UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
---------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000.
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _________
to __________.
Commission file number: 333-78571
333-78571-01
MUZAK LLC
MUZAK FINANCE CORP.
(Exact Name of Registrants as Specified in their charter)
DELAWARE 04-3433729
DELAWARE 56-2187963
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporated or Organization)
5550 77 CENTER DRIVE SUITE 380
CHARLOTTE, NC 28217
(704) 559-5277
(Address, Including Zip Code and Telephone Number including Area Code of
Registrants' Principal Executive Offices)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrants have filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Muzak Finance Corp meets the conditions set forth in General Instruction H(1)
(a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
Muzak Finance Corp had 100 shares of outstanding common stock as of August 14,
2000.
<PAGE>
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MUZAK LLC
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(unaudited)
---------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 6,969 $ 2,275
Accounts receivable, net................................... 42,626 39,203
Inventory.................................................. 10,879 12,283
Prepaid expenses and other assets.......................... 2,395 2,304
--------- ---------
Total current assets................................... 62,869 56,065
Property and equipment, net..................................... 104,382 95,050
Intangible assets, net.......................................... 328,312 314,364
Deposit and other assets, net................................... 36,220 28,795
--------- ---------
Total assets........................................... $ 531,783 $ 494,274
========= =========
LIABILITIES AND MEMBER'S INTEREST
Current liabilities:
Revolving credit facility.................................. $ 34,683 $ 25,000
Current maturities of long term debt....................... 4,434 4,197
Current maturities of other liabilities.................... 2,051 1,394
Accounts payable........................................... 20,796 15,123
Accrued expenses........................................... 18,872 34,433
Advance billings........................................... 12,304 11,171
--------- ---------
Total current liabilities.............................. 93,140 91,318
Long-term debt.................................................. 312,442 278,917
Related party notes............................................. 30,000 30,000
Other liabilities............................................... 17,661 9,798
Commitments and contingencies (Note 9)..........................
Member's interest:
Common units (100 issued and
outstanding)............................................. 124,018 107,124
Accumulated deficit...................................... (45,478) (22,883)
--------- ---------
Total member's interest................................ 78,540 84,241
--------- ---------
Total liabilities and member's interest................ $ 531,783 $494,274
========= ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
2
<PAGE>
MUZAK LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
------------------------------------ ------------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Music and other business services................. $ 34,835 $ 26,408 $ 67,094 $ 34,587
Equipment and related services.................... 13,181 9,110 24,617 13,082
------ ----- ------ ------
Total revenues................................ 48,016 35,518 91,711 47,669
Cost of revenues:
Music and other business services................. 8,517 5,861 15,290 7,460
Equipment and related services.................... 9,724 7,627 18,655 10,499
----- ----- ------ ------
Total cost of revenues........................ 18,241 13,488 33,945 17,959
------ ------ ------ ------
Gross profit.................................. 29,775 22,030 57,766 29,710
------ ------ ------ ------
Selling, general and administrative expenses........... 16,268 11,883 30,450 14,830
Depreciation and amortization expense.................. 15,535 9,142 29,489 12,339
------ ----- ------ ------
Income (loss) from operations................. (2,028) 1,005 (2,173) 2,541
Other income (expense):
Interest expense, net............................. (10,302) (6,513) (19,932) (8,625)
Other, net........................................ (437) -- (430) (21)
------ ----- ------ ------
Loss before income taxes...................... (12,767) (5,508) (22,535) (6,105)
Income tax provision................................... 40 -- 60 --
Net loss...................................... $(12,807) $(5,508) $(22,595) $(6,105)
========= ======== ========= ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
3
<PAGE>
MUZAK LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S INTEREST
(Unaudited)
(in thousands, except for units)
<TABLE>
<CAPTION>
Total
Common Units Accumulated Member's
Outstanding Dollars Deficit Interest
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999....................... 100 $ 107,124 $ (22,883) $ 84,241
Additional capital contributed..................... -- 16,894 -- 16,894
Net loss .......................................... -- -- (22,595) (22,595)
Balance at June 30, 2000........................... 100 $ 124,018 $(45,478) $ 78,540
=== ========= ========= ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
4
<PAGE>
MUZAK LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
--------------------------- -------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss................................................................. $(12,807) $ (5,508) $(22,595) $(6,105)
Adjustments to derive cash flow from continuing operating activities:
Deferred income tax expense.............................................. -- -- 15 --
Depreciation and amortization............................................ 15,535 9,142 29,489 12,339
Amortization of deferred financing fees.................................. 381 325 746 325
Deferred subscriber acquisition costs.................................... (3,047) (1,302) (6,123) (1,435)
Unearned installment income.............................................. (110) -- (172) --
Net change in certain assets and liabilities, net of business
acquisitions
Increase in accounts receivable....................................... (3,942) (3,973) (3,171) (4,337)
Decrease (increase) in inventory ..................................... (93) 580 1,194 373
Increase (decrease) in accrued interest............................... 1,070 6,416 (418) 7,654
Increase (decrease) in accounts payable .............................. 5,229 (6,171) 5,673 (6,287)
Decrease in accrued expenses.......................................... (1,220) (2,769) (9,033) (1,072)
Increase in advance billings......................................... 399 1,568 1,133 1,111
Other, net............................................................ 360 911 175 1,622
--- --- --- -----
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................. 1,755 (781) (3,087) 4,188
----- ----- ------- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash................................................ (962) (9,404) (34,198) (271,913)
Capital expenditures..................................................... (9,970) (5,317) (20,070) (8,022)
------- ------- -------- -------
NET CASH USED IN INVESTING ACTIVITIES............................... (10,932) (14,721) (54,268) (279,935)
-------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior subordinated notes...................... -- -- -- 115,000
Proceeds from issuance of senior credit facility......................... -- -- -- 135,000
Repayments of senior credit facility..................................... (1,800) -- (1,800) --
Net borrowings on revolver............................................... 9,991 16,000 9,683 19,400
Proceeds from issuance of floating rate notes............................ -- -- 36,000 --
Proceeds from interest rate swap......................................... -- -- 4,364 --
Proceeds from contributions by Parent.................................... 5,000 -- 15,636 60,000
Repayment of notes payable to related party.............................. -- -- -- (41,683)
Repayments of capital lease obligations and other debt................... (415) (253) (1,086) (817)
Payment of fees associated with the financing............................ -- -- (748) (10,164)
------ ------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITES............................ 12,776 15,747 62,049 276,736
------ ------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 3,599 245 4,694 989
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................... 3,370 2,037 2,275 1,293
CASH AND CASH EQUIVALENTS, END OF PERIOD................................ $ 6,969 $ 2,282 $ 6,969 $ 2,282
======= ======= ======= =======
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
5
<PAGE>
MUZAK LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Muzak LLC ("the Company"), a Delaware limited liability company, was
formed on August 28, 1998 as ACN Operating LLC and in October 1998 changed its
name to Audio Communications Network, LLC ("ACN"). On October 7, 1998, ACN
commenced operations with its acquisition of the independent franchisees in the
Baltimore, Charlotte, Hillsborough, Kansas City, St. Louis, Jacksonville,
Phoenix, and Fresno areas from Audio Communications Network, Inc. (the
"Predecessor Company"). On March 18, 1999, Muzak Limited Partnership ("Old
Muzak") merged with and into ACN. At the time of the merger, ACN changed its
name to Muzak LLC.
The Company is a wholly owned subsidiary of Muzak Holdings LLC (the
"Parent"), previously known as ACN Holdings, LLC. As of June 30, 2000, ABRY
Partners, LLC and its respective affiliates collectively own approximately 67%
of the voting interests in the Parent. All of the operating activities are
conducted through the Company and its subsidiaries.
The Company derives the majority of its revenues from the sale of
business music products. The core products are Audio Architecture and Audio
Marketing. In addition, the Company produces a complementary product, Video
Imaging. The Company produces its Video Imaging product through an arrangement
with an outside vendor. These revenues are generated by clients, who pay monthly
subscription fees under noncancelable five-year contracts.
The Company also derives revenues from the sale and lease of audio
system-related products, principally sound systems and intercoms, to business
music clients and other clients. In addition, the Company sells electronic
equipment, such as proprietary tape playback equipment and other audio and video
equipment to franchisees to support the sale of 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.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the
accounts of the Company and its subsidiaries: Muzak Capital Corporation, Muzak
Finance Corporation, Business Sound Inc., Electro Systems Corporation, BI
Acquisition LLC, MLP Environmental Music LLC, Audio Environments Inc.,
Background Music Broadcasters Inc., Telephone Audio Productions Inc., Vortex
Sound Communications Company Inc., Music Incorporated, and Muzak Houston, Inc.
All significant intercompany items have been eliminated in consolidation.
Pursuant to the rules and regulations of the Securities and Exchange
Commission for Form 10-Q, certain financial information has been condensed and
certain footnote disclosures have been omitted. Such information and disclosures
are normally included in financial statements prepared in accordance with
generally accepted accounting principles. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Muzak
LLC Annual Report on Form 10-K/A for the fiscal year ended December 31, 1999.
The financial statements as of June 30, 2000 and June 30, 1999 and for
the three and six month periods then ended are unaudited; however, in the
opinion of management, such statements include all adjustments (consisting
solely of normal recurring adjustments except for the acquisitions described in
Note 3) necessary for a fair statement of the financial information included
herein in accordance with Generally Accepted Accounting Principles. Results of
operations for interim periods are not necessarily indicative of results for the
full year.
6
<PAGE>
MUZAK LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS
As discussed in Note 1, on March 18, 1999 Old Muzak merged with and
into ACN. Under the terms of the agreement, the Company paid total consideration
of $274.2 million, which is comprised of the following: $125.5 million cash
consideration, $114.9 million consideration in the tender offer and consent
solicitation for the 10% Senior Notes due 2003 of Old Muzak, $15.9 million for
debt repayment of Old Muzak outstanding obligations, and $17.9 million of other
assumed obligations. In addition, at the time of the merger, the Company repaid
$41.7 million borrowed from ABRY Broadcast Partners by ACN in October 1998 in
connection with the acquisition of the Company's independent franchisees from
the Predecessor Company and converted $0.7 million into voting units of the
Parent.
In 1999, prior to the merger, the Company made the following
acquisitions:
On January 15, 1999, the Company acquired all of the outstanding stock of
Business Sound, Inc. for approximately $4.1 million, which included 3,661
Class A units of the Parent. Business Sound was the Company's independent
franchisee for the New Orleans, Louisiana and Mobile, Alabama areas.
On February 24, 1999, the Company acquired all of the outstanding stock of
Electro Systems for approximately $0.7 million, which included 650 Class A
units of the Parent, and assumed certain non-recourse debt of $2.4 million.
Electro Systems was the Company's independent franchisee located in Panama
City, Florida.
The Company made twenty-one acquisitions between the merger on March 18,
1999 and June 30, 2000. The table below provides information regarding these
acquisitions (in millions, except for number of Parent units).
<TABLE>
<CAPTION>
Purchase Acquired Assets Acquired Acquired
Date Price (1) Or Stock Business Markets
----------------------- ---------- ---------------------------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C>
March 18,1999 $18.1 (2) Net assets of Capstar Broadcasting Independent franchisee Georgia, Florida
Corporation's independent franchisee
April 1, 1999 $ 0.2 Net assets of Custom On Hold Services Audio Marketing Washington
Inc
May 1,1999 $ 3.2 (3) Net assets of Capstar Broadcasting Independent franchisee Nebraska
Corporation's independent franchisee
June 1, 1999 $ 6.9 Net assets of Advertising on Hold, Inc Audio Marketing Florida, Georgia, North
Carolina
July 1, 1999 $ 0.8 Net assets of CustomTronics Sound Business Music California
July 1, 1999 $ 0.9 Net assets of Penobscot Broadcasting Independent franchisee Maine
Corporation
July 26, 1999 $ 1.3 Net assets of LaBov and Beyond, Inc Audio Marketing Indiana
August 1, 1999 $ 3.5 Net assets of US West Communications Audio Marketing National
Services, Inc's Please Hold Promotions
September 1, 1999 $ 4.7 Stock of Broadcast International, Inc Business Music National
October 1, 1999 $10.3 Net assets of Midwest Systems and Business Music Illinois, Indiana, Ohio,
Services, Inc West Virginia
November 1, 1999 $ 2.9 Net assets of A & D Music, Inc Independent franchisee Oregon
November 1, 1999 $ 7.9 (4) Stock of Audio Environment, Inc and Independent franchisee California
Background Music Broadcasters Inc
December 1, 1999 $13.2 (5) Net assets of MountainWest Audio, Inc Independent franchisee Utah, Idaho, Washington
</TABLE>
7
<PAGE>
MUZAK LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Acquisitions (Continued)
<TABLE>
<CAPTION>
Purchase Acquired Assets Acquired Acquired
Date Price (1) Or Stock Business Markets
----------------------- ---------- ---------------------------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C>
February 2, 2000 $0.4 Net assets of Quincy Broadcasting Independent franchisee Illinois
Company
February 2, 2000 $0.9 Net assets of General Communications Audio Marketing Indiana, Georgia,
Corporation ("On Hold America") Florida, Ohio
February 2, 2000 $0.4 Net assets of Texas Sound Co. Ltd Business Music Texas
February 24, 2000 $3.7 Stock of Telephone Audio Productions, Audio Marketing National
Inc.
March 24, 2000 $9.2 (6) Stock of Vortex Sound Communications Independent franchisee District of Columbia
Company, Inc.
March 31, 2000 $1.6 Net assets of Dynamic Sound Independent franchisee Nevada, California
March 31, 2000 $8.3 Stock of Muzak Houston, Inc. Independent franchisee Texas
April 11, 2000 $1.0 Net assets of Audio Plus, Inc. Independent franchisee Ohio
</TABLE>
(1) The purchase price does not include transaction costs.
(2) The Parent acquired Capstar Broadcasting Corporation's ("Capstar")
independent franchisees located in Atlanta, Albany, and Macon, Georgia, and
Ft. Myers, Florida. The total consideration was accounted for as an equity
contribution to the Company and included 13,535 Class A units of the Parent.
(3) The Parent acquired Capstar's independent franchisee located in Omaha,
Nebraska. The total consideration was accounted for as an equity
contribution to the Company and included 2,385 Class A units of the Parent.
(4) Total purchase price included 100 Class A units of the Parent.
(5) The Company paid $3.1 million of the purchase price of Mountain West Audio,
Inc. as of December 31, 1999. In February 2000, the Company paid the
remaining purchase price, which included 456 Class A units of the Parent.
(6) Total purchase price included 802 Class A units of the Parent.
The results of operations of the acquired companies are included in the
Company's consolidated statement of operations for the periods in which they
were owned by the Company.
The acquisitions were accounted for under the purchase method of
accounting. Accordingly, the consideration was allocated to the net assets
acquired based on the fair market values at the date of acquisition. The excess
of purchase price for each acquisition over the estimated fair value of the
tangible and identifiable intangible assets acquired approximated $10.3 million
and $127.9 million for the six months ended June 30, 2000 and the year ended
December 31, 1999, respectively and is being amortized over a period of twenty
years on a straight-line basis.
The following presents the unaudited pro forma results assuming that
the acquisitions discussed above had occurred as of the beginning of fiscal 2000
and 1999. These pro forma results are not necessarily indicative of the results
that will occur in future periods (in thousands).
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues.................................. $48,029 $43,384 $93,779 $86,941
Income (Loss) from operations............. (2,025) 1,213 (1,842) (651)
Net loss.................................. (12,808) (6,578) (22,845) (16,677)
</TABLE>
8
<PAGE>
MUZAK LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
Useful June 30, December 31,
Life 2000 1999
(years) (Unaudited)
---------- ------------------- -------------------
<S> <C> <C> <C>
Equipment provided to subscribers.......................... 4-6 $ 87,405 $ 72,598
Capitalized installation labor............................. 5 23,895 18,270
Other...................................................... 3-30 25,355 22,606
------- -------
136,655 113,474
Less accumulated depreciation.............................. (32,273) (18,424)
--------- --------
$ 104,382 $ 95,050
========= =========
</TABLE>
Depreciation expense was $7.4 million and $14.0 million for the quarter and six
months ended June 30, 2000, respectively, and $3.8 million and $5.3 million for
the quarter and six months ended June 30, 1999, respectively.
5. INTANGIBLE ASSETS
Intangible assets consists of the following (in thousands):
<TABLE>
<CAPTION>
Useful June 30, December 31,
Life 2000 1999
(years) (Unaudited)
---------- ------------------- -------------------
<S> <C> <C> <C>
Goodwill................................................. 20 $ 153,385 $ 143,094
Income producing contracts............................... 8-14 148,624 136,184
License agreements....................................... 20 5,082 5,082
Trademarks............................................... 5 14,895 14,866
Non-compete agreements................................... 2-7 22,285 16,401
Other.................................................... 5-20 19,233 18,430
--------- --------
363,504 334,057
Less accumulated amortization............................ (35,192) (19,693)
--------- --------
$ 328,312 $ 314,364
========= =========
</TABLE>
Amortization expense was $8.1 million and $15.5 million for the quarter and six
months ended June 30, 2000, respectively, and $5.3 million and $7.0 million for
the quarter and six months ended June 30, 1999, respectively.
9
<PAGE>
MUZAK LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT
Debt obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
Unaudited)
------------------ ---------------------
<S> <C> <C>
Revolving loan- Senior Credit Facility........................ $ 34,683 $ 25,000
====== ======
Related Party Notes........................................... 30,000 30,000
====== ======
Long term debt:
Senior Credit Facility...................................... 163,200 165,000
Senior Notes................................................ 115,000 115,000
Floating Rate Notes......................................... 36,000 -
Other....................................................... 2,676 3,114
------- -------
Total debt obligations........................................ 316,876 283,114
Less current maturities....................................... (4,434) (4,197)
------- -------
$ 312,442 $ 278,917
========= =========
</TABLE>
Senior Credit Facility
In August 2000, the Company amended the Senior Credit Facility as
follows: (i) increased the additional secured indebtedness permitted from $2.5
million to $9.0 million and decreased the additional unsecured indebtedness
permitted from $5.0 million to $1.0 million (ii) amended the interest coverage
ratio for the quarters ended June 30, 2000, September 30, 2000, and December 31,
2000 from the present level of 1.80x to 1.65x and (iii) increased the total
capital expenditures permitted for fiscal 2000 from $32.0 million to $38.0
million. As a result of the renegotiated EchoStar Satellite
Corporation ("EchoStar") agreement (see Note 10), the Company was in violation
of certain debt covenants and has obtained waivers.
Senior Notes
On March 18, 1999, the Company together with its wholly owned
subsidiary, Muzak Finance Corp., co-issued $115.0 million in principal amount of
9 7/8% Senior Subordinated Notes ("Senior Notes") which mature on March 15,
2009. Interest is payable semi-annually, in arrears, on March 15 and September
15 of each year. The Senior Notes are general unsecured obligations of the
Company and Muzak Finance Corp., and are subordinated in right of payment to all
existing and future Senior Indebtedness of the Company and Muzak Finance Corp.
The Senior Notes are guaranteed by the Parent, MLP Environmental Music LLC,
Business Sound Inc., BI Acquisition LLC, Audio Environments Inc., Background
Music Broadcasters Inc., Muzak Capital Corporation, Telephone Audio Productions
Inc., Muzak Houston Inc., Vortex Sound Communications Company Inc., and Music
Incorporated. The indenture governing the Senior Notes prohibits the Company
from making certain payments such as dividends and distributions of their
capital stock; repurchases or redemptions of their capital stock, and
investments (other than permitted investments) unless certain conditions are met
by the Company.
Floating Rate Notes
In January 2000, the Company entered into an indenture for up to $50.0
million Senior Subordinated Floating Rate Notes (the "Floating Rate Notes"). The
Floating Rate Notes were available for drawdowns until July 31, 2000.
Commitments on all amounts undrawn under the Floating Rate Notes by July 31,
2000 expired and are ineligible for future drawdowns. The Floating Rate Notes
would have been redeemed at 100% if redeemed before July 31, 2000 and may be
redeemed at 101.50% if redeemed August 1, 2000 through October 31, 2000. If the
Company does not redeem the Floating Rate Notes by November 1, 2000, the
Floating Rate Notes will automatically convert into fixed-rate permanent notes
due March 2009. Proceeds from the Floating Rate Notes were used to fund
acquisitions. As of June 30, 2000, the Company had $36.0 million outstanding
under the Floating Rate Notes.
Indebtedness under the Floating Rate Notes bears interest at a rate
equal to 3 month LIBOR plus a
10
<PAGE>
margin of 5.0% for the period from January 2000 through July 31, 2000, at a rate
of 3 month LIBOR plus a margin of 7.5% for the period from August 1, 2000
through October 31, 2000, and at a fixed rate based on the greater of: (i) 3
month LIBOR plus a margin of 7.5%; and (ii) the yield on the Company's 9.875%
Senior Subordinated Notes due 2009 at time of conversion plus a margin of 2.5%
after October 31, 2000. Interest on the Floating Rate Notes is subject to a
maximum annual cash rate of 14% and a maximum total annual interest rate of 16%,
with any interest in excess of 14% payable in-kind in additional amounts of the
Floating Rate Notes.
11
<PAGE>
MUZAK LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Debt (Continued)
Related Party Notes
From July 1, 1999 through November 24, 1999, the Company borrowed an
aggregate amount of $30.0 million, from MEM Holdings LLC in the form of 15%
Junior Subordinated Unsecured Notes (the "ABRY Notes"). MEM Holdings is a
company that owns 67% of the voting interests in the Parent. ABRY Broadcast
Partners III and ABRY Broadcast Partners II are the beneficial owners of MEM
Holdings.
Interest Rate Protection Programs
During April 1999, the Company entered into a four year interest rate
swap agreement in which the Company effectively exchanged $100.0 million of
floating rate debt at three month LIBOR for 5.59% fixed rate debt. This
agreement was modified on January 28, 2000 resulting in an increase to 7.042%
fixed rate debt and a termination date of April 2002. The proceeds of $4.4
million from the modification are being recorded as an adjustment to interest
expense over the remaining life of the swap agreement.
This agreement is designated as a hedge of interest rates, and the
differential to be paid or received on the swap is accrued as an adjustment to
interest expense as interest rates change. The Company is exposed to credit loss
in the event of nonperformance by the other party to the swap agreement.
However, the Company does not anticipate nonperformance by the counterparty.
During the quarter and six months ended June 30, 2000, this agreement resulted
in an increase to interest expense of approximately $0.2 million and $0.4
million, respectively.
Annual Maturities of Debt
Annual maturities of debt obligations are as follows (in thousands):
2000.............................................$.. 1,844
2001................................................ 5,181
2002................................................ 6,680
2003................................................ 7,761
2004................................................26,344
Thereafter..........................................$.269,066
Total interest paid by the Company on all indebtedness was $6.8 million
and $17.8 million for the quarter and six months ended June 30, 2000,
respectively and $1.3 million and $2.4 million for the quarter and six months
ended June 30, 1999, respectively. Accrued interest payable was $6.8 million and
$7.2 million as of June 30, 2000 and December 31, 1999 respectively.
7. RELATED PARTY TRANSACTIONS
The Company has a Management Agreement with ABRY Partners which
provides that the Company will pay a management fee as defined in the Management
Agreement. There were no fees incurred under the agreement during the quarters
ended June 30, 2000 and June 30, 1999. Either the Company or ABRY Partners, with
the approval of the Board of Directors of the Parent, may terminate the
Management Agreement by prior written notice to the other.
During fiscal 1999, the Company borrowed $30.0 million from MEM
Holdings under junior subordinated notes.
8. MUZAK FINANCE CORP.
12
<PAGE>
Muzak Finance Corp. had no operating activities during the quarters
and six months ended June 30, 2000 and June 30, 1999.
13
<PAGE>
MUZAK LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in various claims and lawsuits arising out of
the normal conduct of its business. Although the ultimate outcome of these legal
proceedings cannot be predicted with certainty, the management of the Company
believes that the resulting liability, if any, will not have a material effect
upon the Company's consolidated financial statements or liquidity.
Other Commitments
As of June 30, 2000, the Company has approximately $2.2 million in
outstanding capital expenditure commitments. The Company is the lessee under
various operating and capital leases for equipment, vehicles, satellite
capacity, and buildings for periods ranging from 2 years to 10 years.
10. SUBSEQUENT EVENTS
The Company concluded its recent negotiations with EchoStar in August
2000. Pursuant to the terms of the parties' new agreement, EchoStar no longer
has a unilateral right to cancel the distribution of the Company's programs that
customers receive via the EchoStar system. EchoStar is now obligated to
distribute 60 music programs on behalf of Muzak for the entire term of the
agreement. Such agreement with EchoStar is scheduled to end in approximately
2010. In order to secure this long-term supply agreement with EchoStar, the
Company recorded a $1.6 million charge to costs of music and business services
revenue during the second quarter of 2000. As adjusted to reflect the economic
impact of the EchoStar renegotiation as if entered into on January 1, 2000, the
gross profit reduction for the quarter ended June 30, 2000 would have been $0.8
million, rather than $1.6 million. Additionally, the new agreement will decrease
the Company's future residential revenues by establishing a sales discount to
EchoStar in connection with the broadcast of the Company's music programming to
residential customers. All other terms of the EchoStar agreement remain
substantially the same.
In July 2000, the Company received an equity contribution of $10.0
million from its Parent. The proceeds of the equity contribution will be used
for general corporate purposes.
14
<PAGE>
<TABLE>
<CAPTION>
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MUZAK HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2000 1999
(unaudited)
---------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $6,969 $ 2,275
Accounts receivable, net................................... 42,626 39,203
Inventory.................................................. 10,879 12,283
Prepaid expenses and other assets.......................... 2,395 2,304
--------- ---------
Total current assets................................... 62,869 56,065
Property and equipment, net..................................... 104,382 95,050
Intangible assets, net.......................................... 328,312 314,364
Deposit and other assets, net................................... 39,096 31,836
--------- ---------
Total assets........................................... $534,659 $ 497,315
========= =========
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Revolving credit facility.................................. $34,683 $ 25,000
Current maturities of long term debt....................... 4,434 4,197
Current maturities of other liabilities.................... 2,051 1,394
Accounts payable........................................... 20,796 15,123
Accrued expenses........................................... 18,872 34,433
Advance billings........................................... 12,304 11,171
--------- ---------
Total current liabilities.............................. 93,140 91,318
Long-term debt.................................................. 359,546 323,131
Related party notes............................................. 30,000 30,000
Other liabilities............................................... 17,661 9,798
Commitments and contingencies (Note 9)..........................
Members' interest:
Class A units................................................ 87,493 70,599
Class B units................................................ 2,822 2,822
Accumulated deficit...................................... (56,003) (30,353)
--------- ---------
Total members' interest................................ 34,312 43,068
--------- ---------
Total liabilities and members' interest................ $534,659 $497,315
========= =========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
MUZAK HOLDINGS LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
Quarter Ended Six Months Ended
------------------------------------ -----------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------------------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Music and other business services................. $ 34,835 $ 26,408 $ 67,094 $ 34,587
Equipment and related services.................... 13,181 9,110 24,617 13,082
-------- -------- -------- --------
Total revenues................................ 48,016 35,518 91,711 47,669
Cost of revenues:
Music and other business services................. 8,517 5,861 15,290 7,460
Equipment and related services.................... 9,724 7,627 18,655 10,499
-------- -------- -------- --------
Total cost of revenues........................ 18,241 13,488 33,945 17,959
-------- -------- -------- --------
Gross profit.................................. 29,775 22,030 57,766 29,710
-------- -------- -------- --------
Selling, general and administrative expenses........... 16,268 11,883 30,450 14,830
Depreciation and amortization expense.................. 15,535 9,142 29,489 12,339
-------- -------- -------- --------
Income (loss) from operations................. (2,028) 1,005 (2,173) 2,541
Other income (expense):
Interest expense, net............................. (11,904) (7,931) (22,987) (10,262)
Other, net........................................ (437) -- (430) (21)
-------- -------- -------- --------
Loss before income taxes...................... (14,369) (6,926) (25,590) (7,742)
Income tax provision...................................
40 -- 60 --
Net loss...................................... $(14,409) $(6,926) $(25,650) $(7,742)
========= ======== ========= ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
MUZAK HOLDINGS LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
(Unaudited)
(in thousands, except for units)
Total
Class A Class B Accumulated Members'
Units Dollars Units Dollars Deficit Equity
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999.......... 70,599 $ 70,599 10,281 $2,822 $ (30,353) $ 43,068
Issuance of units..................... 13,680 16,894 2,452 -- -- 16,894
Net loss ............................. -- -- -- -- (25,650) (25,650)
Balance at June 30, 2000.............. 84,279 $ 87,493 12,733 $2,822 $(56,003) $ 34,312
======= ======== ======= ====== ======== ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
MUZAK HOLDINGS LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Quarter Ended Six Months Ended
--------------------------- -------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss................................................................. $(14,409) $ (6,926) $(25,650) $(7,742)
Adjustments to derive cash flow from continuing operating activities:
Deferred income tax expense.............................................. -- -- 15 --
Depreciation and amortization............................................ 15,535 9,142 29,489 12,339
Amortization of senior discount notes.................................... 1,519 1,336 2,890 1,542
Amortization of deferred financing fees.................................. 546 407 911 420
Deferred subscriber acquisition costs.................................... (3,047) (1,302) (6,123) (1,435)
Unearned installment income.............................................. (110) -- (172) --
Net change in certain assets and liabilities, net of business
acquisitions
Increase in accounts receivable....................................... (3,942) (3,973) (3,171) (4,337)
Decrease (increase) in inventory ..................................... (93) 580 1,194 373
Increase (decrease) in accrued interest............................... 1,070 6,416 (418) 7,654
Increase (decrease) in accounts payable .............................. 5,229 (6,171) 5,673 (6,287)
Decrease in accrued expenses.......................................... (1,220) (2,769) (9,033) (1,072)
Increase in advance billings......................................... 399 1,568 1,133 1,111
Other, net............................................................ 278 911 175 1,622
------- ------- ------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................. 1,755 (781) (3,087) 4,188
------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash................................................ (962) (9,404) (34,198) (271,913)
Capital expenditures..................................................... (9,970) (5,317) (20,070) (8,022)
------- ------- ------- --------
NET CASH USED IN INVESTING ACTIVITIES............................... (10,932) (14,721) (54,268) (279,935)
------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior subordinated notes...................... -- -- -- 115,000
Proceeds from issuance of senior credit facility......................... -- -- -- 135,000
Proceeds from issuance of senior discount notes.......................... -- 39,996
Repayments of senior credit facility..................................... (1,800) -- (1,800) --
Net borrowings on revolver............................................... 9,991 16,000 9,683 19,400
Proceeds from issuance of floating rate notes............................ -- -- 36,000 --
Proceeds from interest rate swap......................................... -- -- 4,364 --
Proceeds from contributions by Parent.................................... 5,000 -- 15,636 23,303
Repayment of notes payable to related party.............................. -- -- -- (41,683)
Repayments of capital lease obligations and other debt................... (415) (253) (1,086) (817)
Payment of fees associated with the financing............................ -- -- (748) (13,463)
------- ------- ------- --------
NET CASH PROVIDED BY FINANCING ACTIVITES............................ 12,776 15,747 62,049 276,736
------- ------- ------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 3,599 245 4,694 989
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................... 3,370 2,037 2,275 1,293
CASH AND CASH EQUIVALENTS, END OF PERIOD................................ $ 6,969 $ 2,282 $ 6,969 $ 2,282
======= ======= ======= =======
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
18
<PAGE>
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Muzak Holdings LLC, together with its subsidiaries, ("the Company"),
formerly known as ACN Holdings, LLC, was formed in September 1998 pursuant to
the laws of Delaware. Muzak LLC, a wholly owned subsidiary of the Company, owns
and operates franchisees. Muzak LLC began its operations on October 7, 1998,
with the acquisition of the independent franchisees in the Baltimore, Charlotte,
Hillsborough, Kansas City, St. Louis, Jacksonville, Phoenix, and Fresno areas
from Audio Communications Network, Inc. (the "Predecessor Company"). On March
18, 1999, Muzak Limited Partnership ("Old Muzak") merged with and into Audio
Communications Network, LLC ("ACN"). At the time of the merger, ACN changed its
name to Muzak LLC.
As of June 30, 2000, ABRY Partners, LLC and its respective affiliates
collectively own approximately 67% of the beneficial interests in the Company's
voting interests.
The Company derives the majority of its revenues from the sale of
business music products. The core products are Audio Architecture and Audio
Marketing. In addition, the Company produces a complementary product, Video
Imaging. The Company produces its Video Imaging product through an arrangement
with an outside vendor. These revenues are generated by clients, who pay monthly
subscription fees under noncancelable five-year contracts.
The Company also derives revenues from the sale and lease of audio
system-related products, principally sound systems and intercoms, to business
music clients and other clients. In addition, the Company sells electronic
equipment, such as proprietary tape playback equipment and other audio and video
equipment to franchisees to support the sale of 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.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
the Company and its subsidiaries: Muzak LLC, Muzak Capital Corporation, Muzak
Holdings Finance Corporation, Muzak Finance Corporation, Business Sound Inc.,
Electro Systems Corporation, BI Acquisition LLC, MLP Environmental Music LLC,
Audio Environments Inc., Background Music Broadcasters Inc., Telephone Audio
Productions Inc., Vortex Sound Communications Company Inc., Music Incorporated,
and Muzak Houston, Inc. All significant intercompany items have been eliminated
in consolidation.
Pursuant to the rules and regulations of the Securities and Exchange
Commission on Form 10-Q, certain financial information has been condensed and
certain footnote disclosures have been omitted. Such information and disclosures
are normally included in financial statements prepared in accordance with
generally accepted accounting principles. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Muzak
Holdings LLC Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
The financial statements as of June 30, 2000 and June 30, 1999 and for
the three and six month periods then ended are unaudited; however, in the
opinion of management, such statements include all adjustments (consisting
solely of normal recurring adjustments except for the acquisitions described in
Note 3) necessary for a fair statement of the financial information included
herein in accordance with Generally Accepted Accounting Principles. Results of
operations for interim periods are not necessarily indicative of results for the
full year.
19
<PAGE>
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS
As discussed in Note 1, on March 18, 1999 Old Muzak merged with and
into ACN. Under the terms of the agreement, the Company paid total consideration
of $274.2 million, which is comprised of the following: $125.5 million cash
consideration, $114.9 million consideration in the tender offer and consent
solicitation for the 10% Senior Notes due 2003 of Old Muzak, $15.9 million for
debt repayment of Old Muzak outstanding obligations, and $17.9 million of other
assumed obligations. In addition, at the time of the merger, the Company repaid
$41.7 million borrowed from ABRY Broadcast Partners by ACN in October 1998 in
connection with the acquisition of the Company's independent franchisees from
the Predecessor Company and converted $0.7 million into voting units of the
Company.
In 1999, prior to the merger, the Company made the following
acquisitions:
On January 15, 1999, the Company acquired all of the outstanding stock of
Business Sound, Inc. for approximately $4.1 million, which included 3,661
Class A units of the Company. Business Sound was the Company's independent
franchisee for the New Orleans, Louisiana and Mobile, Alabama areas.
On February 24, 1999, the Company acquired all of the outstanding stock of
Electro Systems for approximately $0.7 million, which included 650 Class A
units of the Company, and assumed certain non-recourse debt of $2.4 million.
Electro Systems was the Company's independent franchisee located in Panama
City, Florida.
The Company made twenty-one acquisitions between the merger on March 18,
1999 and June 30, 2000. The table below provides information regarding these
acquisitions (in millions, except for number of Company units).
<TABLE>
<CAPTION>
Purchase Acquired Assets Acquired Acquired
Date Price (1) Or Stock Business Markets
----------------------- ---------- ---------------------------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C>
March 18,1999 $18.1 (2) Net assets of Capstar Broadcasting Independent franchisee Georgia, Florida
Corporation's independent franchisee
April 1, 1999 $0.2 Net assets of Custom On Hold Services Audio Marketing Washington
Inc
May 1,1999 $3.2 (3) Net assets of Capstar Broadcasting Independent franchisee Nebraska
Corporation's independent franchisee
June 1, 1999 $6.9 Net assets of Advertising on Hold, Inc Audio Marketing Florida, Georgia, North
Carolina
July 1, 1999 $0.8 Net assets of CustomTronics Sound Business Music California
July 1, 1999 $0.9 Net assets of Penobscot Broadcasting Independent Maine
Corporation franchisee
July 26, 1999 $1.3 Net assets of LaBov and Beyond, Inc Audio Marketing Indiana
August 1, 1999 $3.5 Net assets of US West Communications Audio Marketing National
Services, Inc's Please Hold Promotions
September 1, 1999 $4.7 Stock of Broadcast International, Inc Business Music National
October 1, 1999 $10.3 Net assets of Midwest Systems and Business Music Illinois, Indiana, Ohio,
Services, Inc West Virginia
November 1, 1999 $2.9 Net assets of A & D Music, Inc Independent franchisee Oregon
November 1, 1999 $7.9 (4) Stock of Audio Environment, Inc and Independent California
Background Music Broadcasters Inc franchisee
December 1, 1999 $13.2 (5) Net assets of MountainWest Audio, Inc Independent Utah, Idaho, Washington
franchisee
</TABLE>
20
<PAGE>
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Acquisitions (Continued)
<TABLE>
<CAPTION>
Purchase Acquired Assets Acquired Acquired
Date Price (1) Or Stock Business Markets
----------------------- ---------- ---------------------------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C>
February 2, 2000 $0.4 Net assets of Quincy Broadcasting Company Independent franchisee Illinois
February 2, 2000 $0.9 Net assets of General Communications Audio Marketing Indiana, Georgia,
Corporation ("On Hold America") Florida, Ohio
February 2, 2000 $0.4 Net assets of Texas Sound Co. Ltd Business Music Texas
February 24, 2000 $3.7 Stock of Telephone Audio Productions, Audio Marketing National
Inc.
March 24, 2000 $9.2 (6) Stock of Vortex Sound Communications Independent franchisee District of Columbia
Company, Inc.
March 31, 2000 $1.6 Net assets of Dynamic Sound Independent franchisee Nevada, California
March 31, 2000 $8.3 Stock of Muzak Houston, Inc. Independent franchisee Texas
April 11, 2000 $1.0 Net Assets of Audio Plus, Inc. Independent franchisee Ohio
</TABLE>
(1) The purchase price does not include transaction costs.
(2) Total purchase price included 13,535 Class A units.
(3) Total purchase price included 2,385 Class A units.
(4) Total purchase price included 100 Class A units.
(5) The Company paid $3.1 million of the purchase price of Mountain West Audio,
Inc. as of December 31, 1999. In February 2000, the Company paid the
remaining purchase price, which included 456 Class A units.
(6) Total purchase price included 802 Class A units.
The results of operations of the acquired companies are included in the
Company's consolidated statement of operations for the periods in which they
were owned by the Company.
The acquisitions were accounted for under the purchase method of
accounting. Accordingly, the consideration was allocated to the net assets
acquired based on the fair market values at the date of acquisition. The excess
of purchase price for each acquisition over the estimated fair value of the
tangible and identifiable intangible assets acquired approximated $10.3 million
and $127.9 million for the six months ended June 30, 2000 and the year ended
December 31, 1999, respectively and is being amortized over a period of twenty
years on a straight-line basis.
The following presents the unaudited pro forma results assuming that
the acquisitions discussed above had occurred as of the beginning of fiscal 2000
and 1999. These pro forma results are not necessarily indicative of the results
that will occur in future periods (in thousands).
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------------ ----------------- ----------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues.................................. $48,029 $43,384 $93,779 $86,941
Income (Loss) from operations............. (2,025) 1,213 (1,843) (651)
Net loss.................................. (14,410) (9,424) (25,899) (19,523)
</TABLE>
21
<PAGE>
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
Useful June 30, December 31,
Life 2000 1999
(years) (Unaudited)
---------- ------------------- -------------------
<S> <C> <C> <C>
Equipment provided to subscribers.......................... 4-6 $ 87,405 $ 72,598
Capitalized installation labor............................. 5 23,895 18,270
Other...................................................... 3-30 25,355 22,606
--------- ---------
136,655 113,474
Less accumulated depreciation.............................. (32,273) (18,424)
--------- ---------
$ 104,382 $ 95,050
========= =========
</TABLE>
Depreciation expense was $7.4 million and $14.0 million for the quarter and six
months ended June 30, 2000, respectively, and $3.8 million and $5.3 million for
the quarter and six months ended June 30, 1999, respectively.
5. INTANGIBLE ASSETS
Intangible assets consists of the following (in thousands):
<TABLE>
<CAPTION>
Useful June 30, December 31,
Life 2000 1999
(years) (Unaudited)
<S> <C> <C> <C>
---------- ------------------- -------------------
Goodwill................................................. 20 $ 153,385 $ 143,094
Income producing contracts............................... 8-14 148,624 136,184
License agreements....................................... 20 5,082 5,082
Trademarks............................................... 5 14,895 14,866
Non-compete agreements................................... 2-7 22,285 16,401
Other.................................................... 5-20 19,233 18,430
---------- ---------
363,504 334,057
Less accumulated amortization............................ (35,192) (19,693)
---------- ---------
$ 328,312 $ 314,364
========== =========
</TABLE>
Amortization expense was $8.1 million and $15.5 million for the quarter and six
months ended June 30, 2000, respectively, and $5.3 million and $7.0 million for
the quarter and six months ended June 30, 1999, respectively.
22
<PAGE>
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT
Debt obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(Unaudited)
------------------ ---------------------
<S> <C> <C>
Revolving loan- Senior Credit facility........................ $ 34,683 $ 25,000
========= =========
Related Party Notes........................................... 30,000 30,000
========= =========
Long term debt:
Senior Credit Facility...................................... 163,200 165,000
Senior Notes................................................ 115,000 115,000
Senior Discount Notes....................................... 47,104 44,214
Floating Rate Notes......................................... 36,000 --
Other....................................................... 2,676 3,114
--------- ---------
Total debt obligations........................................ 363,980 327,328
Less current maturities....................................... (4,434) (4,197)
--------- ---------
$ 359,546 $ 323,131
========= =========
</TABLE>
Senior Credit Facility
In August 2000, Muzak LLC amended the Senior Credit Facility as
follows: (i) increased the additional secured indebtedness permitted from $2.5
million to $9.0 million and decreased the additional unsecured indebtedness
permitted from $5.0 million to $1.0 million (ii) amended the interest coverage
ratio for the quarters ended June 30, 2000, September 30, 2000, and December 31,
2000 from the present level of 1.80x to 1.65x and (iii) increased the total
capital expenditures permitted for fiscal 2000 from $32.0 million to $38.0
million. As a result of the renegotiated EchoStar Satellite Corporation
("EchoStar") agreement (see Note 10), the Company was in violation of certain
debt covenants and has obtained waivers.
Senior Notes
On March 18, 1999, Muzak LLC together with its wholly owned subsidiary,
Muzak Finance Corp., co-issued $115.0 million in principal amount of 9 7/8%
Senior Subordinated Notes ("Senior Notes") which mature on March 15, 2009.
Interest is payable semi-annually, in arrears, on March 15 and September 15 of
each year. The Senior Notes are general unsecured obligations of Muzak LLC and
Muzak Finance and are subordinated in right of payment to all existing and
future Senior Indebtedness of Muzak LLC and Muzak Finance. The Senior Notes are
guaranteed by the Company, MLP Environmental Music LLC, Business Sound, Inc., BI
Acquisition LLC, Audio Environments, Inc., Background Music Broadcasters, Inc.,
Telephone Audio Productions, Inc., Muzak Capital Corporation, Muzak Houston,
Inc., Music Incorporated, and Vortex Sound Communications Company, Inc. The
indenture governing the Senior Notes prohibits Muzak LLC and its subsidiaries
from making certain payments such as dividends and distributions of their
capital stock; repurchases or redemptions of their capital stock, and
investments (other than permitted investments) unless certain conditions are
met.
Senior Discount Notes
On March 18, 1999, the Company together with its wholly owned
subsidiary Muzak Holdings Finance Corp., co-issued $75.0 million in principal
amount at maturity, or $39.9 million in accreted value on the issue date, of 13%
Senior Discount Notes (the "Senior Discount Notes") due March 2010. Cash
interest on the Senior Discount Notes does not accrue and is not payable prior
to March 15, 2004. The Senior Discount Notes were issued at a substantial
discount from their principal amount at maturity. Until March 15, 2004, the
Senior Discount Notes will accrete in value such that the accreted value on
March 15, 2004 will equal the principal amount at maturity of the Senior
Discount Notes. From and after March 15, 2004, interest on the Senior Discount
Notes will accrue at a rate of 13% per annum. Interest will be payable
semi-annually in arrears on each March 15 and September 15, commencing September
15, 2004, to holders of record of the Senior Discount Notes at the close of
business on the immediately preceding March 1 and September 1.
23
<PAGE>
Floating Rate Notes
In January 2000, Muzak LLC entered into an indenture for up to $50.0
million Senior Subordinated Floating Rate Notes (the "Floating Rate Notes"). The
Floating Rate Notes were available for drawdowns until July 31, 2000.
Commitments on all amounts undrawn under the Floating Rate Notes by July 31,
2000 expired and are ineligible for future drawdowns. The Floating Rate Notes
would have been redeemed at 100% if redeemed before July 31, 2000 and may be
redeemed at 101.50% if redeemed August 1, 2000 through October 31, 2000. If the
Company does not redeem the Floating Rate Notes by November 1, 2000, the
Floating Rate Notes will automatically convert into fixed-rate permanent notes
due March 2009. Proceeds from the Floating Rate Notes were used to fund
acquisitions. As of June 30, 2000, Muzak LLC had $36.0 million outstanding under
the Floating Rate Notes.
Indebtedness under the Floating Rate Notes bears interest at a rate
equal to 3 month LIBOR plus a margin of 5.0% for the period from January 2000
through July 31, 2000, at a rate of 3 month LIBOR plus a margin of 7.5% for the
period from August 1, 2000 through October 31, 2000, and at a fixed rate based
on the greater of: (i) 3 month LIBOR plus a margin of 7.5%; and (ii) the yield
on the Company's 9.875% Senior Subordinated Notes due 2009 at time of conversion
plus a margin of 2.5% after October 31, 2000. Interest on the Floating Rate
Notes is subject to a maximum annual cash rate of 14% and a maximum total annual
interest rate of 16%, with any interest in excess of 14% payable in-kind in
additional amounts of the Floating Rate Notes.
24
<PAGE>
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Debt (Continued)
Related Party Notes
From July 1, 1999 through November 24, 1999, the Company borrowed an
aggregate amount of $30.0 million, from MEM Holdings LLC in the form of 15%
Junior Subordinated Unsecured Notes (the "ABRY Notes"). MEM Holdings is a
Company that owns 67% of the voting interests in the Company. ABRY Broadcast
Partners III and ABRY Broadcast Partners II are the beneficial owners of MEM
Holdings.
Interest Rate Protection Programs
During April 1999, Muzak LLC entered into a four-year interest rate
swap agreement in which the Company effectively exchanged $100.0 million of
floating rate debt at three month LIBOR for 5.59% fixed rate debt. This
agreement was modified on January 28, 2000 resulting in an increase to 7.042%
fixed rate debt and a termination date of April 2002. The proceeds of $4.4
million from the modification are being recorded as an adjustment to interest
expense over the remaining life of the swap agreement.
This agreement is designated as a hedge of interest rates, and the
differential to be paid or received on the swap is accrued as an adjustment to
interest expense as interest rates change. The Company is exposed to credit loss
in the event of nonperformance by the other party to the swap agreement.
However, the Company does not anticipate nonperformance by the counterparty.
During the quarter and six months ended June 30, 2000, this agreement resulted
in an increase to interest expense of approximately $0.2 million and $0.4
million, respectively.
Annual Maturities of Debt
Annual maturities of debt obligations are as follows (in thousands):
2000.......................................... $ 1,844
2001.......................................... 5,181
2002.......................................... 6,680
2003.......................................... 7,761
2004.......................................... 26,344
Thereafter....................................... $ 316,170
Total interest paid by the Company on all indebtedness was $6.8 million
and $17.8 million for the quarter and six months ended June 30, 2000,
respectively and $1.3 million and $2.4 million for the quarter and six months
ended June 30, 1999, respectively. Accrued interest payable was $6.8 million and
$7.2 million as of June 30, 2000 and December 31, 1999 respectively.
7. RELATED PARTY TRANSACTIONS
The Company has a Management Agreement with ABRY Partners which
provides that the Company will pay a management fee as defined in the Management
Agreement. There were no fees incurred under the agreement during the quarters
ended June 30, 2000 and June 30, 1999. Either the Company or ABRY Partners, with
the approval of the Board of Directors of the Parent, may terminate the
Management Agreement by prior written notice to the other.
During fiscal 1999, Muzak LLC borrowed $30.0 million from MEM Holdings
under junior subordinated notes.
8. MUZAK HOLDINGS FINANCE CORP.
Muzak Holdings Finance Corp. had no operating activities during the
quarters and six months ended June 30, 2000 and June 30, 1999.
25
<PAGE>
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in various claims and lawsuits arising out of
the normal conduct of its business. Although the ultimate outcome of these legal
proceedings cannot be predicted with certainty, the management of the Company
believes that the resulting liability, if any, will not have a material effect
upon the Company's consolidated financial statements or liquidity.
Other Commitments
As of June 30, 2000, the Company has approximately $2.2 million in
outstanding capital expenditure commitments. The Company is the lessee under
various operating and capital leases for equipment, vehicles, satellite
capacity, and buildings for periods ranging from 2 years to 10 years.
10. SUBSEQUENT EVENTS
The Company concluded its recent negotiations with EchoStar in August
2000. Pursuant to the terms of the parties' new agreement, EchoStar no longer
has a unilateral right to cancel the distribution of the Company's programs that
customers receive via the EchoStar system. EchoStar is now obligated to
distribute 60 music programs on behalf of Muzak for the entire term of the
agreement. Such agreement with EchoStar is scheduled to end in approximately
2010. In order to secure this long-term supply agreement with EchoStar, the
Company recorded a $1.6 million charge to costs of music and business services
revenue during the second quarter of 2000. As adjusted to reflect the economic
impact of the renegotiation as if entered into on January 1, 2000, the gross
profit reduction for the quarter ended June 30, 2000 would have been $0.8
million, rather than $1.6 million. Additionally, the new agreement will decrease
the Company's future residential revenues by establishing a sales discount to
EchoStar in connection with the broadcast of the Company's music programming to
residential customers. All other terms of the EchoStar agreement remain
substantially the same.
In July 2000, the Company received an equity contribution of $10.0
million from its members. The proceeds of the equity contribution will be used
for general corporate purposes.
26
<PAGE>
MUZAK LLC
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains statements which, to the extent they are not
historical fact, constitute forward-looking statements within the meaning of
Section 27A of the securities Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934 (the "Safe Harbor Acts"). All forward-looking statements
involve risks and uncertainties. The forward-looking statements in this Form
10-Q are intended to be subject to the safe harbor protection provided by the
Safe Harbor Acts.
Risks and uncertainties that could cause actual results to vary
materially from those anticipated in the forward-looking statements included in
this Form 10-Q include industry-based factors such as the level of competition
in the business music industry, changes in consumer preference, competitive
pricing, concentrations in and dependence on satellite delivery capabilities,
rapid technological changes, as well as factors more specific to the Company
such as the substantial leverage of the Company, limitations imposed by the
Company's debt facilities, and changes made in connection with the integration
of operations acquired by the Company. For a discussion of certain of these and
important other factors which may affect the Company's operations, products and
markets, see the Company's Securities and Exchange Filings, including without
limitation "Business" in the Company's Form 10-K/A for the fiscal year ended
December 31, 1999 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Form 10-K/A, in the Company's report
on Form 10-Q for the fiscal quarter ended March 30, 2000 and above in this Form
10-Q and also see the Company's other filings with the Securities and Exchange
Commission.
General
The Company is the leading provider of business music programming in
the United States based on market share. Together with its independent
franchisees, the Company serves an installed base of approximately 300,000
business locations nationwide. The Company and its independent franchisees also
sell, install and maintain electronic equipment related to the Company's
business.
The Company was formed on August 28, 1998 as ACN Operating LLC and in
October of 1998 changed its name to Audio Communications Network, LLC ("ACN").
On October 7, 1998, ACN acquired the independent franchisees in the Baltimore,
Charlotte, Hillsborough, Kansas City, St. Louis, Jacksonville, Phoenix, and
Fresno areas from Audio Communications Network, Inc. (the "Predecessor Company")
for $66.8 million. On March 18, 1999, Muzak Limited Partnership ("Old Muzak")
merged with and into ACN. At the time of the merger, ACN changed its name to
Muzak LLC. Under the terms of the agreement, the Company paid total
consideration of $274.2 million, which consisted of the following: $125.5
million cash consideration, $114.9 million consideration in the tender offer and
consent solicitation for the 10% Senior Notes due 2003 of Old Muzak, $15.9
million for debt repayment of Old Muzak outstanding obligations, and $17.9
million of other general obligations. In addition, at the time of the merger,
the Company repaid $41.7 million, which included $0.9 million of interest,
borrowed from ABRY Broadcast Partners by ACN in October 1998 in connection with
the acquisition of the Company's independent franchisees from the Predecessor
Company and converted $0.7 million of interest into voting units of the Parent.
Since the merger, the Company and the Parent have acquired twenty-one businesses
for total consideration of $99.4 million, which included 17,278 Class A units of
Muzak Holdings LLC ("the Parent").
In 1999, prior to the merger, the Company made the following acquisitions:
On January 15, 1999, the Company acquired all of the outstanding stock of
Business Sound Inc. for approximately $4.1 million, which included 3,661
Class A units of the Parent. Business Sound was the Company's independent
franchisee for the New Orleans, Louisiana and Mobile, Alabama areas.
On February 24, 1999, the Company acquired all of the outstanding stock of
Electro Systems for approximately $0.7 million, which included 650 Class A
units of the Parent, and assumed certain non-recourse debt of $2.4 million.
Electro Systems was the Company's independent franchisee located in Panama
City, Florida.
I-1
<PAGE>
MUZAK LLC
Item 2 Management's Discussion and Analysis (Continued)
The Company made twenty-one acquisitions between the merger on March 18,
1999 and June 30, 2000. The table below provides information regarding these
acquisitions (in millions, except for number of Parent units).
<TABLE>
<CAPTION>
Purchase Acquired Assets Acquired Acquired
Date Price (1) Or Stock Business Markets
------------------------- ---------- ---------------------------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C>
March 18,1999 $18.1 (2) Net assets of Capstar Broadcasting Independent franchisee Georgia, Florida
Corporation's independent franchisee
April 1, 1999 $ 0.2 Net assets of Custom On Hold Services Audio Marketing Washington
Inc.
May 1,1999 $ 3.2 (3) Net assets of Capstar Broadcasting Independent franchisee Nebraska
Corporation's independent franchisee
June 1, 1999 $ 6.9 Net assets of Advertising on Hold, Inc. Audio Marketing Florida, Georgia, North
Carolina
July 1, 1999 $ 0.8 Net assets of CustomTronics Sound Business Music California
July 1, 1999 $ 0.9 Net assets of Penobscot Broadcasting Independent franchisee Maine
Corporation
July 26, 1999 $ 1.3 Net assets of LaBov and Beyond, Inc. Audio Marketing Indiana
August 1, 1999 $ 3.5 Net assets of US West Communications Audio Marketing National
Services, Inc.'s Please Hold Promotions
September 1, 1999 $ 4.7 Stock of Broadcast International, Inc. Business Music National
October 1, 1999 $10.3 Net assets of Midwest Systems and Business Music Illinois, Indiana,
Services, Inc. Ohio,
West Virginia
November 1, 1999 $ 2.9 Net assets of A & D Music, Inc. Independent franchisee Oregon
November 1, 1999 $ 7.9 (4) Stock of Audio Environment, Inc. and Independent franchisee California
Background Music Broadcasters Inc.
December 1, 1999 $13.2 (5) Net assets of MountainWest Audio, Inc. Independent franchisee Utah, Idaho, Washington
February 2, 2000 $ 0.4 Net assets of Quincy Broadcasting Independent franchisee Illinois
Company
February 2, 2000 $ 0.9 Net assets of General Communications Audio Marketing Indiana, Georgia,
Corporation ("On Hold America") Florida, Ohio
February 2, 2000 $ 0.4 Net assets of Texas Sound Co. Ltd Business Music Texas
February 24, 2000 $ 3.7 Stock of Telephone Audio Productions, Audio Marketing National
Inc.
March 24, 2000 $ 9.2 (6) Stock of Vortex Sound Communications Independent franchisee District of Columbia
Company, Inc.
March 31, 2000 $ 1.6 Net assets of Dynamic Sound Independent franchisee Nevada, California
March 31, 2000 $ 8.3 Stock of Muzak Houston, Inc. Independent franchisee Texas
April 11, 2000 $ 1.0 Net assets of Audio Plus, Inc. Independent franchisee Ohio
</TABLE>
(1) The purchase price does not include transaction costs.
(2) The Parent acquired Capstar Broadcasting Corporation's ("Capstar")
independent franchisees located in Atlanta, Albany, and Macon, Georgia, and
Ft. Myers, Florida. The total consideration was accounted for as an equity
contribution to the Company and included 13,535 Class A units of the Parent.
(3) The Parent acquired Capstar's independent franchisee located in Omaha,
Nebraska. The total consideration was accounted for as an equity
contribution to the Company and included 2,385 Class A units of the Parent.
(4) Total purchase price included 100 Class A units of the Parent.
(5) The Company paid $3.1 million of the purchase price of Mountain West Audio,
Inc. as of December 31, 1999. In February 2000, the Company paid the
remaining purchase price, which included 456 Class A units of the Parent.
(6) Total purchase price included 802 Class A units of the Parent.
I-2
<PAGE>
MUZAK LLC
Item 2. Management's Discussion and Analysis (Continued)
Recent Developments
EchoStar
The Company concluded its recent negotiations with EchoStar Satellite
Corporation ("EchoStar") in August 2000. Pursuant to the terms of the parties'
new agreement, EchoStar no longer has a unilateral right to cancel the
distribution of the Company's programs that customers receive via the EchoStar
system. EchoStar is now obligated to distribute 60 music programs on behalf of
Muzak for the entire term of the agreement. Such agreement with EchoStar is
scheduled to end in approximately 2010. In order to secure this long-term supply
agreement with EchoStar, the Company recorded a $1.6 million charge to costs of
music and business services revenue during the second quarter of 2000. As
adjusted to reflect the economic impact of the EchoStar renegotiation as if
entered into on January 1, 2000, the gross profit reduction for the quarter
ended June 30, 2000 would have been $0.8 million, rather than $1.6 million.
Additionally, the new agreement will decrease the Company's future residential
revenues by establishing a sales discount to EchoStar in connection with the
broadcast of the Company's music programming to residential customers. All other
terms of the EchoStar agreement remain substantially the same.
Equity Infusions
In July, June, and February 2000, the Company received equity
contributions of $10.0 million, $5.0 million, and $10.6 million, respectively
from its Parent. The proceeds of the equity contributions were used to make
repayments on the Senior Credit Facility (as defined below) and for general
corporate purposes.
Revenues and Expenses
The Company derives the majority of its music and other business
services revenues from the sale of business music products. The core products
are Audio Architecture and Audio Marketing. In addition, the Company offers a
complementary product, Video Imaging. The Company's Video Imaging product is
produced through an arrangement with an outside vendor. These revenues are
generated by clients, who pay monthly subscription fees under noncancelable
five-year contracts.
The Company also derives equipment and related services revenues from
the sale and lease of audio system-related products, principally sound systems
and intercoms, to business music clients and other clients. In addition, the
Company sells electronic equipment, such as proprietary tape playback equipment
and other audio and video equipment to franchisees to support the sale of
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.
I-3
<PAGE>
MUZAK LLC
Item 2. Management's Discussion and Analysis (Continued)
The cost of revenues for music and other business services consists
primarily of broadcast delivery, programming and licensing associated with
providing music and other business programming to a client or a franchisee. The
cost of revenues for equipment and related services represents the purchase cost
plus handling, shipping and warranty expenses. The 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 client locations.
Installation costs associated with new client locations are capitalized and
charged to depreciation expense over the estimated life of the clients'
contract.
The Company's customers typically enter into a noncancelable five-year
contract that renews automatically for at least one five-year term unless
specifically terminated at the initial contract expiration date. The average
length of service per customer is approximately 12 years. The Company typically
makes an initial one-time installation investment per location, in exchange for
recurring monthly fees. For music clients under contract with the independent
franchisees, the Company receives a net monthly royalty fee in exchange for
music programming. The Company does not incur a capital outlay for a new client
location generated by an independent franchisee.
The business music industry remains highly fragmented, with numerous
independent operators. The Company plans to pursue acquisitions of competitors
and of its independent franchisees. Through acquisitions, the Company expects to
realize cost savings by eliminating duplicative programming, distribution, sales
and marketing, and technical and other general administrative expenses.
The business music industry is influenced by the recording industry,
performing rights societies, government regulations, technological advancements,
satellite capabilities, and competition. The Company must license rights to
rerecord and distribute music and is reliant on third parties for satellite
capabilities.
Selling, general and administrative expenses include salaries,
benefits, commissions, travel, marketing materials, training and occupancy costs
associated with staffing and operating sales offices. These expenses also
include personnel and other costs in connection with the Company's headquarters
functions. Sales commissions are capitalized and charged as selling, general and
administrative expense over the typical contract term of five years. If a client
contract is terminated early, the unamortized sales commission is typically
recovered from the salesperson.
Results of Operations
The Company has provided a comparison of the quarter ended June 30,
2000 to the prior year period. However, the Company did not compare the results
for the six months ended June 30, 2000 to the prior year period as the prior
year period does not include a full six months of operations of the Company
subsequent to the merger of Old Muzak and ACN, which occurred on March 18, 1999.
Revenues. Total revenues for the second quarter of 2000 increased 35.2% to $48.0
million, up $12.5 million from the second quarter of 1999. Excluding the impact
of acquisitions consummated subsequent to the second quarter of 1999, total
revenues would have increased 11.3% to $39.5 million, up $4.0 million from the
second quarter of 1999. Acquisitions completed subsequent to the second quarter
of 1999 contributed $8.5 million of total revenue in the second quarter of 2000.
The 11.3% increase is attributable to strong growth in both audio marketing and
audio architecture products.
I-4
<PAGE>
MUZAK LLC
Item 2. Management's Discussion and Analysis (Continued)
Gross Profit. For both the second quarter of 2000 and 1999, gross profit margin
was approximately 62.0%. Gross profit increased $7.7 million or 35.2% for the
quarter ended June 30, 2000 as compared to the quarter ended June 30, 1999.
Excluding the impact of acquisitions consummated subsequent to the second
quarter of 1999 as well as the economic impact of the renegotiated EchoStar
agreement as if entered into on January 1, 2000, gross profit would have
increased $3.1 million or 14.2% in the second quarter of 2000 as compared to the
second quarter of 1999. Acquisitions completed subsequent to the second quarter
of 1999 contributed $5.4 million of gross profit in the second quarter of 2000.
The economic impact of the renegotiated EchoStar agreement as if entered into on
January 1, 2000 would have been an increase of $0.8 million to gross profit in
the second quarter of 2000.
Selling, general and administrative expenses. Selling, general, and
administrative expenses for the quarter ended June 30, 2000 increased $4.4
million, or 36.9% as compared to the quarter ended June 30, 1999. These
expenses, as a percentage of revenues, were 33.9% and 33.5% for the second
quarter of 2000 and 1999, respectively.
Depreciation and amortization expenses. Depreciation and amortization expense
increased to $15.5 million in the second quarter of 2000, up $6.4 million from
the comparable 1999 period. This increase is due to the acquisition of
competitors' and independent franchisees business music contracts as well as the
additional capital investment associated with the growth in new subscriber
locations.
Interest expense. Interest expense, net of interest income, increased to $10.3
million in the second quarter of 2000, up 58.2% from the comparable 1999 period.
The increase is due to the overall increase in debt levels, as well as an
increase in interest rates.
Income tax provision. The Company is a Limited Liability Company and is treated
as a partnership for income tax purposes. No provision for income taxes is
required by the Company as its income and expenses are taxable to or deductible
by its member. The Company's corporate subsidiaries are subject to income taxes
and account for deferred income taxes under the liability method which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax basis of assets and liabilities. For the second quarter of 2000, the income
tax provision was $40 thousand.
Net Loss. The combined effect of the foregoing resulted in a net loss of $12.8
million for the second quarter of 2000, compared to a net loss of $5.5 million
for the comparable 1999 period.
Liquidity and Capital Resources
The Company had cash and cash equivalents totaling $7.0 million and
$2.3 million at June 30, 2000 and December 31, 1999, respectively. The Company
had $35 thousand of borrowing availability (after giving effect to outstanding
letters of credit of $0.3 million) under its credit agreements as of June 30,
2000.
Sources and Uses of Funds
The Company's principal sources of funds are cash generated from
continuing operations, borrowings under the Senior Credit Facility, and proceeds
from equity contributions. In July, June and February 2000, the Company received
equity contributions of $10.0 million, $5.0 million, and $10.6 million,
respectively from its Parent. The proceeds were used to pay down the Senior
Credit Facility and for general corporate purposes. Net cash provided by
continuing operating activities of the Company was $1.8 million during the
quarter ended June 30, 2000. Net cash used in continuing operating activities
was $3.1 million during the six months ended June 30, 2000.
The Company expects that its principal uses of funds from operating
activities and borrowings will be to fund acquisitions, interest and principal
payments on its indebtedness, net working capital increases and
I-5
<PAGE>
capital expenditures associated with new client locations.
I-6
<PAGE>
MUZAK LLC
Item 2. Management's Discussion and Analysis (Continued)
The Company believes that its cash flows from operations will be
sufficient to fund operations, excluding acquisitions and capital expenditure
requirements associated with new client locations, through December 31, 2000.
Due to continued growth in its operating activities and the associated need to
invest capital in connection with each new client location to realize such
growth as well as the Company's strategic plan for acquisitions, the Parent is
currently pursing additional financing options. The Parent plans to contribute
the proceeds from any such financing as an equity contribution to the Company
and the Company would use any such contribution primarily to repay the revolving
loan and to repay the Floating Rate Notes.
At June 30, 2000, the Company has total outstanding indebtedness of
$381.6 million (excluding approximately $0.3 million of outstanding letters of
credit) at an average interest rate of 10.53%. Of the total outstanding
indebtedness, $312.9 million relates to the Senior Credit Facility and the
Senior Notes.
Capital Expenditures
The Company's business generally requires capital for the installation
of equipment for new business clients. The Company also expends capital for
property and equipment to be used at headquarters and within the owned
operations. The Company currently anticipates that its capital expenditures for
fiscal 2000 will be in the range of $32.0 million to $38.0 million, which
includes approximately $5.0 million to be incurred in connection with the build
out of the Company's headquarters facility in Fort Mill, South Carolina. As of
June 30, 2000, the Company had approximately $2.2 million in outstanding capital
expenditure commitments.
Senior Credit Facility
The Senior Credit Facility, which is guaranteed by the Parent, the
Company, and certain of its domestic subsidiaries, contains restrictive
covenants including maintenance of interest and leverage ratios and various
other restrictive covenants which are customary for such facilities. In
addition, the Company is generally prohibited from incurring additional
indebtedness, incurring liens, paying dividends or making other restricted
payments, consummating asset sales, entering into transactions with affiliates,
merging or consolidating with any other person or selling, assigning,
transferring, leasing, conveying, or otherwise disposing of assets. Such
limitations, together with the Company's highly leveraged nature could limit the
Company's corporate and operating activities in the future, including the
implementation of future acquisitions. As a result of the renegotiated EchoStar
agreement, the Company was in violation of certain debt covenants and has
obtained waivers.
Effective August 2, 2000, the Company, in view of the overall higher
interest rate environment and the Company's strong organic growth as well as
acquisitions, amended the Senior Credit Facility as follows: (i) increased the
additional secured indebtedness permitted from $2.5 million to $9.0 million and
decreased the additional unsecured indebtedness permitted from $5.0 million to
$1.0 million (ii) amended the interest coverage ratio for the quarters ended
June 30, 2000, September 30, 2000, and December 31, 2000 from the present level
of 1.80x to 1.65x and (iii) increased the total capital expenditures permitted
for fiscal 2000 from $32.0 million to $38.0 million.
Floating Rate Notes
In January 2000, the Company entered into an indenture for up to $50.0
million Senior Subordinated Floating Rate Notes (the "Floating Rate Notes"). The
Floating Rate Notes were available for drawdowns until July 31, 2000.
Commitments on all amounts undrawn under the Floating Rate Notes by July 31,
2000 expired and are ineligible for future drawdowns. The Floating Rate Notes
would have been redeemed at 100% if redeemed before July 31, 2000 and may be
redeemed at 101.50% if redeemed August 1, 2000 through October 31, 2000. If the
Company does not redeem the Floating Rate Notes by November 1, 2000, the
Floating Rate Notes will automatically convert into fixed-rate permanent notes
due March 2009.
I-7
<PAGE>
MUZAK LLC
Item 2. Management's Discussion and Analysis (Continued)
Senior Notes
On March 18, 1999, the Company together with its wholly owned
subsidiary, Muzak Finance Corp., co-issued $115.0 million in principal amount of
Senior Subordinated Notes ("Senior Notes") which mature on March 15, 2009.
Interest is payable semi-annually, in arrears, on March 15 and September 15 of
each year, commencing on September 15, 1999.
The Senior Notes are general unsecured obligations of the Company
and Muzak Finance Corp. and are subordinated in right of payment to all existing
and future Senior Indebtedness of the Company and Muzak Finance Corp. The Senior
Notes are guaranteed by the Parent, the Company, MLP Environmental Music LLC,
Business Sound Inc., BI Acquisition LLC, Audio Environments Inc., Background
Music Broadcasters Inc., Muzak Capital Corporation, Muzak Houston Inc.,
Telephone Audio Productions Inc., Music Incorporated, and Vortex Sound
Communications Company Inc. The indenture governing the Senior Notes generally
prohibits the Company from making certain payments such as dividends and
distributions of their capital stock, repurchases or redemptions of their
capital stock, and investments (other than permitted investments) unless certain
conditions are met by the Company.
Before March 15, 2002, the issuers may redeem up to 35% of the
aggregate principal amount of the Notes originally issued under the indenture at
a redemption price of 109.875% of the aggregate principal amount so redeemed,
plus accrued and unpaid interest to the redemption date, with the net proceeds
of one or more equity offerings if certain conditions are met. After March 15,
2004, the issuers may redeem all or part of the Senior Notes at a redemption
price equal to 104.938% of the principal amount, which redemption price declines
to 100% of the principal amount in 2007.
Senior Discount Notes
On March 18, 1999, the Parent together with its wholly owned subsidiary
Muzak Holdings Finance Corp., co-issued $75.0 million in principal amount at
maturity or $39.9 million in accreted value on the issue date, of 13% Senior
Discount Notes (the "Senior Discount Notes") due 2010. Cash interest on the
Senior Discount Notes does not accrue and is not payable prior to March 15,
2004. The Senior Discount Notes were issued at a substantial discount from their
principal amount at maturity. Until March 15, 2004, the Senior Discount Notes
will accrete in value such that the accreted value on March 15, 2004 will equal
the principal amount at maturity of the Senior Discount Notes. From and after
March 15, 2004, interest on the Senior Discount Notes will accrue at a rate of
13% per annum. Interest will be payable semi-annually in arrears on each March
15 and September 15, commencing September 15, 2004, to holders of record of the
Senior Discount Notes at the close of business on the immediately preceding
March 1 and September 1.
The Senior Discount Notes are general unsecured obligations of the
Parent and Muzak Holdings Finance Corp. and effectively subordinated in right of
payment to all existing and future Senior Indebtedness of the Company and Muzak
Finance Corp. The Parent is a holding company for the Company and its
subsidiaries, with no material operations of its own and only limited assets.
Muzak Holdings Finance Corp. has no operations and substantially no assets.
Accordingly, the Parent is dependent upon the distribution of the earnings of
its subsidiaries to service its debt obligations. The indenture governing the
Senior Discount Notes generally prohibits the Parent and its restricted
subsidiaries from making certain payments such as dividends and distributions of
their capital stock, repurchases or redemptions of their capital stock, and
investments (other than permitted investments) unless certain conditions are met
by the Parent and its restricted subsidiaries.
I-8
<PAGE>
MUZAK LLC
Item 2. Management's Discussion and Analysis (Continued)
Before March 15, 2002, the issuers may redeem up to 35% of the
aggregate principal amount of the Senior Discount Notes originally issued under
the indenture at a redemption price of 113% of the aggregate principal amount so
redeemed, plus accrued and unpaid interest to the redemption date, with the net
proceeds of one or more equity offerings if certain conditions are met. After
March 15, 2004, the issuers may redeem all or part of the Senior Discount Notes
at a redemption price equal to 106.5% of the principal amount which redemption
price declines to 100% of the principal amount in 2007.
Interest Rate Exposure
Indebtedness under the Term Loan A and the revolving loans bears
interest at a per annum rate equal to the Company's choice of: (i) the Alternate
Base Rate (which is the highest of prime rate and the Federal Funds Rate plus
.5%) plus a margin ranging from 1.00% to 2.00%; or (ii) the offered rates for
Eurodollar deposits ("LIBOR") of one, two, three, or six months, as selected by
the Company, plus a margin ranging from 2.0% to 3.0%. Margins, which are subject
to adjustment based on the changes in the Company's ratio of consolidated total
debt to EBITDA (i.e., earnings before interest, taxes, interest, depreciation,
amortization and other non cash charges) were 2.0% in the case of Alternate Base
Rate and 3.0% in the case of LIBOR as of June 30, 2000. Indebtedness under the
Term Loan B bears interest at a per annum rate equal to the Company's choice of:
(i) the Alternate Base Rate (as described above) plus a margin of 2.5%; or (ii)
LIBOR of one, two, three, or six months, as selected by the Company plus a
margin of 3.5%. Commitment fees range from .375% to .625%.
Indebtedness under the Floating Rate Notes bears interest at a per
annum rate equal to (i) three month LIBOR plus a margin of 5.0% until July 31,
2000; (ii) at three month LIBOR plus a margin of 7.5% for the period beginning
August 1, 2000 through October 31, 2000; and (iii) for the period from November
1, 2000 through maturity, at a fixed rate based on the greater of: (a) three
month LIBOR plus 7.5%; and (b) the yield on the Company's Senior Notes plus
2.5%.
Interest on the Senior Notes accrues at a rate of 9.875% per annum.
Until March 15, 2004, the Senior Discount Notes will accrete in value such that
the accreted value on March 15, 2004 will equal the principal amount at maturity
of the Senior Discount Notes. From and after March 15, 2004, interest on the
Senior Discount Notes will accrue at a rate of 13% per annum.
Cash interest paid was $6.8 million and $17.8 million for the quarter
and six months ended June 30, 2000, respectively and was $1.4 million and $2.4
million for the quarter and six months ended June 30, 1999, respectively.
Due to the variable interest rates under the Senior Credit Facility,
the Company is sensitive to changes in interest rates. Accordingly, during April
1999, the Company entered into a four-year interest rate swap agreement in which
the Company effectively exchanged $100.0 million of floating rate debt at three
month LIBOR for 5.59% fixed rate debt. The Company modified this agreement on
January 28, 2000 resulting in an increase to 7.042% fixed rate debt and a
termination date of April 2002. Based on amounts outstanding at June 30, 2000, a
.5% increase in each of LIBOR and the Alternate Base Rate (6.77% and 9.50%
respectively, at June 30, 2000) would impact interest costs by approximately
$1.2 million annually on the Senior Credit Facility and the Floating Rate Notes.
Debt Maturities
The current maturities of long-term debt primarily consist of the
current portion of the Senior Credit Facility and other miscellaneous debt. The
maturities of long-term debt of the Company's operations during the remainder of
2000 and for 2001, 2002, 2003, and 2004 are $1.8 million, $5.2 million, $6.7
million, $7.8 million, $26.3 million, respectively.
I-9
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk disclosure that
affect the quantitative and qualitative disclosures since those reported in the
Company's Report on Form 10-K/A for the fiscal year ended December 31, 1999.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
There have been no material developments in legal proceedings involving
the Company since those reported in the Company's Report on Form 10-K/A for
fiscal year ended December 31, 1999.
I-10
<PAGE>
MUZAK LLC
PART II - OTHER INFORMATION, Continued
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
4.1 Indenture, dated as of February 2, 2000 by and among Muzak LLC and
Muzak Finance Corp., as Issuers and State Street Bank and Trust
Company, as Trustee. (1)
4.2 Purchase Agreement, dated February 2, 2000 by and among Muzak LLC
and Muzak Finance Corp., the Guarantors named therein and CIBC
Inc. (1)
4.3 Registration Rights Agreement, dated as of February 2, 2000 by and
among Muzak LLC and Muzak Finance Corp., the Guarantors named
therein and CIBC Inc. (1)
4.4 Supplemental Indenture, dated as of February 24, 2000 by and among
Telephone Audio Productions, Inc., Muzak LLC, and subsidiaries, as
Guarantors and State Street Bank and Trust Company, as Trustee
(Senior Subordinated Notes). (2)
4.5 Supplemental Indenture, dated as of February 24, 2000 by and among
Telephone Audio Productions, Inc., Muzak LLC, and subsidiaries, as
Guarantors and State Street Bank and Trust Company, as Trustee
(Floating Rate Notes). (2)
4.6 Supplemental Indenture, dated as of March 24, 2000 by and among
Vortex Sound Communications Company, Inc., Muzak LLC, and
subsidiaries, as Guarantors and State Street Bank and Trust Company,
as Trustee (Senior Subordinated Notes). (2)
4.7 Supplemental Indenture, dated as of March 24, 2000 by and among
Vortex Sound Communications Company, Inc., Muzak LLC, and
subsidiaries, as Guarantors and State Street Bank and Trust Company,
as Trustee (Floating Rate Notes). (2)
4.8 Supplemental Indenture, dated as of March 31, 2000 by and among
Music Incorporated, Muzak LLC, and subsidiaries, as Guarantors and
State Street Bank and Trust Company, as Trustee (Senior Subordinated
Notes). (2)
4.9 Supplemental Indenture, dated as of March 31, 2000 by and among
Music Incorporated, Muzak LLC, and subsidiaries, as Guarantors and
State Street Bank and Trust Company, as Trustee (Floating Rate
Notes). (2)
4.10 Supplemental Indenture, dated as of March 31, 2000 by and among
Muzak Houston, Inc., Muzak LLC, and subsidiaries, as Guarantors and
State Street Bank and Trust Company, as Trustee (Senior Subordinated
Notes). (2)
4.11 Supplemental Indenture, dated as of March 31, 2000 by and among
Muzak Houston, Inc., Muzak LLC, and subsidiaries, as Guarantors and
State Street Bank and Trust Company, as Trustee (Floating Rate
Notes). (2)
10.1 Fourth Amendment and Waiver dated August 2, 2000 to the Credit and
Guaranty Agreement dated as of March 18, 1999 with Muzak LLC as
Borrower
27 Financial Data Schedules
(1) Incorporated by reference to the Company's Report on Form 10-K/A for
the fiscal year ended December 31, 1999.
(2) Incorporated by reference to the Company's Report on Form 10-Q for
the quarter ended March 31, 2000.
(b) Reports on Form 8-K
During the quarter for which this Report on Form 10-Q is being filed,
the Company filed no reports on Form 8-K.
I-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
MUZAK LLC
MUZAK FINANCE CORP.
By: /s/ Robert M. Riley
---------------------------------
Date: August 14, 2000 Robert M. Riley
Controller
(Principal Financial
Officer and Chief
Accounting Officer)
By: /s/ William A. Boyd
---------------------------------
Date: August 14, 2000 William A. Boyd
President and Chief Executive Officer
(Principal Executive Officer)
I-12
