests.
-----------------------------
(a) In order to provide for the consolidation of the assets of the
Partnership with and into the Corporation or a wholly-owned subsidiary of the
Corporation designated by the Corporation on or prior to the Closing Date,
effective as of the Closing Date as described in Section 3 hereof, (i) each
holder of a Partner Interest listed on Schedule I (each, a "Transferring
------------
Partner") hereby irrevocably and unconditionally sells, transfers and assigns
the Partner Interest of such holder, and any and all other rights and interests
of such holder in the Partnership, to the Corporation or a wholly-owned
subsidiary of the Corporation designated by the Corporation on or prior to the
Closing Date, subject only to the payment of the consideration for such Partner
Interests set forth in this Section 1, and (ii) the Partnership shall be merged
with and into the Corporation or such subsidiary, with the Corporation or such
subsidiary being the surviving corporation and the certificate of incorporation
of the Corporation or such subsidiary being the certificate of incorporation of
the surviving corporation, in accordance with Section 17-211 of the Delaware
Revised Uniform Limited Partnership Act.
(b) In consideration for the transfer of the Partner Interests, the
Corporation shall (i) issue to each Transferring Partner that is designated on
Schedule I as an "Exchanging Partner", on the Closing Date, the number of shares
------------------
of Common Stock set forth on Schedule I opposite the name of such Exchanging
Partner and (ii) in lieu of issuing to each Transferring Partner that is
designated on Schedule I as a "Selling Partner" such number of shares of Common
---------------
Stock set forth on Schedule I opposite the name of such Selling Partner (the
"Selling Partner's Share Interest"), pay to such Selling Partner on the Closing
- - - ---------------------------------
Date, by wire transfer to an account specified by such Selling Partner in
writing to the Corporation prior to the Closing Date, by certified or bank check
or by such other means as the parties may agree, cash in an amount equal to the
Net Price per Share (as defined below) multiplied by such Selling Partner's
Share Interest. "Net Price per Share" means the per share offering price of
-------------------
less the per share pro rata costs of all underwriting discounts and commissions
applicable to the Offering.
(c) Notwithstanding the foregoing, (i) the number of shares of Common
Stock set forth on Schedule I may be modified by the Corporation prior to the
Closing Date provided that any such modification shall be applied in the same
manner to each holder of a Partner Interest party hereto so that the relative
percentage ownership of such Common Stock by each such holder shall be
unaffected, and (ii) the number of shares of Common Stock issuable to MLP
Holdings L.P. ("MLP
---
2
<PAGE>
Holdings") on the Closing Date, as reflected on Schedule I, shall be reduced by
- - - --------
100 shares, representing the shares of Common Stock outstanding on the date
hereof and held by MLP Holdings (the "Initial Stock").
-------------
Section 2. Additional Actions. On the Closing Date:
------------------
(i) MLP Administration and the Corporation shall take such
actions as may be necessary to cause the merger of MLP Administration
with and into the Corporation or a wholly-owned subsidiary of the
Corporation designated by the Corporation, with the Corporation or
such subsidiary of the Corporation being the surviving entity, and the
shares of capital stock of MLP Administration shall be cancelled and
the holders of such capital stock shall receive, pro rata in respect
of their shares of such capital stock, shares of Common Stock in an
aggregate amount equal to the number of shares of Common Stock set
forth opposite the name of MLP Administration on Schedule I;
(ii) Music Holdings shall cause MLP Acquisition to, and MLP
Administration and the Corporation shall, take such actions as may be
necessary to, at the election of the Corporation, either transfer all
of the partnership interests in, or assign all of the assets of, MLP
Communications Company to Muzak Communications, Inc., a wholly-owned
subsidiary of the Corporation, in consideration for the assumption of
any and all liabilities of MLP Communications Company by such
subsidiary of the Corporation;
(iii) MLP Acquisition shall be liquidated and its assets
distributed to its partners and the Corporation and Music Holdings
shall take such actions as may be necessary to cause Music Holdings to
be merged with and into the Corporation or a wholly-owned subsidiary
of the Corporation designated by the Corporation, with the Corporation
or such subsidiary being the surviving entity, and the shares of
capital stock of Music Holdings shall be cancelled and the holders of
such capital stock shall receive, pro rata in respect of their shares
of such capital stock, shares of Common Stock in an aggregate amount
equal to the number of shares of Common Stock distributed to Music
Holdings upon the liquidation of MLP Acquisition; and
3
<PAGE>
(iv) The Corporation shall satisfy (or cause to be
satisfied) all of the Partnership's obligations under the Subordinated
Loan Agreement dated as of September 4, 1992 between the Partnership
and Barclays Bank PLC.
Section 3. Effectiveness and Closing Date. The closing of the
------------------------------
transactions contemplated by this Agreement (the "Closing Date") shall take
------------
place at the offices of Weil, Gotshal & Manges LLP in New York City, or such
other place as the parties shall agree, on the date of and immediately prior to
the closing of the initial public offering and sale by the Corporation of shares
of Common Stock (the Offering") pursuant to a Registration Statement on Form S-1
--------
under the Securities Act of 1933, as amended (the "Act"), to be filed with the
---
Securities and Exchange Commission following the execution and delivery of this
Agreement and sale by Comcast Sound Communications, Inc., a Colorado corporation
and Comcast Sound Communications, Inc., an Illinois corporation (collectively,
"Comcast"), of 358,423 shares of Common Stock in the Offering or such other
- - - --------
amounts, if any, as Comcast and the Corporation shall agree.
Section 4. Termination. In the event the Closing Date shall not have
-----------
occurred or the Offering shall have been abandoned by the Corporation on or
prior to November 30, 1996, this Agreement shall terminate and be of no further
force or effect and the Corporation shall give notice of such abandonment to the
parties hereto promptly thereafter.
Section 5. Representations, Warranties and Covenants of the
------------------------------------------------
Corporation. The Corporation represents, warrants and covenants to the other
- - - -----------
parties hereto as follows:
(a) Due Incorporation and Qualification. The Corporation is a
-----------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power to own, lease and
operate its properties and to carry on its business as the same is now being
conducted and will be conducted following the Closing Date.
(b) Outstanding Capital Stock. The Corporation is authorized to issue
-------------------------
30,000,000 shares of Common Stock, of which 100 shares are issued and
outstanding as of the date hereof and registered in the name of MLP Holdings,
and 10,000,000 shares of Preferred Stock, par value $0.01, of which no shares
are issued and outstanding as of the date hereof. On the Closing Date and prior
to the
4
<PAGE>
consummation of the Offering, (a) the Corporation will have issued to the
Exchanging Partners a number of shares of Common Stock which will constitute
100% of the then outstanding Common Stock, and (b) no other shares of capital
stock of the Corporation will then be outstanding.
(c) Options or Other Rights. On the Closing Date after giving effect
-----------------------
to the transactions contemplated hereby, there will be no outstanding rights of
subscription, warrants, calls, options, contracts or other agreements of any
kind issued or granted by the Corporation to purchase or otherwise to receive
any capital stock of the Corporation, except (i) options issued in exchange for,
as replacements to or in connection with the modification of the Performance
Options outstanding under the Management Option Plan and options issued or to be
issued under the Corporation's 1996 Stock Option Plan and (ii) the underwriting
agreement with respect to the shares of Common Stock to be issued and sold in
the Offering.
(d) Conduct of Business. Since its formation, the Corporation has not
-------------------
been engaged in the conduct of any business except for the activities incident
to the transactions contemplated hereunder.
Section 6. Representations, Warranties and Covenants of the Holders.
--------------------------------------------------------
Each of the parties hereto (other than the Corporation) severally and not
jointly represents and warrants to the Corporation as follows:
(a) Title to Interests. Upon the transfer of any Partner Interest of
------------------
such party to the Corporation on the Closing Date, title to such Partner
Interest will be acquired by the Corporation, free and clear of any pledge,
lien, security interest or other encumbrances, other than any lien securing
obligations of the Partnership and, in the case of any management employee,
liens of the Partnership securing obligations of such employee to the
Partnership for indebtedness incurred in connection with the purchase of the
Partner Interests (the "Purchase Money Debt").
-------------------
(b) Acknowledgement of Transfer Restrictions. Each Exchanging Partner
----------------------------------------
acknowledges that: (i) it has no present plan or intention to sell, exchange,
transfer, distribute or otherwise dispose of (whether by gift or by means of any
hedging or similar transaction that would reduce its risk of loss on ) any of
the shares of Common Stock or rights to acquire shares of Common Stock that it
will receive on the Closing Date other than the shares of Common Stock to be
received by Comcast that are to be included in the Offering; and (ii) it has
been informed by the Corporation of the restrictions contained in Section 7
hereof and that it is acquiring
5
<PAGE>
the Common Stock for its own account with no present intention of ever
distributing the same, except in compliance with the Act; provided, however,
-------- -------
that Comcast may transfer its Partner Interests to a direct or indirect wholly-
owned subsidiary of Comcast Corporation, and such subsidiary shall be bound by
all of the terms, covenants, restrictions and obligations of this Agreement.
(c) Investment Representations. Each Exchanging Partner acknowledges
--------------------------
that it has such knowledge and experience in financial and business matters that
such party is capable of evaluating the merits and risks of the acquisition of
the Common Stock pursuant to this Agreement. Each Exchanging Partner recognizes
that the Common Stock has not been registered under the Act or applicable state
securities laws, and that, accordingly, such securities will not be transferable
except upon satisfaction of the registration and prospectus delivery
requirements of such laws or pursuant to an available exemption therefrom, and
such party must bear the economic risk of its investment for an indefinite
period of time. Such party acknowledges it has received or been given access to
financial information and other documents and records necessary to make a well-
informed investment decision and has had an opportunity to discuss the
Corporation's business, management and financial affairs with the Corporation's
management.
(d) No Assurance of Offering. Such party acknowledges that nothing in
------------------------
this Agreement shall obligate the Corporation or any proposed managing
underwriter to commence the Offering, nor create any liability on the part of
the Corporation or any proposed managing underwriter to the parties hereto if
the Corporation shall elect for any reason not to file a registration statement
or withdraw any registration statement subsequent to its filing or if any
managing underwriter shall decline to participate in the Offering, regardless of
any action that any party hereto may have taken in connection therewith. Such
party acknowledges that no representation is being made by the Corporation or
any proposed managing underwriter, nor can there be any assurance, that the
Offering will be made or consummated.
(e) Confidentiality. Such party shall, prior to the initial filing of
---------------
the registration statement for the Offering, maintain the confidentiality of,
and not disclose to any person, the pendency of the Offering except as may be
required by applicable law or authorized by the Corporation and except on a
confidential basis to any agents or employees of such party to the extent
reasonably necessary in order to effectuate the transactions contemplated
hereby.
6
<PAGE>
Section 7. Covenants
---------
(a) Restrictions on Shares. No Exchanging Partner shall, directly or
----------------------
indirectly, at any time transfer, sell, assign, convey or otherwise dispose of
any Common Stock held by it or any right, title or interest therein (each a
"Transfer") except in compliance with the Act, and the certificates representing
- - - ---------
the Common Stock issued pursuant hereto shall be so restricted and a restrictive
legend placed on the certificates therefor in the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR AN OPINION OF COUNSEL SELECTED BY THE HOLDER AND
SATISFACTORY TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED BY
SAID ACT."
(b) Holdback. Until 180 days after the effective date of the
--------
registration statement for the Offering, no Exchanging Partner shall offer to
sell, sell, contract to sell or otherwise dispose of any shares of Common Stock,
or securities convertible into or exchangeable or exercisable for, or rights to
acquire shares of Common Stock (including the right to acquire Common Stock
arising out of this Agreement) without the prior written consent of the lead
managing underwriter of the Offering, other than pursuant to gifts or pursuant
to transfers to (or to a trust exclusively for the benefit of) a member of the
family, or one or more beneficial owners, of such Exchanging Partner or their
successors, subsidiaries and controlled or controlling entities, provided the
donee or transferee agrees in writing to be bound by the terms of this Agreement
in the same manner as if it were originally a party hereto. Each Exchanging
Partner shall execute an agreement to such effect in the form tendered by the
proposed lead managing underwriter of the Offering, but failure to execute any
such agreement shall not impair the obligation of any Exchanging Partner under
this Section 7(b).
(c) Further Assurances. Each of the parties shall execute such
------------------
documents and other papers and take such further actions as may be reasonably
required or desirable or as may be reasonably be requested by the Corporation to
give effect to the transactions contemplated hereby or carry out its obligations
hereunder in consummating the transactions contemplated hereby. The Corporation
may issue
7
<PAGE>
"stop transfer" instructions to the transfer agent for the Common Stock and take
such other actions as it may deem appropriate (including, without limitation,
refusing to honor instructions from Exchanging Partners inconsistent with this
Section 7) to prevent transfers in violation of this Section 7.
Section 8. Delivery of Stock Certificates. On the Closing Date, the
------------------------------
Corporation shall deliver to or at the written direction of each Exchanging
Partner a stock certificate or certificates representing the shares of Common
Stock to be issued to such holder pursuant to Section 1 registered in the name
of such holder, subject to the right of the Corporation or its subsidiaries to
retain the certificates for such shares of management employees to secure any
Purchase Money Debt.
Section 9. Stockholders' Agreement. Concurrently with the execution
-----------------------
and delivery of this Agreement, each Exchanging Partner shall enter into a
Stockholders' Agreement, in the form attached hereto as Exhibit A, to be
effective upon the Closing Date.
Section 10. Notices. Any notice or other communication required or
-------
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission, sent by a recognized
national courier service, postage or charges prepaid or sent by first class
registered or certified mail, return receipt requested, postage prepaid. Any
such notice shall be deemed given when so delivered personally, telegraphed,
telexed or sent by facsimile transmission, or in the case of delivery by a
courier service, on the date of confirmation of delivery or, if by first class
registered or certified mailed, return receipt requested, three days after the
date of deposit in the United States mails, as follows:
(i) If to the Corporation, to:
Muzak, Inc.
2901 Third Avenue, Suite 400
Seattle, WA 98121
Attn: President
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, NY 10153
8
<PAGE>
Attn: Norman D. Chirite, Esq.
(ii) If to any Partner or Music Holdings,
to the address set forth on the registry
of the Partnership.
Any party may by notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
Section 11. Miscellaneous.
-------------
(a) Entire Agreement. This Agreement contains the entire agreement
----------------
among the parties with respect to the subject matter hereof and supersedes all
prior agreements, written or oral, with respect thereto.
(b) Waivers and Amendments; Preservation of Remedies. This Agreement
------------------------------------------------
may be amended, superseded, cancelled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
parties or, in the case of a waiver, by the party waiving compliance or, in the
case of any transaction described in Section 2, by the parties thereto. No
delay on the part of any party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any waiver on the part of
any party of any such right, power or privilege, nor any single or partial
exercise of any such right, power or privilege, preclude any further exercise
thereof or the exercise of any other such right, power or privilege. The rights
and remedies herein provided are cumulative and are not exclusive of any rights
or remedies that any party may otherwise have at law or in equity.
(c) Governing Law. This Agreement shall be governed and construed in
-------------
accordance with the laws of the State of New York, without regard to the
conflict of laws principles thereof.
(d) Binding Effect. This Agreement shall be binding upon and inure to
--------------
the benefit of the parties and their respective successors and permitted
assigns.
(e) Counterparts. This Agreement may be executed by the parties
------------
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute but
one and the same
9
<PAGE>
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
(f) Headings. The headings in this Agreement are for reference only
--------
and shall not affect the interpretation of this Agreement.
10
<PAGE>
[Signature page to Exchange and Transfer Agreement]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
MUZAK, INC.
By: /s/ John R. Jester
-------------------------
Title: President
Music Holdings Corp.
By: /s/ John R. Jester
-------------------------
Title:
MLP Acquisition, L.P.
By: Music Holdings Corp.,
as General Partner
By: /s/ John R. Jester
-------------------------
Title:
MLP Administration Corp.
By: /s/ John R. Jester
-------------------------
Title: President
MLP Holdings, L.P.
By: Centre Partners L.P.,
as General Partner
By: Park Road Corp.,
as General Partner
By: /s/ John R. Jester
-------------------------
Title: Vice President
<PAGE>
[Signature Page to Exchange and Transfer Agreement]
Comcast Sound Communications, Inc. Comcast Sound Communications, Inc.
By: /s/ Robert S. Pick By: /s/ Robert S. Pick
----------------------- -----------------------
Title: Vice President Title: Vice President
UBS Capital LLC
By: /s/ Michael Greene By: /s/ Jeffrey W. Wald
----------------------- -----------------------
Title: Managing Director Title: Vice President
Internationale Nederlanden Finance Corp.
By: /s/ John Lanier
-----------------------
Title: Vice President
Barclays Bank PLC Barclays Bank PLC
By: Harvest LLC By: Harvest LLC
By: /s/ Patrick Turner By: /s/ Nick Dunphy
----------------------- -----------------------
Title: Member/Attorney-in-fact Title: Member/Attorney-in-fact
Exeter Venture Lenders, L.P.
By: Exeter Venture Advisors, Inc.,
its general partner
By: /s/ Timothy P. Bradley
-----------------------
Title: Vice President
/s/ John A. Hawkins /s/ John R. Jester
____________________ ________________________
John A. Hawkins John R. Jester
<PAGE>
[Signature page to Exchange and Transfer Agreement]
/s/ James F. Harrison /s/ Kirk A. Collamer
_____________________ _________________________
James F. Harrison Kirk A. Collamer
/s/ Wallace R. Borgeson /s/ Bruce B. Funkhouser
_____________________ _________________________
Wallace R. Borgeson Bruce B. Funkhouser
/s/ L. Dale Stewart /s/ Thomas J. Gentry
_____________________ _________________________
L. Dale Stewart Thomas J. Gentry
/s/ John A. Neal /s/ Jack D. Craig
_____________________ _________________________
John A. Neal Jack D. Craig
/s/ Richard Chaffee /s/ Roger Fairchild
_____________________ _________________________
Richard Chaffee Roger Fairchild
/s/ James G. Henderson /s/ Susan P. Chetwin
_____________________ _________________________
James G. Henderson Susan P. Chetwin
/s/ Robert E. Crowe /s/ Dino J. DeRose
_____________________ _________________________
Robert E. Crowe Dino J. DeRose
/s/ Daniel Lee Hart /s/ Steven Tracy
_____________________ _________________________
Daniel Lee Hart Steven Tracy
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I to Exchange Transfer Agreement
Shares of Common Stock(1) Fully Diluted
------------------------------- ----------------------------
Partner/Optionholder Total Ownership Options Total Ownership
- - - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MLP Acquisition L.P. 3,898,269 46.4% 3,898,269 42.5%
MLP Holdings L.P. 1,348,015 16.1% 1,348,015 14.7%
UBS Capital LLC(2) 749,656 8.9% 749,656 8.2%
Internationale Nederlanden Finance Corp.(2) 128,691 1.5% 128,691 1.4%
Barclays Bank PLC(2) 582,805 6.9% 582,805 6.3%
Exeter Venture Lenders, L.P.(2) 196,037 2.3% 196,037 2.1%
Comcast Sound Communications, Inc.(3) 609,294 7.3% 609,294 6.6%
John Hawkins 14,410 0.2% 14,410 0.2%
Management
MLP Administration Corp. 5,615 0.1% 5,615 0.1%
John R. Jester 156,323 1.9% 139,415 295,738 3.2%
James F. Harrison 92,479 1.1% 87,939 180,418 2.0%
Thomas J. Gentry 67,521 0.8% 60,056 127,576 1.4%
John A. Neal 74,485 0.9% 60,056 134,541 1.5%
Wallace R. Borgeson 42,563 0.5% 60,056 102,618 1.1%
Jack D. Craig 68,747 0.8% 27,883 96,630 1.1%
Richard Chaffee 55,978 0.7% 15,014 70,992 0.8%
Bruce B. Funkhouser 43,855 0.5% 27,883 71,738 0.8%
L. Dale Stewart 67,588 0.8% 27,883 95,471 1.0%
Daniel Lee Hart 21,281 0.3% 12,869 34,150 0.4%
Robert E. Crowe 42,563 0.5% 17,159 59,722 0.7%
Dino J. DeRose 28,145 0.3% 27,883 56,028 0.6%
J. Gary Henderson 47,800 0.6% 42,897 90,697 1.0%
Roger Fairchild 4,290 0.1% 27,883 32,173 0.4%
Steven Tracy 10,640 0.1% 12,869 23,509 0.3%
Susan P. Chetwin 12,256 0.1% 10,529 22,785 0.2%
Thomas J. Gantert 8,579 8,579 0.1%
Stephen F. Ward 6,435 6,435 0.1%
Douglas Collis 6,435 6,435 0.1%
Leslie Ritter 6,435 6,435 0.1%
Matthew McTee 6,435 6,435 0.1%
Terry Johnson 6,435 6,435 0.1%
Jonathan McKinnon 6,435 6,435 0.1%
Harry Kuhman 8,579 8,579 0.1%
Jeffrey Kelley 8,579 8,579 0.1%
Kirk Collamer 25,738 0.3% 64,345 90,084 1.0%
- - - ---------------------------------------------------------------------------------------------------------------------
Subtotal Management 867,866 10.3% 786,964 1,654,830 18.0%
- - - ---------------------------------------------------------------------------------------------------------------------
Total 8,395,044 100.0% 786,964 9,182,007 100.0%
=====================================================================================================================
</TABLE>
1) Assumes Share/Unit conversion ratio of 0.428969.
2) Denotes "Selling Partner".
3) Includes Shares held by Comcast Sound Communications, Inc., a Colorado
corporation and Comcast Sound Communications, Inc., an Illinois corporation.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
MUZAK, INC.
_________
THE UNDERSIGNED, being a natural person, for the purpose of organizing
a corporation under the General Corporation law of the State of Delaware, hereby
certifies that:
ARTICLE I
NAME
The name of the corporation is "Muzak, Inc." (the "Corporation").
ARTICLE II
OFFICE AND REGISTERED AGENT, INCORPORATOR
2.1. Office and Registered Agent. The address of the registered
---------------------------
office of the Corporation in the State of Delaware is Corporation Trust Center,
1209 Orange Street, City of Wilmington, County of New Castle, State of Delaware
19801. The name of its registered agent at such address is The Corporation
Trust Company.
2.2. Incorporator. The name and mailing address of the incorporator
------------
are David A. Jacobs, c/o Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York,
New York 10153.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in, carry on and conduct
any lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware, as from time to time amended
(the "DGCL").
<PAGE>
ARTICLE IV
CAPITAL STOCK
4.1. Authorized Capital Stock. The total number of shares of stock
------------------------
that the Corporation shall have authority to issue is forty-million (40,000,000)
shares, thirty-million (30,000,000) of which shares shall be Common Stock having
a par value of $0.01 per share and ten-million (10,000,000) of which shares
shall be Preferred Stock having a par value of $0.01 per share. Except as
otherwise provided by law, the shares of stock of the Corporation, regardless of
class, may be issued by the Corporation from time to time in such amounts, for
such consideration and for such corporate purposes as the Board of Directors may
from time to time determine.
Shares of Preferred Stock may be issued from time to time in one or
more series of any number of shares as may be determined from time to time by
the Board of Directors, provided that the aggregate number of shares issued and
not cancelled of any and all such series shall not exceed the total number of
shares of Preferred Stock authorized by this Certificate of Incorporation. Each
series of Preferred Stock shall be distinctly designated. Except in respect of
the particulars fixed for series by the Board of Directors as permitted hereby,
all shares shall be alike in every particular, except that shares of any one
series issued at different times may differ as to the dates from which dividends
thereon shall be cumulative. The voting powers, if any, of each such series and
the preferences and relative, participating, optional and other special rights
of each such series and the qualifications, limitations and restrictions
thereof, if any, may differ from those of any and all other series at any time
outstanding; and the Board of Directors is hereby expressly granted authority to
fix, in the resolution or resolutions providing for the issue of a particular
series of Preferred Stock, the voting powers, if any, of each such series and
the designations, preferences and relative, participating, optional and other
special rights of each such series and the qualifications, limitations and
restrictions thereof to the full extent now or hereafter permitted by this
Certificate of Incorporation and the laws of the State of Delaware.
2
<PAGE>
ARTICLE V
LIABILITY OF DIRECTORS
5.1. Limitation on Liability. (a) No director of the Corporation
-----------------------
shall be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Corporation or its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) under Section 174 of
the DGCL; or (iv) for any transaction from which the director derived an
improper personal benefit. If the DGCL is amended after the filing of this
Certificate of Incorporation to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the DGCL, as so amended.
(b) The Corporation shall have the power to indemnify any person who
was or is a party or is threatened to be made a party to, or testifies in, any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative in nature, by reason of the fact that
such person is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding to
the full extent permitted by law, and the Corporation may adopt Bylaws or enter
into agreements with any such person for the purpose of providing for such
indemnification.
5.2. Amendments. Any repeal or modification of Section 5.1 hereof by
----------
the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
ARTICLE VI
STOCKHOLDERS
6.1. Action by Stockholders. Any action required or permitted to be
----------------------
taken by the holders of the issued and outstanding stock of the Corporation may
be effected at an annual or special meeting of stockholders duly called and held
in
3
<PAGE>
accordance with law and this Certificate of Incorporation and the Bylaws, or
without a meeting, by written consent, setting forth the action so taken, signed
by the holders of outstanding shares entitled to vote thereon having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a stockholders' meeting at which all shares entitled to vote
thereon were present.
6.2. Special Meetings of Stockholders. Except as otherwise required
--------------------------------
by law, special meetings of stockholders may be called by the Chief Executive
Officer, the Board of Directors pursuant to a resolution adopted by the
affirmative vote of a majority of the entire Board, or the stockholders by a
majority vote of the voting power of all shares of capital stock then entitled
to vote generally in the election of directors, voting as a single class. The
use of the phrase "entire Board" herein refers to the total number of directors
which the Corporation would have if there were no vacancies.
ARTICLE VII
BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal
the Bylaws by the affirmative vote of at least a majority of the members then in
office. The stockholders may adopt, amend or repeal the Bylaws upon the
affirmative vote of a majority of the voting power of all shares of capital
stock of the Corporation then entitled to vote generally in the election of
directors, voting as a single class (notwithstanding the fact that approval by a
lesser percentage may be permitted by the DGCL).
ARTICLE VIII
AMENDMENT OF
CERTIFICATE OF INCORPORATION
The Corporation hereby reserves the right from time to time to amend,
alter, change or repeal any provision contained in this Certificate of
Incorporation in any manner permitted by law and all rights and powers conferred
upon stockholders, directors and officers herein are granted subject to this
reservation. In addition to any vote otherwise required by law, any such
amendment, alteration, change or repeal shall require approval of either (a) the
Board of Directors by the affirmative vote of a majority of the members then in
office or (b) the holders of a majority of the voting power of all the shares of
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
4
<PAGE>
IN WITNESS WHEREOF, the undersigned has duly executed this Certificate
of Incorporation on this 8th day of May, 1996.
MUZAK, INC.
/s/ David A. Jacobs
-------------------------------------
David A. Jacobs
Sole Incorporator
5
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
MUZAK, INC.
(a Delaware corporation)
ARTICLE I
OFFICES
SECTION 1. Registered Office. The registered office of Muzak, Inc. (the
-----------------
"Corporation") in the State of Delaware shall be at Corporation Trust Center,
1209 Orange Street, City of Wilmington, County of New Castle, State of Delaware,
19801. and its registered agent at such address shall be The Corporation Trust
Company, or such other office or agent as the Board of Directors of the
Corporation (the "Board") shall from time to time select.
SECTION 2. Other Offices. The Corporation may also have an office or
-------------
offices, and keep the books and records of the Corporation, except as may
otherwise be required by law, at such other place or places, either within or
without the State of Delaware, as the Board may from time to time determine or
the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. Place of Meeting. All meetings of the stockholders of the
----------------
Corporation shall be held at the office of the Corporation or at such other
places, within or without the State of Delaware, as may from time to time be
fixed by the Board.
SECTION 2. Annual Meetings. The annual meeting of the stockholders for
---------------
the election of directors and for the transaction of such other business as may
properly come before the meeting shall be held each year at such date and time,
within or without the State of Delaware, as the Board shall determine.
<PAGE>
SECTION 3. Special Meetings. Except as otherwise required by law or the
----------------
Certificate of Incorporation of the Corporation (the "Certificate"), special
meetings of the stockholders for any purpose or purposes may be called by the
Chairman of the Board, by a majority of the entire Board, or the stockholders by
a majority vote of the voting power of all shares of capital stock then entitled
to vote generally in the election of directors.
SECTION 4. Notice of Meetings. Except as otherwise provided by law,
------------------
written notice of each meeting of the stockholders, whether annual or special,
shall be given, either by personal delivery or by mail, not less than 10 nor
more than 60 days before the date of the meeting to each stockholder of record
entitled to notice of the meeting. If mailed, such notice shall be deemed given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at such stockholder's address as it appears on the records of the
Corporation. Each such notice shall state the place, date and hour of the
meeting, and the purpose or purposes for which the meeting is called. Notice of
any meeting of stockholders shall not be required to be given to any stockholder
who shall attend such meeting in person or by proxy without protesting, prior to
or at the commencement of the meeting, the lack of proper notice to such
stockholder, or who shall sign a written waiver of notice thereof, whether
before or after such meeting. Notice of adjournment of a meeting of
stockholders need not be given if the time and place to which it is adjourned
are announced at such meeting, unless the adjournment is for more than 30 days
or, after adjournment, a new record date is fixed for the adjourned meeting.
SECTION 5. Quorum. Except as otherwise provided by law or by the
------
Certificate, the holders of a majority of the votes entitled to be cast by the
stockholders entitled to vote generally, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of the
stockholders; provided, however, that in the case of any vote to be taken by
classes, the holders of a majority of the votes entitled to be cast by the
stockholders of a particular class shall constitute a quorum for the transaction
of business by such class. When a quorum is once present it is not broken by
the subsequent withdrawal of any stockholder.
SECTION 6. Adjournments. The chairman of the meeting or the holders of a
------------
majority of the votes entitled to be cast by the stockholders who are present in
person or by proxy may adjourn the meeting from time to time whether or not a
quorum is present. In the event that a quorum does not exist with respect to
any vote to be taken by a particular class, the chairman of the meeting or the
holders of a majority of the votes entitled to be cast by the stockholders of
such class who are
2
<PAGE>
present in person or by proxy may adjourn the meeting with respect to the
vote(s) to be taken by such class. At such adjourned meeting at which a quorum
may be present, any business may be transacted which might have been transacted
at the meeting as originally called.
SECTION 7. Order of Business. At each meeting of the stockholders, the
-----------------
Chairman of the Board or, in the absence of the Chairman of the Board, such
person as shall be selected by the Board shall act as chairman of the meeting.
The order of business at each such meeting shall be as determined by the
chairman of the meeting. The chairman of the meeting shall have the right and
authority to prescribe such rules, regulations and procedures and to do all such
acts and things as are necessary or desirable for the proper conduct of the
meeting, including, without limitation, the establishment of procedures for the
maintenance of order and safety, limitations on the time allotted to questions
or comments on the affairs of the Corporation, restrictions on entry to such
meeting after the time prescribed for the commencement thereof, and the opening
and closing of the voting polls.
SECTION 8. List of Stockholders. It shall be the duty of the Secretary or
--------------------
other officer who has charge of the stock ledger to prepare and make, at least
10 days before each meeting of the stockholders, a complete list of the
stockholders entitled to vote thereat, arranged in alphabetical order, and
showing the address of each stockholder and the number of shares registered in
such stockholder's name. Such list shall be produced and kept available at the
times and places required by law.
SECTION 9. Voting. (a) Except as otherwise provided by law or by the
------
Certificate, each stockholder of record of any class or series of capital stock
of the Corporation shall be entitled at each meeting of stockholders to such
number of votes for each share of such stock as may be fixed in the Certificate
or in the resolution or resolutions adopted by the Board providing for the
issuance of such stock, registered in such stockholder's name on the books of
the Corporation:
(i) on the date fixed pursuant to Section 6 of Article VII of these
Bylaws as the record date for the determination of stockholders entitled to
notice of and to vote at such meeting; or
(ii) if no such record date shall have been so fixed, then at the
close of business on the day next preceding the day on which notice of such
meeting is given, or, if notice is waived, at the close of business on the
day next preceding the day on which the meeting is held.
3
<PAGE>
(b) Each stockholder entitled to vote at any meeting of stockholders may
authorize not in excess of three persons to act for such stockholder by proxy.
Any such proxy shall be delivered to the secretary of such meeting at or prior
to the time designated for holding such meeting. No such proxy shall be voted
or acted upon after three years from its date, unless the proxy provides for a
longer period.
(c) At each meeting of the stockholders, all corporate actions to be taken
by vote of the stockholders (except as otherwise required by law and except as
otherwise provided in the Certificate or these Bylaws) shall be authorized by a
majority of the votes cast affirmatively or negatively by the stockholders, and
where a separate vote by class is required, a majority of the votes cast
affirmatively or negatively by the stockholders of such class shall be the act
of such class.
(d) Unless required by law or determined by the chairman of the meeting to
be advisable, the vote on any matter, including the election of directors, need
not be by written ballot. In the case of a vote by written ballot, each ballot
shall be signed by the stockholder voting, or by such stockholder's proxy.
(e) Any action required or permitted to be taken at any meeting of
stockholders may, except as otherwise required by law or the Certificate, be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
record of the issued and outstanding capital stock of the Corporation having a
majority of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted, and
the writing or writings are filed with the permanent records of the Corporation.
Prompt notice of the taking of corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing.
SECTION 10. Inspectors. The chairman of the meeting may appoint one or
----------
more inspectors to act at any meeting of stockholders. If appointed, such
inspectors shall perform such duties as shall be required by law and as shall be
specified by the chairman of the meeting. Inspectors need not be stockholders.
No director or nominee for the office of director shall be appointed such
inspector.
4
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. General Powers. The business and affairs of the Corporation
--------------
shall be managed by or under the direction of the Board, which may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by law or by the Certificate directed or required to be exercised or done by the
stockholders.
SECTION 2. Number, Qualification and Election. (a) Except as otherwise
----------------------------------
fixed by or pursuant to the provisions of Article IV of the Certificate relating
to the rights of the holders of any class or series of stock having preference
over the common stock of the Corporation as to dividends or upon liquidation,
the number of directors of the Corporation shall be determined from time to time
by the Board by the affirmative vote of directors constituting at least a
majority of the entire Board. The use of the phrase "entire Board" herein
refers to the total number of directors which the Corporation would have if
there were no vacancies.
(b) Directors who are elected at an annual meeting of the stockholders,
and directors who are elected in the interim to fill vacancies and newly created
directorships, shall hold office until the next annual meeting of stockholders
and until his or her successor shall be elected and qualified, subject, however,
to his or her prior death, resignation, retirement or removal from office.
(c) Each director shall be at least 18 years of age. Directors need not be
stockholders of the Corporation.
(d) In any election of directors held at a meeting of stockholders, the
persons receiving a plurality of the votes cast by the stockholders entitled to
vote thereon at such meeting who are present or represented by proxy, up to the
number of directors to be elected in such election, shall be deemed elected.
SECTION 3. Quorum and Manner of Acting. Except as otherwise provided by
---------------------------
law, the Certificate or these Bylaws, a majority of the entire Board shall
constitute a quorum for the transaction of business at any meeting of the Board,
and, except as so provided, the vote of a majority of the directors present at
any meeting at which a quorum is present shall be the act of the Board. The
chairman of the meeting
5
<PAGE>
or a majority of the directors present may adjourn the meeting to another time
and place whether or not a quorum is present. At any adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called.
SECTION 4. Place of Meeting. The Board may hold its meetings at such
----------------
place or places within or without the State of Delaware as the Board may from
time to time determine or as shall be specified or fixed in the respective
notice or waivers of notice thereof.
SECTION 5. Regular Meetings. Regular meetings of the Board shall be held
----------------
at such times and places as the Chairman of the Board or the Board shall from
time to time by resolution determine. If any day fixed for a regular meeting
shall be a legal holiday under the laws of the place where the meeting is to be
held, the meeting which would otherwise be held on that day shall be held at the
same hour on the next succeeding business day.
SECTION 6. Special Meetings. Special meetings of the Board shall be held
----------------
whenever called by the Chairman of the Board or by a majority of the directors
then in office.
SECTION 7. Notice of Meetings. Notice of regular meetings of the Board or
------------------
of any adjourned meeting thereof need not be given. Notice of each special
meeting of the Board shall be given by overnight delivery service or mailed to
each director, in either case addressed to such director at such director's
residence or usual place of business, at least two days before the day on which
the meeting is to be held or shall be sent to such director at such place by
telegraph or telecopy or be given personally or by telephone, not later than the
day before the meeting is to be held, but notice need not be given to any
director who shall, either before or after the meeting, submit a signed waiver
of such notice or who shall attend such meeting other than for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting was not lawfully called or convened. Every such
notice shall state the time and place but need not state the purpose of the
meeting.
SECTION 8. Organization. At all meetings of the Board, the Chairman, if
------------
any, or if none or in the Chairman's absence or inability to act the President,
or in the President's absence or inability to act any Vice-President who is a
member of the Board of Directors, or in such Vice-President's absence or
inability to act a chairman chosen by the directors, shall preside. The
Secretary of the Corporation
6
<PAGE>
shall act as secretary at all meetings of the Board when present, and, in the
Secretary's absence, the presiding officer may appoint any person to act as
secretary.
SECTION 9. Rules and Regulations. The Board may adopt such rules and
---------------------
regulations not inconsistent with the provisions of law, the Certificate or
these Bylaws for the conduct of its meetings and management of the affairs of
the Corporation as the Board may deem proper.
SECTION 10. Participation in Meeting by Means of Communication Equipment.
------------------------------------------------------------
Any one or more members of the Board or any committee thereof may participate in
any meeting of the Board or of any such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at such meeting.
SECTION 11. Action without Meeting. Any action required or permitted to
----------------------
be taken at any meeting of the Board or any committee thereof may be taken
without a meeting if all of the members of the Board or of any such committee
consent thereto in writing and the writing or writings are filed with the
minutes or proceedings of the Board or of such committee.
SECTION 12. Resignations. Any director of the Corporation may at any time
------------
resign by giving written notice to the Board, the Chairman of the Board, the
President or the Secretary. Such resignation shall take effect at the time
specified therein or, if the time be not specified therein, upon receipt
thereof; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 13. Removal of Directors. Any director (including all members of
--------------------
the Board) may be removed from office at any time, with or without cause, by the
holders of a majority of the shares of capital stock of the Corporation then
entitled to vote generally in the election of directors, voting together as a
single class.
SECTION 14. Vacancies. Except as otherwise required by law and subject to
---------
the rights of the holders of any class or series of stock having a preference
over the common stock of the Corporation as to dividends or upon liquidation,
any vacancy in the Board for any reason and any newly created directorship
resulting by reason of any increase in the number of directors may be filled by
the Board by resolution adopted by the affirmative vote of a majority of the
remaining directors then
7
<PAGE>
in office, even though less than a quorum (or by a sole remaining director) or
by the stockholders upon the affirmative vote of a majority of the shares of
capital stock of the Corporation then entitled to vote generally in the election
of directors, voting together as a single class. Any director so appointed shall
hold office until the next meeting of stockholders at which directors of the
class for which such director has been chosen are to be elected and until his or
her successor is elected and qualified.
SECTION 15. Compensation. Each director, in consideration of such person
------------
serving as a director, shall be entitled to receive from the Corporation such
amount per annum and such fees for attendance at meetings of the Board or of
committees of the Board, or both, as the Board shall from time to time
determine. In addition, each director shall be entitled to receive from the
Corporation reimbursement for the reasonable expenses incurred by such person in
connection with the performance of such person's duties as a director. Nothing
contained in this Section 15 of this Article III shall preclude any director
from serving the Corporation or any of its subsidiaries in any other capacity
and receiving proper compensation therefor.
ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
SECTION 1. Establishment of Committees of the Board of Directors; Election
---------------------------------------------------------------
of Members of Committees of the Board of Directors; Functions of Committees of
- - - ------------------------------------------------------------------------------
the Board of Directors. The Board may, in accordance with and subject to the
- - - ----------------------
Delaware General Corporation Law ("DGCL"), from time to time establish
committees of the Board to exercise such powers and authorities of the Board,
and to perform such other functions, as the Board may from time to time
determine.
SECTION 2. Procedure; Meetings; Quorum. Regular meetings of committees of
---------------------------
the Board, of which no notice shall be necessary, may be held at such times and
places as shall be fixed by resolution adopted by a majority of the members
thereof. Special meetings of any committee of the Board shall be called at the
request of a majority of the members thereof. Notice of each special meeting of
any committee of the Board shall be given by overnight delivery service or
mailed to each member, in either case addressed to such member at such member's
residence or normal place of business, at least two days before the day on which
the meeting is to be held or shall be sent to such members at such place by
telegraph or telecopy or be given personally or
8
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by telephone, not later than the day before the meeting is to be held, but
notice need not be given to any member who shall, either before or after the
meeting, submit a signed waiver of such notice or who shall attend such meeting
other than for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting was not lawfully
called or convened. Any special meeting of any committee of the Board shall be a
legal meeting without any notice thereof having been given, if all the members
thereof shall be present thereat. Notice of any adjourned meeting of any
committee of the Board need not be given. Any committee of the Board may adopt
such rules and regulations not inconsistent with the provisions of law, the
Certificate or these Bylaws for the conduct of its meetings as such committee of
the Board may deem proper. A majority of the members of any committee of the
Board shall constitute a quorum for the transaction of business at any meeting,
and the vote of a majority of the members thereof present at any meeting at
which a quorum is present shall be the act of such committee. Each committee of
the Board shall keep written minutes of its proceedings and shall report on such
proceedings to the Board.
SECTION 3. Action by Written Consent. Any action required or permitted to
-------------------------
be taken at any meeting of any committee of the Board may be taken without a
meeting if all the members of the committee consent thereto in writing, and the
writing or writings are filed with the minutes of proceedings of the committee.
SECTION 4. Term; Termination. In the event any person shall cease to be a
-----------------
director of the Corporation, such person shall simultaneously therewith cease to
be a member of any committee appointed by the Board.
ARTICLE V
OFFICERS
SECTION 1. Number; Term of Office. The Board shall elect the officers of
----------------------
the Corporation, which shall include a President and a Secretary, and may
include, by election or appointment, one of more Vice-Presidents (any one or
more of whom may be given an additional designation of rank, such as "Executive
Vice-President" or "Senior Vice-President," or function), a Treasurer and such
Assistant Secretaries, such Assistant Treasurers and such other officers as the
Board may from time to time deem proper. Each officer shall have such powers
and duties as may be prescribed by these Bylaws and as may be assigned by the
Board or the President. Any
9
<PAGE>
two or more offices may be held by the same person except the offices of
President and Secretary; provided, however, that no officer shall execute,
acknowledge or verify any instrument in more than one capacity if such
instrument is required by law, the Certificate or these Bylaws to be executed,
acknowledged or verified by two or more officers. The Board may from time to
time authorize any officer to appoint and remove any such other officers and
agents and to prescribe their powers and duties. The Board may require any
officer or agent to give security for the faithful performance of such person's
duties.
SECTION 2. Term of Office; Removal; Remuneration. Each officer shall hold
-------------------------------------
office for such term as may be prescribed by the Board and until such person's
successor shall have been chosen and shall qualify, or until such person's death
or resignation, or until such person's removal in the manner hereinafter
provided. Any officer may be removed, either with or without cause, by the
Board.
SECTION 3. Resignation. Any officer may resign at any time by giving
-----------
notice to the Board, the President or the Secretary. Any such resignation shall
take effect at the date of receipt of such notice or at any later date specified
therein; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 4. Vacancies. A vacancy in any office because of death,
---------
resignation, removal or any other cause may be filled for the unexpired portion
of the term by the Board.
SECTION 5. Chairman of the Board; Powers and Duties. The Chairman of the
----------------------------------------
Board, subject to the control of the Board, shall preside at all meetings of the
stockholders and the Board. Any document may be signed by the Chairman of the
Board or any other person who may be thereunto authorized by the Board or the
Chairman of the Board. The Chairman of the Board may appoint such assistant
officers as are deemed necessary.
SECTION 6. President; Chief Executive Officer; Executive Vice Presidents,
--------------------------------------------------------------
Senior Vice Presidents and Vice Presidents; Powers and Duties. The President
- - - -------------------------------------------------------------
shall be the chief executive officer of the Corporation and shall have such
duties as customarily pertain to that office. The President shall have general
management and supervision of the property, business and affairs of the
Corporation and over its other officers; may appoint and remove assistant
officers and other agents and employees. The President and each Executive Vice
President, each Senior Vice
10
<PAGE>
President, and each Vice President shall have such powers and perform such
duties as may be assigned by the Board or the President. The Board may elect one
or more persons to be the President and/or Chief Executive Officer of a division
or business unit of the Corporation.
SECTION 7. Secretary and Assistant Secretary; Powers and Duties. The
----------------------------------------------------
Secretary shall attend all meetings of the stockholders and the Board and shall
keep the minutes for such meetings in one or more books provided for that
purpose. The Secretary shall be custodian of the corporate records, except
those required to be in the custody of the Treasurer or the Controller, shall
keep the seal of the Corporation, and shall perform all of the duties incident
to the office of Secretary, as well as such other duties as may be assigned by
the Chairman of the Board or the Board.
The Assistant Secretaries shall perform such of the Secretary's duties as
the Secretary shall from time to time direct. In case of the absence or
disability of the Secretary or a vacancy in the office, an Assistant Secretary
designated by the Chairman of the Board or by the Secretary, if the office is
not vacant, shall perform the duties of the Secretary.
SECTION 8. Chief Financial Officer; Powers and Duties. The Chief
------------------------------------------
Financial Officer shall be responsible for maintaining the financial integrity
of the Corporation, shall prepare the financial plans for the Corporation, and
shall monitor the financial performance of the Corporation and its subsidiaries,
as well as performing such other duties as may be assigned by the Chairman of
the Board or the Board.
SECTION 9. Treasurer and Assistant Treasurers; Powers and Duties. The
-----------------------------------------------------
Treasurer shall have care and custody of the funds and securities of the
Corporation, shall deposit such funds in the name and to the credit of the
Corporation with such depositories as the Treasurer shall approve, shall
disburse the funds of the Corporation for proper expenses and dividends, and as
may be ordered by the Board, taking proper vouchers for such disbursements. The
Treasurer shall perform all of the duties incident to the office of Treasurer,
as well as such other duties as may be assigned by the Board or the President.
The Assistant Treasurers shall perform such of the Treasurer's duties as
the Treasurer shall from time to time direct. In case of the absence or
disability of the Treasurer or a vacancy in the office, an Assistant Treasurer
designated by the President or by the Treasurer, if the office is not vacant,
shall perform the duties of the Treasurer.
11
<PAGE>
SECTION 10. Controller and Assistant Controllers; Powers and Duties. The
-------------------------------------------------------
Controller shall be the chief accounting officer of the Corporation and shall
keep and maintain in good and lawful order all accounts required by law and
shall have sole control over, and ultimate responsibility for, the accounts and
accounting methods of the Corporation and the compliance of the Corporation with
all systems of accounts and accounting regulations prescribed by law. The
Controller shall audit, to such extent and at such times as may be required by
law or as the Controller may think necessary, all accounts and records of
corporate funds or property, by whomsoever kept, and for such purposes shall
have access to all such accounts and records. The Controller shall make and
sign all necessary and proper accounting statements and financial reports of the
Corporation, and shall perform all of the duties incident to the office of
Controller, as well as such other duties as may be assigned by the President or
the Board.
The Assistant Controllers shall perform such of the Controller's duties as
the Controller shall from time to time direct. In case of the absence or
disability of the Controller or a vacancy in the office, an Assistant Controller
designated by the President or the Controller, if the office is not vacant,
shall perform the duties of the Controller.
SECTION 11. Salaries. The salaries of all officers of the Corporation
--------
shall be fixed by the Board, or an authorized committee thereof, or in such
manner as the Board, or any authorized committee thereof, shall provide. No
officer shall be disqualified from receiving a salary by reason of also being a
director of the Corporation.
ARTICLE VI
INDEMNIFICATION
SECTION 1. Right to Indemnification. Each person who was or is made a
------------------------
party or is threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "Proceeding"), by reason of the
fact (a) that he or she is or was a director or officer of the corporation, or
(b) that he or she, being at the time a director or officer of the corporation,
is or was serving at the request of the corporation as a director, officer,
member, employee, fiduciary or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including
12
<PAGE>
service with respect to an employee benefit plan (collectively, "another
enterprise" or "other enterprise"), shall be indemnified and held harmless by
the corporation to the fullest extent permitted under the DGCL as the same
exists or may hereafter be amended, against all expense, liability and loss
(including, without limitation, attorneys' and other professionals' fees and
expenses, claims, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) actually and reasonably incurred or suffered by such person
in connection therewith ("Losses"). Without diminishing the scope of
indemnification provided by this Section 1, such persons shall also be entitled
to the further rights set forth below.
SECTION 2. Actions, Suits Or Proceedings Other Than Those By Or In The
-----------------------------------------------------------
Right Of The Corporation. Subject to the terms and conditions of this Article,
- - - ------------------------
the corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any Proceeding (other than an action by or in
the right of the corporation) by reason of the fact that such person is or was a
director, officer or employee of the corporation, or, being at the time a
director, officer or employee of the corporation, is or was serving at the
request of the corporation as a director, officer, member, employee, fiduciary
or agent of another enterprise, against all Losses, actually and reasonably
incurred or suffered by such person in connection with such Proceeding if such
person acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the conduct
was unlawful. The termination of any Proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
---------------
itself, create a presumption that the person did not act in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that the conduct was unlawful.
SECTION 3. Actions, Suits Or Proceedings By Or In The Right Of The
-------------------------------------------------------
Corporation. Subject to the terms and conditions of this Article, the
- - - -----------
corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any Proceeding by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person is or was
a director, officer or employee of the corporation, or being at the time a
director, officer or employee of the corporation, is or was serving at the
request of the corporation as a director, officer, member, employee, fiduciary
or agent of another enterprise against all Losses actually and reasonably
incurred or suffered by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation
13
<PAGE>
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
SECTION 4. Authorization of Indemnification. Any indemnification under
--------------------------------
this Article (unless ordered by a court) shall be made by the corporation only
as authorized in the specific case upon a determination that indemnification of
a person is proper in the circumstances because such person has met the
applicable standard of conduct required by Section 1 or set forth in Section 2
or 3 of this Article, as the case may be. Such determination shall be made in a
reasonably prompt manner (i) by the Board of Directors by a majority vote of
directors who were not parties to such action, suit or proceeding, whether or
not they constitute a quorum of the Board of Directors, (ii) if there are no
such directors, or if such directors so direct, by independent legal counsel in
a written opinion, (iii) by the stockholders or (iv) as the DGCL may otherwise
permit. To the extent, however, that a director, officer, employee or agent of
the corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding described above, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses (including
attorneys' and other professionals' fees) actually and reasonably incurred by
such person in connection therewith, without the necessity of authorization in
the specific case.
SECTION 5. Good Faith Defined. For purposes of any determination under
------------------
Section 4 of this Article, a person shall be deemed to have acted in good faith
if the action is based on (a) the records or books of account of the corporation
or another enterprise, or on information supplied to such person by the officers
of the corporation or another enterprise in the course of their duties or on (b)
the advice of legal counsel for the corporation or another enterprise, or on
information or records given or reports made to the corporation or another
enterprise by an independent certified public accountant, independent financial
adviser, appraiser or other expert selected with reasonable care by the
corporation or the other enterprise. The provisions of this Section 5 shall not
be deemed to be exclusive or to limit in any way the circumstances in which a
person may be deemed to have met the applicable standard of conduct.
SECTION 6. Proceedings Initiated by Indemnified Persons. Notwithstanding
--------------------------------------------
any provisions of this Article to the contrary, the corporation shall not
14
<PAGE>
indemnify any person or make advance payments in respect of Losses to any person
pursuant to this Article in connection with any Proceeding (or portion thereof)
initiated against the corporation by such person unless such Proceeding (or
portion thereof) is authorized by the Board of Directors or its designee;
provided, however, that this prohibition shall not apply to a counterclaim,
- - - -------- -------
cross-claim or third-party claim brought in any Proceeding or to any claims
provided for in Section 7 of this Article.
SECTION 7. Indemnification By A Court. Notwithstanding any contrary
--------------------------
determination in the specific case under Section 4 of this Article, and
notwithstanding the absence of any determination thereunder, any director,
officer or employee may apply to any court of competent jurisdiction for
indemnification to the extent otherwise permissible under Section 1, 2 or 3 of
this Article. Notice of any application for indemnification pursuant to this
Section 7 shall be given to the corporation promptly upon the filing of such
application.
SECTION 8. Losses Payable In Advance. Losses reasonably incurred by an
-------------------------
officer or director in defending any threatened or pending Proceeding shall be
paid by the corporation in advance of the final disposition of such Proceeding
upon receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in this Article.
Losses shall be reasonably documented by the officer or director and required
payments shall be made promptly by the corporation. Losses incurred by other
employees may be so paid upon such terms and conditions, if any, as the Board of
Directors deems appropriate.
SECTION 9. Non-exclusivity and Survival of Indemnification. The
-----------------------------------------------
indemnification and advancement of expenses provided by or granted pursuant to
this Article shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under the
Certificate of Incorporation, any bylaw, agreement, contract, vote of
stockholders or of disinterested directors, or pursuant to the direction
(howsoever embodied) of any court of competent jurisdiction or otherwise. The
provisions of this Article shall not be deemed to preclude the indemnification
of any person who is not specified in Section 1, 2 or 3 of this Article but whom
the corporation has the power or obligation to indemnify under the provisions of
the DGCL, or otherwise. The rights conferred by this Article shall continue as
to a person who has ceased to be a director, officer or employee and shall inure
to the benefit of such person and the heirs, executors, administrators and other
comparable legal representatives of such person. The rights conferred in this
Article shall be enforceable as contract rights, and shall continue to exist
after any rescission or
15
<PAGE>
restrictive modification hereof with respect to events occurring prior thereto.
No rights are conferred in this Article for the benefit of any person
(including, without limitation, officers, directors and employees of
subsidiaries of the corporation) in any capacity other than as explicitly set
forth herein.
SECTION 10. Meaning of certain terms in connection with Employee Benefit
------------------------------------------------------------
Plans, etc. For purposes of this Article, references to "fines" shall include
- - - -----------
any excise taxes assessed on a person with respect to an employee benefit plan;
references to "serving at the request of the corporation" shall include any
service as a director, officer or employee of the corporation which imposes
duties on, or involves services by, such director, officer or employee, with
respect to an employee benefit plan, its participants or beneficiaries; and a
person who has acted in good faith and in a manner reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" as referred to in this Article.
SECTION 11. Insurance. The corporation may, but shall not be required to,
----------
purchase and maintain insurance on behalf of any person who is or was a
director, officer or employee of the corporation, or is or was serving at the
request of the corporation as a director, officer, member, employee, fiduciary
or agent of another against any liability asserted against such person and
incurred by such person in any such capacity, or arising out of such person's
status as such, whether or not the corporation would have the power or the
obligation to indemnify such person against such liability under the provisions
of this Article.
SECTION 12. Severability. If any provision or provisions of this Article
------------
VI shall be held to be invalid, illegal or unenforceable for any reason
whatsoever: (a) the validity, legality and enforceability of the remaining
provisions of this Article VI (including, without limitation, all portions of
any paragraph of this Article VI containing any such provision held to be
invalid, illegal or unenforceable, that are not themselves invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby; and (b) to
the fullest extent possible, the provisions of this Article VI (including,
without limitation, all portions of any paragraph of this Article VI containing
any such provision held to be invalid, illegal or unenforceable, that are not
themselves invalid, illegal or unenforceable) shall be construed so as to give
effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
16
<PAGE>
ARTICLE VII
CAPITAL STOCK
SECTION 1. Share Ownership. (a) Holders of shares of stock of each class
---------------
of the Corporation shall be recorded on the books of the Corporation and
ownership of such stock shall be evidenced by a certificate or other form as
shall be approved by the Board. Certificates representing shares of stock of
each class shall be signed by, or in the name of, the Corporation by the
Chairman or Vice-Chairman of the Board, or the President or any Vice President
and by the Secretary or any Assistant Secretary or the Treasurer or any
Assistant Treasurer of the Corporation, and sealed with the seal of the
Corporation, which may be a facsimile thereof. Any or all such signatures and
the signatures of any transfer agent or registrar may be facsimiles. Although
any officer, transfer agent or registrar whose manual or facsimile signature is
affixed to such a certificate ceases to be such officer, transfer agent or
registrar before such certificate has been issued, the certificate may
nevertheless be issued by the Corporation with the same effect as if such
officer, transfer agent or registrar were still such at the date of its issue.
(b) The stock ledger and blank share certificates shall be kept by the
Secretary or by a transfer agent or by a registrar or by any officer or agent
designated by the Board.
SECTION 2. Transfer of Shares. Transfers of shares of stock of each class
------------------
of the Corporation shall be made only on the books of the Corporation by the
holder thereof, or by such holder's attorney thereunto authorized by a power of
attorney duly executed and filed with the Secretary or a transfer agent for such
stock, if any, and on surrender of the certificate or certificates, if any, for
such shares properly endorsed or accompanied by a duly executed stock transfer
power (or by proper evidence of succession, assignment or authority to transfer)
and the payment of any taxes thereon; provided, however, that the Corporation
shall be entitled to recognize and enforce any lawful restriction on transfer.
The person in whose name shares are registered on the books of the Corporation
shall be deemed the owner thereof for all purposes as regards the Corporation;
provided, however, that whenever any transfer of shares shall be made for
collateral security and not absolutely, and written notice thereof shall be
given to the Secretary or to such transfer agent, such fact shall be stated in
the entry of the transfer. No transfer of shares shall be valid as against the
Corporation, its stockholders and creditors for any purpose, until it shall have
been
17
<PAGE>
entered in the stock records of the Corporation by an entry showing from and to
whom transferred.
SECTION 3. Registered Stockholders and Addresses of Stockholders. (a) The
-----------------------------------------------------
Corporation shall be entitled to recognize the exclusive right of a person
registered on its records as the owner of shares of stock to receive dividends
and to vote as such owner, and shall not be bound to recognize any equitable or
other claim to, or interest in, such share or shares of stock on the part of any
other person, whether or not it shall have express or other notice thereof,
except as otherwise provided by applicable law.
(b) Each stockholder shall designate to the Secretary or transfer agent of
the Corporation an address at which notices of meetings and all other corporate
notices may be delivered or mailed to such person, and, if any stockholder shall
fail to designate such address, corporate notices may be delivered to such
person by mail directed to such person at such person's post office address, if
any, as the same appears on the stock record books of the Corporation or at such
person's last known post office address.
SECTION 4. Lost, Stolen, Destroyed and Mutilated Certificates. The
--------------------------------------------------
Corporation may issue to any holder of shares of stock the certificate for which
has been lost, stolen, destroyed or mutilated a new certificate or certificates
for shares, upon the surrender of the mutilated certificate or, in the case of
loss, theft or destruction of the certificate, upon satisfactory proof of such
loss, theft or destruction. The Board, or a committee designated thereby, or
the transfer agents and registrars for the stock, may, in their discretion,
require the owner of the lost, stolen or destroyed certificate, or such person's
legal representative, to give the Corporation a bond in such sum and with such
surety or sureties as they may direct to indemnify the Corporation and said
transfer agents and registrars against any claim that may be made on account of
the alleged loss, theft or destruction of any such certificate or the issuance
of such new certificate.
SECTION 5. Regulations. The Board may make such additional rules and
-----------
regulations as it may deem expedient concerning the issue and transfer of
certificates representing shares of stock of each class of the Corporation and
may make such rules and take such action as it may deem expedient concerning the
issue of certificates in lieu of certificates claimed to have been lost,
destroyed, stolen or mutilated.
18
<PAGE>
SECTION 6. Fixing Date for Determination of Stockholders of Record. (a)
-------------------------------------------------------
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
or any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days before the date of such meeting, nor more than 60 days
prior to any other action. A determination of stockholders entitled to notice of
or to vote at a meeting of the stockholders shall apply to any adjournment of
the meeting; provided, however, that the Board may fix a new record date for the
adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled
to consent to corporate action in writing without a meeting, the Board may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board, and which date shall
not be more than 10 days after the date upon which the resolution fixing the
record date is adopted by the Board. Any stockholder of record seeking to have
the stockholders authorize or take corporate action by written consent shall, by
written notice to the Secretary, request the Board to fix a record date. The
Board shall promptly, but in all events within 10 days after the date on which
such a request is received, adopt a resolution fixing the record date. If no
record date has been fixed by the Board within 10 days of the date on which such
a request is received, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the Board is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation by delivery to its registered office in the State
of Delaware, its principal place of business, or any officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board and prior action by the Board is
required by applicable law, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be at
the close of business on the date on which the board adopts the resolution
taking such prior action.
SECTION 7. Transfer Agents and Registrars. The Board may appoint, or
------------------------------
authorize any officer or officers to appoint, one or more transfer agents and
one or more registrars.
19
<PAGE>
ARTICLE VIII
DIVIDENDS
Subject always to the provisions of law and the Certificate, the Board
shall have full power to determine whether any, and, if any, what part of any,
funds legally available for the payment of dividends shall be declared as
dividends and paid to stockholders; the division of the whole or any part of
such funds of the Corporation shall rest wholly within the lawful discretion of
the Board, and it shall not be required at any time, against such discretion, to
divide or pay any part of such funds among or to the stockholders as dividends
or otherwise; and before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
Board from time to time, in its absolute discretion, thinks proper as a reserve
or reserves to meet contingencies, or for equalizing dividends, or for repairing
or maintaining any property of the Corporation, or for such other purpose as the
Board shall think conducive to the interest of the Corporation, and the Board
may modify or abolish any such reserve in the manner in which it was created.
ARTICLE IX
CORPORATE SEAL
The Board shall provide a corporate seal which shall have inscribed thereon
the name of the Corporation and the year of its incorporation, and shall be in
such form and contain such other words and/or figures as the Board shall
determine. The corporate seal may be used by printing, engraving,
lithographing, stamping or otherwise making, placing or affixing, or causing to
be printed, engraved, lithographed, stamped or otherwise made, placed or
affixed, upon any paper or document, by any process whatsoever, an impression,
facsimile or other reproduction of said corporate seal.
20
<PAGE>
ARTICLE X
FISCAL YEAR
The fiscal year of the Corporation shall be fixed, and shall be subject to
change, by the Board. Unless otherwise fixed by the Board, the fiscal year of
the Corporation shall be the calendar year.
ARTICLE XI
WAIVER OF NOTICE
Whenever notice is required to be given by these Bylaws or by the
Certificate of Incorporation or by law, a written waiver thereof, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent to notice.
ARTICLE XII
BANK ACCOUNTS, DRAFTS, CONTRACTS, ETC.
SECTION 1. Bank Accounts and Drafts. In addition to such bank accounts as
------------------------
may be authorized by the Board, the Chief Financial Officer or any person
designated by the Chief Financial Officer, whether or not an employee of the
Corporation, may authorize such bank accounts to be opened or maintained in the
name and on behalf of the Corporation as he may deem necessary or appropriate,
payments from such bank accounts to be made upon and according to the check of
the Corporation in accordance with the written instructions of the Treasurer, or
other person so designated by the Treasurer.
SECTION 2. Contracts. The Board may authorize any person or persons, in
---------
the name and on behalf of the Corporation, to enter into or execute and deliver
any and all deeds, bonds, mortgages, contracts and other obligations or
instruments, and such authority may be general or confined to specific
instances.
SECTION 3. Proxies; Powers of Attorney; Other Instruments. The Chairman,
----------------------------------------------
the President or any other person designated by either of them shall have the
21
<PAGE>
power and authority to execute and deliver proxies, powers of attorney and other
instruments on behalf of the Corporation in connection with the rights and
powers incident to the ownership of stock by the Corporation. The Chairman, the
President or any other person authorized by proxy or power of attorney executed
and delivered by either of them on behalf of the Corporation may attend and vote
at any meeting of stockholders of any company in which the Corporation may hold
stock, and may exercise on behalf of the Corporation any and all of the rights
and powers incident to the ownership of such stock at any such meeting, or
otherwise as specified in the proxy or power of attorney so authorizing any such
person. The Board, from time to time, may confer like powers upon any other
person.
SECTION 4. Financial Reports. The Board may appoint the primary financial
-----------------
officer or other fiscal officer and/or the Secretary or any other officer to
cause to be prepared and furnished to stockholders entitled thereto any special
financial notice and/or financial statement, as the case may be, which may be
required by any provision of law.
ARTICLE XIII
AMENDMENTS
The Board shall have the power to adopt, amend or repeal these Bylaws by
the affirmative vote of at least a majority of the members then in office and
the stockholders shall have the power to adopt, amend or repeal these Bylaws
upon the affirmative vote of the holders of a majority of the voting power of
all shares of capital stock of the Corporation then entitled to vote generally
in the election of directors, voting as a single class (notwithstanding the fact
that approval by a lesser percentage may be permitted by the DGCL).
22
<PAGE>
EXHIBIT 4.1
STOCKHOLDERS' AGREEMENT
-----------------------
STOCKHOLDERS' AGREEMENT, dated as of the 10th day of May, 1996, by and
among Muzak, Inc., a Delaware corporation (the "Corporation"), the Stockholders
-----------
(as hereinafter defined) and the additional parties who may from time to time
become parties to this Agreement after the date hereof in accordance with the
terms hereof.
W I T N E S S E T H :
-------------------
WHEREAS, concurrently herewith, certain of the parties hereto are entering
into an Exchange and Transfer Agreement, dated as of May 10, 1996 (the "Exchange
--------
Agreement"), pursuant to which the holders of the partnership interests (other
- - - ---------
than the Class C Limited Partners) and certain holders of options for such
partnership interests in Muzak Limited Partnership, a Delaware limited
partnership (the "Partnership"), have agreed to exchange their interests in the
-----------
Partnership with the Corporation for cash and shares of common stock of the
Corporation, par value $0.01 ("Common Stock");
------------
WHEREAS, upon the effective date of the Exchange Agreement, the
Stockholders shall own the number of shares of Common Stock as set forth
opposite their names on Schedule I hereto;
WHEREAS, it is deemed to be in the best interests of the Corporation and
the Stockholders that provision be made for the continuity and stability of the
business and management of the Corporation; and
WHEREAS, the Corporation intends to sell to the public, pursuant to an
initial registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), additional shares of its Common Stock (such sale hereinafter
--------------
being referred to as the "Offering");
--------
NOW, THEREFORE, in consideration of the mutual covenants and obligations
hereinafter set forth, the parties hereto, intending to be legally bound, hereby
agree as follows:
SECTION 1. Definitions. In addition to the terms defined elsewhere
-----------
herein, when used herein the following terms shall have the meanings indicated:
(a) "Affiliate" shall mean, with respect to any Stockholder, (i) any
---------
Person who, directly or indirectly, is in control of, is controlled by or is
under common control with
<PAGE>
such Stockholder, and (ii) any person who is a director or officer of such
Stockholder or of any Person described in clause (i) above.
(b) "Agreement" shall mean this Stockholders' Agreement, as the same
---------
may be amended from time to time.
(c) "Audit Committee and Compensation Committee" shall mean such
------------------------------------------
committees of the Board of Directors as constituted in accordance with the
Corporation's By-Laws. "Board Committee" or "Committee" shall mean any such
--------------- ---------
committee.
(d) "By-Laws" shall mean the By-Laws of the Corporation, as amended
-------
from time to time.
(e) "Board of Directors" or "Board" shall mean the Board of Directors
------------------ -----
of the Corporation.
(f) "Centre Director" shall have the meaning set forth in Section 2
---------------
hereof.
(g) "Centre Holders" shall mean Centre Partners and MLP Holdings.
--------------
(h) "Centre Partners" shall mean Centre Partners L.P.
---------------
(i) "Certificate of Incorporation" shall mean the Certificate of
----------------------------
Incorporation of the Corporation dated May 8, 1996, as amended from time to
time.
(j) "Chief Executive Officer" shall mean the person who is at the time
-----------------------
serving as Chief Executive Officer of the Corporation.
(k) "Comcast" shall mean Comcast Sound Communications, Inc., a
-------
Colorado corporation, and Comcast Sound Communications, Inc., an Illinois
corporation.
(l) "Director" shall mean a member of the Board of Directors.
--------
(m) "Effective Date" shall mean the Closing Date under the Exchange
--------------
Agreement.
(n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
(o) "Freely Transferable Shares" shall have the meaning set forth in
--------------------------
Section 6(h) hereof.
2
<PAGE>
(p) "Hawkins" shall mean John A. Hawkins.
-------
(q) "Holder" shall have the meaning set forth in Section 4 hereof.
------
(r) "Independent" shall mean a person other than an officer or
-----------
employee of the Corporation or its subsidiaries or any other individual having a
relationship which, in the opinion of the Board, would interfere with the
exercise of independent judgment in carrying out the responsibilities of a
Director.
(s) "Management Director" shall have the meaning set forth in Section
-------------------
2 hereof.
(t) "Management Investor" shall mean each Stockholder listed on
-------------------
Schedule I hereto other than the Centre Holders, Comcast and Hawkins.
(u) "MLP Holdings" means MLP Holdings L.P.
------------
(v) "Person" shall mean a natural person, corporation, partnership,
------
estate, joint stock company, joint venture, association, company, trust, bank,
trust company, land trust, business trust, unincorporated organization or other
organization, whether or not a legal entity, and a government or agency or
political subdivision thereof.
(w) "Public Director" shall have the meaning set forth in Section 2
---------------
hereof.
(x) "Registration Expense" shall mean any and all expenses incident to
--------------------
a registration pursuant to Sections 4 or 5 hereof, including, without
limitation, (i) all SEC, NASD and securities exchange registration and filing
fees, (ii) all fees and expenses of complying with state securities or blue sky
laws (including fees and disbursements of counsel for any underwriters in
connection with blue sky qualifications of the Shares), (iii) all printing,
messenger and delivery expenses, (iv) all fees and expenses incurred in
connection with the listing of the Shares on any securities exchange pursuant to
Section 6(a)(vii), (v) the fees and disbursements of counsel for the Corporation
and of its independent public accountants and the fees and disbursements of one
counsel for the Centre Holders and any other Holders that are selling
stockholders therein, and (vi) the reasonable fees and expenses of any special
experts retained by the Corporation in connection with the requested
registration; provided, however, that Registration Expenses shall not include
-------- -------
underwriting discounts and commissions and transfer taxes, if any, with respect
to any Shares being sold by any Holder that is a selling stockholder thereunder.
(y) "Sale of the Corporation" shall mean (i) any transaction or series
-----------------------
of related transactions (including, without limitation, a merger or
consolidation), in which all of
3
<PAGE>
the issued and outstanding Shares will be changed into or exchanged for common
stock or other securities of another corporation or interests in a non-corporate
entity or other property (including cash) or any combination of the foregoing or
(ii) the sale of all or substantially all of the Corporation's assets in one
transaction or a series of related transactions.
(z) "SEC" shall mean the Securities Exchange Commission.
---
(aa) "Shares" shall mean the issued and outstanding shares
------
of Common Stock held by the Stockholders upon to the Effective Date and any
other shares of Common Stock thereafter acquired by any Stockholder, in each
case held from time to time by the Stockholders.
(ab) "Stockholders" shall mean Centre Partners and those
------------
Persons listed on Schedule I hereto (as it may be amended from time to time), so
long as any such Person owns any Shares.
(ac) "Transfer" shall mean (i) the making of any sale,
--------
exchange, assignment or gift of, (ii) the granting of any security interest,
pledge or other encumbrance in, or (iii) the creation of any voting trust or
other agreement or arrangement with respect to the transfer of voting rights in,
the Shares, or the creation of any other claim thereto or any other transfer or
disposition whatsoever, whether voluntary or involuntary, affecting the right,
title or interest or possession in or to the Shares.
SECTION 2. Election and Removal of Directors.
---------------------------------
(a) Number of Directors. Each of the Stockholders agrees to take such
-------------------
action, including the voting of the Common Shares owned or controlled by such
Stockholder, as may be necessary to cause the Corporation to be managed by a
Board consisting of six members in accordance with the provisions of this
Section 2.
(b) Board of Directors. The Stockholders agree to vote, in accordance
------------------
herewith, for a Board of Directors consisting of (i) the Chief Executive Officer
of the Corporation (the "Management Director"), (ii) three individuals from time
-------------------
to time designated by the Centre Holders (the "Centre Directors") so long as the
----------------
Centre Holders are the Holders of more than 30% of the issued and outstanding
shares of Common Stock; two Centre Directors so long as the Centre Holders are
the Holders of less than 30% of the issued and outstanding shares of Common
Stock but more than 15% of the issued and outstanding shares of Common Stock;
and one Centre Director in the event the Centre Holders are the Holders of less
than 15% of the issued and outstanding shares of Common Stock so long as the
Centre Holders are the Holders of any Shares, and (iii) two individuals from
time to time
4
<PAGE>
approved by the Board of Directors who are not Affiliates of the Centre Holders
or any other Stockholder and who are Independent (the "Public Directors"). The
----------------
Stockholders shall at any time that directors of the Corporation are to be
elected take such action as may be necessary to nominate or to cause the Board
to nominate and recommend to the Stockholders, as the proposed members of the
Board, individuals designated as provided in this Section 2. The failure of the
Centre Holders to designate any one or more of the Centre Directors shall not
constitute a waiver of this Section.
(c) Board Committees. (i) The Compensation Committee shall consist
----------------
of two Centre Directors and one Public Director.
(ii) The Audit Committee shall consist of two Public Directors and one
Centre Director.
(d) Removal. (i) The Centre Holders shall be entitled at any time and
-------
for any reason (or for no reason) to designate any Centre Director for removal
as a Director or as a member of a Committee. The Stockholders agree to take
such action, and to cause the remaining Directors to take such action, as
promptly as practicable after such designation, as is necessary to remove such
Director or Committee Member. The Stockholders further agree to take such
action, and to cause the Directors to take such action, as is necessary to
remove as a Director the Management Director if he or she has ceased to be a
full-time employee of the Corporation or any of its subsidiaries as promptly as
practicable after such cessation of employment.
(e) Filling Vacancies. If at any time a vacancy exists on the Board,
-----------------
or a vacancy is created on the Board by reason of the death, removal or
resignation of any Director, the Stockholders agree (at the request of the
Centre Holders with respect to a vacancy to be filled with a Centre Director,
and at the request of the Board with respect to a vacancy to be filled with a
Public Director or the Management Director) to take such action, and to cause
the remaining Directors to take such action, as promptly as practicable after
such occurrence, to approve and elect an individual to fill such vacancy, which
individual shall be designated for election as a Director (i) by the Centre
Holders, if the individual who has ceased to be a Director was a Centre
Director, (ii) by the Board if the individual who has ceased to be a Director
was a Public Director or the Management Director.
(f) Covenant to Vote. Each of the Stockholders shall vote the Shares
----------------
owned or controlled by such Stockholder (i) at any annual or special meeting of
stockholders of the Corporation called for the purpose of voting on the election
or removal of Directors or (ii) by consensual action of stockholders with
respect to the election or removal of Directors, in favor of the election or
removal of the Directors designated in accordance with this Section 2.
5
<PAGE>
SECTION 3. Other Arrangements. No Stockholder shall grant any proxy
------------------
or enter into or agree to be bound by any voting trust with respect to any
Shares nor shall any Stockholder enter into any stockholder agreements or
arrangements of any kind with any Person with respect to any Shares inconsistent
with the provisions of this Agreement (whether or not such agreements and
arrangements are with other Stockholders or holders of Shares that are not bound
by this Agreement), including, but not limited to, agreements or arrangements
with respect to the acquisition, disposition or voting of Shares, or act, for
any reason, as a member of a group or in concert with any other Persons in
connection with the acquisition, disposition or voting of Shares in any manner
which is inconsistent with the provisions of this Agreement.
SECTION 4. Piggy-Back Registration Rights.
------------------------------
(a) Whenever the Corporation shall propose to file a registration
statement under the Securities Act (whether on its own initiative or pursuant to
a Centre Holders Registration Request) relating to the public offering of the
Common Stock (other than in connection with the Offering and other than pursuant
to a registration statement on Form S-4 or Form S-8 or any successor forms, or
filed in connection with an exchange offer or an offering of securities solely
to existing stockholders or employees of the Corporation), the Corporation shall
on each such occasion (i) give prompt written notice to the Centre Holders and
each other Stockholder who is an owner of record of Shares (each a "Holder" and
------
collectively "Holders"), specifying the approximate date on which the
-------
Corporation proposes to file such registration statement and advising such
Holders of their right to have any or all of their Shares included among the
securities to be covered thereby and (ii) at the written request of each such
Holder given to the Corporation within 15 days after the date upon which the
Corporation gave the aforementioned notice, include among the securities covered
by such registration statement the number of Shares of each such Holder that
shall have been requested be so included (subject, however, to reduction in
accordance with Section 6(c) hereof); provided, however, that no Holder other
-------- -------
than the Centre Holders, Comcast and Hawkins may participate in any registration
made (A) pursuant to the first Centre Holders Registration Request or (B)
pursuant to which Securities are to be sold pursuant to a shelf registration as
a result of a Centre Holders Registration Request.
(b) Nothing in this Section 4 shall create any liability on the part
of the Corporation to such Holders if the Corporation or the Centre Holders for
any reason should decide not to file a registration statement proposed to be
filed under Section 4(a) or to withdraw such registration statement subsequent
to its filing in accordance with Section 6(b), regardless of any action
whatsoever that the Centre Holders or any other Holder may have taken, whether
as a result of the issuance by the Corporation of any notice hereunder or
otherwise.
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<PAGE>
(c) A request by such Holders to include Shares in a proposed
underwritten offering pursuant to Section 4(a) shall not be deemed to be a
request for a demand registration pursuant to Section 5.
SECTION 5. Demand Registration Rights.
--------------------------
(a) Upon the written request of the Centre Holders that the
Corporation effect the registration of all or part of the Centre Holders' Shares
(a "Centre Holders Registration Request"), the Corporation shall use its
-----------------------------------
reasonable best efforts to effect, as promptly as practicable (but in no event
later than 120 days after the Corporation receives such request), the
registration under the Securities Act of such Shares and any other Shares that
may be included therein pursuant to Section 4 and this Section 5, all to the
extent necessary to permit disposition of such Shares pursuant to a registered
public offering and the Corporation will use its reasonable best efforts to
effect such registration using a shelf registration when and if it is qualified
to do so on Form S-2 or S-3 or any successor form and if so requested by the
Centre Holders; provided, however, that the Corporation shall not be required to
-------- -------
take any action pursuant to this Section 5:
(i) prior to 180 days after the Effective Date;
(ii) if prior to the date of such request the Corporation
shall have effected three (3) registrations pursuant to this Section
5;
(iii) if the Corporation has effected a registration pursuant
to this Section 5 within the 90-day period (if at the time the
Corporation qualifies to use Form S-3) or 180-day period (in all other
cases) immediately preceding such request; or
(iv) if the Centre Holders' Shares that the Corporation shall
have been requested to register shall have a then current market value
of less than $5,000,000, unless such registration request is for all
of the Centre Holders' remaining Shares and such registration is
pursuant to a registration statement on Form S-2 or S-3 or any
successor form;
and provided, further, however, that the Corporation shall be permitted to
-------- ------- -------
satisfy its obligations under this Section 5(a) by amending (to the extent
permitted by applicable law) any registration statement (including any shelf
registration) previously filed by the Corporation under the Securities Act so
that such registration statement (as amended) shall permit the disposition (in
accordance with the intended methods of disposition specified as aforesaid) of
all of the Centre Holders' Shares for which a demand for registration has been
made under this Section 5(a) and such additional Shares that may be registered
in conjunction
7
<PAGE>
therewith pursuant to Section 4 hereof. If the Corporation shall so amend a
previously filed registration statement, it shall be deemed to have effected a
registration for purposes of this Section 5.
(b) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to a demand made in accordance with
Section 5(a), the Centre Holders shall have the right to select a managing
underwriter or underwriters to administer the offering, subject to the consent
of the Corporation which may not be unreasonably withheld.
SECTION 6. Registration Procedures.
-----------------------
(a) If and whenever the Corporation is required to use its reasonable
best efforts to effect or cause the registration of any Shares under the
Securities Act as provided in this Agreement, the Corporation shall, as
expeditiously as possible and at its expense, take the actions specified in
clauses (i) through (xii) below (the Common Shares as to which registration is
so requested, including those as to which the Centre Holders requests
registration, if applicable, hereinafter being referred to herein as
"Securities" and the Persons whose Securities are included in the registration
----------
hereinafter sometimes being referred to as "Selling Stockholders");
--------------------
(i) use its reasonable best efforts to effect
registration, qualification or compliance under the Securities Act and
under any other applicable federal law and any applicable securities
or blue sky laws of such jurisdictions within the United States (such
action being herein called a "Filing" or the "Filings") of the
------ -------
Securities as each Holder shall reasonably request; provided, however,
-------- -------
that in no event shall the Corporation be obligated to qualify to do
business in any jurisdiction where it is not so qualified or to take
any action that would subject it to tax or the service of process
(other than process in connection with such registration) in any state
where it is not subject thereto;
(ii) furnish to each Selling Stockholder such number of
copies of such registration statement and of each amendment and
supplement thereto (in each case including all exhibits), the
prospectus in the registration statement filed under the Securities
Act (including each preliminary and summary prospectus) in conformity
with the requirements of the Securities Act and such other documents
as such Selling Stockholder may reasonably request in order to
facilitate the disposition of the Securities covered by the
registration statement;
8
<PAGE>
(iii) notify each Selling Stockholder, at any time when a
prospectus relating to the Securities covered by such registration
statement is required to be delivered under the Securities Act, of the
Corporation's becoming aware that the prospectus in such registration
statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, and at the request of any Selling Stockholder, prepare and
furnish to such Selling Stockholder any reasonable number of copies of
any supplement to or amendment of such prospectus necessary so that,
as thereafter delivered to any purchaser of the Securities, such
prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
(iv) notify each Holder covered by such registration
statement at any time;
(a) when the prospectus or any prospectus supplement
or post-effective amendment has been filed, and, with
respect to the registration statement or and any post-
effective amendment, when the same has become effective;
(b) of any request by the SEC for amendments or
supplements to the registration statement or the
prospectus or for additional information;
(c) of the issuance by the SEC of any stop order
suspending the effectiveness of the registration statement
or any order preventing the use of a related prospectus,
or the initiation (or any overt threats) of any proceedings
for such purposes;
(d) of the receipt by the Corporation of any written
notification of (A) the suspension of the qualification of
any of the Shares for sale in any jurisdiction or (B) the
initiation (or overt threats) of any proceeding for that
purpose); and
(e) if at any time the representations and
warranties of the Corporation contemplated by paragraph
(ix) below cease to be true and correct;
(v) prepare and file with the SEC such amendments
and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such
registration statement
9
<PAGE>
effective for such period not to exceed 120 days as any Selling
Stockholder shall request and to comply with the provisions of the
Securities Act with respect to the sale or other disposition of all
Securities covered by such registration statement during such period;
(vi) otherwise use its reasonable best efforts to comply
with all applicable rules and regulations of the SEC, and make
available to its security holders, as soon as reasonably practicable,
an earning statement covering the period of twelve months beginning
not later than the first day of the Corporation's first calendar
quarter after the effective date of the registration statement, which
earning statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder;
(vii) use its reasonable best efforts to cause all
Securities covered by such registration statement to be listed on the
principal securities exchange or over-the-counter market on which
similar equity securities issued by the Corporation are then listed or
eligible for listing, if the listing of such Securities is then
permitted under the rules of such exchange;
(viii) provide a transfer agent and registrar for all
Securities covered such registration statement not later than the
effective date of such registration statement;
(ix) in connection with any underwritten offering, enter
into an underwriting agreement with the underwriter of such offering
in the form customary for such underwriter for similar offerings,
including such representations and warranties by the Corporation,
provisions regarding the delivery of opinions of counsel for the
Corporation and accountants' letters, provisions regarding
indemnification and contribution, and such other terms and conditions
as are at the time customarily contained in such underwriter's
underwriting agreements for similar offerings (and, at the request of
any holder of securities that are to be distributed by such
underwriter(s), any or all (as requested by such Selling Stockholder)
of the representations and warranties by, and the other agreements on
the part of, the Corporation to and for the benefit of such
underwriter(s) shall also be made to and for the benefit of such
Selling Stockholder);
(x) upon receipt of such confidentiality agreements as
the Corporation may reasonably request, make available for inspection
by any Selling Stockholder and by any attorney, accountant or other
agent retained by any such Selling Stockholder, all pertinent
financial and other records,
10
<PAGE>
pertinent corporate documents and properties of the Corporation and
its subsidiaries, and cause all of the Corporation's and its
subsidiaries' officers, directors and employees to supply all
information reasonably requested by any such Selling Stockholder,
attorney, accountant or agent in connection with such registration
statement;
(xi) permit any Holder of Securities who in the sole
judgment, exercised in good faith, of the Board, might be deemed to be
a controlling person of the Corporation, to participate in the
preparation of such registration or comparable statement and to
require the insertion therein of material, furnished to the
Corporation in writing, that in the judgment of the Board, as
aforesaid, should be included; and
(xii) in the event of the issuance of any stop order
suspending the effectiveness of the registration statement or of any
order suspending or preventing the use of any related prospectus or
suspending the qualification of any Shares included in the
registration statement for sale in any jurisdiction, the Corporation
will use all commercially reasonable efforts promptly to obtain its
withdrawal.
(b) Except in connection with a registration to be effected pursuant
to a Centre Holders Registration Request under Section 5, the Corporation may,
at its election at any time after giving written notice of its intention to
effect a registration of Securities and prior to the effective date of the
registration statement filed in connection with such registration, if it shall
determine for any reason not to register such Securities, give written notice of
such determination to each Holder of Securities and thereupon it shall be
relieved of its obligation to register any Securities (but not of its obligation
to pay Registration Expenses).
(c) If the Corporation's offering is underwritten, Holders of
Securities shall sell such Securities to or through the underwriter or
underwriters of the Securities being registered for the account of the
Corporation and/or the Centre Holders upon terms generally comparable to the
terms applicable to the Corporation and/or the Centre Holders. If any lead
underwriter reasonably determines that the number of Securities included in the
registration statement exceeds the number (the "Saleable Number") that can be
---------------
sold in an orderly fashion within a price range acceptable to the Corporation or
the Centre Holders, then the number of Securities that the Corporation and the
Holders of Securities will be permitted to include in such registration
statement will be allocated as follows:
(i) in the event of a registration initiated by the Corporation, (A)
first, all of the securities of the Corporation, (B) second, the difference
between the Saleable Number
11
<PAGE>
and the number of shares to be included pursuant to clause (A) of this
subsection (i) to all of the Securities of Comcast, (C) third, the difference
between the Saleable Number and the number of shares to be included pursuant to
clauses (A) and (B) of this subsection (i) to all of the Securities of the
Centre Holders and Hawkins, allocated pro rata on the basis of the relative
number of Securities held by each, and (D) fourth, the difference between the
Saleable Number and the number of shares to be included pursuant to clauses (A),
(B) and (C) of this subsection (i) to the Securities of all other Selling
Stockholders allocated pro rata on the basis of the relative number of
Securities held by each such Selling Stockholder not included pursuant to
clauses (i)(A), (B) and (C) of this sentence;
(ii) in the event of a registration pursuant to a Centre Holders
Registration Request, (A) first, all of the Securities of the Comcast, (B)
second, the difference between the Saleable Number and the number of shares to
be included pursuant to clause (A) of this subsection (ii) to all of the
Securities of the Centre Holders and Hawkins, allocated pro rata on the basis of
the relative number of Securities held by each, (C) third, the difference
between the Saleable Number and the number of Shares to be included pursuant to
clauses (A) and (B) of this subsection (ii) to all of the Securities of the
Corporation, and (D) fourth, subject to the proviso to Section 4(a), the
difference between the Saleable Number and the number of shares to be included
pursuant to clauses (A), (B) and (C) of this subsection (ii) to the Securities
of all other Selling Stockholders allocated pro rata on the basis of the
relative number of Securities held by each such Selling Stockholder not included
pursuant to clauses (ii)(A), (B) and (C) of this sentence;
If as a result of the proration provisions of this Section 6(c), any
Holder of Securities is not entitled to include all such Securities in such
registration, such Holder may elect to withdraw his request to include any
Securities in such registration (a "Withdrawal Election"); provided, however,
------------------- -------- -------
that a Withdrawal Election shall be irrevocable and a Holder of Securities who
has made a Withdrawal Election shall no longer have any right to include any
Securities in the registration as to which such Withdrawal Election was made.
The number of Securities required to satisfy any underwriters' overallotment
option shall be allocated pro rata among the Corporation and all Holders of
Securities on the basis of the relative number of Securities otherwise to be
included by each of them in the registration.
(d) If requested in writing by the Corporation or the lead
underwriter, if any, of any offering effected pursuant to this Agreement, the
Corporation and each Stockholder owning of record more than 1% of the Shares
then outstanding (including Shares a Stockholder has the right to acquire upon
exercise of Options or otherwise), agrees not to effect any public sale or
distribution, including any sale pursuant to Rule 144 under the Securities Act,
of any Shares (other than as part of such underwritten public offering) within 7
days before or 120 days after the effective date of a registration statement
filed pursuant to this Agreement.
12
<PAGE>
(e) As a condition to including any Holder's Securities in a
registration, the Corporation may require (i) that such Holder furnish to the
Corporation such information regarding such Holder and the contemplated
distribution of such Holder's Securities as is required to be included in the
registration statement, and (ii) that such information be furnished to the
Corporation in writing and signed by such Holder and stated to be specifically
for use in the related registration statement, prospectus, offering circular or
other document incident thereto. Except for the foregoing and as otherwise
provided by Section 8, Holders of Securities shall not be required to make any
representations or warranties to or agreements with the Corporation or the
underwriters as a condition to the inclusion of such Securities in a
registration.
(f) Each Selling Stockholder shall, upon receipt of any notice from
the Corporation pursuant to Section 6(a)(iii), forthwith discontinue disposition
of Securities pursuant to the registration statement covering such Securities
until such Selling Stockholder shall receive copies of the supplemented or
amended prospectus contemplated by Section 6(a)(iii) and, if so directed by the
Corporation, such Selling Stockholder shall deliver to the Corporation (at the
Corporation's expense) all copies other than permanent file copies then in such
Selling Stockholder's possession, of the prospectus covering such Securities
that was in effect prior to such amendment or supplement. In the event the
Corporation shall give any such notice, the period set forth in Section 6(a)(v)
shall be extended by the number of days elapsed from and including the date of
the giving of such notice pursuant to Section 6(a)(iii) to and including the
date on which each Selling Stockholder covered by such registration statement
shall have received the copies of the supplemented or amended prospectus
contemplated by Section 6(a)(ii).
(g) Anything to the contrary contained herein notwithstanding, the
Corporation may postpone filing any registration statement for a reasonable
period (not to exceed 60 days in any 12 month period) if, in the reasonable
judgment of the Board, such filing would require the disclosure of material
information that the Corporation has a bona fide business purpose for preserving
as confidential or such filing would have an adverse effect on the Corporation.
(h) Notwithstanding any other provisions of this Agreement, the
Corporation is under no obligation to include in any registration statement any
(i) Shares for which a registration statement covering such Shares has been
declared effective under the Securities Act and such Shares have been disposed
of pursuant to such effective registration statement, (ii) Shares that have been
distributed to the public pursuant to Rule 144 (or any similar provision then in
force) under the Securities Act, (iii) Shares that have been otherwise
transferred to a party that is not an affiliate of the Holder and new
certificates for such Shares not bearing a legend restricting further transfer
shall have been delivered by the Corporation, or (iv) Shares which, in the
opinion of counsel to the Corporation, may be
13
<PAGE>
freely transferred by the holder thereof in the contemplated manner of
distribution without registration under the Securities Act ("Freely Transferable
-------------------
Shares").
- - - ------
SECTION 7. Registration Expenses. The Corporation shall pay all
---------------------
Registration Expenses in connection with all registrations pursuant to Sections
4 and 5, and each Holder shall pay all underwriting discounts and commissions
and transfer taxes, if any, relating to the sale or disposition of such Holder's
Securities pursuant to the registration statement; provided, however, that if a
-------- -------
registration statement pursuant to a Centre Holders Registration Request under
Section 5 does not become effective because of a refusal to proceed by the
Centre Holders (other than for good cause, including based on market
conditions), then such registration shall be deemed to have been effected by the
Corporation for the purpose of determining the number of demand registrations
available to the Centre Holders unless the Corporation is reimbursed in full for
all Registration Expenses associated therewith; provided, however, that in no
-------- -------
case shall any such registration that is deemed effected be considered the
"first Centre Holders Registration Request" for any purposes but shall instead
reduce the total number of registrations that may be made pursuant to Section 5.
SECTION 8. Indemnification. In the event of the filing of any
---------------
registration statement under the Securities Act with respect to the Securities
pursuant to Section 4 or Section 5, the Corporation will indemnify and hold each
Selling Stockholder and the directors, officers, general and limited partners
and controlling persons (within the meaning of the Securities Act ("Controlling
-----------
Persons")) of each such Selling Stockholder (each, a "Stockholder Indemnitee")
- - - ------- ----------------------
harmless from and against any losses, claims, damages or liabilities, joint or
several, to which each such Stockholder Indemnitee may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained, on
the effective date thereof, in any registration statement under which the
Securities were registered under the Securities Act, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or arise out of or are based upon the failure
by the Corporation to file any amendment or supplement thereto that was required
to be filed under the Securities Act, and will reimburse each such Stockholder
Indemnitee for any legal or any other expenses reasonably incurred by such
Stockholder Indemnitee in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the
-------- -------
Corporation will not be liable to any Stockholder Indemnitee in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made (i) in such registration statement, preliminary
prospectus, final prospectus or amendment or supplement in reliance upon and in
conformity with written information furnished to the
14
<PAGE>
Corporation through an instrument duly executed by such Stockholder Indemnitee
specifically for use in the preparation thereof or (ii) in any preliminary
prospectus or any final prospectus later amended or supplemented if (A) such
Stockholder Indemnitee failed to deliver a copy of the final prospectus or the
final prospectus as then amended or supplemented, as the case may be, to the
Person asserting such loss, claim, damage or liability at or prior to the
written confirmation of such sale, (B) such delivery was required by the
Securities Act and (C) the untrue statement or alleged untrue statement or
omission or alleged omission in such preliminary prospectus or final prospectus
was corrected in the final prospectus or the final prospectus as then amended or
supplemented, respectively. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of any such
Stockholder Indemnitee and shall survive the transfer of such Securities.
Each Holder of Securities agrees that if such Holder requests the
inclusion of Securities in a registration, such Holder will execute, and the
Corporation's obligation to take any action pursuant to Section 4 or Section 5
hereof is specifically conditioned on the Corporation's receipt of, an
undertaking satisfactory to the Corporation to indemnify and hold harmless (in
the same manner and to the same extent as set forth in the preceding paragraph
of this Section 8) the Corporation, all other Holders of Securities and any
underwriter of such offering, and their respective directors, officers, general
and limited partners and Controlling Persons (each, an "Indemnitee"), with
----------
respect to any untrue statement or alleged untrue statement of any material fact
contained, on the effective date thereof, in any registration statement under
the Securities Act, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading if such statement or
omission was made in reliance upon and in conformity with written information
furnished to the Corporation through an instrument duly executed by such Holder
of Securities specifically for use in the preparation of such registration
statement, preliminary prospectus or final prospectus or amendment or
supplement; provided, however, that such Holder will not be liable in any such
-------- -------
case to any Indemnitee to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission in any preliminary prospectus or any
final prospectus later amended or supplemented if (i) such Indemnitee failed to
deliver a copy of the final prospectus or the final prospectus as then amended
or supplemented, as the case may be, to the Person asserting such loss, claim,
damage or liability at or prior to the written confirmation of such sale, (ii)
such delivery was required by the Securities Act and (iii) the untrue statement
or alleged untrue statement or omission or alleged omission in such preliminary
prospectus or final prospectus was corrected in the final prospectus or the
final prospectus as then amended or supplemented, respectively; and further
provided, however, that no indemnification liability shall exceed the amount
- - - -------- -------
received by such Holder in the relevant offering. Such
15
<PAGE>
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of any such Indemnitee and shall survive the transfer of
such securities.
As soon as possible after receipt by an indemnified party hereunder of
written notice of the commencement of any action or proceeding with respect to
which a claim for indemnification may be made pursuant to this Section 8, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, give written notice to the latter of the commencement of
such action; provided, however, that the failure of any indemnified party to
-------- -------
give notice as provided herein shall not relieve the indemnifying party of its
obligations under the preceding paragraphs of this Section 8 except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. If any such claim or action shall be brought against an
indemnified party, and it shall notify the indemnifying party thereof, the
indemnifying party shall be entitled to participate therein, and, to the extent
that it wishes, jointly with any other similarly notified indemnifying party, to
assume the defense thereof with counsel reasonably satisfactory to the
indemnified party; provided that the indemnifying party shall not be entitled to
--------
so participate or so assume the defense if, in the indemnified party's
reasonable judgment, a conflict of interest between the indemnified party and
the indemnifying party exists in respect of such claim. After notice from the
indemnifying party to such indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof; provided, however, that an indemnified party shall have the right to
-------- -------
employ one counsel to represent such indemnified party and its officers,
directors, general and limited partners and Controlling Persons if, in such
indemnified party's reasonable judgment, a conflict of interest between such
indemnified parties and the indemnifying parties exists in respect of such
claim, and in that event the fees and expenses of such separate counsel shall be
paid by the indemnifying party; and provided, further, that if, in the
-------- -------
reasonable judgment of any indemnified party, a conflict of interest between
such indemnified party and any other indemnified parties exists in respect of
such claim, such indemnified party shall be entitled to additional counsel or
counsels and the indemnifying party shall be obligated to pay the fees and
expenses of such additional counsel or counsels. No indemnifying party will
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to all indemnified parties of a release from all liability in respect of such
claim or litigation.
Indemnification similar to that specified in the preceding paragraphs
of this Section 8 (with appropriate modifications) shall be given by the
Corporation and, at the Corporation's request, by each Selling Stockholder with
respect to any required registration or other qualification of securities under
any state securities and "blue sky" laws.
16
<PAGE>
If the indemnification provided for in this Section 8 is unavailable
or insufficient to hold harmless an indemnified party, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of the losses, claims, damages or liabilities referred to in the
first two paragraphs of this Section 8 in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and the
indemnified party on the other hand in connection with statements or omissions
which resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the indemnifying party or the
indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statements or
omission. The parties hereto agree that it would not be just and equitable if
contributions pursuant to this paragraph were to be determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the first sentence of this
paragraph. The amount paid by an indemnified party as a result of the losses,
claims, damages or liabilities referred to in the first sentence of this
paragraph shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any action or claim (which shall be limited as provided in the third paragraph
of this Section 8 if the indemnifying party has assumed the defense of any such
action in accordance with the provisions thereof) which is the subject of this
paragraph. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. Promptly
after receipt by an indemnified party under this paragraph of notice of the
commencement of any action against such party in respect of which a claim for
contribution may be made against an indemnifying party under this paragraph,
such indemnified party shall notify the indemnifying party in writing of the
commencement thereof if the notice specified in respect to indemnification has
not been given with respect to such action; provided, however, that the omission
-------- -------
so to notify the indemnifying party shall not relieve the indemnifying party
from liability which it may have to any indemnified party otherwise under this
paragraph, except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice. Notwithstanding anything in this
paragraph to the contrary, no indemnifying party (other than the Corporation)
shall be required pursuant to this paragraph to contribute any amount in excess
of the proceeds received by such indemnifying party from the sale of Securities
in the offering to which the losses, claims, damages or liabilities of the
indemnified parties relate.
SECTION 9. Termination. This Agreement may be terminated at any time
-----------
by an instrument in writing signed by the Corporation and Stockholders that own
of record a majority of the outstanding Shares then held by the Stockholders,
copies of which instrument shall be delivered to each Stockholder and to the
Corporation; provided, however, that
-------- -------
17
<PAGE>
termination shall not be allowed without the prior written consent of Comcast so
long as Comcast has outstanding Shares that are not Freely Transferrable Shares.
This Agreement shall terminate on the earlier to occur of (a) the Sale of the
Corporation or (b) ten years after the date hereof, unless, at any time within
two years prior to such date, the Corporation and Stockholders that own of
record a majority of the outstanding Shares then held by the Stockholders extend
its duration for as many additional periods, each not to exceed ten years, as
they may desire.
SECTION 10. Transfer Restriction.
--------------------
(a) Each Stockholder agrees that it will not Transfer any of the
Shares held by such Stockholder unless and until the same are registered under
the Securities Act and any applicable state securities laws, or unless an
exemption from such registration is available and until the Corporation shall
have received a written opinion of legal counsel reasonably acceptable to the
Corporation that the Transfer is in compliance with or exempt from the
registration requirements of the Securities Act and any applicable state
securities laws. Except for a purchaser of Freely Transferrable Shares, any
transferee of Shares (a "Transferee") shall (i) take and hold such Shares
----------
subject to this Agreement and to all the obligations and restrictions upon the
Stockholder making such Transfer, (ii) observe and comply with this Agreement
and with such obligations and restrictions, and (iii) as a condition of
Transfer, execute and deliver to the Corporation an agreement (a "Joinder
Agreement") in a form satisfactory to the Corporation, adopting all of the
obligations and restrictions of this Agreement (upon execution and delivery
thereof to the Corporation, such Transferee shall be deemed to have joined in
this Agreement and to have become a party hereto and Schedule I hereto shall be
amended to reflect the inclusion of such purchaser as a Stockholder hereunder).
(b) No Stockholder may Transfer any Shares prior to (i) the
effectiveness of the registration statement for Common Stock made pursuant to
the first Centre Holders Registration Request other than the Centre Holders,
Hawkins and Comcast and (ii) the expiration of the period, if applicable,
referenced to in Section 6(d) other than pursuant to gifts or pursuant to
transfers to (or to a trust exclusively for the benefit of) a member of the
family of such Stockholder or his successors, provided the donee or transferee
agrees in writing to be bound by the terms of this Agreement in the same manner
as if it were originally a party hereto.
SECTION 11. Legend. Each Stockholder acknowledges the Corporation
------
shall have the right, upon advice of its counsel, from time to time to cause
each certificate representing Shares to bear all or part of the following
legend:
18
<PAGE>
"NO TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER
DISPOSITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY
BE MADE EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND ANY
APPLICABLE STATE SECURITIES AND 'BLUE SKY' LAWS, OR (B) IF THE
CORPORATION HAS PREVIOUSLY BEEN FURNISHED WITH AN OPINION OF
COUNSEL FOR THE HOLDER, WHICH OPINION AND COUNSEL SHALL BE
REASONABLY SATISFACTORY TO THE CORPORATION, TO THE EFFECT THAT
SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER
DISPOSITION IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT
AND THE RULES AND REGULATIONS IN EFFECT THEREUNDER AND SUCH STATE
SECURITIES AND 'BLUE SKY' LAWS. THE RIGHTS OF THE HOLDER OF
THESE SECURITIES IN RESPECT OF THE ELECTION AND REMOVAL OF
DIRECTORS AND OTHERWISE RELATING TO VOTING RIGHTS ARE SUBJECT TO
THE TERMS AND CONDITIONS OF A STOCKHOLDERS' AGREEMENT DATED AS OF
May 10, 1996, COPIES OF WHICH STOCKHOLDERS' AGREEMENT ARE ON FILE
WITH THE SECRETARY OF THE CORPORATION."
SECTION 12. Effective Date. This Agreement shall become effective
--------------
upon the Effective Date; provided, however, that this Agreement shall terminate
-------- -------
and have no further force and effect if the Effective Date shall not have
occurred or the Offering shall have been abandoned by the Corporation on or
prior to November 30, 1996.
SECTION 13. Severability; Governing Law. If any provision of this
---------------------------
Agreement shall be determined to be illegal and unenforceable by any court of
law, the remaining provisions shall be severable and enforceable in accordance
with their terms. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without giving effect to the
conflict of law principles thereof.
19
<PAGE>
SECTION 14. Benefits of Agreement. This Agreement shall be binding
---------------------
upon and inure to the benefit of the parties and their respective successors and
permitted assigns, legal representatives and heirs; this Agreement does not
create, and shall not be construed as creating, any rights enforceable by any
other Person. The rights and obligations of the Stockholders hereunder shall
not be assignable.
SECTION 15. Notices. All notices and communications to be given or
-------
to otherwise be made to any party to this Agreement shall be deemed to be
sufficient if contained in a written instrument delivered in person or duly sent
by first class registered or certified mail, return receipt requested, or by a
recognized national courier service, postage or charges prepaid, addressed to:
(a) If to the Corporation:
Muzak, Inc.
2901 Third Avenue, Suite 400
Seattle, Washington 98121
Attention: John R. Jester, President
with a copy to:
Weil, Gotshal & Manges
767 Fifth Avenue
New York, NY 10153
Attention: Norman D. Chirite, Esq.
and to:
Heller, Ehrman, White & McAuliffe
701- 5th Avenue
Suite 6100
Seattle, Washington 98104
Attention: Louisa Barash, Esq.
(b) If to the Centre Holders:
Centre Partners L.P.
30 Rockefeller Plaza, Suite 5050
20
<PAGE>
New York, New York 10020
Attention: Bruce G. Pollack
(c) If to the Comcast:
Comcast Sound Communications, Inc.
1500 Market Street
Philadelphia, PA 19102
Attention: Robert Pick
(d) If to any other Stockholder, to such Stockholder's address as it
appears on the stock books of the Corporation or such other address as may be
designated in writing by the addressee to the addressor.
All such notices and communications shall be deemed to have been
received: (a) in the case of personal delivery, on the date of such delivery,
(b) in the case of mailing, on the third business day following such mailing if
sent by registered or certified mail, return receipt requested, postage prepaid,
and if sent otherwise, upon receipt, or (c) in the case of delivery by a courier
service, on the date of confirmation of delivery, except notices of change of
address which shall only be effective upon receipt.
SECTION 16. Modification. Except as provided in Section 12 or
------------
otherwise provided herein, neither this Agreement nor any provision hereof can
be modified, changed or terminated except by an instrument in writing signed by
the Corporation and Stockholders owning of record at least a majority of the
outstanding Shares then held by each of (i) the Centre Holders and (ii) the
Management Investors, in which event such amendment or modification shall be
binding upon all Stockholders in accordance with its terms; provided, however,
-------- -------
that no such modification may limit the right of Comcast or Hawkins to dispose
of its or his Shares pursuant to the terms of this Agreement without the consent
of such Stockholder so long as such Stockholder has outstanding Shares that are
not Freely Transferrable Shares. This Agreement shall automatically be deemed
amended to add, as a party hereto, any Person (i) who, after the date hereof,
executes a Joinder Agreement under Section 10(a) or otherwise acquires Shares
from a Stockholder, other than Freely Transferrable Shares, or (ii) who
exercises an option to purchase Common Stock pursuant to the Corporation's
Senior Management Stock Option Plan (and such person shall be deemed a
"Stockholder") and to delete any Person who no longer owns any Shares (and such
Person shall thereafter not be deemed a "Stockholder").
21
<PAGE>
SECTION 17. Captions and References to Sections. The captions herein
-----------------------------------
are inserted for convenience only and shall not define, limit, extend or
describe the scope of this Agreement or affect the construction hereof.
Sections mentioned by number only are the respective sections of this Agreement.
SECTION 18. Availability of Equitable Remedies. Each Stockholder
----------------------------------
acknowledges that a breach of the provisions of this Agreement could not
adequately be compensated by money damages. Accordingly, any party shall be
entitled, in addition to any other right or remedy available to it, to an
injunction restraining such breach or a threatened breach and to specific
performance of any such provision of this Agreement, and in either case no bond
or other security shall be required in connection therewith, and the parties
hereby consent to such injunction and to the ordering of specific performance.
SECTION 19. Entire Agreement. This Agreement and the Certificate of
----------------
Incorporation and the By-Laws of the Corporation set forth the entire
understanding of the parties with respect to the subject matter hereof. There
are no restrictions, agreements, promises, representations, warranties,
covenants or undertakings with respect to the subject matter hereof other than
those expressly set forth in this Agreement and the Certificate of Incorporation
and By-Laws of the Corporation.
SECTION 20. Waiver. Any waiver by any party of a breach of any
------
provision of this Agreement shall not operate as or be construed to be a waiver
of any other breach of that provision or of any breach of any other provision of
this Agreement. The failure of a party to insist upon strict adherence to any
term of this Agreement on one or more occasions shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be evidenced by
a writing signed by the party against whom the waiver is sought to be enforced.
SECTION 21. Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed to be an original, but all of
which taken together shall constitute one and the same instrument. This
Agreement shall become effective and binding upon each proposed party hereto
upon the execution and delivery of a counterpart hereof by such party.
22
<PAGE>
[Signature page to Stockholders' Agreement]
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first above written.
MUZAK, INC.
By: /s/ John R. Jester
-----------------------
Title: President
MLP HOLDINGS L.P.
By: Centre Partners L.P.,
General Partner
By: Park Road Corporation
General Partner
By: /s/ Robert Bergmann
-----------------------
Title: Vice President
CENTRE PARTNERS L.P.
By: Park Road Corporation
General Partner
By: /s/ Robert Bergmann
-----------------------
Title: Vice President
COMCAST SOUND COMMUNICATIONS, INC.
By: /s/ Robert S. Pick
-----------------------
Title: Vice President
COMCAST SOUND COMMUNICATIONS, INC.
By: /s/ Robert S. Pick
-----------------------
Title: Vice President
<PAGE>
[Signature page to Stockholders' Agreement]
/s/ John A. Hawkins /s/ John R. Jester
- - - --------------------- -------------------------
John A. Hawkins John R. Jester
/s/ James F. Harrison /s/ Kirk Collamer
- - - --------------------- -------------------------
James F. Harrison Kirk Collamer
/s/ Wallace R. Borgeson /s/ Bruce B. Funkhouser
- - - --------------------- -------------------------
Wallace R. Borgeson Bruce B. Funkhouser
/s/ L. Dale Stewart /s/ Thomas J. Gentry
- - - --------------------- -------------------------
L. Dale Stewart Thomas J. Gentry
/s/ John A. Neal /s/ Jack D. Craig
- - - --------------------- -------------------------
John A. Neal Jack D. Craig
/s/ Richard Chaffee /s/ Roger Fairchild
- - - --------------------- -------------------------
Richard Chaffee Roger Fairchild
/s/ James G. Henderson /s/ Susan P. Chetwin
- - - --------------------- -------------------------
James G. Henderson Susan P. Chetwin
/s/ Robert E. Crowe /s/ Dino J. DeRose
- - - --------------------- -------------------------
Robert E. Crowe Dino J. DeRose
/s/ Daniel Lee Hart /s/ Steven Tracy
- - - --------------------- -------------------------
Daniel Lee Hart Steven Tracy
<PAGE>
SCHEDULE I to Stockholders' Agreement
Number of
Shares of
Stockholder Common Stock
- - - ----------- ---------------
MLP Holdings L.P. 5,226,404
Centre Partners L.P. 19,881
Comcast Sound Communications(1) 250,871
John A. Hawkins 14,410
Management
John R. Jester 157,493
James F. Harrison 93,148
Kirk Collamer 25,738
Wallace R. Borgeson 42,897
Bruce B. Funkhouser 44,122
L. Dale Stewart 68,022
Thomas J. Gentry 68,022
John A. Neal 75,070
Jack D. Craig 69,248
Richard Chaffee 56,379
Roger Fairchild 4,290
J. Gary Henderson 47,800
Susan P. Chetwin 12,256
Robert E. Crowe 42,897
Dino J. DeRose 28,312
Daniel Lee Hart 21,448
Steven Tracy 10,724
---------
Subtotal Management 867,866
---------
Total 6,379,432
=========
1) Includes Shares held by Comscast Sound Communications, Inc., a Colorado
corporation and Comcast Sound Communications, Inc., an Illinois corporation.
<PAGE>
EXHIBIT 11
MUZAK, INC.
STATEMENT OF COMPUTATION OF PRO FORMA EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE THREE-MONTH PERIOD ENDED MARCH 31,
1996
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
DECEMBER 31, PRO FORMA MARCH 31, PRO FORMA
1995 (AS ADJUSTED) 1996 (AS ADJUSTED)
------------ ------------- --------- -------------
<S> <C> <C> <C> <C>
Pro forma net loss
attributable to common
stockholders............. ($6,371) ($2,015) ($2,314) ($1,218)
========= ========== ========= ==========
Computation of common
stock and common stock
equivalents outstanding:
Common stock............ 6,737,856 6,737,856 6,737,856 6,737,856
Common stock
equivalents............ 390,019 390,019 390,019 390,019
Estimated shares to
provide proceeds to
repay indebtedness..... 3,941,577 3,941,577
--------- ---------- --------- ----------
Common stock and common
stock equivalents
outstanding.............. 7,127,875 11,069,452 7,127,875 11,069,452
========= ========== ========= ==========
Pro forma net loss
attributable to common
stockholders per share... ($0.89) ($0.18) ($0.32) ($0.11)
========= ========== ========= ==========
</TABLE>
<PAGE>
EXHIBIT 21
MUZAK, INC.
List of Subsidiaries
State of
Name Incorporation
- - - ---- -------------
Muzak Services, Inc. Delaware
Muzak Communications, Inc. Delaware
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON FINANCIAL STATEMENT SCHEDULE OF
MUZAK LIMITED PARTNERSHIP
We consent to the use in this Registration Statement relating to the sale of
shares of Common Stock of Muzak, Inc. on Form S-1 of our report dated March 6,
1996 (May 10, 1996, as to Notes 3 and 11) on the financial statements of Muzak
Limited Partnership as of December 31, 1995 and 1994, and for each of the
three years in the period ended December 31, 1995, appearing in the
Prospectus, which is a part of this Registration Statement, and to the
references to us under the headings "Selected Financial Data" and "Experts" in
such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Muzak Limited
Partnership, listed in Item 16(b). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Seattle, Washington
May 13, 1996
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement relating to the sale of
shares of common stock of Muzak, Inc. on Form S-1 of our report dated February
10, 1994 on the financial statements of Comcast Sound Communications, Inc. and
subsidiaries for the year ended December 31, 1993, appearing in the Prospectus,
which is part of this Registration Statement.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
May 13, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted for the financial
statements contained in the body of the accompanying Form S-1 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 1770
<SECURITIES> 0
<RECEIVABLES> 15188
<ALLOWANCES> (654)
<INVENTORY> 3081
<CURRENT-ASSETS> 21271
<PP&E> 59383
<DEPRECIATION> (22840)
<TOTAL-ASSETS> 94358
<CURRENT-LIABILITIES> 32237
<BONDS> 44150
15993
0
<COMMON> 0
<OTHER-SE> (1058)
<TOTAL-LIABILITY-AND-EQUITY> 94358
<SALES> 5283
<TOTAL-REVENUES> 20940
<CGS> 2791
<TOTAL-COSTS> 8962
<OTHER-EXPENSES> 12027
<LOSS-PROVISION> 173
<INTEREST-EXPENSE> 1798
<INCOME-PRETAX> (2142)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2142)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
financial statements contained in the body of the accompanying Form S-1 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1115
<SECURITIES> 0
<RECEIVABLES> 16166
<ALLOWANCES> (632)
<INVENTORY> 3473
<CURRENT-ASSETS> 22022
<PP&E> 57171
<DEPRECIATION> (20585)
<TOTAL-ASSETS> 96439
<CURRENT-LIABILITIES> 29464
<BONDS> 47094
15722
0
<COMMON> 0
<OTHER-SE> 1373
<TOTAL-LIABILITY-AND-EQUITY> 96439
<SALES> 23901
<TOTAL-REVENUES> 86881
<CGS> 13451
<TOTAL-COSTS> 38360
<OTHER-EXPENSES> 45977
<LOSS-PROVISION> 810
<INTEREST-EXPENSE> 7483
<INCOME-PRETAX> (5714)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5714)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5714)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> (0.89)
</TABLE>
