<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1996
REGISTRATION NOS. 333-03741
333-03741-01
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
MUZAK LIMITED PARTNERSHIP
MUZAK CAPITAL CORPORATION
(FORMERLY MUZAK, INC.)
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
DELAWARE 7389 13-3647593
DELAWARE 7389 91-1722302
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBERS) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
---------------
2901 THIRD AVENUE, SUITE 400
SEATTLE, WA 98121
(206) 633-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
---------------
MR. JOHN R. JESTER
PRESIDENT
MUZAK LIMITED PARTNERSHIP
MUZAK CAPITAL CORPORATION
2901 THIRD AVENUE, SUITE 400
SEATTLE, WA 98121
(206) 633-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
NORMAN D. CHIRITE, LOUISA BARASH, ESQ. PHILIP E. COVIELLO, JR.,
ESQ. ESQ.
HELLER, EHRMAN, WHITE & MCAULIFFE
WEIL, GOTSHAL & MANGES 701 FIFTH AVENUE, SUITE 6100 LATHAM & WATKINS
LLP SEATTLE, WA 98104 885 THIRD AVENUE, SUITE
767 FIFTH AVENUE (206) 447-0900 1000
NEW YORK, NY 10153 NEW YORK, NY 10022-4802
(212) 310-8000 (212) 906-1200
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO MAXIMUM AGGREGATE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED OFFERING PRICE OFFERING PRICE(1) REGISTRATION FEE(2)
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<S> <C> <C> <C> <C>
% Senior Notes due
2003................... $100,000,000 100% $100,000,000 $34,483
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Previously paid.
---------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains a Prospectus relating to the offering
(the "Offering") of $100,000,000 aggregate principal amount of % Senior
Notes due 2003 (the "Senior Notes") by Muzak Limited Partnership and Muzak
Capital Corporation, together with separate Prospectus pages relating to
certain market-making transactions in the Senior Notes. The complete
Prospectus for the Offering follows immediately after this Explanatory Note.
Following such Prospectus are certain portions of the Prospectus relating to
the market-making transactions, which include alternate front and back cover
pages, a section entitled "Plan of Distribution" to be used in lieu of the
section entitled "Underwriting", a section entitled "Risk Factors--Absence of
Public Market; Illiquidity; Market Value" to be used in lieu of "Risk
Factors--Absence of Public Market; Illiquidity; Market Value" and alternate
"Use of Proceeds" and "Legal Matters" sections. In addition, the stabilization
legend will be deleted from the inside front cover page of the Prospectus
relating to market-making transactions. In order to register under Rule 415 of
the Securities Act of 1933 those Senior Notes that will be offered and sold in
market-making transactions, the appropriate box on the cover page of the
Registration Statement has been checked and the undertakings required by Item
512(a) of Regulation S-K have been included in Item 17 of Part II.
<PAGE>
MUZAK LIMITED PARTNERSHIP
MUZAK CAPITAL CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND HEADING CAPTION OR LOCATION IN PROSPECTUS
<S> <C> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page;
Prospectus..................................... Available Information; Outside
Back Cover Page
3. Summary Information, Risk Factors and Ratio of Outside Front Cover Page;
Earnings to Fixed Charges...................... Prospectus Summary; Risk
Factors; The Issuers; Unaudited
Pro Forma Financial Information;
Selected Financial Data
4. Use of Proceeds................................. Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price................. Not Applicable
6. Dilution........................................ Not Applicable
7. Selling Security Holders........................ Not Applicable
8. Plan of Distribution............................ Outside Front Cover Page;
Underwriting
9. Description of Securities to be Registered...... Outside Front Cover Page;
Prospectus Summary; Description
of the Senior Notes; Federal
Income Tax Consequences
10. Interests of Named Experts and Counsel.......... Legal Matters; Experts
11. Information with Respect to the Registrants..... Outside Front Cover Page;
Prospectus Summary; Risk
Factors; The Issuers; Use of
Proceeds; Capitalization;
Unaudited Pro Forma Financial
Information; Selected Financial
Data; Management's Discussion
and Analysis of Financial
Condition and Results of
Operations; Business;
Management; Certain
Relationships and Related
Transactions; Security Ownership
of Certain Beneficial Owners;
Description of the Partnership
Agreement; Index to Financial
Statements; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................... Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 1996
PROSPECTUS
, 1996
$100,000,000
MUZAK
MUZAK LIMITED PARTNERSHIP
MUZAK CAPITAL CORPORATION
% SENIOR NOTES DUE 2003
The % Senior Notes due 2003 (the "Senior Notes") are being offered (the
"Offering") by Muzak Limited Partnership, a Delaware limited partnership (the
"Company"), and Muzak Capital Corporation, a Delaware corporation ("Capital
Corp.", and together with the Company, the "Issuers"). The Senior Notes are the
joint and several obligations of the Issuers. Capital Corp. is a wholly-owned
subsidiary of the Company. The Company will receive all of the net proceeds of
the Offering.
Interest on the Senior Notes is payable semi-annually in cash on and
of each year, commencing , 1997. The Senior Notes will be redeemable
at the option of the Issuers, in whole or in part, at any time on or after ,
2000, in cash at the redemption prices set forth herein, plus accrued and
unpaid interest, if any, thereon to the date of redemption. In addition, during
the first 36 months after the date of this Prospectus, the Issuers may on any
one or more occasions redeem up to 35% of the initially outstanding aggregate
principal amount of Senior Notes at a redemption price equal to % of the
principal amount thereof, plus accrued and unpaid interest, if any, thereon to
the redemption date, with the net proceeds of one or more equity offerings of
the Issuers; provided that at least 65% of the initially outstanding aggregate
principal amount of Senior Notes remains outstanding immediately after the
occurrence of any such redemption. See "Description of the Senior Notes--
Optional Redemption." In addition, upon the occurrence of a Change of Control
(as defined herein), each holder of Senior Notes will have the right to require
the Issuers to repurchase all or any part of such holder's Senior Notes at an
offer price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest, if any, thereon to the date of purchase. See
"Description of the Senior Notes--Repurchase at the Option of Holders--Change
of Control." There can be no assurance that, in the event of a Change of
Control, the Issuers would have sufficient funds to purchase all Senior Notes
tendered. See "Risk Factors--Risk of Inability to Satisfy Change of Control
Offer."
The Senior Notes will represent unsecured senior obligations of the Issuers,
will rank senior in right of payment to all Subordinated Indebtedness (as
defined herein) of the Issuers and will rank pari passu in right of payment
with all senior indebtedness of the Issuers. At June 30, 1996, on a pro forma
basis after giving effect to the Offering and the application of the estimated
net proceeds therefrom, the Issuers would have had approximately $1.1 million
of total indebtedness, other than the Senior Notes. The Senior Notes will be
guaranteed on a senior basis by all future Domestic Subsidiaries (as defined
herein) of the Company (other than Capital Corp.). As of the date hereof, the
Company has no subsidiaries other than Capital Corp., which will be a
Restricted Subsidiary (as defined herein). The Indenture (as defined herein)
will limit the ability of the Company and its Restricted Subsidiaries to incur
additional indebtedness; however, the Company and its Restricted Subsidiaries
will be permitted to incur certain indebtedness, which may be secured. See
"Description of the Senior Notes--General" and "--Certain Covenants."
The Issuers do not intend to list the Senior Notes on any national securities
exchange or include the Senior Notes for quotation through an inter-dealer
quotation system. Although the Underwriters have indicated that they presently
intend to make a market in the Senior Notes, there can be no assurance that any
market for the Senior Notes will develop or, if any such market develops, that
it would continue to exist. Such market-making activities may be discontinued
at any time. See "Risk Factors--Absence of Public Market; Illiquidity; Market
Value."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SENIOR NOTES,
INCLUDING:
.The substantial leverage of the Company and its ability to incur
additional indebtedness.
.The risk of possible future net losses from operations.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC (1) COMMISSIONS (2) COMPANY (3)
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<S> <C> <C> <C>
Per Senior Note......................... % % %
Total................................... $ $ $
</TABLE>
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(1) Plus accrued interest, if any, from the date of issuance.
(2) The Issuers have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses of the Offering payable by the Issuers estimated
at $ .
The Senior Notes are being offered by the several Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to various conditions, including the right of the Underwriters to
reject any order in whole or in part. It is expected that delivery of the
Senior Notes will be made in New York, New York on or about , 1996.
DONALDSON, LUFKIN & JENRETTE LAZARD FRERES & CO. LLC
SECURITIES CORPORATION
<PAGE>
[MAP OF CUSTOMER LOCATIONS]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR NOTES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
FOR CALIFORNIA RESIDENTS ONLY
WITH RESPECT TO SALES OF THE SECURITIES BEING OFFERED HEREBY TO CALIFORNIA
RESIDENTS, SUCH SECURITIES MAY BE SOLD ONLY TO (1) "ACCREDITED INVESTORS"
WITHIN THE MEANING OF REGULATION D UNDER THE SECURITIES ACT OF 1933, (2)
BANKS, SAVINGS AND LOAN ASSOCIATIONS, TRUST COMPANIES, INSURANCE COMPANIES,
INVESTMENT COMPANIES REGISTERED UNDER THE INVESTMENT COMPANY ACT OF 1940,
PENSION AND PROFIT SHARING TRUSTS, ANY CORPORATIONS OR OTHER ENTITIES, WHICH,
TOGETHER WITH SUCH CORPORATION'S OR OTHER ENTITY'S AFFILIATES, HAVE A NET
WORTH ON A CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT REGULARLY
PREPARED FINANCIAL STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED BUT NOT
NECESSARILY AUDITED, BY OUTSIDE ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND
SUBSIDIARIES OF THE FOREGOING, (3) ANY CORPORATION, PARTNERSHIP OR
ORGANIZATION (OTHER THAN A CORPORATION, PARTNERSHIP OR ORGANIZATION FORMED FOR
THE SOLE PURPOSE OF PURCHASING THE SECURITIES BEING OFFERED HEREBY) WHO
PURCHASES AT LEAST $1,000,000 AGGREGATE AMOUNT OF THE SECURITIES OFFERED
HEREBY, OR (4) ANY NATURAL PERSON WHO HAS INCOME OF $65,000 AND A NET WORTH OF
$250,000, OR (B) HAS A NET WORTH OF $500,000 (IN EACH CASE, EXCLUDING HOME,
HOME FURNISHINGS AND PERSONAL AUTOMOBILES). EACH CALIFORNIA RESIDENT
PURCHASING THE SECURITIES OFFERED HEREBY WILL NOT SELL OR OTHERWISE TRANSFER
SUCH SECURITY TO A CALIFORNIA RESIDENT UNLESS THE TRANSFEREE COMES WITHIN ONE
OF THE AFOREMENTIONED CATEGORIES AND THAT IT WILL ADVISE THE TRANSFEREE OF
THIS CONDITION WHICH TRANSFEREE, BY BECOMING SUCH, WILL BE DEEMED TO BE BOUND
BY THE SAME RESTRICTIONS ON RESALE.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless the context otherwise requires, all
references to the "Company" include Muzak Limited Partnership and its
consolidated subsidiary, Muzak Capital Corporation ("Capital Corp.").
THE COMPANY
The Company is the leading provider of business music in the United States,
based on the number of customer locations served. The Company and its
franchisees serve approximately 180,000 customer locations in the United
States, representing a market share of approximately 50% of the estimated
number of domestic locations currently served by business music providers and
approximately twice the estimated number of locations served by its nearest
competitor. Through a network of distributors, the Company also provides
business music to subscribers outside the United States. In addition, the
Company offers its customers a range of non-music services, including broadcast
data delivery, video, audio marketing and in-store advertising services, and
sells, installs and services related equipment.
The Company markets business music in a variety of formats, including (i) its
well-known proprietary Environmental Music(R) (or "background" music) and (ii)
over 100 "foreground" music formats ranging from top-of-the-charts hits to
contemporary jazz, country music and classical music. Internal and third-party
studies sponsored by the Company have indicated that properly programmed music
can have a favorable impact on listeners in business and retail environments.
The broadcasting of music, including the rebroadcasting of commercial music, in
such locations is not permitted without licenses and the payment of royalties.
Environmental Music(R), which is principally comprised of instrumental versions
of popular songs that have been adapted and rerecorded by the Company, is
generally used in business offices and manufacturing facilities to improve
employee concentration and reduce stress. Foreground music, consisting
principally of original artist recordings, is most commonly used in public
areas, such as restaurants and retail establishments, primarily as a sales
enhancement tool. The Company distributes 30 of its channels by broadcast media
(principally direct broadcast satellite ("DBS") transmission) and supplies the
balance to subscribers in the form of long-playing audio tapes.
Since 1991, the total number of domestic customer locations served by the
Company and its franchisees has grown from 134,000 to 180,000, with the number
of domestic customer locations served by the Company growing from approximately
32,000 to approximately 62,000 and the number of domestic customer locations
served by the Company's franchisees growing from approximately 102,000 to
approximately 118,000. Over the same period, the Company's total revenues and
earnings before interest, taxes, depreciation, amortization and other
income/expense ("EBITDA") have grown from $56.0 million and $12.6 million in
1991, respectively, to $86.9 million and $20.0 million in 1995, respectively,
and the Company's net losses from operations have decreased from approximately
$9.5 million in 1991 to approximately $5.7 million in 1995.
COMPETITIVE STRENGTHS
The Company believes that it possesses a number of attributes that have
allowed it to become the leading provider of business music in the nation
(based on number of customer locations served), including:
Broad Appeal to Diverse Customer Base. The Company's music products have been
programmed to appeal to a variety of end users, including business offices,
manufacturing facilities, retail establishments and restaurants. The Company's
salesforce markets over 100 different music formats, allowing each customer to
select a format appropriate for its line of business and customer base. The
Company's major national customers include national restaurant chains, such as
Taco Bell, McDonald's and Boston Market, and specialty retailers, such as
Nordstrom, Crate & Barrel, Kroger, Staples, Hallmark and Wal-Mart, as well as a
large number of local and regional accounts, none of which represents more than
3% of the Company's consolidated revenues and the top five of which represent
in the aggregate less than 10% of consolidated revenues. The Company believes
that the geographic dispersion of its customers, and the diversity of
businesses in which they are engaged minimizes
3
<PAGE>
the impact to the Company of a cyclical downturn in any one area of the country
or in any one sector of the economy.
Attractive Economics to Customers and the Company. The Company believes that
its services are highly cost effective, providing an important business tool to
its customers for a low monthly cost. On average, the Company receives
approximately $45 of revenue per month per subscriber location, net of
licensing fee and applicable royalties, for which it makes an investment per
subscriber location (including sales commission) of approximately $950 for
medium-powered DBS subscribers (substantially lower for local broadcast
technology subscribers). This allows the Company to recover its capital costs
within two years. The Company's customers typically enter into long-term
contracts, which are generally for a period of five years with an automatic
renewal option. The Company's annual cancellation rate is less than 10% of
music and other business services revenues, which equates to an average length
of service per customer of approximately ten years.
Full Line of Audio, Video and Data Products and Services. The Company can
provide its customers with an integrated package of services including: (i)
over 100 different music formats including both background and foreground
music; (ii) customized audio messages inserted in regular programming; (iii) e-
mail and computer bulk data transfer; (iv) on-premise music videos; (v)
customized messages for use with "on-hold" business telephone systems; and (vi)
"point of purchase" audio advertising and merchandising services. The ability
to deliver a package of music and non-music services over a common transmission
system has been a critical factor in enabling the Company to generate
incremental revenues from its customers at little or no additional cost, gain
new customers and protect existing customers from competitive business music
providers that do not offer such a broad line of products and services.
Multiple Delivery Systems. The Company believes that its ability to
distribute its services through each of high-powered and medium-powered DBS
transmission, local radio broadcast transmission, telephone lines and audio
tapes enables it to effectively serve customers with either single or multiple
locations as well as those having varied music or service needs. The number of
domestic subscriber locations served by medium-powered DBS transmission has
grown from approximately 26,000 at the end of 1991 to approximately 120,000 at
June 30, 1996. In addition, the Company has recently entered into a unique
distribution arrangement with EchoStar Satellite Corporation ("EchoStar"). The
Company anticipates that its agreements with EchoStar will enable it to: (i)
attract additional business music subscribers by offering an expanded array of
DBS-delivered music programming; (ii) deliver music services to residential
subscribers for the first time; and (iii) deliver television programming, such
as CNN(R), MTV(R) and ESPN(R), to business music subscribers in packages
specifically designed for businesses (i.e., news, entertainment or lifestyles).
In addition, the EchoStar agreements provide the Company with high-powered DBS
transmission capability to supplement its existing medium-powered DBS system,
reduced equipment installation costs and an opportunity to shift certain
equipment costs to the subscriber.
Integrated Sales Network. The Company believes that its 35 sales offices in
the United States, its 81 franchisees, whose sales territories cover the
remaining market in the United States, and its 20 international distributors in
15 foreign countries, comprise the largest network of customer sales and
service offices among business music providers in the United States. The
Company further believes that this network allows the Company, among other
things, to more effectively market to and support its national and
international accounts.
OPERATING STRATEGY
The Company believes it has opportunities to achieve growth in revenues and
cash flow by:
Increasing U.S. Market Penetration. The Company intends to increase its
penetration of the U.S. market by expanding its local and national account
sales force, offering more music formats (including up to 60 broadcast formats
with the EchoStar agreements), developing sales strategies focused on
underserved market segments and aggressively marketing its services as part of
a unique bundled package. 1993 census data indicate that there are
approximately 6.4 million business locations in the United States, including
approximately 1.1 million retail outlets and 450,000 restaurant and other food
service locations. Of the total 6.4 million business locations, only about 5%
are currently believed by the Company to subscribe to a business music service.
4
<PAGE>
Pursuing Strategic Relationships and Acquisitions. The Company intends to
pursue additional strategic relationships, acquisitions and joint ventures,
such as the Company's recent distribution agreements with EchoStar and its 1994
acquisition of the assets of Comcast Sound Communications Inc. ("Comcast"),
then the Company's largest franchisee, in order to: (i) increase the breadth of
its programming offerings; (ii) further diversify its distribution channels;
and (iii) take advantage of certain economies of scale.
Expanding in International Markets. The Company plans to continue its
expansion in Europe primarily through strategic relationships and joint
ventures, such as Muzak Europe B.V. ("Muzak Europe"), a joint venture formed in
1995 between the Company and Alcas Holdings B.V. ("Alcas"), a leading European
business music provider. This joint venture couples the Company's broadcast
technology skills with Alcas' market knowledge and marketing expertise and
further permits the Company to leverage its assets and programming expertise
and diversify its sources of revenue. The Company also intends to expand into
Latin America and Asia by establishing similar strategic relationships in those
markets.
Exploiting New Market Opportunities. The Company intends to continue to
leverage its music programming expertise and its extensive recorded music
library into new products and markets. For example, the Company has recently
developed and begun operating its proprietary MusicServer SM service, which
permits real-time delivery of digitized song samples over the Internet to music
retailers and others (including companies such as CDnow!, Tower Records and
Microsoft) that require access to a large library of recorded music.
Enhancing Operating Margins. The Company seeks to enhance operating margins
through continued centralization of operations and leveraging fixed expenses
over a wider customer base. The Company strives to exploit less costly
transmission technologies and to reduce the capital required to initiate
service to a customer.
The Company was formed in September 1992 by Centre Capital Investors L.P.
("CCI"), a private investment partnership of which Centre Partners L.P.
("Centre Partners") is the general partner, to acquire substantially all of the
assets and business of the Company (the "1992 Acquisition") from a predecessor
entity (the "Predecessor"). MLP Holdings L.P. ("MLP"), an affiliate of CCI, and
the Management Investors (as defined herein) beneficially own approximately
62.9% and 9.7%, respectively, of the outstanding partnership interests of the
Company. Capital Corp., a Delaware corporation, is acting as co-obligor for the
Senior Notes. Capital Corp. is a wholly-owned subsidiary of the Company which
has nominal assets and will not conduct any operations. Certain institutional
investors that might otherwise be limited in their ability to invest in
securities offered by partnerships by reason of the investment laws of their
states of organization or their charter documents may be able to invest in the
Senior Notes because Capital Corp. is a corporation. A portion of the net
proceeds from the Offering will be used to retire indebtedness incurred in the
1992 Acquisition.
THE OFFERING
Securities Offered........ $100,000,000 in aggregate principal amount of %
Senior Notes due 2003 (the "Senior Notes").
Maturity Date............. , 2003.
Interest Payment Dates.... and of each year, commencing , 1997.
Optional Redemption....... The Senior Notes will be redeemable at the option
of the Issuers, in whole or in part, at any time on
or after , 2000, in cash at the redemption
prices set forth herein, plus accrued and unpaid
interest, if any, thereon to the date of redemp-
tion. In addition, during the first 36 months after
the date of this Prospectus, the Issuers may on any
one or more occasions redeem up to 35% of the ini-
tially outstanding aggregate principal amount of
Senior Notes at a redemption price equal to % of
the principal amount thereof, plus accrued and un-
paid interest, if any, thereon to the redemption
date, with the net proceeds of one or more equity
offerings of the Issuers; provided that at least
65% of the initially outstanding aggregate princi-
pal amount of Senior Notes remains outstanding im-
mediately after the occurrence of any such redemp-
tion. See "Description of the Senior Notes--Op-
tional Redemption."
5
<PAGE>
Change of Control......... Upon the occurrence of a Change of Control, each
holder of Senior Notes will have the right to re-
quire the Issuers to repurchase all or any part of
such holder's Senior Notes at an offer price in
cash equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest,
if any, thereon to the date of purchase. See "De-
scription of the Senior Notes--Repurchase at the
Option of Holders--Change of Control." There can be
no assurance that, in the event of a Change of Con-
trol, the Issuers would have sufficient funds to
purchase all Senior Notes tendered. See "Risk Fac-
tors--Risk of Inability to Satisfy Change of Con-
trol Offer."
Ranking................... The Senior Notes will represent unsecured senior
obligations of the Issuers, will rank senior in
right of payment to all Subordinated Indebtedness
of the Issuers and will rank pari passu in right of
payment with all senior indebtedness of the Is-
suers. At June 30, 1996, on a pro forma basis after
giving effect to the Offering and the application
of the estimated net proceeds therefrom, the Is-
suers would have had approximately $1.1 million of
total indebtedness, other than the Senior Notes.
The Senior Notes will be guaranteed on a senior ba-
sis by all future Domestic Subsidiaries of the Com-
pany (other than Capital Corp.). As of the date
hereof, the Company has no subsidiaries other than
Capital Corp., which will be a Restricted Subsidi-
ary. The Indenture will limit the ability of the
Company and its Restricted Subsidiaries to incur
additional indebtedness; however, the Company and
its Restricted Subsidiaries will be permitted to
incur certain indebtedness, which may be secured.
See "Description of the Senior Notes--General" and
"--Certain Covenants."
Certain Covenants......... The Indenture will contain certain covenants that
will limit, among other things, the ability of the
Company and its Restricted Subsidiaries to (i) pay
dividends or make certain other restricted payments
or investments, (ii) incur additional indebtedness
or issue preferred equity interests, (iii) merge,
consolidate or sell all or substantially all of
their assets, (iv) create liens on assets, (v) en-
ter into certain transactions with affiliates or
related persons and (vi) engage in other lines of
business. See "Description of the Senior Notes--
Certain Covenants."
Use of Proceeds........... The net proceeds from the sale of the Senior Notes
are estimated to be approximately $96.5 million
(after deducting underwriting discounts and esti-
mated expenses of the Offering) and will be used:
(i) to repay approximately $49.2 million of secured
indebtedness outstanding under the Company's exist-
ing credit facility; (ii) to repay approximately
$12.5 million of subordinated indebtedness incurred
in connection with the 1992 Acquisition; (iii) to
pay approximately $7.5 million to repurchase the
Company's Class C Limited Partner Interest with a
recorded value of approximately $10.4 million; and
(iv) for general corporate purposes.
RISK FACTORS
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SENIOR NOTES,
INCLUDING:
.The substantial leverage of the Company and its ability to incur
additional indebtedness.
.The risk of possible future net losses from operations.
6
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------- ------------------
1993 1994(1) 1995 1995 1996
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Music and other business
services.................. $ 36,800 $ 50,410 $ 52,489 $ 25,916 $ 26,977
Equipment and related
services.................. 21,741 33,006 34,392 16,646 15,179
-------- -------- -------- -------- --------
Total revenues........... 58,541 83,416 86,881 42,562 42,156
-------- -------- -------- -------- --------
Cost of revenues:
Music and other business
services.................. 10,611 13,685 14,465 7,063 7,501
Equipment and related
services.................. 16,756 23,413 23,895 11,465 10,303
-------- -------- -------- -------- --------
Total cost of revenues... 27,367 37,098 38,360 18,528 17,804
-------- -------- -------- -------- --------
Gross profit................ 31,174 46,318 48,521 24,034 24,352
Selling, general and
administrative expenses.... 19,603 28,699 28,496 14,628 15,107
Depreciation................ 4,349 8,211 9,382 4,669 5,155
Amortization................ 6,942 9,622 8,909 4,443 4,463
-------- -------- -------- -------- --------
Operating income (loss)..... 280 (214) 1,734 294 (373)
Interest expense............ 3,785 6,990 7,483 3,791 3,574
Other (income) expense,
net........................ (30) (21) (35) (42) 228
-------- -------- -------- -------- --------
Net income (loss)........... $ (3,475) $ (7,183) $ (5,714) $ (3,455) $ (4,175)
======== ======== ======== ======== ========
OTHER INFORMATION:
Gross profit margin(2)...... 53.3% 55.5% 55.8% 56.5% 57.8%
EBITDA(3)................... $ 11,571 $ 17,619 $ 20,025 $ 9,406 $ 9,245
Capital expenditures(4)..... 8,235 13,804 12,757 6,043 7,416
Estimated number of domestic
customer locations:
Company.................. 33,000 56,000 60,000 58,000 62,000
Franchisees.............. 116,000 103,000 111,000 107,000 118,000
-------- -------- -------- -------- --------
Total................... 149,000 159,000 171,000 165,000 180,000
======== ======== ======== ======== ========
Estimated number of domestic
DBS customer locations:
Company.................. 12,000 29,000 35,000 32,000 38,000
Franchisees.............. 49,000 55,000 72,000 64,000 82,000
-------- -------- -------- -------- --------
Total................... 61,000 84,000 107,000 96,000 120,000
======== ======== ======== ======== ========
PRO FORMA INFORMATION:(5)
Total interest expense(6)... -- -- $ 7,517 -- $ 3,700
Ratio of EBITDA to total in-
terest expense(6).......... -- -- 2.66x -- 2.50x
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
--------------------
AS
ACTUAL ADJUSTED(7)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 3,239 $ 30,533
Total assets.............................................. 95,358 123,580
Total long-term obligations, including current portion.... 50,672 101,085
Redeemable preferred partnership interests................ 16,265 5,891
Partners' deficit......................................... (3,200) (4,267)
Ratio of net debt to LTM EBITDA(8)........................ -- 3.55x
</TABLE>
(footnotes on following page)
7
<PAGE>
(footnotes to table on preceding page)
- --------------------
(1) Includes the results of Comcast from January 31, 1994. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(2) Gross profit margin represents gross profit as a percentage of total
revenues.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization and other income/expense. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles. The Company, however, believes that EBITDA provides useful
information regarding a company's ability to service and/or incur
indebtedness.
(4) Includes additions to property and equipment and additions to deferred
costs and intangible assets.
(5) Gives pro forma effect to the Offering and the application of $61.7 million
of the estimated net proceeds therefrom to repay existing indebtedness as
if the Offering had taken place on January 1, 1995.
(6) Total interest expense consists of cash interest expense on the Senior
Notes at an assumed rate of 11% plus the amortization of deferred debt
issuance costs. Pro forma total interest expense gives effect to the
issuance of the Senior Notes only to the extent that the proceeds therefrom
are used to repay existing indebtedness. Giving effect to the full amount
of the Senior Notes, cash interest expense would have been $11.1 million
and $5.6 million for the year ended December 31, 1995 and the six-month
period ended June 30, 1996, respectively. The ratio of EBITDA for the
twelve months ended June 30, 1996 to cash interest expense for the same
period (excluding the impact of any interest income earned on the Company's
cash balances) would have been 1.79x.
(7) As adjusted to give effect to the Offering and the application of the
estimated net proceeds therefrom as if the Offering had taken place on June
30, 1996.
(8) For purposes of calculating the ratio of net debt to LTM EBITDA, net debt
is defined as total long-term obligations (including the current portion
thereof) less cash and cash equivalents, and LTM EBITDA is defined as
EBITDA for the twelve months ended June 30, 1996.
8
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other information contained in this Prospectus, before
deciding whether to make an investment in the Senior Notes offered hereby.
SUBSTANTIAL LEVERAGE
The Company is, and after the consummation of the Offering will continue to
be, highly leveraged, and the Company's historical earnings have not been
sufficient to cover its fixed charges. After giving effect to the Offering and
the use of proceeds therefrom, on an as adjusted basis, the Company will have
total long-term indebtedness (excluding the current portion thereof), of
approximately $101.1 million and a ratio of total long-term indebtedness to
total capitalization of 98.4% at June 30, 1996 (as if the Offering and the
application of the net proceeds therefrom had occurred on such date). The
Indenture will permit the Company and its Restricted Subsidiaries to incur
certain specified additional indebtedness.
The Company currently incurs, and after the consummation of the Offering
will continue to incur, significant annual cash interest expense in connection
with its obligations under its long-term indebtedness. As a result of the
Offering, total interest expense would have increased from $3.6 million for
the six-month period ended June 30, 1996, to $5.6 million on a pro forma basis
(giving effect to the issuance of the full amount of Senior Notes), for the
six months ended June 30, 1996, due primarily to the increase in overall debt
levels as well as substitution of long-term fixed-rate debt for high-rate
subordinated debt and the floating-rate debt under the Company's existing
senior secured credit facility.
The degree to which the Company is leveraged could have important
consequences to holders of the Senior Notes, including, but not limited to,
the following: (i) the Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes will be restricted; (ii) a significant
portion of the Company's cash flow from operations must be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing the
funds available to the Company for its operations; and (iii) such indebtedness
contains financial and restrictive covenants, the failure to comply with which
may result in an event of default which, if not cured or waived, could have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
RANKING; UNSECURED STATUS OF THE SENIOR NOTES
The Senior Notes will represent unsecured senior obligations of the Issuers,
will rank senior in right of payment to all Subordinated Indebtedness of the
Issuers and will rank pari passu in right of payment with all senior
indebtedness of the Issuers. At June 30, 1996, on a pro forma basis after
giving effect to the Offering and the application of the estimated net
proceeds therefrom, the Issuers would have had approximately $1.1 million of
total indebtedness, other than the Senior Notes. The Senior Notes will be
guaranteed on a senior basis by all future Domestic Subsidiaries of the
Company (other than Capital Corp.). As of the date hereof, the Company has no
subsidiaries other than Capital Corp., which will be a Restricted Subsidiary.
The Indenture will limit the ability of the Company and its Restricted
Subsidiaries to incur additional indebtedness; however, the Company and its
Restricted Subsidiaries will be permitted to incur certain indebtedness, which
may be secured. See "Description of the Senior Notes--General" and "--Certain
Covenants." In the event of a bankruptcy, liquidation or reorganization of the
Company or any default in the payment of any indebtedness under any senior
secured credit facility or other secured indebtedness, holders of such secured
indebtedness will be entitled to payment in full from the proceeds of all
assets of the Company pledged to secure such indebtedness prior to any payment
of such proceeds to holders of the Senior Notes. Consequently, there can be no
assurance that the Company will have sufficient funds to make payments to
holders of the Senior Notes. See "Description of the Senior Notes."
RISK OF INABILITY TO SATISFY CHANGE OF CONTROL OFFER
Upon the occurrence of a Change of Control, each holder of Senior Notes will
have the right to require the Issuers to repurchase all or any part of such
holder's Senior Notes at an offer price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, thereon to
the date of purchase.
9
<PAGE>
There can be no assurance that the Issuers will have the funds necessary to
effect such a purchase if such an event were to occur. In the event a Change
of Control occurs at a time when the Issuers are unable to purchase the Notes,
the Issuers could seek to refinance the Notes. If the Issuers are unsuccessful
in refinancing the Notes, the Issuers' failure to purchase tendered Notes
would constitute an Event of Default under the Indenture. See "Description of
the Senior Notes--Repurchase at the Option of Holders--Change of Control."
LIMITED ABILITY OF CAPITAL CORP. TO SATISFY ITS OBLIGATIONS ON THE SENIOR
NOTES
Capital Corp., a wholly-owned subsidiary of the Company, has nominal assets
and will have a limited ability to satisfy its joint and several obligation as
a co-issuer of the Senior Notes due to its lack of substantial assets and
absence of business operations. Capital Corp. has no independent operations
and, therefore, is dependent on the cash flow of the Company to meet its own
obligations, including the payment of interest and principal obligations on
the Senior Notes when due. There can be no assurance that Capital Corp. will
have the funds necessary to satisfy its obligations under the Indenture. See
"Description of the Senior Notes."
NONRECOURSE NATURE OF THE SENIOR NOTES
The Senior Notes are being issued solely by the Issuers, which are the sole
obligors thereunder. None of the managing general partner, the general partner
of the managing general partner or the limited partners of the Company, or any
of their respective directors, officers, partners, stockholders, employees or
affiliates will be an obligor under the Senior Notes. The Indenture expressly
provides that the partners of the Company, together with their respective
directors, officers, partners, stockholders, employees or affiliates shall not
have any liability for any obligations of the Issuers under the Senior Notes
or the Indenture or any claim based on, in respect of or by reason of, such
obligations, and that by accepting the Senior Notes, each holder waives and
releases all such liability, which waiver and release are part of the
consideration for issuance of the Senior Notes. There should be no expectation
that the managing general partner, the general partner of the managing general
partner, the direct and indirect investors in the Company, or any person other
than the Issuers, will, in the future, fund the operations or deficits of the
Issuers or any of their subsidiaries. See "Description of the Senior Notes--No
Personal Liability of Directors, Officers, Employees, Partners and
Stockholders."
NET LOSSES FROM OPERATIONS; WORKING CAPITAL DEFICIT; EXTRAORDINARY ITEMS
The Company had net losses from operations of approximately $3.5 million,
$7.2 million and $5.7 million for the years ended December 31, 1993, 1994 and
1995, respectively, and $3.5 million and $4.2 million for the six-month
periods ended June 30, 1995 and 1996, respectively. During these periods, the
Company was highly leveraged and these losses resulted primarily from interest
payments on acquisition financing, accelerated amortization of income-
producing contracts acquired through acquisitions and other related
acquisition and financing costs. The Company anticipates a net loss from
operations for the year ended December 31, 1996. There can be no assurance
that the Company will not continue to incur net losses from operations. As of
June 30, 1996, the Company had a working capital deficit of $12.1 million.
There can be no assurance that the Company will not experience working capital
deficits in the future. In connection with the Offering, the Company will
recognize non-cash charges of approximately $3.9 million in connection with
write-offs of deferred financing fees, unamortized debt discount and
organizational costs. The Company will record additional future non-cash
charges to earnings in connection with its management option arrangements that
will adversely affect results of operations. The Company will also record a
non-recurring gain of approximately $3.0 million from the retirement at a
discount of a preferred interest in the Partnership in connection with the
Offering. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General."
DEPENDENCE ON SATELLITE DELIVERY CAPABILITIES
There are a limited number of satellites with orbital positions suitable for
DBS transmission of the Company's signals and a limited number of available
transponders on those satellites. Satellite transponders receive signals,
translate signal frequencies and transmit signals to receiving satellite dish
antennas. The
10
<PAGE>
Company leases transponder capacity from Microspace Communications Corporation
("Microspace"), which also provides facilities for uplink transmission of the
Company's medium-powered DBS signals to the transponders. Microspace, in turn,
leases its transponder capacity on satellites operated by third parties,
including the Galaxy IV satellite operated by Hughes Communications Galaxy
Inc. ("Hughes") through which a majority of the Company's DBS signals are
transmitted. The term of the Company's principal transponder lease with
Microspace for the Galaxy IV satellite runs through the life of that satellite
(which is expected to continue through 2004). Although there has never been
sustained interruption of the Company's DBS signals due to transponder failure
or satellite unavailability, failure or loss, no assurance can be given that
any such event will not occur in the future. If such an event were to occur or
if Microspace were unable to provide transponder services to the Company, the
Company would have to seek alternative transponder or satellite facilities.
However, alternative facilities may not be available on a timely or cost-
effective basis, may be available only on a satellite that is not positioned
as favorably as the Company's current satellites or may require a change in
the frequency currently used to transmit the Company's signal. Any one or more
of these events would require the Company to incur additional expenditures and
could degrade the Company's ability to serve its customer base and have a
material adverse effect on the Company's financial condition and results of
operations. If the Company is required to enter into new transponder lease
agreements, no assurance can be given that it will be able to do so on terms
as favorable as those in its current agreements with Microspace. See
"Business--Business Music Services."
DEPENDENCE ON ECHOSTAR AND ITS SATELLITES
In December 1995, the Company entered into several agreements with EchoStar,
a high-powered DBS home television service provider. Through these agreements,
the Company furnishes EchoStar with 30 channels of digital music programming,
of which 27 channels have begun to be distributed in stereo to EchoStar's
residential subscribers. The Company has only recently begun providing
services via EchoStar. There can be no assurance that either EchoStar's
business or the Company's relationship with EchoStar will be successful. In
addition, the Company's ability to expand its music services through the
EchoStar satellite system is subject to EchoStar's ability to provide
transponder capacity on its second high-powered direct broadcast satellite by
December 31, 1997, or, if a second satellite is not operational by that date,
EchoStar's willingness to allocate transponder capacity to the Company on
EchoStar's first satellite. The second EchoStar satellite was launched on
September 11, 1996, but there can be no assurance that the second satellite
will be operational in a timely manner. The Company is obligated to pay
certain fees, rents and royalties to EchoStar in connection with these
agreements. Any business failure of EchoStar, breach by EchoStar of its
agreements with the Company or failure by the Company to satisfy its
obligations to EchoStar, or any loss, failure or malfunction of the EchoStar
satellite system could impair the Company's ability to serve customers through
the EchoStar system. See "Business--Business Music Services" and "--EchoStar
Agreements."
UNPROVEN CAPABILITIES OF NEW SERVICES
The Company's operating strategy includes developing new services and
technologies to complement and expand its existing technologies and services.
This strategy presents risks inherent in assessing the value, strengths and
weaknesses of development opportunities, in evaluating the costs and uncertain
returns of new services and in integrating and managing new technologies.
Within these new markets, the Company will encounter technical, financial and
operating challenges, including competition from a variety of sources. There
can be no assurance that the Company will successfully develop new services or
that any new service will achieve market acceptance and generate additional
revenues or earnings for the Company.
The Company has recently started providing its Internet MusicServer SM
service, which permits music retailers and others to offer visitors to their
websites access to digitized 30-second samples from recordings in the
Company's library of recorded songs. At present, the economic viability of
Internet-based technologies, including the Company's Internet service, cannot
be ascertained. There is no assurance that music sampling on the Internet will
increase sales of compact discs, that extensive music-related content and
sales will be provided over the Internet or that any other service that the
Company may develop will achieve market acceptance. There
11
<PAGE>
can also be no assurance that the Internet will be able to support the high
bandwidth required for multimedia services, such as the MusicServerSM service.
There are also relatively limited barriers to entry to the Internet music-
sampling business, so that competition in the market may increase, and it is
not certain that the Company will be able to compete effectively with
competitive services on the Internet. There is also a risk that the record
companies that own the copyrights to the music used in the MusicServerSM
service will restrict the use of music samples by third parties, such as the
Company, or will decide to enter the Internet-based music-sampling business
directly. See "Business--Internet Services."
COMPETITION; TECHNOLOGICAL CHANGE
The Company competes in the business music and business services markets
with many competitors. In providing its business services, such as broadcast
data delivery, video, audio marketing and in-store advertising services, the
Company competes with numerous companies using broadcast as well as other
delivery systems to provide similar business services. There are numerous
methods by which programming, such as the Company's business music, broadcast
data delivery, video, audio marketing and in-store advertising services, can
be delivered by existing and future competitors, including medium and high-
powered DBS, wireless cable and fiber optic cable and digital compression over
existing telephone lines. Many competitors or potential competitors with
access to these delivery technologies have substantially greater financial,
technical, personnel and other resources than the Company.
The communications, media and entertainment industries are undergoing
significant and rapid change, including strategic relationships and the
development of new services, delivery systems and interactive technologies.
Many other companies also offer DBS services and strategic relationships
between these companies and cable, telephone, media and other related
businesses may provide increased competition in the future using new systems
and technologies to deliver business music, business data and other similar
services. In addition, the recently enacted Telecommunications Act of 1996
(the "Telecommunications Act") may increase competition in the markets in
which the Company operates. No assurance can be given that the Company will be
able to compete successfully with existing or potential new competitors using
new delivery methods and technologies, or that discoveries or improvements in
the communications, media and entertainment industries will not render
obsolete some or all of the technologies or delivery systems currently relied
upon by the Company. See "Business--Competition."
No assurance can be given that the Company will be able to compete
successfully with its existing or potential new competitors or to maintain or
increase its current market share, that it will be able to use, or compete
effectively with competitors that adopt, new delivery methods and
technologies, or that discoveries or improvements in the communications, media
and entertainment industries will not render obsolete some or all of the
technologies or delivery systems currently relied upon by the Company.
DEPENDENCE ON LICENSED RIGHTS; RISK OF INCREASED FEES
The Company and other business music providers license rights to rerecord
and distribute music from a variety of sources and pay royalties to
songwriters and publishers through contracts negotiated with performing rights
societies such as the American Society of Composers, Authors and Publishers
("ASCAP"), Broadcast Music, Inc. ("BMI") and the Society of European Stage
Authors and Composers ("SESAC"). The industry-wide agreement between business
music providers (including the Company) and ASCAP runs through 1999;
agreements with BMI and SESAC expired on December 31, 1993 and December 31,
1995, respectively, and new agreements are being negotiated. In 1995, the fees
paid by the Company to ASCAP, BMI and SESAC were approximately $2.6 million,
$946,000 and $7,000, respectively. The interim fee structure with BMI provides
for continued licensing at the 1993 payment levels. The BMI license extension
stipulates that any settlement of ongoing fees may include retroactivity to
January 1, 1994. If the fees paid by the Company to these licensors increase,
the Company's operating margin could be adversely affected, although the
Company does not believe that its liquidity or financial condition would be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Music Licenses."
12
<PAGE>
RELIANCE ON KEY PERSONNEL
The Company is dependent on the continued services of its senior management
personnel. The Company has in effect a $4.0 million key man term life
insurance policy covering John R. Jester, the Company's President and Chief
Executive Officer, but there can be no assurance that the coverage provided by
such policy will be sufficient to compensate the Company for the loss of
Mr. Jester's services. The Company believes that the loss of any one member of
senior management would not have a material adverse effect upon the Company.
However, the loss of the services of more than one member of senior management
could have a material adverse effect upon the Company. See "Management."
CERTAIN BENEFITS TO PRINCIPAL OWNERS AND MANAGEMENT
The Company intends to use a portion of the net proceeds of the Offering to
repay approximately $49.2 million of indebtedness outstanding under the
Company's existing senior credit facility, which is secured by, among other
things, the interests in the Company held by MLP, and the Named Executive
Officers referred to in "Management--Executive Compensation," Wallace R.
Borgeson, Bruce B. Funkhouser, L. Dale Stewart, Jack D. Craig, Richard
Chaffee, Roger C. Fairchild, J. Gary Henderson, Susan P. Chetwin, Dino J.
DeRose, Daniel Lee Hart and Steven Tracy (the "Management Investors"), and
their respective affiliates.
RISKS OF ADVERSE EFFECTS OF GOVERNMENT REGULATION
The Company is subject to the regulatory authority of the U.S. government
and the governments of other countries in which it provides services to
subscribers. The business prospects of the Company could be adversely affected
by the adoption of new laws, policies or regulations that modify the present
regulatory environment. The Company currently provides music services in a few
areas in the United States through 928 to 960 megahertz radio broadcast
frequencies, which are transmission facilities licensed by the Federal
Communications Commission ("FCC"). Additionally, the radio frequencies
utilized by satellites on which the Company transmits its DBS services in the
United States are licensed by the FCC. If the FCC authorizations for any of
these satellites are revoked or are not extended, the Company would be
required to seek alternative satellite facilities. Laws, regulations and
policy, or changes therein, in other countries could adversely affect the
Company's existing services or restrict the growth of the Company's business
in these countries.
FRAUDULENT CONVEYANCE
Management believes that the indebtedness represented by the Senior Notes is
being incurred for proper purposes and in good faith, and that, based on
present forecasts, internal asset valuations and other financial information,
the Issuers are, and after the consummation of the Offering will be, solvent,
will have sufficient capital for carrying on their business and will be able
to pay their debts as they mature. Notwithstanding management's belief,
however, if a court of competent jurisdiction in a suit by an unpaid creditor
or a representative of creditors (such as a trustee in bankruptcy or a debtor-
in-possession) were to find that, at the time of the incurrence of such
indebtedness, the Issuers were insolvent, were rendered insolvent by reason of
such incurrence, were engaged in a business or transaction for which their
remaining assets constituted unreasonably small capital, intended to incur, or
believed that they would incur, debts beyond their ability to pay such debts
as they matured, or intended to hinder, delay or defraud their creditors, and
that the indebtedness was incurred for less than reasonably equivalent value,
then such court could, among other things, (a) void all or a portion of the
Issuers' obligations to the holders of the Senior Notes, the effect of which
would be that the holders of the Senior Notes might not be repaid in full,
and/or (b) subordinate the Issuers' obligations to the holders of the Senior
Notes to other existing and future indebtedness of the Issuers, the effect of
which would be to entitle such other creditors to be paid in full before any
payment could be made on such Senior Notes.
ABSENCE OF PUBLIC MARKET; ILLIQUIDITY; MARKET VALUE
The Senior Notes will not be listed on any national securities exchange or
included for quotation through an inter-dealer quotation system. The Senior
Notes constitute new issues of securities with no established trading market.
Although the Underwriters have indicated that they presently intend to make a
market in the Senior
13
<PAGE>
Notes, there can be no assurance that a trading market will develop or, if any
such market develops, that it would continue to exist. Such market-making may
be discontinued at any time. Therefore, an investment in the Senior Notes may
be illiquid. In addition, the Senior Notes may trade at a discount from their
initial offering prices, depending upon prevailing interest rates, the market
for similar securities and other factors. In addition, because Lazard (as
defined) may be deemed to be an affiliate of the Issuers, Lazard will be
required to deliver a current "market-maker" prospectus and otherwise to
comply with the registration requirements of the Securities Act in connection
with any secondary market sale of the Senior Notes, which may affect its
ability to continue market-making activities. Any or all of the foregoing may
have an adverse effect on the market value of the Senior Notes.
14
<PAGE>
THE ISSUERS
The Company is the leading provider of business music in the United States,
based on the number of customer locations served. The Company also offers its
customers a range of non-music services, including broadcast data delivery,
video, audio marketing and in-store advertising services, and sells, installs
and services related equipment.
The Company was formed in September 1992 by CCI, a private investment
partnership of which Centre Partners is the general partner, in order to
effectuate the 1992 Acquisition. MLP, an affiliate of CCI, and the Management
Investors beneficially own approximately 62.9% and 9.7%, respectively, of the
outstanding partnership interests of the Company. Capital Corp., a Delaware
corporation, is acting as co-obligor for the Senior Notes. Capital Corp. is a
wholly-owned subsidiary of the Company which has nominal assets and will not
conduct any operations. Certain institutional investors that might otherwise
be limited in their ability to invest in securities offered by partnerships by
reason of the investment laws of their states of organization or their charter
documents may be able to invest in the Senior Notes because Capital Corp. is a
corporation. A portion of the net proceeds from the Offering will be used to
retire indebtedness incurred in the 1992 Acquisition. See "Use of Proceeds."
The Company's business was founded in 1934. The Issuers' principal executive
offices are located at 2901 Third Avenue, Suite 400, Seattle, Washington
98121, and their telephone number is (206) 633-3000.
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $96.5 million.
Of such proceeds, approximately $49.2 million will be used to repay
outstanding senior secured indebtedness payable in semi-annual installments
through January 2001 and bearing interest at an effective rate of 10.6% per
annum at June 30, 1996 and approximately $12.5 million will be used to repay
outstanding subordinated indebtedness bearing interest at an effective rate of
14.5% per annum and due in installments between September 2001 and September
2002. In addition, approximately $7.5 million will be used to repurchase the
Company's Class C Limited Partner Interest with a recorded value of
approximately $10.4 million. The balance of the net proceeds, approximately
$27.3 million, will be used for general corporate purposes, which may include
acquisitions of the Company's franchisees to further its operating strategy,
other acquisitions or investment opportunities and working capital. The
Company has no material arrangement, commitment or understanding with respect
thereto. Pending such use, the balance of the proceeds will be invested in
short-term investment grade obligations as permitted by the Indenture.
15
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents, short-term
debt and capitalization of the Company at June 30, 1996 and as adjusted to
give effect to the Offering. The information presented below should be read in
conjunction with the financial statements of the Company and the historical
and pro forma financial data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1996
-----------------------
(DOLLARS IN THOUSANDS)
ACTUAL AS ADJUSTED(1)
<S> <C> <C>
Cash and cash equivalents.............................. $ 3,239 $ 30,533
======= ========
Short-term borrowings and current portion of long-term
debt.................................................. $17,121 $ 391
======= ========
Long-term debt (excluding current portion):
Senior secured credit facility....................... $32,519 $ --
Senior Notes......................................... -- 100,000
14.5% subordinated indebtedness (net of unamortized
discount of $1,412)................................. 11,088 --
Other long-term debt................................. 694 694
------- --------
Total long-term debt (excluding current por-
tion)........................................... 44,301 100,694
------- --------
Redeemable preferred partnership interest.............. 16,265 5,891
------- --------
Partners' capital (deficit):
Limited interests.................................... 4,328 3,955
General interests.................................... (7,528) (8,222)
------- --------
Total partners' deficit.............................. (3,200) (4,267)
------- --------
Total capitalization............................. $57,366 $102,318
======= ========
</TABLE>
- ---------------------
(1) Adjusted to reflect the Offering and the application of the net proceeds
therefrom.
16
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information sets forth historical
information which has been adjusted to reflect (i) the application of the net
proceeds of the Offering to repay $49.2 million of senior secured indebtedness
and $12.5 million of subordinated debt, (ii) the repurchase of the Class C
Limited Partner Interest which has a recorded value of approximately $10.4
million for approximately $7.5 million and (iii) a related impact on interest
expense.
No effect has been given in the Statements of Operations Data to non-
recurring expenses for the year ended December 31, 1995 and six-month period
ended June 30, 1996 for (i) the write-off of $3,056,000 and $2,572,000,
respectively, of deferred financing costs and (ii) the write-off of $1,536,000
and $1,412,000, respectively, of unamortized discount, both of which are
associated with long-term obligations expected to be repaid with the proceeds
of the Offering. In addition, no effect has been given to the extraordinary
gain of $2,573,000 and $2,917,000 for the year ended December 31, 1995 and
six-months ended June 30, 1996, respectively, associated with the retirement
of the Class C Limited Partner Interest at less than its recorded value of
$10.4 million.
The Unaudited Pro Forma Statements of Operations Data assumes that the
Offering took place on January 1, 1995, the beginning of the earliest period
presented. The Unaudited Balance Sheet Data assumes the Offering took place on
June 30, 1996. The pro forma information is based on certain assumptions and
estimates that management believes are reasonable in the circumstances and
does not purport to be indicative of the results which actually would have
been attained had the above transactions occurred at the dates indicated or
the results which may be attained in the future. This information should be
read in conjunction with the Company's audited financial statements and
related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
--------------------------- -----------------------------
(DOLLARS IN THOUSANDS)
PRO FORMA PRO PRO FORMA PRO
ACTUAL ADJUSTMENTS FORMA ACTUAL ADJUSTMENTS FORMA
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Total interest ex-
pense................ $7,483 $34 (1) $ 7,517 $ 3,574 $ 126 (1) $ 3,700
Net income (loss)..... (5,714) (34) (5,748) (4,175) (126) (4,301)
OTHER INFORMATION:(2)
Total interest ex-
pense(1)............. -- -- $ 7,517 -- -- $ 3,700
Ratio of EBITDA to to-
tal interest
expense.............. -- -- 2.66x -- -- 2.50x
Ratio of earnings to
fixed charges(3)..... -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
----------------------------------
(DOLLARS IN THOUSANDS)
OFFERING
ACTUAL ADJUSTMENTS AS ADJUSTED
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 3,239 $27,294 (4) $ 30,533
Total assets.............................. 95,358 28,222 (5) 123,580
Total long-term obligations, including
current portion.......................... 50,672 50,413 (6) 101,085
Redeemable preferred partnership inter-
ests..................................... 16,265 (10,374)(7) 5,891
Total partners' deficit................... (3,200) (1,067)(8) (4,267)
Ratio of net debt to LTM EBITDA(9)........ -- -- 3.55x
</TABLE>
- ---------------------
(1) Total interest expense consists of cash interest expense on the Senior
Notes at an assumed rate of 11% plus the amortization of deferred debt
issuance costs. Pro forma total interest expense gives effect to the
issuance of the Senior Notes only to the extent that the proceeds
therefrom are used to repay existing indebtedness.
17
<PAGE>
Historical interest expense was adjusted as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
<S> <C> <C>
Average principal balance refinanced by Senior
Notes............................................. $62,800 $61,750
Assumed interest rate.............................. 11% 11%
------- -------
6,908 3,396
Amortization of new deferred issuance costs........ 500 250
Other interest expense............................. 109 54
------- -------
Pro forma interest expense......................... 7,517 3,700
Less: actual interest expense and amortization of
historical financing fees......................... 7,483 3,574
------- -------
Net increase in interest expense................... $ 34 $ 126
======= =======
</TABLE>
Giving effect to the full amount of the Senior Notes, cash paid for
interest would have been $11.1 million and $5.6 million for the year ended
December 31, 1995 and the six-month period ended June 30, 1996,
respectively. Each 1/4% change in the assumed interest rate on the Senior
Notes would increase/decrease pro forma total interest expense by $0.3
million.
(2) Gives pro forma effect to the Offering and the application of $61.7
million of the net proceeds therefrom to repay existing indebtedness as if
the Offering had taken place on January 1, 1995.
(3) For purposes of computing the ratio of earnings to fixed charges, earnings
include net loss attributable to general and limited partners, plus
redeemable preferred returns and interest expense, including that portion
of lease expense attributable to interest costs. Fixed charges consist of
preferred returns and interest expense, including that portion of lease
expense attributable to interest costs. On a pro forma basis, earnings
were insufficient to cover fixed charges by $6.6 million and $4.7 million
for the year ended December 31, 1995 and the six-month period ended June
30, 1996, respectively.
(4) Reflects the increase in cash and cash equivalents in an amount equal to
net proceeds in excess of refinanced debt and the retirement of the Class
C Limited Partner Interest calculated as follows:
<TABLE>
<S> <C>
Net proceeds................................................... $ 96,500
Less refinanced debt........................................... (61,749)
Less Class C Limited Partner Interest.......................... (7,457)
--------
Net increase in cash and cash equivalents.................... $ 27,294
========
</TABLE>
(5) Reflects increase in total assets due to the following transactions:
<TABLE>
<S> <C>
Net increase in cash and cash equivalents....................... $27,294
Write-off of deferred financing fees on refinanced debt......... (2,572)
Deferred debt issuance cost on Senior Notes..................... 3,500
-------
Net increase in total assets.................................. $28,222
=======
</TABLE>
(6) Reflects the increase in outstanding indebtedness as a result of the
Offering and the application of net proceeds therefrom:
<TABLE>
<S> <C>
Retirement of senior secured indebtedness..................... $(38,499)
Retirement of subordinated debt............................... (12,500)
Write-off of unamortized debt discount........................ 1,412
Issuance of Senior Notes...................................... 100,000
--------
Net increase in outstanding indebtedness.................... $50,413
========
</TABLE>
(7) Reflects the decrease in Class C Limited Partner Interest as a result of
the Offering and the application of net proceeds therefrom:
<TABLE>
<S> <C>
Class C Limited Partner Interest with a recorded value of
$10.4 million.............................................. $( 7,457)
Gain on retirement of Class C Limited Partner Interest...... (2,917)
--------
Net decrease in redeemable preferred partnership inter-
ests..................................................... $(10,374)
========
</TABLE>
18
<PAGE>
(8) Reflects the write-off of deferred financing costs and unamortized debt
discount associated with the refinanced debt net of a gain on retirement
of redeemable preferred partnership interests:
<TABLE>
<S> <C>
Write-off of deferred financing costs.......................... $(2,572)
Write-off of unamortized debt discount......................... (1,412)
Gain on the retirement of Class C Limited Partner Interest..... 2,917
-------
Net increase in partners' deficit............................ $(1,067)
=======
</TABLE>
(9) For purposes of calculating the ratio of net debt to LTM EBITDA, net debt
is defined as total long-term obligations (including the current portion
thereof) less cash and cash equivalents, and LTM EBITDA is defined as
EBITDA for the twelve months ended June 30, 1996.
19
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain selected historical and financial and
operating data of the Company and the Predecessor as of the dates and for the
periods indicated. The following selected financial data are qualified by
reference to, and should be read in conjunction with, the financial statements,
related notes and other financial information included elsewhere in this
Prospectus, as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The statements of operations data set
forth below for each of the three years in the period ended December 31, 1995
and the balance sheet data at December 31, 1994, and 1995 are derived from the
financial statements of the Company audited by Deloitte & Touche LLP,
independent auditors, which are included elsewhere in this Prospectus.
The statements of operations data for the year ended December 31, 1991, the
eight-month period ended August 31, 1992 and the four-month period ended
December 31, 1992 and the balance sheet data at of December 31, 1991, August
31, 1992, and December 31, 1992 and 1993 are derived from audited financial
statements of the Predecessor and the Company, respectively, which are not
included herein.
The statements of operations data for the six-month periods ended June 30,
1995 and 1996 and the balance sheet data as of June 30, 1996 are derived from
unaudited financial statements of the Company that, in the opinion of
management, reflect all adjustments, which are of a normal recurring nature,
necessary to present fairly the information set forth therein. The results for
the six-month period ended June 30, 1996 are not necessarily indicative of the
results that may be expected for any other interim period or for the full year.
The pro forma financial information is based on certain assumptions and
estimates that management believes are reasonable in the circumstances and does
not purport to be indicative of the results which actually would have been
attained had the transactions described in the Unaudited Pro Forma Financial
Information occurred at the dates indicated or the results which may be
attained in the future. See "Unaudited Pro Forma Financial Information."
20
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------------ ----------------------------------------------------------
EIGHT FOUR
YEAR MONTHS MONTHS SIX MONTH PERIOD
ENDED ENDED ENDED YEAR ENDED DECEMBER 31, ENDED JUNE 30,
DEC. 31, AUG. 31, DEC. 31, ---------------------------- ------------------
1991 1992 1992 1993 1994(1) 1995 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Music and other busi-
ness services......... $ 36,689 $ 23,771 $ 12,039 $ 36,800 $ 50,410 $ 52,489 $ 25,916 $ 26,977
Equipment and related
services.............. 19,318 12,102 6,602 21,741 33,006 34,392 16,646 15,179
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues......... 56,007 35,873 18,641 58,541 83,416 86,881 42,562 42,156
-------- -------- -------- -------- -------- -------- -------- --------
Cost of revenues:
Music and other busi-
ness services......... 9,652 6,420 3,249 10,611 13,685 14,465 7,063 7,501
Equipment and related
services.............. 14,753 9,513 5,235 16,756 23,413 23,895 11,465 10,303
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of reve-
nues.................. 24,405 15,933 8,484 27,367 37,098 38,360 18,528 17,804
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............ 31,602 19,940 10,157 31,174 46,318 48,521 24,034 24,352
Selling, general & ad-
ministrative expenses.. 19,009 14,230 5,846 19,603 28,699 28,496 14,628 15,107
Depreciation............ 8,187 3,990 1,349 4,349 8,211 9,382 4,669 5,155
Amortization............ 6,936 5,005 2,259 6,942 9,622 8,909 4,443 4,463
-------- -------- -------- -------- -------- -------- -------- --------
Operating income
(loss)................. (2,530) (3,285) 703 280 (214) 1,734 294 (373)
Interest expense........ 7,514 3,639 1,228 3,785 6,990 7,483 3,791 3,574
Other (income) expense,
net.................... (539) (949) (57) (30) (21) (35) (42) 228
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)....... (9,505) (5,975) (468) (3,475) (7,183) (5,714) (3,455) (4,175)
Redeemable preferred re-
turns.................. -- -- (188) (572) (933) (1,029) (506) (543)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) at-
tributable to general
and limited partners... $ (9,505) $ (5,975) $ (656) $ (4,047) $ (8,116) $ (6,743) $ (3,961) $ (4,718)
======== ======== ======== ======== ======== ======== ======== ========
OTHER INFORMATION:
Gross profit margin(2).. 56.4% 55.6% 54.5% 53.3% 55.5% 55.8% 56.5% 57.8%
EBITDA(3)............... $ 12,593 $ 5,710 $ 4,311 $ 11,571 $ 17,619 $ 20,025 $ 9,406 $ 9,245
Capital expendi-
tures(4)............... 7,722 5,034 3,628 8,235 13,804 12,757 6,043 7,416
Ratio of earnings to
fixed charges(5)....... -- -- -- -- -- -- -- --
Estimated number of do-
mestic customer loca-
tions:
Company................ 32,000 32,000 32,000 33,000 56,000 60,000 58,000 62,000
Franchisees............ 102,000 104,000 112,000 116,000 103,000 111,000 107,000 118,000
-------- -------- -------- -------- -------- -------- -------- --------
Total................. 134,000 136,000 144,000 149,000 159,000 171,000 165,000 180,000
======== ======== ======== ======== ======== ======== ======== ========
Estimated number of do-
mestic DBS customer lo-
cations:
Company................ 5,000 7,000 8,000 12,000 29,000 35,000 32,000 38,000
Franchisees............ 21,000 31,000 36,000 49,000 55,000 72,000 64,000 82,000
-------- -------- -------- -------- -------- -------- -------- --------
Total................. 26,000 38,000 44,000 61,000 84,000 107,000 96,000 120,000
======== ======== ======== ======== ======== ======== ======== ========
PRO FORMA INFORMA-
TION:(6)
Total interest ex-
pense(7).............. -- -- -- -- -- $ 7,517 -- $ 3,700
Ratio of EBITDA to to-
tal interest expense.. -- -- -- -- -- 2.66x -- 2.50x
Ratio of earnings to
fixed charges(5)...... -- -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
----------------- ---------------------------------------------------------
AT AT AT AT DECEMBER 31, AT JUNE 30, 1996
DEC. 31, AUG. 31, DEC. 31, ------------------------ -----------------------
1991 1992 1992 1993 1994 1995 ACTUAL AS ADJUSTED(8)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 2,171 $ 2,070 $ 1,441 $ 1,436 $ 1,445 $ 1,115 $ 3,239 $ 30,533
Total assets............ 62,939 58,837 66,598 66,294 103,092 96,439 95,358 123,580
Total long-term
obligations, including
current portion........ 39,111 37,889 36,218 35,022 56,833 53,005 50,672 101,085
Redeemable preferred
partnership interests.. -- -- 8,188 8,760 14,693 15,722 16,265 5,891
Partners' capital
(deficit).............. 11,259 7,284 12,199 8,047 7,943 1,373 (3,200) (4,267)
Ratio of net debt to LTM
EBITDA(9).............. -- -- -- -- -- -- -- 3.55x
</TABLE>
(footnotes on following page)
21
<PAGE>
(footnotes to table on preceding page)
- -------------------
(1) Includes the results of Comcast from January 31, 1994. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(2) Gross profit margin represents gross profit as a percentage of total
revenues.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization and other income/expense. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles. The Company, however, believes that EBITDA provides useful
information regarding a company's ability to service and/or incur
indebtedness.
(4) Includes additions to property and equipment and additions to deferred
costs and intangible assets.
(5) For purposes of computing the ratio of earnings to fixed charges, earnings
include net loss attributable to general and limited partners, redeemable
preferred returns and interest expense, including that portion of lease
expense attributable to interest costs. Fixed charges consist of preferred
returns and interest expense, including that portion of lease expense
attributable to interest costs. Earnings were insufficient to cover fixed
charges by $9.5 million, $6.0 million, $0.7 million, $4.0 million, $8.1
million, $6.7 million, $4.0 million and $4.7 million for the year ended
December 31, 1991, the eight-month period ended August 31, 1992, four-
month period ended December 31, 1992, the years ended December 31, 1993,
1994, and 1995, and the six-month periods ended June 30, 1995 and 1996,
respectively. On a pro forma basis, earnings were insufficient to cover
fixed charges by $6.0 million and $4.4 million for the year ended December
31, 1995 and the six-month period ended June 30, 1996, respectively.
(6) Gives pro forma effect to the Offering and the application of $61.7
million of the estimated net proceeds therefrom to repay existing
indebtedness as if the Offering had taken place on January 1, 1995.
(7) Total interest expense consists of cash interest expense on the Senior
Notes at an assumed rate of 11% plus the amortization of deferred debt
issuance costs. Pro forma total interest expense gives effect to the
issuance of the Senior Notes only to the extent that the proceeds
therefrom are used to repay existing indebtedness. Giving effect to the
full amount of the Senior Notes, cash interest expense would have been
$11.1 million and $5.6 million for the year ended December 31, 1995 and
the six-month period ended June 30, 1996, respectively. The ratio of
EBITDA for the twelve months ended June 30, 1996 to cash interest expense
for the same period (excluding the impact of any interest income earned on
the Company's cash balances) would have been 1.79x.
(8) As adjusted to give effect to the Offering and the application of the
estimated net proceeds therefrom as if the Offering had taken place on
June 30, 1996.
(9) For purposes of calculating the ratio of net debt to LTM EBITDA, net debt
is defined as total long-term obligations (including the current portion
thereof) less cash and cash equivalents, and LTM EBITDA is defined as
EBITDA for the twelve months ended June 30, 1996.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company operates as a limited partnership and as such, the income tax
effects of all earnings or losses of the Company are passed directly to the
partners and no provision for income taxes is required.
In January 1994, the Partnership acquired the assets of its largest
franchisee, Comcast, for approximately $33.0 million (the "Comcast
Acquisition"). Operating results in 1994 include eleven months of Comcast
operations, while operating results in 1995 include a full year of Comcast
operations. The former Comcast operations represented approximately 28% of the
Company's revenues in 1995. Following the Comcast Acquisition, the Company
eliminated redundant administrative and field operations, resulting in
annualized net savings estimated by the Company to be approximately $1.8
million, the majority of which was realized immediately.
The Company derives revenues from its business services and from the sale,
installation and servicing of customer premises equipment. The Company's
principal business services include broadcast music services, on-premise
tapes, on-premise music video, audio marketing and in-store advertising.
Business services represented approximately 60% of total revenues in 1995.
Equipment and related revenues accounted for the remaining 40% of 1995
revenues. A large majority of the Company's broadcast and on-premise tape
revenues are generated from subscribers who typically execute five-year
contracts at rates ranging from $35 to $75 per month. These subscription rates
typically include the provision of the Company's equipment for use at the
subscriber's location. Royalties received from franchisees and international
distributors are included in broadcast music revenues and represented
approximately 7.9% of total revenues in 1995. The Company's franchisees pay
royalties to the Company based generally on 10% to 11.5% of adjusted music
revenues, which are broadcast music revenues less licensing payments and bad
debt write-offs. In-store advertising revenues are generated from the sale of
advertising for delivery to certain subscribers. On-premise music video
revenues are derived from the sale of specialized on-premise music videos
targeted for certain segments of the market place. Audio marketing revenues
are generated primarily from the sale of customized audio messages for use
with "on-hold" telephone systems. The Company also provides other broadcast
business services, including AdParting(R), data delivery services, custom
business television and other music-related services.
Equipment revenues are derived from the sale or lease of audio system-
related products, principally sound systems and intercoms, to business music
subscribers and other customers. The Company also sells electronic equipment,
principally DBS receivers and dishes, as well as proprietary tape playback
equipment, audio and video equipment to its franchisees to support their
business music services. Installation, service and repair revenues consist
principally of revenues from the installation of sound systems and other
equipment that is not expressly part of a business music contract, such as
paging, security and drive-through systems. These revenues also include
revenue from the installation, service and repair of equipment installed under
a business music contract. Music contract installation revenues are deferred
and recognized over the term of the respective contracts.
Cost of revenues for business services consists primarily of broadcast,
delivery, manufacturing, licensing and research costs associated with
providing music and other business services to a subscriber or a franchisee.
Cost of revenues for equipment represents the purchase cost plus handling,
shipping and warranty expenses. Cost of revenues for installation, service and
repair consists primarily of service and repair labor and labor for
installation that is not associated with new business music subscribers.
Installation costs associated with new business music subscribers are
capitalized and charged to depreciation expense over ten years.
Selling, general and administrative expenses include salaries, benefits,
commissions, travel, marketing materials, training and occupancy costs
associated with staffing and operating local and national sales offices. Such
expenses also include personnel and other costs in connection with the
Company's headquarters functions. A significant portion of commissions and
certain other selling costs are capitalized on a successful-efforts basis and
charged as amortization expense over the average contract term of five years
and, accordingly, are not
23
<PAGE>
reflected in selling, general and administrative expenses. The Company
capitalized $1.3 million, $2.8 million and $3.2 million of such costs in 1993,
1994 and 1995, respectively.
The Company amortizes leasehold improvements over the shorter of the lease
term or five years and deferred costs and intangible assets over lives ranging
from two and one-half to ten years. These deferred costs and intangible assets
consist of the costs associated with subscriber contracts acquired from third
parties (typically amortized on an accelerated basis over eight years),
commissions and certain other sales related expenses (five years), the
acquisition and production costs of a music library (typically five years),
organizational expenses related to acquiring certain franchise operations
(five years) and capitalized financing costs (over the life of the loans).
As part of the Offering, the Company will adopt a performance-based Amended
and Restated Management Option Plan (the "Amended and Restated Option Plan")
that replaces an option plan implemented in connection with the 1992
Acquisition. The options granted under the Amended and Restated Option Plan
represent the same proportionate equity interest and carry equivalent exercise
prices as the options granted under the original plan. The Company has not
been required to record non-cash compensation expense for the original plan
because those options were not deemed exercisable. The Amended and Restated
Option Plan will result in non-cash compensation being recorded in the future.
Non-cash compensation expense will be determined with respect to options under
the Amended and Restated Option Plan based on the difference between the
exercise price and the fair value of the partnership units and recognition of
expense will begin when it is deemed that the options are, in the judgment of
management, likely to become exercisable. Such expense will be recognized from
that date to the date the options actually become exercisable and will appear
in the Company's Statement of Operations as part of operating income (loss) on
a separate line item entitled "Non-cash incentive compensation expense."
Capital Corp., a wholly-owned subsidiary of the Company, was organized on
May 8, 1996, has nominal assets and conducts no business operations. Capital
Corp. has no independent operations and is dependent on the cash flow of the
Company to meet its sole obligation, the payment of interest and principal on
the Senior Notes when due. A discussion of Capital Corp. has been omitted in
the period-to-period comparison that follows due to its limited history, lack
of significant assets and lack of operations. See "Risk Factors--Limited
Ability of Capital Corp. to Satisfy its Obligations on the Senior Notes."
24
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial information for the periods
presented and should be read in conjunction with the Company's Financial
Statements, including the Notes thereto, appearing elsewhere in this
Prospectus:
<TABLE>
<CAPTION>
SIX-MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, JUNE 30, PERCENTAGE CHANGE
------------------------- ---------------- -----------------------------
FIRST HALF
1996 VS.
1994 VS. 1995 VS. FIRST HALF
1993 1994 1995 1995 1996 1993 1994 1995
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Business services:
Broadcast music........ $28,023 $39,519 $40,664 $20,166 $20,858 41.0 % 2.9 % 3.4 %
On-premise tapes....... 5,067 5,434 4,895 2,483 2,236 7.2 (9.9) (9.9)
Other broadcast........ 950 1,227 1,403 669 742 29.2 14.3 10.9
On-premise music vid-
eo.................... 1,010 1,257 1,741 735 1,029 24.5 38.5 40.0
Audio marketing........ 769 1,615 2,027 970 1,199 110.0 25.5 23.6
In-store advertising... 306 814 913 550 320 166.0 12.2 (41.8)
Other.................. 675 544 846 343 593 (19.4) 55.5 72.9
------- ------- ------- ------- -------
Total music and other
business services... 36,800 50,410 52,489 25,916 26,977 37.0 4.1 4.1
------- ------- ------- ------- -------
Equipment.............. 15,885 23,060 23,901 11,641 10,400 45.2 3.6 (10.7)
Installation, service
and repair............ 5,856 9,946 10,491 5,005 4,779 69.8 5.5 (4.5)
------- ------- ------- ------- -------
Total equipment and
related services.... 21,741 33,006 34,392 16,646 15,179 51.8 4.2 (8.8)
------- ------- ------- ------- -------
Total revenues....... 58,541 83,416 86,881 42,562 42,156 42.5 4.2 (1.0)
Gross profit:
Business services...... 26,188 36,725 38,024 18,853 19,476 40.2 3.5 3.3
Equipment.............. 5,139 9,596 10,450 5,206 4,970 86.7 8.9 (4.5)
Installation, service
and repair............ (153) (3) 47 (25) (94) -- -- --
------- ------- ------- ------- -------
Total gross profit... 31,174 46,318 48,521 24,034 24,352 48.6 4.8 1.3
Gross profit margin(1).. 53.3% 55.5% 55.8% 56.5% 57.8%
Selling, general and
administrative ex-
penses................. $19,603 $28,699 $28,496 $14,628 $15,107 46.4 (0.7) 3.3
S,G&A margin(2)......... 33.5% 34.4% 32.8% 34.4% 35.8%
EBITDA(3)............... $11,571 $17,619 $20,025 $ 9,406 $ 9,245 52.3 13.7 (1.7)
EBITDA margin(4)........ 19.8% 21.1% 23.0% 22.1% 21.9%
Net income (loss)....... $(3,475) $(7,183) $(5,714) $(3,455) $(4,175) -- -- --
</TABLE>
- ---------------------
(1) Gross profit margin represents gross profit as a percentage of total
revenues.
(2) S,G&A margin represents selling, general and administrative expenses as a
percentage of total revenues.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation, amortization and other income/expense. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles. The Company, however, believes that EBITDA provides useful
information regarding a company's ability to service and/or incur
indebtedness.
(4) EBITDA margin represents EBITDA as a percentage of total revenues.
SIX-MONTH PERIOD ENDED JUNE 30, 1996 COMPARED TO SIX-MONTH PERIOD ENDED JUNE
30, 1995
Revenues. Total revenues decreased 1.0% from $42.6 million in the first six
months of 1995 to $42.2 million in the first six months of 1996 as a result of
an 8.8% decrease in equipment and related services revenues that was partially
offset by a 4.1% increase in business services revenues. Equipment sales
decreased 10.7% as the Company maintained its focus on higher margin sales and
reduced its participation in lower margin competitively bid equipment sales.
Starting in late 1995, the Company also began to deemphasize the sale of
equipment not integral to the Company's business services. Installation,
service and repair revenues decreased from strong levels generated in the 1995
period due to fewer installations of large equipment jobs in the 1996 period.
Broadcast music revenues grew 3.4% in the 1996 period due to increased demand
and the conversion of on-premise tape subscribers to broadcast music services,
which was offset in part by the cancellation of three national broadcast
accounts during the 1996 period. On-premise tape revenues continued to decline
principally due to the Company's conversion of many of these customers to
broadcast services. On-premise music video, audio marketing and other
broadcast services revenues continued to benefit from growing demand for these
25
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services, as a group increasing 25.1% in the 1996 period over the 1995 period.
In-store advertising revenues declined 41.8% principally due to sales to a
single customer in the first six months of 1995 that did not continue into the
last six months of 1995 or the first six months of 1996. Other business
services revenues increased as a result of an increase in reimbursable
satellite fee revenue and the one-time sale of proprietary software and other
rights to Muzak Europe.
Gross Profit. Total gross profit increased 1.3% from $24.0 million in the
first six months of 1995 to $24.4 million for the first six months of 1996
while the gross profit margin increased from 56.5% to 57.8%, respectively.
This improvement was principally due to an improvement in equipment sales
gross profit margin from 44.7% in the 1995 period to 47.8% in the 1996 period
reflecting sales of higher margin equipment. This improvement was partially
offset by a slight decline in the business services gross profit margin
primarily due to lower in-store advertising and on-premise tape revenues and a
decrease in on-premise music video margin, combined with higher compensation,
satellite and licensing costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 3.3% from $14.6 million in the first six
months of 1995 to $15.1 million in the first six months of 1996 and increased
as a percentage of total revenues from 34.4% to 35.8%, respectively. Selling
and marketing expenses remained essentially unchanged at $5.4 million for the
first six months of 1995 and 1996. General and administrative expenses
increased 5.1% from $9.2 million in the first six months of 1995 to $9.7
million over the same period in 1996. This increase was due primarily to an
increase in relocation expenses, consulting expenses related to the EchoStar
agreements and the Internet MusicServer SM project, communication costs
related to the Internet MusicServer SM project and national account rollouts,
the continued centralization of data and collection systems, and higher travel
and rent expense and personal property taxes.
Depreciation Expense. Depreciation expense increased 10.4% from $4.7 million
in the first six months of 1995 to $5.2 million in the first six months of
1996 due to an increase in fixed assets of $8.2 million primarily related to
an increased investment in equipment for business service customers, new
service and delivery vehicles and computers and other equipment for video
production, the EchoStar uplink facility and systems upgrades and development.
Amortization Expense. Amortization expense increased 0.5% from $4.4 million
in the first six months of 1995 to $4.5 million in the first six months of
1996 as a result of an increase to intangible assets of $5.6 million primarily
attributable to business acquisitions, obtaining customer contracts and
creating master recordings partially offset by the final amortization in the
1995 period of the music purchased as part of the 1992 Acquisition.
Interest Expense. Interest expense decreased 5.7% from $3.8 million for the
first six months of 1995 to $3.6 million in the first six months of 1996
principally due to a $2.5 million paydown of the Company's term loan in July
1995, a $2.5 million paydown of the term loan in January 1996 and a reduction
of the effective weighted average interest rate under the term loan and
revolving credit facility from 11.3% for the 1995 period to 10.6% for the 1996
period.
Other (Income) Expense. Other (income) expense reflected expense of $228,000
in the first six months of 1996 versus income of $42,000 in the comparable
period in 1995, primarily due to a loss on the sale of a product line acquired
in the Comcast Acquisition that was inconsistent with the Company's strategic
plans and equity in losses of Muzak Europe not included in the 1995 period.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Total revenues increased 4.2% from $83.4 million in 1994 to $86.9
million in 1995 principally as a result of a 4.1% increase in business
services revenues and a 4.2% increase in equipment and related revenues.
Business services revenues increased due to an increase in the number of
broadcast music subscribers, offset partially by a reduction in the royalty
surcharges paid by franchisees for DBS services. Other business
26
<PAGE>
services revenues, with the exception of on-premise tape sales, increased at
more rapid rates than broadcast music revenues due to the increased marketing
of, and increasing customer demand for, video, audio messaging, and
AdParting(R) services, among others. On-premise tape revenues declined due to
the Company's conversion of such customers to broadcast services, primarily
DBS transmission. Royalties and other fees from franchisees and international
distributors (included in broadcast music revenues) accounted for $6.9 million
or 7.9% of the Company's revenues in 1995, compared with $6.8 million or 8.2%
of the Company's revenues in 1994 due to growth in the number of customer
locations being served, partially offset by a planned reduction in DBS
surcharges. Equipment revenues increased 3.6% as a result of an increase in
leased equipment subscribers. Installation, service and repair revenues
increased 5.5% primarily related to large job revenue increases. In-store
advertising revenues increased 12.2%, principally due to sales to a single
customer in the first quarter of 1995, which did not continue into the last
three quarters of the year.
Gross Profit. Total gross profit increased 4.8% from $46.3 million in 1994
to $48.5 million in 1995. As a percentage of total revenues, gross profit
increased slightly from 55.5% in 1994 to 55.8% in 1995. The improvement in the
gross profit percentage in 1995 was due to growth in higher margin business
services, such as broadcast music, audio marketing and on-premise music video
services, and improved equipment margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 0.7% from $28.7 million in 1994 to $28.5
million in 1995. As a percentage of total revenues, selling, general and
administrative expenses declined from 34.4% in 1994 to 32.8% in 1995. Selling
and marketing expenses declined 5.1% from $11.3 million in 1994 to $10.7
million in 1995. This decline was primarily attributable to a reduction in
local sales offices' administrative and operating support personnel, reduced
costs of new product and service research, a decrease in promotional expenses
and lower sales award costs, offset somewhat by higher non-capitalized selling
costs. General and administrative costs increased 2.1% from $17.4 million in
1994 to $17.8 million in 1995, primarily due to relocation and expansion of
the headquarters office, additional personnel to support centralization of
local and national sales office services, higher bad debt expense and
consulting expenses for the Internet MusicServer SM and EchoStar projects.
These increased expenses were partially offset by a decrease in bonuses
accrued and expenses incurred in 1994 in connection with an unconsummated
financing.
Depreciation Expense. Depreciation expense increased 14.3% from $8.2 million
in 1994 to $9.4 million in 1995, principally as a result of an increased
investment in equipment installed at customers' premises due to an expanded
customer base, and twelve months of depreciation of the assets acquired in the
Comcast Acquisition in 1995 compared to eleven months in 1994.
Amortization Expense. Amortization expense decreased 7.4% from $9.6 million
in 1994 to $8.9 million in 1995. The decline in amortization expense was due
to the final amortization in early 1995 of music acquired in the 1992
Acquisition.
Interest Expense. Total interest expense increased 7.1% from $7.0 million in
1994 to $7.5 million in 1995. The increase in interest expense in 1995 as
compared to 1994 was the result of increased borrowing as well as an increase
in the effective weighted average interest rate under the Company's existing
term loan and revolving credit facility from 10.0% in 1994 to 11.2% in 1995.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues. Total revenues increased 42.5% from $58.5 million in 1993 to $83.4
million in 1994 primarily as a result of the Comcast Acquisition. Business
services revenues increased 37.0% from $36.8 million to $50.4 million from
1993 to 1994. Equipment revenues increased 45.2% as a result of the Comcast
Acquisition, resulting in higher sales of DBS equipment, sound system
equipment and leased drive-through equipment. Installation, service and repair
revenues increased 69.8% from 1993 to 1994 also as a result of the Comcast
Acquisition. Video revenues increased 24.5% in 1994 as compared to 1993 due to
the acquisition of an on-premises music video operation as of February 28,
1994 that significantly expanded the Company's base of video customers and its
capability to service a larger customer base. In-store advertising revenues
increased 166.0% due to increased efforts in marketing this service.
27
<PAGE>
Gross Profit. Total gross profit increased 48.6% from $31.2 million in 1993
to $46.3 million in 1994 primarily as a result of the Comcast Acquisition. As
a percentage of total revenues, gross profit increased from 53.3% in 1993 to
55.5% in 1994. The improvement in the gross profit percentage in 1994 was
principally due to improved profit margins on equipment revenues and business
services revenues. The significant improvement in equipment profit margin from
32.4% in 1993 to 41.6% in 1994 was due to a greater proportion of higher
margin equipment lease revenues and more selective bidding of competitive
equipment contracts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 46.4% from $19.6 million in 1993 to $28.7
million in 1994. As a percentage of total revenues, selling, general and
administrative expenses increased from 33.5% in 1993 to 34.4% in 1994. Selling
and marketing expenses increased 44.7% from $7.8 million in 1993 to $11.3
million in 1994. This increase was attributable to the Comcast Acquisition,
and the acquisition of the video operation as well as an increase in research
and development. General and administrative expenses increased 47.6% from
$11.8 million in 1993 to $17.4 million in 1994, primarily due to the new
locations and facilities acquired from Comcast and expenses incurred in
connection with an unconsummated financing.
Depreciation Expense. Depreciation expense increased 88.8% from $4.3 million
in 1993 to $8.2 million in 1994. The significant increase in 1994 as compared
to 1993 is attributable to the acquisition of approximately $16.0 million in
tangible assets in the Comcast Acquisition.
Amortization Expense. Amortization expense increased 38.6% from $6.9 million
in 1993 to $9.6 million in 1994. The significant increase in 1994 as compared
to 1993 is attributable to the acquisition of approximately $14.0 million of
intangible assets related to the Comcast Acquisition.
Interest Expense. Total interest expense increased 84.7% from $3.8 million
in 1993 to $7.0 million in 1994 as a result of additional borrowings and an
effective weighted average interest rate under the Company's existing term
loan and revolving credit facility of 10.0% in 1994 as compared to 9.1% in
1993. The additional borrowings in 1994 were a result of the Comcast
Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs have been primarily for capital expenditures,
business acquisitions, debt service and working capital. As of June 30, 1996,
the Company had a working capital deficit of $12.1 million compared with a
working capital deficit of $4.9 million as of June 30, 1995. The increase in
the deficit for this period was due principally to an increase in short-term
debt, utilized primarily to fund capital expenditures and repay term debt.
The Company's investing activities, excluding the Comcast Acquisition, have
historically included the purchase of on-premise customer equipment (such as
satellite dishes and receivers) and certain capitalized deferred costs related
to business acquisitions, obtaining customer contracts and creating master
recordings. Capital expenditures were $4.5 million in 1993, $9.5 million in
1994, $8.1 million in 1995, $3.7 million in the first half of 1995 and $4.5
million in the first half of 1996. Additions to deferred costs were $3.7
million in 1993, $4.3 million in 1994, $4.6 million in 1995, $2.4 million in
the first half of 1995 and $2.9 million in the first half of 1996. The Company
believes that its future investing activities may include acquisitions of the
Company's franchisees to further its operating strategy and other acquisitions
in addition to these capital expenditures and deferred customer and music
acquisition costs.
The Company's primary sources of liquidity have been cash flows from
operations and bank borrowings. Net cash provided by operating activities for
the first half of 1996 was $10.6 million as compared to $8.1 million for the
comparable 1995 period. This increase was due to an increase in cash from
operating assets and liabilities, primarily payables and accruals. Net cash
provided by operating activities for the year ended December 31, 1995 was
$14.2 million as compared to $15.7 million in 1994. Cash provided by the
Company's operations, adjusted for the effect of non-cash items, totaled $14.7
million in 1995, an increase of $2.3 million over the $12.4 million provided
in 1994, due primarily to a reduction in the Company's net loss through
improved operating performance. Net changes in the operating assets and
liabilities utilized cash of $500,000 in 1995 as compared
28
<PAGE>
to providing cash of $3.3 million in 1994. The change in operating assets and
liabilities was primarily attributable to a reduction in accounts payable and
accrued expenses.
The Company has a term loan ($38.5 million outstanding as of June 30, 1996)
and a $13.0 million revolving credit facility ($10.8 million outstanding as of
June 30, 1996) provided by Union Bank of Switzerland, New York Branch ("UBS"),
and other lenders. Substantially all of the Company's assets and the interests
in the Company held by MLP, certain of its affiliates and the Management
Investors are pledged as collateral under the UBS term loan and credit
facility. The revolving credit facility is available for, among other things,
ongoing working capital needs and letters of credit. This credit facility
terminates on January 15, 2001. Interest accrues on the outstanding principal
amounts of the term loan and the revolving credit facility at an interest rate
based on UBS's announced base rate plus 1.75% or LIBOR plus 3.00%. The Company
intends to repay the outstanding amounts under the UBS term loan and revolving
credit facility with the proceeds of the Offering. See "Use of Proceeds." As
of June 30, 1996, aggregate maturities of the Company's term loan were $3.0
million in 1996, $7.0 million in 1997, $8.0 million in 1998, $8.0 million in
1999, $8.3 million in 2000 and $4.2 million in 2001.
The Company leases certain facilities under both operating and capital
leases. Minimum lease payments for 1996 under noncancelable leases are $6.3
million.
The Company anticipates capital expenditures of between $11.9 and $12.4
million in 1996 and additions to deferred costs and intangible assets of
between $4.8 and $5.2 million in 1996. The level of capital expenditures and
additions to deferred costs and intangible assets are subject to a variety of
factors which may cause these expenditures to exceed the ranges set forth
above.
Through June 30, 1996, the Company had capitalized approximately $1.1
million of expenses associated with an initial underwritten public offering of
its equity securities. In August 1996, the Company postponed the equity
offering. If it is determined that a public equity offering is not likely to
occur, these capitalized expenses will be charged to operations in the quarter
such determination is made.
The Company believes that subsequent to the Offering, its cash flows from
operations, borrowing availability and cash on hand will be adequate to
support currently planned business operations, capital expenditures and debt
service requirements at least through December 1998. If the Company engages in
one or more material acquisitions, joint ventures or alliances or other major
business initiatives requiring significant cash commitments, or incurs
unanticipated expenses, additional financing could be required.
The 1992 Acquisition of the business of the Predecessor by CCI and certain
of the Management Investors provides for contingent earn-out payments ("Earn-
Out Payments") of between $5.0 million to $24.0 million to the Predecessor if
certain performance measures are achieved in the five years following the
transaction. The minimum performance requirement for the $5.0 million Earn-Out
Payment requires the Company to achieve a cumulative performance target (as
defined in the acquisition documents) over the five-year period ending
August 31, 1997. The Company believes that the minimum performance target
triggering an Earn-Out Payment will not be reached.
The Washington State Department of Revenue has levied an assessment against
the Predecessor for $1.7 million in sales and use and business and occupation
taxes for the period from 1987 through September 1992. Under successor
liability statutes in the State of Washington, the Company could, if the
Predecessor fails to pay its tax obligation, become liable for the assessment.
The assessment is under appeal by the Predecessor. The Company has the right
to offset any future payments from the Company to the Predecessor if the
Predecessor fails to pay its tax obligation. Management does not believe that
the assessment will have an adverse effect on the Company's financial
condition or results of operations.
INFLATION AND CHANGING PRICES
Management does not believe that inflation and other changing prices have
had a significant impact on the Company's operations.
29
<PAGE>
BUSINESS
GENERAL
The Company is the leading provider of business music in the United States,
based on the number of customer locations served. The Company and its
franchisees serve approximately 180,000 customer locations in the United
States, representing a market share of approximately 50% of the estimated
number of domestic locations currently served by business music providers and
approximately twice the estimated number of locations served by its nearest
competitor. Through a network of distributors, the Company also provides
business music to subscribers outside the United States. In addition, the
Company offers its customers a range of non-music services, including
broadcast data delivery, video, audio marketing and in-store advertising
services, and sells, installs and services related equipment.
The Company markets business music in a variety of formats, including (i)
its well-known proprietary Environmental Music(R) (or "background" music) and
(ii) over 100 "foreground" music formats ranging from top-of-the-charts hits
to contemporary jazz, country music and classical music. Internal and third-
party studies sponsored by the Company have indicated that properly programmed
music can have a favorable impact on listeners in business and retail
environments. The broadcasting of music, including the rebroadcasting of
commercial music, in such locations is not permitted without licenses and the
payment of royalties. Environmental Music(R), which is principally comprised
of instrumental versions of popular songs that have been adapted and
rerecorded by the Company, is generally used in business offices and
manufacturing facilities to improve employee concentration and reduce stress.
Foreground music, consisting principally of original artist recordings, is
most commonly used in public areas, such as restaurants and retail
establishments, primarily as a sales enhancement tool. The Company distributes
30 of its channels by broadcast media (principally DBS transmission) and
supplies the balance to subscribers in the form of long-playing audio tapes.
Since 1991, the total number of domestic customer locations served by the
Company and its franchisees has grown from 134,000 to 180,000, with the number
of domestic customer locations served by the Company growing from
approximately 32,000 to approximately 62,000 and the number of domestic
customer locations served by the Company's franchisees growing from
approximately 102,000 to approximately 118,000. Over the same period, the
Company's total revenues and EBITDA have grown from $56.0 million and $12.6
million in 1991, respectively, to $86.9 million and $20.0 million in 1995,
respectively, and the Company's net losses from operations have decreased from
approximately $9.5 million in 1991 to approximately $5.7 million in 1995.
Capital Corp., a wholly-owned subsidiary of the Company, has nominal assets
and does not conduct any operations.
COMPETITIVE STRENGTHS
The Company believes that it possesses a number of attributes that have
allowed it to become the leading provider of business music in the nation
(based on number of customer locations served), including:
Broad Appeal to Diverse Customer Base. The Company's music products have
been programmed to appeal to a variety of end users, including business
offices, manufacturing facilities, retail establishments and restaurants. The
Company's salesforce markets over 100 different music formats, allowing each
customer to select a format appropriate for its line of business and customer
base. The Company's major national customers include national restaurant
chains, such as Taco Bell, McDonald's and Boston Market, and specialty
retailers, such as Nordstrom, Crate & Barrel, Kroger, Staples, Hallmark and
Wal-Mart, as well as a large number of local and regional accounts, none of
which represents more than 3% of the Company's consolidated revenues and the
top five of which represent in the aggregate less than 10% of consolidated
revenues. The Company believes that the geographic dispersion of its
customers, and the diversity of businesses in which they are engaged,
minimizes the impact to the Company of a cyclical downturn in any one area of
the country or in any one sector of the economy.
Attractive Economics to Customers and the Company. The Company believes that
its services are highly cost effective, providing an important business tool
to its customers for a low monthly cost. On average, the Company receives
approximately $45 of revenue per month per subscriber location, net of
licensing fee and applicable royalties, for which it makes an investment per
subscriber location (including sales commission) of
30
<PAGE>
approximately $950 for medium-powered DBS subscribers (substantially lower for
local broadcast technology subscribers). This allows the Company to recover
its capital costs within two years. The Company's customers typically enter
into long-term contracts, which are generally for a period of five years with
an automatic renewal option. The Company's annual cancellation rate is less
than 10% of music and other business services revenues, which equates to an
average length of service per customer of approximately ten years.
Full Line of Audio, Video and Data Products and Services. The Company can
provide its customers with an integrated package of services including: (i)
over 100 different music formats including both background and foreground
music; (ii) customized audio messages inserted in regular programming; (iii)
e-mail and computer bulk data transfer; (iv) on-premise music videos; (v)
customized messages for use with "on-hold" business telephone systems; and
(vi) "point of purchase" audio advertising and merchandising services. The
ability to deliver a package of music and non-music services over a common
transmission system has been a critical factor in enabling the Company to
generate incremental revenues from its customers at little or no additional
cost, gain new customers and protect existing customers from competitive
business music providers that do not offer such a broad line of products and
services.
Multiple Delivery Systems. The Company believes that its ability to
distribute its services through each of high-powered and medium-powered DBS
transmission, local radio broadcast transmission, telephone lines and audio
tapes enables it to effectively serve customers with either single or multiple
locations as well as those having varied music or service needs. The number of
domestic subscriber locations served by medium-powered DBS transmission has
grown from approximately 26,000 at the end of 1991 to approximately 120,000 at
June 30, 1996. In addition, the Company has recently entered into a unique
distribution arrangement with EchoStar. The Company anticipates that its
agreements with EchoStar will enable it to: (i) attract additional business
music subscribers by offering an expanded array of DBS-delivered music
programming; (ii) deliver music services to residential subscribers for the
first time; and (iii) deliver television programming, such as CNN(R), MTV(R)
and ESPN(R), to business music subscribers in packages specifically designed
for businesses (i.e., news, entertainment or lifestyles). In addition, the
EchoStar agreements provide the Company with high-powered DBS transmission
capability to supplement its existing medium-powered DBS system, reduced
equipment installation costs and an opportunity to shift certain equipment
costs to the subscriber.
Integrated Sales Network. The Company believes that its 35 sales offices in
the United States, its 81 franchisees, whose sales territories cover the
remaining market in the United States, and its 20 international distributors
in 15 foreign countries, comprise the largest network of customer sales and
service offices among business music providers in the United States. The
Company further believes that this network allows the Company, among other
things, to more effectively market to and support its national and
international accounts.
OPERATING STRATEGY
The Company believes it has opportunities to achieve growth in revenues and
cash flow by:
Increasing U.S. Market Penetration. The Company intends to increase its
penetration of the U.S. market by expanding its local and national account
sales force, offering more music formats (including up to 60 broadcast formats
with the EchoStar agreements), developing sales strategies focused on
underserved market segments and aggressively marketing its services as part of
a unique bundled package. 1993 census data indicate that there are
approximately 6.4 million business locations in the United States, including
approximately 1.1 million retail outlets and 450,000 restaurant and other food
service locations. Of the total 6.4 million business locations, only about 5%
are currently believed by the Company to subscribe to a business music
service.
Pursuing Strategic Relationships and Acquisitions. The Company intends to
pursue additional strategic relationships, acquisitions and joint ventures,
such as the Company's recent distribution agreements with EchoStar and its
1994 acquisition of the assets of Comcast, then the Company's largest
franchisee, in order to: (i) increase the breadth of its programming
offerings; (ii) further diversify its distribution channels; and (iii) take
advantage of certain economies of scale.
31
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Expanding in International Markets. The Company plans to continue its
expansion in Europe primarily through strategic relationships and joint
ventures, such as Muzak Europe, a joint venture formed in 1995 between the
Company and Alcas, a leading European business music provider. This joint
venture couples the Company's broadcast technology skills with Alcas' market
knowledge and marketing expertise and further permits the Company to leverage
its assets and programming expertise and diversify its sources of revenue. The
Company also intends to expand into Latin America and Asia by establishing
similar strategic relationships in those markets.
Exploiting New Market Opportunities. The Company intends to continue to
leverage its music programming expertise and its extensive recorded music
library into new products and markets. For example, the Company has recently
developed and begun operating its proprietary MusicServer SM service, which
permits real-time delivery of digitized song samples over the Internet to
music retailers and others (including companies such as CDnow!, Tower Records
and Microsoft) that require access to a large library of recorded music.
Enhancing Operating Margins. The Company seeks to enhance operating margins
through continued centralization of operations and leveraging fixed expenses
over a wider customer base. The Company strives to exploit less costly
transmission technologies and to reduce the capital required to initiate
service to a customer.
BUSINESS MUSIC SERVICES
MUSIC FORMATS
The Company conducts on-going research into the effects of music on human
behavior. This research has shown that certain types of music may reduce
employee stress and improve worker performance by counteracting the fatigue
cycles that affect workers, particularly those involved in repetitive work.
This research also has shown that, in retail environments, certain types of
music may induce consumers to purchase more and may help the retailer in its
efforts to project a particular image of a store. The Company uses its
research to create proprietary music program formats that will have a
favorable impact on listeners. In addition, the Company's sales staff uses the
results of its research to explain to prospective subscribers the benefits of
business music and to assist each subscriber in choosing a music format which
will further the subscriber's desired business goal. These music formats cover
a wide range of musical tastes.
The Company's best-selling format, Environmental Music(R), is a unique blend
of completely instrumental music that is distributed to subscribers via DBS
transmission and local broadcast technology. Environmental Music(R) is
principally comprised of instrumental versions of popular songs that have been
adapted and rerecorded by the Company ("covers"), instrumentals that have been
composed and recorded exclusively for inclusion in the Environmental Music(R)
program ("originals"), and some commercially available instrumental
recordings, and is generally used in business offices and manufacturing
facilities to improve employee concentration and reduce stress. The
Environmental Music(R) library consists of approximately 30,000 recordings
owned by the Company, of which approximately 5,000 are actively used at any
given time. The library includes the instrumental recordings of titles made
popular by a wide variety of artists and composers, ranging from George
Gershwin to Elvis Presley, Boyz II Men and Toad the Wet Sprocket. The Company
spends over $400,000 annually in payments to third parties to update the
library and adds approximately 1,000 new selections each year. In 1993, in
order to improve the quality of its active Environmental Music(R) library, the
Company digitally remastered all of its recordings on compact discs.
Foreground music, consisting principally of original artist recordings, is
most commonly used in public areas, such as restaurants and retail
establishments, primarily as a sales enhancement tool. The Company's most
popular foreground music product, FM-1(R), features moderate tempo, original
artist recordings of familiar adult contemporary favorites. Like Environmental
Music(R), FM-1(R) has been developed for distribution to subscribers via DBS
transmission and local broadcast technology. With its broad appeal, FM-1(R) is
second to the Environmental Music(R) channel in the total number of subscriber
locations served and is the Company's most
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widely-used format in the restaurant and retail markets. FM-1(R) features a
broad range of popular artists from the last 30 years, with an emphasis on
current popular music. FM-1(R) artists include Sting, Celine Dion, Elton John
and Bonnie Raitt, among others.
In addition to FM-1(R), foreground music formats developed by the Company
for DBS or local broadcast transmission include:
HITLINE(R) ADULT CONTEMPORARY
An up-to-the-minute mix of top chart A more consumer-oriented version of
hits. FM-1(R) with higher repetition of
current hits.
COUNTRY CURRENTS(R)
An upbeat mix of current and recent ADULT ALTERNATIVE
country music hits. An eclectic mix of artists and
styles with a progressive edge.
JUKEBOX GOLD(R)
Rock "n' roll hits of the '50s, '60s NON-STOP HIP HOPSM
and early '70s. The hottest new music from the
streets.
'70S SONGBOOKSM
A mix of familiar hits spanning the POWERROCKSM
late '60s to early '80s. Hard-edged hits and heavy metal
album tracks.
URBAN BEATSM
The best of contemporary urban hits THE EDGESM
from today's hottest artists. A mix of top hits and album tracks
from the college and alternative
music charts.
CONTEMPORARY JAZZ FLAVORSSM
Today's light contemporary jazz,
mainstream jazz and soft vocals. CLASSIC ROCK
A non-stop collection of the best
rock "n' roll tunes of all time.
LIGHT CLASSICAL
An artful blend of chamber and small
orchestral pieces from the Baroque NEW COUNTRY
and Romantic periods. An upbeat mix of top chart hits from
today's country superstars.
EXPRESSIONS(R)
Light hits from yesterday and today COUNTRY CLASSICSSM
plus instrumental versions of hit A blend of classic Country hits from
songs, easy jazz and acoustic music. the '50s, '60s and '70s.
CONTEMPORARY INSTRUMENTALS CONCERT CLASSICSSM
Smart contemporary instrumentals for The most renowned classical
businesses where vocals are symphonies.
inappropriate.
JAZZ TRADITIONSSM
HOT FMSM The more traditional, acoustic side
The upbeat side of current Adult of the jazz genre.
Contemporary music.
BIG BAND ERA
EUROSTYLESM A blend of the best known standards
Dance and Top 40 tracks hot off the and hits from vocalists and
European music charts. instrumental artists from the '30s,
'40s, and '50s.
LATIN STYLESSM
A smooth blend of today's Spanish- EASY INSTRUMENTALSSM
language hits and Salsa rhythms. A mix of lush and soothing
instrumental favorites.
FIESTA MEXICANASM
An upbeat blend of Mexican regional CONTEMPORARY CHRISTIAN
styles including Mariachi, Nortena The very best from the top artists
and Tejano. of contemporary Christian popular
music.
HOLIDAY
From November 1st through December KIDZONESM
31st the Holiday Channel features a A bright, upbeat mix of sing alongs,
blend of traditional and folk songs, soundtracks and pop hits
contemporary holiday music. targeted to kids ages 3-10.
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The Company has also developed approximately 80 different tape-based formats
of foreground music targeted to the specialized business needs of subscribers
with more focused customer demographics. Among the formats offered are
contemporary jazz, chamber music, reggae, hard rock, German music, Chinese
music and seasonal (holiday) music. These music programs are distributed to
subscribers in the form of long-playing audio tapes that are replayed by the
subscriber on its own premises using specially-designed equipment that has
been installed by the Company. Subscribers typically receive an initial tape
library of approximately 40 hours of music programming and are allowed
unlimited exchanges of tapes during their first 30 days of service, thereby
enabling them to fine-tune their format selections to their individual
preferences and requirements. New tapes are generally sent to subscribers on a
fixed schedule (30, 60 or 90 days), as selected by the subscriber, although
subscribers can elect unlimited exchange privileges. In all cases, subscribers
are required to return old tapes upon receipt of new tapes, and pricing varies
with the frequency of exchange. As of June 30, 1996, the Company and its
franchisees had approximately 18,000 subscribers for taped-based services.
DISTRIBUTION SYSTEMS
The Company's Environmental Music(R) and FM-1(R) programs are distributed to
subscribers either through the Company's medium-powered DBS system or by local
broadcast technology. The Company also uses its medium-powered DBS system to
distribute these programs to its franchisees for local broadcasting to the
franchisees' subscribers. Medium-powered DBS systems utilize satellite dishes
ranging from 0.75 to 1.8 meters in diameter. At June 30, 1996, approximately
120,000 subscriber locations were served by its medium-powered DBS
transmission and approximately 42,000 locations were served by local broadcast
technology. In addition, at that date, on-premise tape programs were being
distributed to approximately 18,000 subscriber locations.
Satellite transmission has become the Company's primary delivery medium for
its business music programs and most of its newest program formats are
generally available only via satellite. The Company's proprietary Music
Plus(R) service permits its medium-powered DBS subscribers to choose the
traditional Environmental Music(R) and FM-1(R) formats as well as up to
fourteen other foreground music formats from a single satellite transmission
signal. In addition, its proprietary DayParting(R) and WeekParting(R) services
enable a subscriber to arrange for automatic switching from one music format
to another on a predetermined schedule to adjust to changing customer
demographic patterns.
The Company leases substantially all of its transponder capacity from
Microspace, which also provides facilities for the uplink of the Company's
signals to Microspace's transponder. Microspace, in turn, leases its
transponder capacity on satellites operated by third parties, including the
Galaxy IV satellite operated by Hughes, on which a majority of the Company's
DBS signals are transmitted. The term of the Company's principal transponder
lease with Microspace for the Galaxy IV satellite runs through the life of
that satellite (which is expected to continue through 2004). Microspace may
terminate its agreements with the Company if the Company materially breaches
its obligations thereunder or if any governmental restriction results in a
sustained interruption of the Company's performance thereunder. Microspace
also is entitled to terminate its agreements with the Company immediately upon
termination of its underlying agreement with Hughes. See "Risk Factors--
Dependence on Satellite Delivery Capabilities."
The Company has begun offering high-powered DBS transmission service through
the EchoStar satellite system, as more fully described below under "--EchoStar
Agreements." High-powered DBS systems utilize satellite dishes as small as 18
inches in diameter. The Company's ability to expand its music services on the
EchoStar satellite system is subject to EchoStar's ability to provide
transponder capacity on its second high-powered direct broadcast satellite by
December 31, 1997 (which satellite was launched on September 11, 1996), or, if
the second satellite is not operational by December 31, 1997, EchoStar's
willingness to allocate additional transponder capacity to the Company on
EchoStar's first satellite. See "Risk Factors--Dependence on EchoStar and its
Satellites" and "--EchoStar Agreements."
Local broadcast transmission is used by the Company and its franchisees to
distribute business music in localized metropolitan areas where the
concentration of subscriber locations is sufficiently large to justify the
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cost. Local area FM broadcasting is primarily made via commercial FM radio
station subcarriers and requires the use of a separate subcarrier and on-
premises subscriber receiver for each program format being distributed.
Accordingly, local broadcasting is not cost-effective for delivery of more
than two formats to a particular area and is generally limited to the
Company's most popular program formats, Environmental Music(R) and FM-1(R).
OTHER SERVICES
NON-MUSIC BROADCAST SERVICES
The Company offers a variety of non-music services to its medium-powered DBS
business music subscribers that complement its music services. These services
are generally "bundled" and marketed in conjunction with the Company's
business music services. As a result, these services serve to stimulate sales
of music services to new customers. In addition to providing incremental
revenue, these services enable the Company to maintain strong relationships
with its business music subscribers. These non-music services generally carry
higher margins, since they require low incremental costs and when the
associated revenue is shared by the Company and its franchisees, the Company
receives 50% or 60% of these revenues in lieu of royalty payments.
The Company currently offers the following non-music business services to
its medium-powered DBS subscribers:
. AdParting(R). AdParting(R) permits the subscriber to receive customized
audio messages ("spots") interspersed in its business music service and to
control the message content of the spot. This service is used by retailers
ranging from supermarkets and convenience stores, to fast food restaurants
and fashion retailers. At June 30, 1996, the Company was providing
AdParting(R) to approximately 12,300 subscriber locations.
. Broadcast Data Delivery. The Company's broadcast data delivery service
provides point-to-multipoint electronic mail as well as computer to
computer bulk data transfer. This service provides the subscriber with a
low cost alternative to two-way data transmission systems. For example,
fast food chains use this service to deliver software and other data
updates to in-store computers at their outlets, while wholesale grocery
distributors use it to provide price, inventory, product recall and
delivery information to their network retailers. At June 30, 1996, the
Company was providing broadcast data delivery services to approximately
5,200 subscriber locations.
. Custom Business Television. The Company takes advantage of the
availability of occasional use video transponder space to offer its
customers the opportunity to broadcast private customer-specific video
programming. At June 30, 1996, the Company was providing custom business
television services to approximately 600 subscriber locations.
ON-PREMISE MUSIC VIDEO--ZTV(R)
The Company programs, duplicates on videotape and sells its proprietary
ZTV(R) on-premise music video service to subscribers wishing to increase the
impact of music through video. The Company's on-premise video programs allow
subscribers to create an "MTV(R)-type" environment for their customers through
specially programmed, long-playing videotapes. The ZTV(R) taped music videos
are produced and shipped directly from the Company's production facilities to
more than 3,000 viewing locations. Subscribers currently using the ZTV(R)
service include Macy's, Bloomingdale's, Lord & Taylor, Filene's Basement,
Oshman's Sporting Goods and Rent-A-Center.
ZTV(R) offerings are available in the following categories, each consisting
of multiple long-playing programs that are supplied to subscribers on a 30, 60
or 90-day rotation:
. Music and Entertainment Programs. Programs produced for a variety of
retailing environments, such as department stores, specialty shops,
athletic footwear stores, children's apparel stores, sporting goods
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stores, toy and hobby stores, drug stores and appliance stores. These
programs include licensed music video elements in addition to sports
clips, cartoon and fashion segments and other elements appropriate to the
demographics of a particular customer or application. These targeted
programs are produced monthly and are supplied in four-hour tapes.
. Music Video Programs. These are segued music video programs, representing
a style and tempo of music applicable to particular business environments,
and are produced monthly in two-hour and four-hour lengths.
. VeeJay Programs. These monthly programs are produced exclusively for
nightclubs and dance clubs and are furnished in one-hour lengths.
AUDIO MARKETING
The Company creates, produces and records spoken messages for use with "on-
hold" business telephone systems, AdParting(R) broadcasts and other forms of
in-store messaging and advertising.
IN-STORE ADVERTISING
The Company markets in-store "point of purchase" audio advertising and
merchandising services for transmission through its medium-powered DBS system.
The Company has established an industry-specific network (SuperLink(R)) of
grocery wholesalers and wholesaler-supplied retailers and sells time on the
network to advertisers seeking to deliver a message simultaneously to multiple
locations in the network.
ECHOSTAR AGREEMENTS
Through its agreements with EchoStar (the "EchoStar Agreements"), the
Company has begun providing 30 channels of digital music programming, of which
27 channels are being distributed in stereo to EchoStar's residential
customers, thus providing the Company with access to the residential consumer
market for the first time. EchoStar, as part of its overall sales activities,
will brand and market 27 channels of music programming provided by the Company
and currently plans to package these channels as an automatic inclusion in the
majority of its service packages. EchoStar's second high-powered satellite was
launched on September 11, 1996, and when operational will give the Company the
exclusive right to distribute approximately 30 additional channels to business
music subscribers and will also provide EchoStar an additional three channels.
However, there can be no assurance that the second satellite will become
operational in a timely manner.
The music services offered through EchoStar contain much of the Company's
Music Plus(R) programming but are broadcast in digital stereo to appeal to
residential customers instead of the monophonic format used in the Company's
medium-powered DBS transmission system, which is more appropriate to business
music applications. The Company's Environmental Music(R) and FM-1(R) channels
are transmitted in the monophonic format over the EchoStar system to business
music subscribers.
The EchoStar agreements will allow the Company to expand the range of music
that can be made available to businesses. They also provide the Company with
access to a family of television programming services that the Company
believes can be sold in several critical market segments, such as the
hospitality and retailing markets. The availability of these television
services is expected to allow the Company to penetrate commercial market
segments and reach new customers that have traditionally been outside of its
core subscriber base. The Company believes that EchoStar's high-powered DBS
delivery technology also provides the Company with the opportunity to realize
significant cost savings in furnishing music services to business subscribers.
EchoStar's receiving equipment is smaller, lighter in weight, and simpler to
install than the Company's medium-powered DBS receiving equipment, and as DBS
television service increases in popularity, this equipment is expected to be
mass manufactured and marketed, thus reducing its cost. In addition, the
EchoStar receiving equipment generally is not proprietary and has uses and
applications beyond commercial business music. Accordingly, the
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Company believes that subscribers to business music services through the
EchoStar system may be more likely to purchase the necessary receiving
equipment rather than rely on Company-provided equipment, as has generally
been the case to date, thus permitting the Company to reduce its per-
subscriber capital investment with only a limited reduction in the monthly
subscription charge.
Pursuant to the EchoStar Agreements, EchoStar will pay the Company a
programming fee for each residential music subscriber and will pay the
Company's franchisees a commission on sales by EchoStar distributors to
commercial customers in a franchisee's territory. Pursuant to the EchoStar
Agreements, the Company pays EchoStar a fee for uplink transmission of the
approximately 30 exclusive channels and rents space at EchoStar's Cheyenne,
Wyoming uplink facility. The fees for the uplink of the channels and use of
the uplink facility increase significantly upon the launch of EchoStar's
second satellite once the Company is allocated an additional 2.4 megahertz of
transponder capacity. EchoStar's second satellite was launched on September
11, 1996. The Company and its franchisees are obligated to pay EchoStar a
royalty on music sales from EchoStar channels to commercial customers.
EchoStar has agreed that it will not (i) provide transponder space to, (ii)
enter into or maintain distributor agreements or relationships with, or (iii)
enter into any agreements for the programming or delivery of any audio
services via DBS frequencies with, a specified group of the Company's
competitors. The Company has agreed it will not (i) secure transponder space
for, (ii) enter into or maintain distributor agreements or relationships with,
or (iii) enter into any agreement for the programming or delivery of any of
the Company's services with any competitor of EchoStar via DBS frequencies or
with specified competitors of EchoStar via K-band frequencies.
The Company may terminate its agreements with EchoStar if EchoStar is unable
to provide transponder capacity on its second satellite by December 31, 1997,
unless EchoStar allocates 2.4 megahertz of transponder capacity on the
EchoStar-I satellite for the Company's exclusive use.
EchoStar may cancel the terms of the EchoStar Agreements related to the
provision of residential music channels at any time. Upon such cancellation,
EchoStar is required to pay to the Company the depreciated book value of the
Company's capital investment in equipment to support residential music
channels and to continue to provide 2.4 megahertz of transponder capacity for
use by the Company. The Company and its franchisees also would be permitted to
continue to market and sell the video services carried on the EchoStar system.
The EchoStar relationship is still in its formative stage and there can be
no assurance that the benefits anticipated by the Company will be realized.
See "Risk Factors--Dependence on EchoStar and its Satellites."
INTERNET SERVICES
The Company has recently developed and begun operating its Internet
MusicServerSM service.
The Company is seeking to exploit recent software developments in real-time
delivery of audio via low-cost, high-speed modems to provide access to
digitized samples of recordings in its library to businesses having
informational or retailing sites on the Internet. The design of the Company's
Internet MusicServer SM service allows the Company to use a hardware and
software server system to, among other things, supply services to many
different Internet-based retailers and thus provide music samples to many
retailers more economically than those retailers could provide themselves. The
MusicServer SM service permits music retailers and others to offer visitors to
their websites access to digitized 30-second samples from the Company's
library of recorded music. This service, which permits, among other things, a
consumer to preview recordings offered for sale by a retailer, currently is
being provided to CDnow!, an on-line retailer of compact discs and audio
cassettes, Tower Records and Microsoft.
There can be no assurance that Internet services will be economically viable
or generate significant revenue for the Company. See "Risk Factors--Unproven
Capabilities of New Services."
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EQUIPMENT AND RELATED SERVICES
The Company sells or leases various audio system-related products,
principally sound systems and intercoms to its business music subscribers and
other customers. The Company also sells electronic equipment, principally DBS
receivers and dishes as well as proprietary tape playback equipment, to its
franchisees to support their business music services business. All the
equipment is manufactured by third parties, although some items bear the
Muzak(R) brand name. Revenues from equipment and related services accounted
for 40% of the Company's revenues in 1995 and 36% of such revenues during the
six-month period ended June 30, 1996.
The Company and its franchisees also sell, install and maintain non-music
related equipment, such as intercoms and paging systems, for use by their
business music subscribers and other customers. Although the maintenance of
program-receiving equipment provided to business music subscribers is
typically included as part of the overall music subscription fee, installation
and maintenance of audio or other equipment not directly related to reception
of the Company's business music service is provided on a contractual or time-
and-materials basis. Labor rates and charges for installation and service vary
by location and are determined by the Company or its franchisee. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MARKETING
COMPANY SALES OFFICES
The Company has 35 sales offices in the United States, including in seven of
the top ten U.S. markets (the greater metropolitan areas of New York, Los
Angeles, Chicago, San Francisco, Boston, Dallas and Detroit). These 35 sales
offices accounted for approximately 72% of the Company's revenues in 1995 and
approximately 71% of such revenues during the six-month period ended June 30,
1996.
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The following table shows the locations of the Company's local sales offices
by market size in descending order (major offices within each market are shown
in boldface):
LONG ISLAND CITY, NY SEATTLE/TACOMA, WA
Hicksville, NY Spokane, WA
LOS ANGELES, CA (BURBANK) MINNEAPOLIS, MN
Tustin, CA
DENVER, CO
CHICAGO, IL Colorado Springs, CO
Peoria, IL
Milwaukee, WI ORLANDO, FL
Moline, IL
Springfield, IL PORTLAND, OR
Medford, OR
SAN FRANCISCO, CA
Sacramento, CA SAN DIEGO, CA
San Jose, CA
INDIANAPOLIS, IN
BOSTON, MA Ft. Wayne, IN
Providence, RI
Exeter, NH HARTFORD, CT
DALLAS, TX CINCINNATI, OH
Tyler, TX Columbus, OH
DETROIT, MI BUFFALO, NY
SCRANTON, PA
Holidaysburg, PA
FRANCHISEES
The Company has 81 franchisees serving 138 separate territories in the
United States. The Company's relationships with its franchisees have been very
stable. More than 80% of its franchisees have been affiliated with the Company
for over 20 years and, during the last ten years, the Company has terminated
relations with only one franchisee. Each franchisee has exclusive
responsibility for sales in its territory, except for sales to national
accounts, sales of in-store advertising services and on-premise music video
services. All marketing literature, customer and training videos and sales
materials are designed and produced by the Company and made available to its
franchisees. The Company also conducts sales training for its franchisees'
sales personnel.
The Company currently has a standard form of franchise agreement in effect
for 132 of 138 of its franchised territories. The standard form of agreement
has a renewable ten-year term, and grants to the franchisee an exclusive
license to offer and sell specified business music services and certain non-
music broadcast services and to use certain of the Company's registered marks
within a defined territory. The agreement also prohibits franchisees from
marketing or selling competing products. The agreement includes provisions
relating to distribution of services via the Company's medium-powered DBS
system and via EchoStar, and establishes terms for the provision of services
to "national accounts" on a unified basis.
Under the standard form of agreement, franchisees pay the Company (i) a
monthly fee based on the number of business locations within the specified
territory, (ii) a monthly royalty equal to 10% of billings for broadcast
business music services (subject to certain deductions and adjustments) and
(iii) additional amounts for non-music broadcast services and on-premise tape
services. In addition, franchisees currently pay or have paid a variable
surcharge of billings to customers for eight years following the commencement
of medium-powered DBS services in the franchisee's territory. As a result of
their agreement to participate in the delivery of services
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via the EchoStar satellite system, franchisees also pay a surcharge of monthly
recurring billings in consideration of the Company's development and
implementation of services for delivery over the EchoStar satellite system.
Franchisees are also responsible for paying performing rights fees in
connection with the provision of services in their territories.
Revenues from the sale of other broadcast business services are shared
between the Company and its franchisees, and the Company receives 50% or 60%
of these revenues in lieu of royalty payments. Franchisees generally pay a
monthly fee for use of various medium-powered DBS-delivered business music
services offered by the Company, such as Dayparting(R) and Weekparting(R).
NATIONAL SALES PROGRAM
The Company has established a national sales program to market its services
more effectively to subscribers with numerous locations in various
territories, including those served by franchisees, and to address the needs
of these subscribers for uniform service and centralized billing for all of
their locations. Subscribers with 50 or more locations operating in four or
more territories are deemed to be "national accounts." The national sales
program includes a committee of representatives of the Company and its
franchisees that oversees the pricing and other material terms for national
account subscriber contracts. The Company, through its Seattle headquarters,
coordinates the servicing of national accounts by its franchisees and
allocates revenues from national accounts among the participating franchisees.
The national sales office is comprised of 10 salespeople and is supported by
additional customer service personnel. At June 30, 1996, the Company and its
franchisees had national accounts representing over 65,000 subscriber
locations (of which approximately 40,000 were franchisee subscriber
locations), including those of Taco Bell, McDonald's, Burger King, Bob Evans,
Boston Markets, Crate & Barrel, Kroger, Staples, Hallmark and Wal-Mart. None
of the Company's national accounts represents more than 3% of the Company's
consolidated revenues, and the Company's top five national accounts represent
in the aggregate less than 10% of consolidated revenues.
INTERNATIONAL SALES
The Company has agreements with 15 international distributors and
franchisees in 10 countries outside the United States, including Canada,
Mexico, Japan, Argentina and Australia. These distributors and franchisees
either pay royalties to the Company based on their sales of business music
services or a flat fee based on the number of subscribers they serve.
Royalties and other fees from international sales accounted for approximately
2% of the Company's revenues in 1995.
In addition, in August 1995, the Company formed the Muzak Europe joint
venture with Alcas to more aggressively market the Company's services in
Europe. The joint venture, which is headquartered in Hilversum, The
Netherlands, has been offering business music and non-music services via
satellite transmission since January 1996 and is seeking to establish
relationships with key distributors throughout Europe. As of June 30, 1996,
Muzak Europe had entered into agreements with distributors in Ireland, the
United Kingdom, The Netherlands, Belgium and Hungary. In addition, it recently
acquired the Company's German distributor. As of June 30, 1996, Muzak Europe
was providing services to approximately 3,400 subscriber locations throughout
Europe.
Muzak Europe is a Netherlands corporation in which the Company and Alcas
each own 50% of the outstanding shares. The joint venture agreement between
the Company and Alcas that established Muzak Europe contains restrictions on
the disposition of both parties' shares in Muzak Europe. A credit facility
entered into by Muzak Europe to finance the purchase of the Company's German
distributor requires the Company and Alcas to make any additional investments
in Muzak Europe necessary to maintain equity of four million Netherlands
guilders (approximately $2.4 million), and of at least 25% of its consolidated
total assets. Any additional equity investments must be made equally by the
Company and Alcas. The credit facility also restricts the transfer of the
Company's shares in Muzak Europe.
The Company plans to expand into Latin America and Asia by establishing
similar strategic relationships in those markets.
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Until recently, the Company has not aggressively pursued the development of
its international business; however, the Company believes that the
international market offers significant growth potential. Although the Company
is now pursuing this market, no assurance can be given that the Company will
achieve significant growth in the international market.
COMPETITION
The Company's principal direct competitors in providing business music
services are AEI Music Network, Inc. ("AEI") of Seattle, Washington, and 3M
Sound and Communications, an affiliate of Minnesota Mining and Manufacturing
Corporation. In addition, the Company competes with a number of local
independent providers of business music. DMX, Inc. and Digital Cable Radio
Associates L.P. market and sell commercial-free music programming over cable
to residential cable television subscribers and have launched DBS services
aimed at business users. No assurance can be given that such competition will
not attract customers to whom the Company markets its services, including its
existing customers. In broadcast data delivery, video, audio marketing and in-
store advertising services, the Company faces competition from numerous
companies using broadcast as well as other delivery systems to provide similar
business services.
There are numerous methods by which programming, such as the Company's
business music services, broadcast data delivery, video, audio marketing and
in-store advertising services, can be delivered by existing and future
competitors, including various forms of DBS services, wireless cable and fiber
optic cable and digital compression over existing telephone lines. Many
competitors or potential competitors with access to these delivery
technologies have substantially greater financial, technical, personnel and
other resources than the Company. In addition, the larger communications
industry of which the Company is a part is undergoing significant and rapid
change, including the development of new services, delivery systems and
interactive technologies. In addition, the recently enacted Telecommunications
Act may increase competition in the markets in which the Company operates. The
Telecommunications Act resulted in comprehensive changes to the regulatory
environment for the telecommunications industry as a whole. The legislation
permits telephone companies to enter certain broadcast services businesses.
The entry of telephone companies into such businesses, with greater access to
capital and other resources, could provide significant competition to the
Company. In addition, the legislation affords relief to DBS transmission
providers by exempting them from local restrictions on small-size reception
antennae and preempting the authority of local governments to impose certain
taxes. The Company cannot reasonably predict how the FCC will enforce the
rules and policies promulgated under the Telecommunications Act, or the effect
of such rules and policies on competition in the market for the Company's
services.
The Company competes internationally with AEI and a number of regional
business music providers, some of whom have substantially greater financial,
technical, personnel and other resources than the Company.
The Company competes on the basis of service and system quality, versatility
and flexibility, the variety of its music formats, the availability of its
broadcast data and other non-music services and, to a lesser extent, price.
Even though it is seldom the lowest-priced provider of business music in any
territory, the Company believes that it can compete effectively on all these
bases due to the widespread recognition of the Muzak(R) name, its nationwide
sales and service infrastructure, the quality and variety of its music
programming and its multiple delivery systems. However, no assurance can be
given that the Company will be able to compete successfully with its existing
or potential new competitors or maintain or increase its current market share,
that it will be able to use, or compete effectively with competitors that
adopt, new delivery methods and technologies, or that discoveries or
improvements in the communications, media and entertainment industries will
not render obsolete some or all of the technologies or delivery systems
currently relied upon by the Company.
MUSIC LICENSES
Most music is copyrighted and the Company is required to enter into license
agreements to rerecord and play music in public spaces. The Company has
various types of licensing agreements and arrangements with
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major rights owners and organizations to permit the production and
distribution of its business music, including (i) master performance licensing
agreements with ASCAP, BMI and SESAC that permit public performance of
copyrighted music in a customer's location, (ii) mechanical licensing
agreements under which the Company receives rights to rerecord and make copies
of copyrighted music and (iii) licensing agreements with record companies that
allow the Company to produce, advertise and distribute to its on-premise tape
subscribers audio tapes containing original artist recordings.
The Company's agreement with ASCAP expires on May 31, 1999. During 1995, the
Company paid ASCAP fees aggregating approximately $2.6 million. The Company's
agreement with BMI expired on December 31, 1993 and its agreement with SESAC
expired on December 31, 1995. The Company has entered into an interim fee
structure with BMI and is in negotiations with BMI and SESAC with respect to
new agreements. The interim fee structure with BMI has been in place on an
ongoing month-to-month basis since the expiration of the underlying agreement,
and provides for continued payments at 1993 levels. The BMI license extension
stipulates that any settlement relating to ongoing fees may be retroactive to
January 1, 1994. Negotiations on a new contract with BMI began in early 1994
and at this time it is not known when negotiations will be completed. The
Company discontinued use of SESAC licensed material upon expiration of the
underlying agreement. Negotiations on a new contract with SESAC began in mid-
1995 and it is not known when these negotiations will be completed. During
1995, the Company paid BMI and SESAC fees aggregating approximately $950,000
and $7,000, respectively. The Company's total fees for mechanical licenses and
original artist recording licenses and licensing agreements with record
companies have not been material.
The Digital Recordings Act of 1995 (the "Digital Recordings Act") was
enacted into law on November 1, 1995. The Digital Recordings Act amends U.S.
copyright law to provide sound recording owners with an exclusive performance
right in sound recordings that are performed through digital transmissions.
The legislation was drafted to protect performers and copyright owners
potentially disadvantaged by the emergence of digital subscription services.
The Digital Recordings Act provides a compulsory license for non-interactive
subscription services, but does not provide a compulsory license for
interactive services (where the listener selects a musical piece based upon a
menu or schedule). As music services to or within a business are specifically
exempted from the provisions of the Digital Recordings Act, the digital
performance right does not apply to the Company's traditional business music
services (whether analog or digital). However, to the extent the Company
provides digital music services to residential customers, via satellite or
other broadcast delivery or via the Internet or other digital means, the
Digital Recordings Act would require the payment of additional royalties.
GOVERNMENT REGULATION
The Company is subject to the regulatory authority of the United States
government and the governments of other countries in which it provides
services to subscribers. The business prospects of the Company could be
adversely affected by the adoption of new laws, policies or regulations that
modify the present regulatory environment. The Company currently provides
music services in a few areas in the United States through 928 to 960
megahertz radio broadcast frequencies, which are licensed by the FCC.
Additionally, the satellites on which the Company transmits its DBS services
in the United States are licensed by the FCC. If the FCC authorizations for
any of these satellites are revoked or are not extended, the Company would be
required to seek alternative satellite facilities. Laws, regulations and
policy, or changes therein, in other countries could adversely affect the
Company's existing services or restrict the growth of the Company's business
in these countries.
PROPERTIES
The Company's headquarters in Seattle, Washington, consisting of
approximately 43,300 square feet, its 35 local and two national sales offices,
which occupy an aggregate of approximately 150,000 square feet, as well as
office and satellite uplink facilities at Raleigh, North Carolina and
Cheyenne, Wyoming and two warehouses in Seattle, are leased. The Company's
total lease payments during 1995 were approximately $2.4 million. In addition,
the Company owns office and warehouse facilities, aggregating approximately
21,000 square feet, in
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Buffalo, New York, Irving, Texas and Peoria, Illinois. The Company considers
its facilities to be adequate to meet its current and reasonably foreseeable
needs.
EMPLOYEES
At June 30, 1996, the Company had 734 full-time and part-time employees, of
whom 211 held sales and marketing positions, 186 held administrative positions
and 337 held technical and service positions. A total of 78 of the Company's
technical and service personnel are covered by ten union contracts with the
International Brotherhood of Electrical Workers ("IBEW"). The IBEW contracts
have currently effective terms that expire on dates ranging from November 30,
1996 to May 31, 1999. All of the IBEW contracts provide for successive
automatic one-year renewals, unless a notice of renegotiation or termination
is given prior to the end of the then-effective term. The Company does not
have any pending renegotiations of any of the IBEW contracts, but anticipates
that some of the contracts may be renegotiated as their current terms expire.
The Company believes its relationships with its employees and the IBEW are
good.
LEGAL PROCEEDINGS
The Company is subject to various proceedings arising in the ordinary course
of business, none of which, individually or in the aggregate, is expected to
have a material adverse effect on the Company's financial condition, results
of operations or liquidity.
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MANAGEMENT
The Board of Directors of Music Holdings Corp. ("Music Holdings"), an
affiliate of Centre Partners and the general partner of MLP Acquisition L.P.
("MLP Acquisition"), the managing general partner of the Company, functions as
the governing body of the Company. MLP Acquisition was organized to act as
managing general partner of the Company, and Music Holdings was organized to
act as the general partner of MLP Acquisition. MLP Acquisition and Music
Holdings are not involved in any investment activities and have no independent
operations, except the business operations of the Issuers. Executive officers
of the Company also act as officers of Capital Corp., but do not receive
additional compensation for such services.
DIRECTORS, EXECUTIVE OFFICERS AND OTHER SENIOR MANAGEMENT PERSONNEL
Certain information is set forth below concerning (i) executive officers and
other members of senior management of the Company and (ii) directors of Music
Holdings:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
Directors and Executive Officers:
<S> <C> <C>
John R. Jester.......... 55 President and Chief Executive Officer and a Director
James F. Harrison....... 49 Senior Vice President, Sales and Marketing
Kirk A. Collamer........ 44 Vice President and Chief Financial Officer
Thomas J. Gentry........ 61 Vice President and General Manager, DBS Division
John A. Neal............ 60 Vice President, Owned Operations
Paul F. Balser.......... 54 Director
William A. Boyd......... 55 Director
Mark E. Jennings........ 34 Director
Bruce G. Pollack........ 37 Director
Other Senior Management Personnel:
Wallace R. Borgeson..... 51 Vice President, Centralized Operations
Bruce B. Funkhouser..... 47 Vice President, Programming and Licensing
L. Dale Stewart......... 49 Vice President, Operations and Engineering
Jack D. Craig........... 61 Vice President, Affiliate Sales and Development
Richard Chaffee......... 53 Vice President, Owned Affiliate Operations
Roger C. Fairchild...... 48 Vice President, Owned Affiliate Sales and Market Development
J. Gary Henderson....... 42 President, In-Store Marketing Group
</TABLE>
John R. Jester has been a Director of Music Holdings, an affiliate of Centre
Partners and the general partner of MLP Acquisition, the managing general
partner of the Company, since September 1992, and has been President and Chief
Executive Officer of the Company and its predecessors since January 1988.
Prior to joining the Predecessor, Mr. Jester served from 1985 to 1987 as
President of US West Information Systems. From 1983 to 1985, Mr. Jester was
President of Executone Inc. Prior to that, Mr. Jester held various financial
and management positions with Contel Corporation, ITT Corporation and C & P of
Maryland, Inc. Mr. Jester currently serves as a director of Montana Power
Company.
James F. Harrison has been Senior Vice President for Sales and Marketing of
the Company and the Predecessor since March 1988. Prior to joining the
Predecessor, Mr. Harrison served from 1986 to 1987 as President of Telegence
Corporation, a start-up data communications manufacturer. From 1985 to 1986,
Mr. Harrison was Vice President of Marketing with US West Information Systems.
From 1983 to 1984, Mr. Harrison was Vice President of Business Market
Development for Contel Corporation's unregulated businesses. From 1981 to
1982, he was head of Communications Marketing Division at Wang Laboratories,
Inc., and from 1976 to 1980, Mr. Harrison was PBX Systems Engineering and
Development Supervisor and Member of the Technical Staff for Human Factors
Research with Bell Laboratories, Inc.
Kirk A. Collamer, a certified public accountant, has been Vice President of
Finance and Administration and Chief Financial Officer of the Company since
August 1995. Prior to joining the Company, Mr. Collamer served from July 1990
to July 1995 as Vice President of Finance at Ameritech Corporation for its
Enhanced Business Services division and Chief Financial Officer of its New
Zealand subsidiary. Prior to that time, Mr. Collamer held a variety of
financial and accounting positions with Jack Daniel Distillery/Brown-Forman
Corporation, Aladdin Industries, Inc. and Arthur Andersen LLP.
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<PAGE>
Thomas J. Gentry has been Vice President and General Manager of the DBS
Division of the Company and the Predecessor since June 1988. Prior to joining
the Predecessor, Mr. Gentry served from 1985 to 1987 as President and Chief
Executive Officer of SkySwitch Satellite Communications. Mr. Gentry has over
30 years of experience in telecommunications and satellite communications with
Westinghouse Defense Group, COMSAT Corporation, Western Union and Contel
A.S.C.
John A. Neal has been Vice President, Owned Operations of the Company and
the Predecessor since January 1991. From October 1988 to December 1990, Mr.
Neal served as Vice President of National Sales for the Predecessor. From 1987
to 1988, Mr. Neal was Vice President and Chief Operating Officer of Executone
Telecommunications, Rochester, New York. From 1979 to 1987, he was Vice
President of Sales for Contel Executone, where he developed and managed
Executone's National Account program.
Paul F. Balser has been a Director of Music Holdings since September 1992.
Mr. Balser was a partner of Centre Partners from 1986 until August 1995. In
August 1995, Mr. Balser resigned as an officer of the managing general partner
of Centre Partners to become a founding partner of Generation Capital Partners
L.P., a newly organized private investment partnership. From 1982 to 1986, Mr.
Balser was a Managing Director and a member of the Board of Directors of J.
Henry Schroeder Corp. Mr. Balser currently serves as a director of Kansas City
Southern Industries, Inc. (NYSE), The Carbide/Graphite Group, Inc. (Nasdaq),
The Quarton Group--Publishers, Inc., Jungle Jim's Playlands, Inc., Scientific
Games Holdings Corp. (Nasdaq) and Victory Holdings Corp.
William A. Boyd has been a Director of Music Holdings since August 1996.
From September 1995 to August 1996, Mr. Boyd was a private investor. From 1982
to September 1995, Mr. Boyd was owner and president of the largest franchisee
of the Company. Mr. Boyd was President of the Independent Affiliate
Organization from 1994 to 1995 and from 1986 to 1987. Mr. Boyd was also
President of the Company's Owned Affiliate division in 1987. Prior to owning a
franchise, Mr. Boyd held various positions with the Predecessor.
Mark E. Jennings has been a Director of Music Holdings since September 1992.
Through August 1995, Mr. Jennings was a partner of Centre Partners where he
has been employed since 1987. In August 1995, Mr. Jennings resigned as an
officer of the managing general partner of Centre Partners to become a
founding partner of Generation Capital Partners L.P. From 1986 to 1987, Mr.
Jennings was employed at Goldman, Sachs & Co. in its Corporate Finance
Department. Mr. Jennings currently serves as a director of The
Carbide/Graphite Group, Inc. (Nasdaq), Jungle Jim's Playlands, Inc.,
Scientific Games Holdings Corp. (Nasdaq) and Johnny Rockets Group, Inc.
Bruce G. Pollack has been a Director of Music Holdings since September 1995.
Mr. Pollack is a partner of Centre Partners, which he joined in January 1991,
and is a Managing Director of Centre Partners Management LLC, which was formed
in December 1995 to manage investments on behalf of Centre Capital Investors
II, L.P. and affiliated entities. From 1988 to June 1991, Mr. Pollack was an
officer and director of RSG Partners, Inc. and its predecessors, and from 1985
to 1988, Mr. Pollack was an officer of TSG Holdings, Inc. Mr. Pollack
currently serves as a director of Johnny Rockets Group, Inc., The Quarton
Group--Publishers, Inc., Jungle Jim's Playlands, Inc. and Victory Holdings
Corp. On December 28, 1992, a petition under chapter 11 of the U.S. bankruptcy
code was filed by SC Corporation and its operating subsidiaries, of which Mr.
Pollack served as a vice president until January 1991. Mr. Pollack is also a
director of, and prior to October 4, 1994 was a vice president of, Victory
Markets Inc. and New Almacs Inc., operating subsidiaries of Victory Holdings
Corp. that filed petitions under chapter 11 on September 20, 1995.
Wallace R. Borgeson has been Vice President of Centralized Operations of the
Company since August 1995. From April 1990 to August 1995, Mr. Borgeson served
as Vice President of Finance and Administration of the Company and the
Predecessor. From 1988 to 1990, Mr. Borgeson was the Chief Financial Officer
of Hickory Farms, Inc., and from 1971 to 1988, he served in various capacities
with Wurlitzer Company, most recently as Chief Financial Officer.
Bruce B. Funkhouser has been Vice President of Programming and Licensing of
the Company and the Predecessor since October 1987. From 1983 to 1987, Mr.
Funkhouser served as Programming and Production Manager for YesCo, Inc., which
was merged with a predecessor to the Predecessor in 1986. Prior to 1983, Mr.
Funkhouser was a record company owner and producer, former broadcasting
manager and on-air talent and Professor of Communications at Bellevue
Community College. He is a member of The American Federation of Television and
Radio Artists and The National Academy of Recording Arts and Sciences.
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<PAGE>
L. Dale Stewart has been Vice President of Operations and Engineering of the
Company and the Predecessor since November 1987. From 1986 to 1987, Mr.
Stewart was Acting General Manager and Operations Manager at the Predecessor's
New York City office. From 1984 to 1986, Mr. Stewart was General Manager of
the Corpus Christi, Texas franchise, and prior to that he worked for the
franchisee in San Antonio, Texas.
Jack D. Craig has been Vice President, Affiliate Sales and Development of
the Company and the Predecessor since September 1988. From 1983 to 1988, Mr.
Craig was Vice President, Dealer Sales for AEI. From 1979 to 1983, Mr. Craig
was Marketing/Sales Manager for Aiphone Corporation, a leading intercom
manufacturer. Prior to joining Aiphone Corporation, Mr. Craig served as Vice
President/Account Supervisor for 11 years with J. Walter Thompson Advertising.
Richard Chaffee has been Vice President, Owned Affiliate Operations of the
Company and the Predecessor since July 1987. Since joining a predecessor to
the Predecessor in 1968, Mr. Chaffee has served in both local sales offices
and franchisee operations in New York, Boston, Chicago, Minneapolis and
Charlotte, primarily as Chief Engineer and Operations Manager.
Roger C. Fairchild has been Vice President, Owned Affiliate Sales and Market
Development of the Company since December 1993. From January 1991 to December
1993, Mr. Fairchild provided consulting services to the Company and the
Predecessor through Strategic Growth Advisory, a marketing and business
development consultancy. From 1989 to 1991, Mr. Fairchild was President of a
start-up voice processing equipment manufacturer. From 1988 to 1989, Mr.
Fairchild was Director of Marketing for ADC Telecommunications, Inc., a $175
million growth-stage telecommunications manufacturer. From 1983 to 1988, Mr.
Fairchild served as a vice president of operations and marketing for a US West
Information Systems subsidiary.
J. Gary Henderson has been President of the In-Store Marketing Group of the
Company since December 1993. From April 1991 to November 1993, Mr. Henderson
was a private investor. From 1986 to April 1991, Mr. Henderson was Executive
Vice President and Chief Marketing Officer of POP Radio Corporation. From 1982
to 1986, Mr. Henderson was Account Director for Actmedia, Inc.
There are no family relationships among the directors and executive officers
of the Company.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
the Company's Chief Executive Officer and to each of the Company's four other
most highly compensated executive officers (together with the Chief Executive
Officer, the "Named Executive Officers") for services in all capacities
rendered to the Company and its subsidiaries in 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION COMPENSATION(2)
<S> <C> <C> <C> <C>
John R. Jester, $213,725 -- -- $2,310
President and Chief Executive
Officer
James F. Harrison, $172,750 -- -- $2,310
Senior Vice President, Sales &
Marketing
John A. Neal, $155,000 -- -- $1,744
Vice President, Owned
Operations
Thomas J. Gentry, $152,000 -- -- $1,995
Vice President and General
Manager, DBS Division
Wallace R. Borgeson, $113,000 -- -- $1,624
Vice President, Centralized
Operations(3)
</TABLE>
- ---------------------
(1) Bonuses in respect of services rendered in 1994 were determined and paid
in 1995 ($20,000 for Mr. Harrison, $25,000 for Mr. Neal, $18,000 for Mr.
Gentry and $12,000 for Mr. Borgeson). No bonuses were awarded to Named
Executive Officers with respect to services rendered in 1995.
(2) Consists of contributions by the Company to a defined contribution 401(k)
plan.
(3) Mr. Borgeson served as an executive officer of the Partnership and the
Predecessor until August 1995.
No restricted partnership interest awards, appreciation rights or long-term
incentive plan awards were awarded to, earned by or paid to the Named
Executive Officers during the fiscal year ended December 31, 1995.
DIRECTORS' COMPENSATION
Directors of Music Holdings, the general partner of the managing partner of
the Company, who are also employees of the Company receive no remuneration for
services as members of the Board or any committee of the Board. Directors who
are not employed by the Company receive an annual retainer of $20,000 plus
$3,000 for each meeting of the Board attended, except in the case of the
Centre Partners designees, who receive an annual retainer of $50,000, in each
case plus reimbursement of expenses. See "Certain Relationships and Related
Transactions."
CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
Effective August 31, 1992, the Company entered into five-year employment
agreements with each of John R. Jester, President and Chief Executive Officer
of the Company, and James F. Harrison, Senior Vice President of the Company.
Under his employment agreement, Mr. Jester currently receives an annual base
salary of $220,000, subject to cost of living adjustments. Under his
employment agreement, Mr. Harrison currently receives an annual base salary of
$178,000, subject to cost of living adjustments. Mr. Jester will receive a
bonus equal to 50% of his annual base salary if the Company achieves a
specified performance target for the 12 months ended December 31, 1996, which
target the Company believes will not be reached. If the target is not reached,
the Board of Directors may nonetheless award Mr. Jester a bonus in an amount
and on the terms determined by the Board of Directors (which amount shall not
exceed 50% of his annual base salary). Each of the agreements also provides
for a severance payment equal to the annual base salary and pro rata bonus in
the event of termination due to disability or death during the term of
employment. Both employment agreements also contain confidentiality covenants
and non-solicitation covenants which extend for five and two years,
respectively,
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<PAGE>
beyond the term of the agreements. The Company can terminate either agreement
without further liability in case of the officer's fraud against, or
embezzlement from, the Company, indictment or conviction of a felony or
misdemeanor having a material adverse effect on the Company or material
failure to discharge his duties. In addition, the Company can terminate the
agreements if there is a material uncured default under the Company's credit
agreements or if the Company's cumulative performance level is less than 80%
of the cumulative target projected for any month; provided that in either such
case the Company is required to pay a severance payment equal to, in the case
of Mr. Jester, his annual base salary plus a pro-rated bonus, or, in the case
of Mr. Harrison, his annual base salary. The Company may otherwise terminate
the agreements for any reason during their terms by paying a severance payment
equal to the lesser of (i) two times the then-effective annual base salary and
(ii) the amount of compensation to which Mr. Jester or Mr. Harrison, as the
case may be, would be entitled to receive between the date of termination and
the fifth anniversary of the employment agreement had the agreement in
question not been terminated; but in no event less than one year's annual base
salary at the then effective rate. Mr. Jester would also be entitled to
receive a pro-rated bonus if cumulative performance targets exceed projections
for the twelve-month period preceding such termination.
Pursuant to a letter dated July 7, 1995, Kirk A. Collamer, Vice President
and Chief Financial Officer of the Company, was hired at an annual salary of
$160,000 and is eligible for discretionary bonuses. In addition, Mr. Collamer
was entitled to purchase up to 150,000 units of partnership interests, of
which 60,000 units were subscribed and paid for at $1.75 per unit and the
remainder forfeited. Mr. Collamer was granted options to purchase 150,000
additional units of partnership interests at $1.75 per unit, conditional upon
the performance of the Company. Mr. Collamer also received $120,000 relating
to the sale of his home in Chicago and his relocation to Seattle.
AMENDED AND RESTATED OPTION PLAN
In August 1992, the Company adopted, and issued options under, the Company's
Management Option Plan (the "Original Option Plan"). As part of the Offering,
the Company will adopt the performance-based Amended and Restated Option Plan
to replace the Original Option Plan. The total number of outstanding options
granted under the Original Option Plan will be the same under the Amended and
Restated Option Plan, and the Original Option Plan will be terminated,
effective upon consummation of the Offering.
The Amended and Restated Option Plan provides for the granting of options to
purchase an aggregate of 1,840,000 units of partnership interest which will be
granted to 23 existing senior management members at an average exercise price
of $1.12 per unit in substitution of the outstanding options held by such
members of senior management under the Original Option Plan. Options granted
under the Amended and Restated Option Plan are not intended to qualify as
"incentive stock options" within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended (the "Code").
The purchase price of the units of partnership interest issuable upon
exercise of each option granted pursuant to the Amended and Restated Option
Plan will be the same as the exercise prices of the options granted under the
Original Option Plan. Options granted under the Amended and Restated Option
Plan expire seven years from the date of grant.
Options granted under the Amended and Restated Option Plan are non-
transferable, except by will, the laws of descent and distribution, or
pursuant to a qualified domestic relations order. As a condition to the
exercise of any option under the Amended and Restated Option Plan, the
optionee is required to become party to the Partnership Agreement (as defined
herein). See "Description of the Partnership Agreement."
Under the Amended and Restated Option Plan, John R. Jester will receive
options to purchase 325,000 units of partnership interest for $1.00 per unit;
James F. Harrison will receive options to purchase 205,000 units of
partnership interest for $1.00 per unit; John A Neal will receive options to
purchase 140,000 units of partnership interest for $1.00 per unit; Thomas J.
Gentry will receive options to purchase 140,000 units of partnership interest
for $1.00 per unit; and Wallace R. Borgeson will receive options to purchase
140,000 units of partnership interest for $1.00 per unit.
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<PAGE>
SENIOR MANAGEMENT INCENTIVE PLAN
In January 1996, the Company adopted the Senior Management Incentive Plan
(the "Incentive Plan"), to provide for annual incentive awards to senior
executives of the Company.
The Incentive Plan will be administered by the Compensation Committee.
Initially, there will be eleven participants in the Incentive Plan, including
Messrs. Jester, Harrison, Neal, Gentry and Borgeson.
Annual incentive awards under the Incentive Plan will be based on the
achievement by the Company of target levels of three distinct measures:
EBITDA, operating cash flow (as defined in the Incentive Plan) and revenue
growth in a calendar year. The annual incentives for participants may range
from no award (if minimum target levels are not reached) to a maximum of 43%
(if maximum target levels are reached) of base salary in effect at the end of
a plan year. No awards will be made under the Incentive Plan unless the
minimum target level for EBITDA is reached, regardless of the performance
levels for the other measurements. The Incentive Plan will first be effective
for the 1996 plan year.
If a participant's employment is terminated during a plan year, a pro-rated
bonus may be awarded at the discretion of the Compensation Committee.
Performance target levels may be modified, at the discretion of the
Compensation Committee, for significant transactions, such as acquisitions,
divestitures or development projects.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation decisions are made by the Board of Directors of Music
Holdings, which consists of Messrs. Balser, Jennings, Jester and Pollack.
Paul F. Balser and Mark E. Jennings are limited partners of MLP and prior to
August 1995 were officers of Park Road Corporation ("Park Road"), the managing
general partner of Centre Partners. Bruce G. Pollack, a director of Music
Holdings, is a limited partner of MLP and is an officer and director of Park
Road.
Centre Partners was paid (i) $324,000 for its efforts in initiating,
structuring and consummating the Comcast Acquisition and (ii) $150,000 as
consideration for the guarantees by MLP and CCI of a $10.0 million unsecured
loan made by UBS (the "UBS Loan"). In addition, the Company agreed to pay
Centre Partners $300,000 if any amounts were required to be paid under either
the MLP or CCI guarantee. Such guarantees have been discharged and no payments
were required to be made thereunder.
During each of 1992, 1993 and 1994, the Company paid to Centre Partners the
aggregate amount of $100,000 for the services of the Centre Partners designees
as directors of Music Holdings for the subsequent calendar year. In 1996, the
Company will pay to Centre Partners $162,500 for services provided by the
Centre Partners designees during 1995 and 1996.
BENEFIT PLAN
The Company maintains a 401(k) defined contribution savings and retirement
plan (the "Benefit Plan") that covers substantially all of the Company's
employees, including certain Named Executive Officers. Under the Benefit
Plan's savings portion, eligible employees may contribute from 2% to 14% of
their compensation per year, subject to certain tax law restrictions. The
Company may make a matching contribution of up to a maximum of 100% of the
first 2% and 50% of the next 4%, up to 6% of the total base salary contributed
by the employee each year. The Company's contributions under the retirement
portion of the Benefit Plan are determined annually by the Company, but may
not exceed 3% of the eligible employee's annual compensation. Benefit Plan
participants are immediately vested in their contributions as well as the
Company's contributions.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 17-108 of the Delaware Revised Uniform Limited Partnership Act (the
"RULPA") empowers a limited partnership to indemnify and hold harmless any
partner or other person from and against any and all claims and demands
whatsoever.
49
<PAGE>
The Third Amended and Restated Agreement of Limited Partnership of the
Company, dated as of November 4, 1994, as amended (the "Partnership
Agreement"), provides that the general partners of the Company, their
respective affiliates and all officers, partners, directors, employees,
stockholders and agents of the general partners and their respective
affiliates and all officers, agents and employees of the Company who are
partners of the Company, shall not be liable to the Company, to limited
partners or to any other person holding an interest in the Company for any
losses sustained or liabilities incurred, including monetary damages, as a
result of any act or omission of the general partners or any such other
person, if the conduct of the general partners or such other person did not
constitute fraud, willful misconduct or criminal conduct.
The Partnership Agreement also provides that the Company shall, to the
fullest extent permitted by law, indemnify and hold harmless the general
partners of the Company, their respective affiliates and the officers,
directors, employees and agents of the general partners and their respective
affiliates, from and against any and all liabilities and expenses which arise
by reason of any such person's management of the affairs of the Company or of
a general partner, or any such person's status as a general partner of the
Company or affiliate thereof, as a partner, director, officer, employee,
stockholder or agent thereof, or as a partner, director, officer, agent or
employee of the Company or a person serving at the request of such persons,
provided, that such liability or expense is not the result of the fraud,
willful misconduct or criminal conduct of the indemnitee.
In the event of the filing of a public offering of securities of the Company
pursuant to a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), the Partnership Agreement provides that the
Company shall indemnify and hold harmless holders of such securities
participating in such registration, the directors, officers, partners and
controlling persons of such holders, and partners of the Company for any
liability which arises from such filing under the Securities Act. The Issuers
have been informed that in the opinion of the Commission such indemnification
is against public policy and is therefore unenforceable.
Pursuant to the provisions of the Delaware General Corporation Law (the
"DGCL"), Capital Corp. has adopted provisions in its Certificate of
Incorporation which provide that directors of Capital Corp. shall not be
personally liable for monetary damages to Capital Corp. or its stockholders
for a breach of fiduciary duty as a director, except for liability as a result
of: (i) a breach of the director's duty of loyalty to Capital Corp. or its
stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) an act related to
the unlawful stock repurchase or payment of a dividend under Section 174 of
the DGCL; and (iv) transactions from which the director derived an improper
personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
Capital Corp.'s Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the fullest extent permitted under DGCL.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Company or Capital Corp. as
to which indemnification is being sought, nor is the Company or Capital Corp.
aware of any pending or threatened litigation that may result in claims for
indemnification by any director, officer, employee or other agent.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1994, the Company purchased substantially all of the assets of
Comcast in the Comcast Acquisition for total consideration of approximately
$33.0 million, $28.0 million of which was paid in cash and the balance of
which was paid with a $5.0 million 7% preferred limited partnership interest
of the Partnership.
In order to finance the Comcast Acquisition, the Company's existing secured
term loan and revolving credit facility, in respect of which UBS acts as agent
bank and is a lender, was increased. In addition, the Company borrowed $10.0
million under the UBS Loan. In November 1994, the UBS Loan was repaid in full
with proceeds from a subordinated financing involving the sale of $7.0 million
in additional preferred partnership interests to existing investors, including
MLP and certain of the Management Investors, with a pledge of the limited
partnership interests to the lenders under the term loan and revolving credit
facility, and an increase in an existing subordinated debt facility provided
by Barclays Bank PLC, New York Branch ("Barclays"), and Exeter Venture
Lenders, L.P. ("Exeter"). Barclays and Exeter were also granted the right to
purchase for nominal consideration additional interests in the Company
representing approximately 2.8% of the Company's equity.
During the years ended December 31, 1993, 1994 and 1995, and six-month
periods ended June 30, 1995 and 1996, the Company incurred interest expense of
approximately $3.7 million, $6.9 million, $7.4 million, $3.7 million and $3.5
million, respectively, in connection with the UBS term loan and revolving
credit facility and the Barclays subordinated debt facility. In addition, in
1993, 1994 and 1995, the Company paid an aggregate of $250,000, $1.9 million
and $122,000, respectively, in fees to UBS and Barclays in connection with
increases in the Company's term loan and establishment of and increases in the
revolving credit facility and the subordinated debt facility. The outstanding
senior indebtedness and outstanding subordinated indebtedness will be repaid
with the proceeds of the Offering. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Directors of Music Holdings, the general partner of the managing partner of
the Company, who are also employees of the Company receive no remuneration for
services as members of the Board or any committee of the Board. Directors who
are not employed by the Company receive an annual retainer of $20,000 plus
$3,000 for each meeting of the Board attended, except in the case of the
Centre Partners designees, who receive an annual retainer of $50,000, in each
case plus reimbursement of expenses. See "Management--Directors'
Compensation."
For additional information, See "Use of Proceeds" and "Management--
Compensation Committee Interlocks and Insider Participation."
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company as of the date hereof, by (i) each
interestholder known by the Company to beneficially own more than five percent
of the Company, (ii) each director of the general partner of the managing
general partner of the Company, (iii) the Named Executive Officers and (iv)
all directors of the general partner of the managing general partner of the
Company and executive officers of the Company as a group. The following table
excludes units of partnership interest issuable upon the exercise of options
under the Company's Amended and Restated Option Plan. Except pursuant to
applicable community property laws or as otherwise noted below, each of the
owners identified in the table has sole voting and investment power with
respect to the partnership interests beneficially owned by such person.
<TABLE>
<CAPTION>
NUMBER OF
PARTNERSHIP
NAME AND ADDRESS OF BENEFICIAL OWNER INTERESTS PERCENT
<S> <C> <C>
Centre Partners L.P.(1)............................... 12,668,493 62.9%
30 Rockefeller Plaza
Suite 5050
New York, NY 10020
UBS Capital LLC....................................... 1,803,569 9.0
299 Park Avenue
34th Floor
New York, NY 10171
Comcast Corporation(2)................................ 1,420,868 7.1
1500 Market Street
Philadelphia, PA 19102
Barclays Bank PLC..................................... 1,358,617 6.7
600 Fifth Avenue
New York, NY 10023
John R. Jester........................................ 366,816 1.8
James F. Harrison..................................... 217,985 1.1
Thomas J. Gentry...................................... 158,602 0.8
John A. Neal.......................................... 173,637 0.9
Wallace R. Borgeson................................... 99,221 0.5
Paul F. Balser........................................ * (3) * (3)
Mark E. Jennings...................................... * (3) * (3)
Bruce G. Pollack...................................... * (4) * (4)
All directors and executive officers as a group (8
persons)............................................. 1,016,261(5) 5.1(5)
</TABLE>
- ---------------------
* Less than 1%.
(1) Includes partnership interests held by MLP, of which Centre Partners is
the general partner. Centre Partners may be deemed to be indirectly
controlled, through Park Road, the managing general partner of Centre
Partners, by Lester Pollack, a Managing Director of Lazard Freres & Co.
LLC, an underwriter of this Offering, and the father of Bruce G. Pollack,
a director of the general partner of the managing general partner of the
Company.
(2) The Class C-1 Limited Partnership Interest beneficially owned by Comcast
Corporation is a preferred limited partnership interest convertible into
an equivalent number of shares of common stock in the event of the
incorporation of the Company. See "Description of the Partnership
Agreement."
(3) Excludes partnership interests held by Centre Partners and MLP. Messrs.
Balser and Jennings are limited partners of MLP and prior to August 1995
were officers of Park Road. Each disclaims beneficial ownership of such
partnership interests.
(4) Excludes partnership interests held by Centre Partners and MLP. Mr.
Pollack is a limited partner of MLP and is an officer and director of Park
Road. He disclaims beneficial ownership of such partnership interests.
(5) Excludes partnership interests held by Centre Partners and MLP.
52
<PAGE>
DESCRIPTION OF THE SENIOR NOTES
GENERAL
The Senior Notes will be issued pursuant to an Indenture (the "Indenture")
among the Issuers, as joint and several obligors, and First Trust National
Association, as trustee (the "Trustee"). The terms of the Senior Notes include
those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The Senior Notes are subject to all such terms, and holders of Senior
Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of the material provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. A copy of the form of Indenture has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part and is available
as set forth under "--Additional Information." The definitions of certain
terms used in the following summary are set forth below under "--Certain
Definitions."
The Senior Notes will represent unsecured senior obligations of the Issuers,
will rank senior in right of payment to all Subordinated Indebtedness of the
Issuers and will rank pari passu in right of payment with all senior
indebtedness of the Issuers. At June 30, 1996, on a pro forma basis after
giving effect to the Offering and the application of the estimated net
proceeds therefrom, the Issuers would have had approximately $1.1 million of
total indebtedness, other than the Senior Notes. The Senior Notes will be
guaranteed on a senior basis by all future Domestic Subsidiaries of the
Company (other than Capital Corp.). As of the date hereof, the Company has no
Subsidiaries other than Capital Corp, which will be a Restricted Subsidiary.
The Indenture will limit the ability of the Company and its Restricted
Subsidiaries to incur additional indebtedness; however, the Company and its
Restricted Subsidiaries will be permitted to incur certain indebtedness, which
may be secured. See "--Certain Covenants." Capital Corp. has no substantial
assets and no operations of any kind, and the Indenture will limit Capital
Corp.'s ability to acquire or hold any significant assets or other properties
or engage in any business activities. See "--Certain Covenants--Limitation on
Activities of Capital Corp." Under certain circumstances, the Company will be
able to designate future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes will be limited in aggregate principal amount to $100.0
million and will mature on , 2003. Interest on the Senior Notes will
accrue at the rate of % per annum and will be payable in cash semi-
annually in arrears on and , commencing on ,
1997, to holders of record on the immediately preceding and
. Interest on the Senior Notes will accrue from the most recent date
to which interest has been paid or, if no interest has been paid, from the
date of original issuance. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months. Principal, premium, if any, and
interest on the Senior Notes will be payable at the office or agency of the
Issuers maintained for such purpose within the City and State of New York or,
at the option of the Issuers, payment of interest may be made by check mailed
to the holders of the Senior Notes at their respective addresses set forth in
the register of holders of Senior Notes. Until otherwise designated by the
Issuers, the Issuers' office or agency in New York will be the office of the
Trustee maintained for such purpose. The Senior Notes will be issued in
registered form, without coupons, in denominations of $1,000 and integral
multiples thereof.
SUBSIDIARY GUARANTEES
The Issuers' payment obligations under the Senior Notes will be jointly and
severally guaranteed on a senior basis (the "Subsidiary Guarantees") by the
Guarantors. Each Subsidiary Guarantee will be a senior unsecured obligation of
the Guarantor issuing such Subsidiary Guarantee and will rank pari passu in
right of payment with all Guarantor Senior Indebtedness of such Guarantor. The
obligations of each Guarantor under its Subsidiary Guarantee will be limited
so as not to constitute a fraudulent conveyance under applicable law. See
"Risk Factors--Fraudulent Conveyance."
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<PAGE>
The Indenture will provide that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor,
unless (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee, under the Senior Notes and the Indenture, (ii) immediately after
giving effect to such transaction, no Default or Event of Default exists and
(iii) such Guarantor, or any Person formed by or surviving any such
consolidation or merger, would be permitted by virtue of the Company's pro
forma Fixed Charge Coverage Ratio to incur, immediately after giving effect to
such transaction, at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the covenant described above
under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Equity Interests;" provided that the foregoing provisions shall not apply to
any Asset Sale subject to the provisions described below under "Repurchase at
the Option of Holders--Asset Sales."
The Indenture will provide that, in the event of a sale or other disposition
of all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, such Guarantor (in the event of a sale or other disposition, by way
of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied
in accordance with the applicable provisions of the Indenture described below
under "Repurchase at the Option of Holders--Asset Sales."
OPTIONAL REDEMPTION
The Senior Notes will not be redeemable at the Issuers' option prior to
, 2000. Thereafter, the Senior Notes will be subject to redemption
at the option of the Issuers, in whole or in part, upon not less than 30 nor
more than 60 days' notice, in cash at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest, if any, thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on of the years indicated
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
<S> <C>
2000............................................................. %
2001............................................................. %
2002 and thereafter.............................................. 100.00%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the date of
this Prospectus, the Issuers may on any one or more occasions redeem up to 35%
of the initially outstanding aggregate principal amount of Senior Notes at a
redemption price equal to % of the principal amount thereof, plus accrued
and unpaid interest, if any, thereon to the redemption date, with the net
proceeds of one or more equity offerings of the Issuers generating in each
case net proceeds of at least $15.0 million; provided that at least 65% of the
initially outstanding aggregate principal amount of Senior Notes remains
outstanding immediately after the occurrence of any such redemption; and
provided, further, that such redemption shall occur within 60 days of the date
of the closing of any such equity offering of the Issuers.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Issuers are not required to make mandatory redemption or sinking fund payments
with respect to the Senior Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each holder of Senior Notes will
have the right to require the Issuers to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's Senior
54
<PAGE>
Notes pursuant to the offer described below (the "Change of Control Offer") at
an offer price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any, thereon to the date of
purchase (the "Change of Control Payment"). Within ten days following any
Change of Control, the Issuers will mail a notice to each holder describing
the transaction or transactions that constitute the Change of Control and
offering to repurchase Senior Notes pursuant to the procedures required by the
Indenture and described in such notice. The Issuers will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Senior Notes as a result
of a Change of Control.
On the payment date set forth in the Change of Control Offer (the "Change of
Control Payment Date"), the Issuers will, to the extent lawful, (i) accept for
payment all Senior Notes or portions thereof properly tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent an amount equal to
the Change of Control Payment in respect of all Senior Notes or portions
thereof so tendered and (iii) deliver or cause to be delivered to the Trustee
the Senior Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Senior Notes or portions thereof being
purchased by the Issuers. The Paying Agent will promptly mail to each holder
of Senior Notes so tendered the Change of Control Payment for such Senior
Notes, and the Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each holder a new Senior Note equal in principal
amount to any unpurchased portion of the Senior Notes surrendered, if any;
provided that each such new Senior Note will be in a principal amount of
$1,000 or an integral multiple thereof. The Issuers will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act) other than the Principals or their Related
Parties (as defined below), (ii) the adoption of a plan relating to the
liquidation or dissolution of the Company (other than as part of the
reorganization of the Company as a corporation), (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above), other than the
Principals and their Related Parties, becomes the "beneficial owner" (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly
or indirectly, of more than a majority of the voting Capital Interests of the
Company, (iv) the first day on which a majority of the members of the Board of
Directors are not Continuing Directors or (v) prior to the reorganization of
the Company as a corporation, the first day on which the Company ceases to own
100% of the outstanding Equity Interests of Capital Corp. For purposes of this
definition, any transfer of an equity interest of an entity that was formed
for the purpose of acquiring voting Capital Interests of the Company will be
deemed to be a transfer of such portion of such voting Capital Interests as
corresponds to the portion of the equity of such entity that has been so
transferred. Notwithstanding the foregoing, the reorganization of the Company
as a corporation shall not be deemed to constitute a Change of Control, so
long as such reorganization does not result in any of the occurrences
described above under clauses (i) through (v).
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Restricted Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of Senior Notes to
require the Issuers to repurchase such Senior Notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the
assets of the Company and its Restricted Subsidiaries taken as a whole to
another person or group may be uncertain.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors who (i) was a member of such Board of Directors on the
date of the Indenture or (ii) was nominated for election
or elected to such Board of Directors with the approval of the Principals and
their Related Parties or a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.
"Principals" means MLP Acquisition, MLP Holdings, Music Holdings, Centre
Partners and Park Road.
55
<PAGE>
"Related Party" with respect to any Principal means (a) any controlling
stockholder or general partner, 80% (or more) owned Subsidiary, or spouse or
immediate family member (in the case of an individual) of such Principal or
(b) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or more
controlling interest of which consist of such Principal and/or such other
Persons referred to in the immediately preceding clause (a), or (c) any Person
employed by the Company in a management capacity as of the date of the
Indenture.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the Senior Notes to
require that the Issuers repurchase or redeem the Senior Notes in the event of
a takeover, recapitalization or similar restructuring.
Asset Sales
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, engage in an Asset Sale, unless (a) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (b) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary
is in the form of cash or Cash Equivalents; provided that the amount of (i)
any liabilities (as shown on the Company's or such Restricted Subsidiary's
most recent balance sheet or in the notes thereto), of the Company or any
Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Senior Notes or any guarantee thereof) that are assumed by
the transferee of any such assets and (ii) any notes or other obligations
received by the Company or any such Restricted Subsidiary from such transferee
that are promptly converted by the Company or such Restricted Subsidiary into
cash (to the extent of the cash received), shall be deemed to be cash for
purposes of this provision; and provided, further, that the limitation in
clause (b) above shall not apply to any Asset Sale in which the cash portion
of the consideration received therefor, determined in accordance with
foregoing proviso, is equal to or greater than what the after-tax net proceeds
would have been had such Asset Sale complied with the aforementioned
limitation.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Issuers may apply such Net Proceeds (a) to permanently reduce Pari Passu
Indebtedness, (b) to permanently reduce Indebtedness permitted to be incurred
pursuant to clause (i) of the second paragraph of the covenant described below
under "--Incurrence of Indebtedness and Issuance of Preferred Equity
Interests" or (c) to an investment in another business, the making of a
capital expenditure or the acquisition of other tangible assets, in each case,
in the same or a similar or related line of business as the Issuers were
engaged in on the date of the Indenture. Pending the final application of any
such Net Proceeds, the Company and its Restricted Subsidiaries may temporarily
reduce Senior Revolving Debt or otherwise invest such Net Proceeds in any
manner that is not prohibited by the Indenture. Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the first sentence of
this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10.0 million, the Company will be
required to make an offer to all holders of Senior Notes (an "Asset Sale
Offer") to purchase the maximum principal amount of Senior Notes that may be
purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 101% of the principal amount thereof, plus accrued and unpaid
interest thereon to the date of purchase (the "Asset Sale Offer Price"), in
accordance with the procedures set forth in the Indenture. To the extent that
the aggregate amount of Senior Notes tendered pursuant to an Asset Sale Offer
is less than the Excess Proceeds, the Company and its Restricted Subsidiaries
may use any remaining Excess Proceeds for general corporate purposes. If the
aggregate principal amount of Senior Notes surrendered by holders thereof
exceeds the amount of Excess Proceeds, the Trustee shall select the Senior
Notes to be purchased on a pro rata basis. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
SELECTION AND NOTICE
If less than all of the Senior Notes are to be redeemed at any time,
selection of Senior Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities
exchange, if
56
<PAGE>
any, on which the Senior Notes are listed, or, if the Senior Notes are not so
listed, on a pro rata basis, by lot or by such method as the Trustee shall
deem fair and appropriate; provided that no Senior Notes of $1,000 or less
shall be redeemed in part. Notices of redemption shall be mailed by first
class mail at least 30 but not more than 60 days before the redemption date to
each holder of Senior Notes to be redeemed at its registered address. If any
Senior Note is to be redeemed in part only, the notice of redemption that
relates to such Senior Note shall state the portion of the principal amount
thereof to be redeemed. A new Senior Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof
upon cancellation of the original Senior Note. On and after the redemption
date, interest ceases to accrue on Senior Notes or portions of them called for
redemption.
CERTAIN COVENANTS
Restricted Payments
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, (i) declare or
pay any dividend or make any distribution on account of the Company's or any
of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any such distribution by such Persons in connection with any
merger or consolidation involving the Company or Capital Corp. but excluding
any such distribution directly relating to the reorganization of the Company
as a corporation) (other than dividends or distributions payable in Equity
Interests (other than Disqualified Interests) of the Company or dividends or
distributions payable to the Company or any Wholly Owned Restricted Subsidiary
of the Company); (ii) purchase, redeem or otherwise acquire or retire for
value any Equity Interests of the Company or any direct or indirect parent of
the Company; (iii) make any principal payment on, or purchase, redeem, defease
or otherwise acquire or retire for value any Subordinated Indebtedness, except
at final maturity; or (iv) make any Restricted Investment (all such payments
and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of and
after giving effect to such Restricted Payment:
(A) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(B) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the most recently ended four fiscal quarters for which
financial statements are available, have been permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described above
under caption "--Incurrence of Indebtedness and Issuance of Preferred
Equity Interests;" and
(C) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture (excluding Restricted Payments permitted by
clauses (ii), (iii), (iv), (vi) and (vii) of the next succeeding
paragraph), is less than the sum of (1) 50% of the Consolidated Net Income
of the Company for the period (taken as one accounting period) from the
beginning of the first fiscal quarter commencing after the date of the
Indenture to the end of the Company's most recently ended fiscal quarter
for which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is
a deficit, less 100% of such deficit), plus (2) 100% of the aggregate net
cash proceeds received by the Company from the issue or sale since the date
of the Indenture of Equity Interests of the Company or of debt securities
of the Company that have been converted into such Equity Interests (other
than Equity Interests (or convertible debt securities) sold to a Subsidiary
of the Company and other than Disqualified Interests or debt securities
that have been converted into Disqualified Interests), plus (3) to the
extent that any Restricted Investment that was made after the date of the
Indenture is sold for cash or otherwise liquidated or repaid for cash, the
lesser of (x) the cash return of capital with respect to such Restricted
Investment (less the cost of disposition, if any) and (y) the initial
amount of such Restricted Investment.
The foregoing provisions will not prohibit (i) the payment of any dividend
or distribution within 60 days after the date of declaration thereof, if at
said date of declaration such payment would have complied with the
57
<PAGE>
provisions of the Indenture; (ii) the redemption, repurchase, retirement or
other acquisition of any Equity Interests of the Company in exchange for, or
out of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary of the Company) of other Equity Interests of the Company (other
than any Disqualified Interests); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (C)(2) of the
preceding paragraph; (iii) the defeasance, redemption or repurchase of
Subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness or the substantially concurrent sale (other
than to a Subsidiary of the Company) of Equity Interests of the Company (other
than Disqualified Interests); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement or
other acquisition shall be excluded from clause (C)(2) of the preceding
paragraph; (iv) distributions not more frequently than quarterly in accordance
with the Code in respect of partners' income tax liability in an amount not to
exceed the Tax Amount; (v) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company or any Restricted
Subsidiary of the Company held by any member of the Company's (or any of its
Restricted Subsidiaries') management pursuant to the Partnership Agreement or
any management equity subscription agreement or stock option agreement in
effect as of the date of the Indenture or any successor arrangement entered
into in connection with the reorganization of the Company as a corporation
(provided that such successor arrangement is on terms substantially similar to
those of the arrangement so replaced); provided that the aggregate price paid
for all such repurchased, redeemed, acquired or retired Equity Interests shall
not exceed $500,000 in each twelve-month period, plus the amount of any such
amounts which remain unused at the end of the two prior twelve-month periods,
but in no event shall such aggregate amount exceed $1.5 million in any such
twelve-month period, plus the aggregate cash proceeds received by the Company
during such twelve-month period from any reissuance of Equity Interests by the
Company to members of management of the Company and its Restricted
Subsidiaries; and no Default or Event of Default shall have occurred and be
continuing immediately after such transaction; (vi) prior to the
reorganization of the Company as a corporation, distributions or payments to
partners of the Company in an aggregate amount not to exceed $750,000 in any
fiscal year in respect of Administrative Expenses; and (vii) following the
reorganization of the Company as a corporation, (A) payments by the Company to
its parent pursuant to any tax sharing agreement between the Company and such
parent, (B) reimbursement payments by the Company to such parent in respect of
out-of-pocket insurance payments made by such parent on behalf of the Company
and its Restricted Subsidiaries and (C) payments by the Company to such parent
in respect of Administrative Expenses.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at
the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the fair market value of such Investments at the time of such
designation. Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the
Restricted Payment of the asset(s) proposed to be transferred by the Company
or such Subsidiary, as the case may be, pursuant to the Restricted Payment.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which
calculations may be based upon the Issuers' latest available financial
statements.
Incurrence of Indebtedness and Issuance of Preferred Equity Interests
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guaranty or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the
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Company will not issue any Disqualified Interests and will not permit any of
its Subsidiaries to issue any shares of preferred stock or preferred
partnership interests; provided that the Company and any of its Restricted
Subsidiaries that is a Guarantor may incur Indebtedness (including Acquired
Debt) or issue Disqualified Interests, if the Fixed Charge Coverage Ratio for
the Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which
such additional Indebtedness is incurred or such Disqualified Interests is
issued would have been at least (a) 2.0 to 1, on or prior to December 31,
1998, and (b) 2.25 to 1, thereafter, in each case, determined on a pro forma
basis (including a pro forma application of the net proceeds therefrom), as if
the additional Indebtedness had been incurred, or the Disqualified Interests
had been issued, as the case may be, at the beginning of such four-quarter
period.
The foregoing provisions will not apply to:
(i) the incurrence by the Company and any of its Restricted Subsidiaries
that is a Guarantor of Senior Revolving Debt and letters of credit pursuant
to any Credit Facility for working capital purposes (with letters of credit
being deemed to have a principal amount equal to the maximum potential
liability of the Company thereunder) in an aggregate principal amount not
to exceed the amount of the Borrowing Base;
(ii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness and the Company's Class C-1 Limited Partner Interest
outstanding as of the date of the Indenture and any conversion of such
interest in accordance with the terms of the Partnership Agreement;
(iii) the incurrence by the Company and Capital Corp. of the Indebtedness
represented by the Senior Notes and the incurrence by any Guarantor of the
Indebtedness represented by its Subsidiary Guarantee;
(iv) the incurrence by the Company and any of its Restricted Subsidiaries
that is a Guarantor of Permitted Refinancing Indebtedness in exchange for,
or the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund, Indebtedness that was permitted by the Indenture to be
incurred;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Wholly Owned Restricted Subsidiaries; provided that (A) any subsequent
issuance or transfer of Equity Interests that results in any such
Indebtedness being held by a Person other than a Wholly Owned Restricted
Subsidiary and (B) any sale or other transfer of any such Indebtedness to a
Person that is not either the Company or a Wholly Owned Restricted
Subsidiary shall be deemed, in each case, to constitute an incurrence of
such Indebtedness by the Company or such Restricted Subsidiary, as the case
may be;
(vi) the incurrence by the Company and any of its Restricted Subsidiaries
that is a Guarantor of Indebtedness represented by Capital Lease
Obligations, mortgage financings or purchase money obligations, in each
case incurred for the purpose of financing up to all or any part of the
purchase price or cost of construction or improvement of property used in
the business of the Company or such Restricted Subsidiary, in an aggregate
principal amount not to exceed $2.0 million at any time outstanding;
(vii) the incurrence by the Company and any of its Restricted
Subsidiaries that is a Guarantor of Hedging Obligations that are incurred
for the purpose of fixing or hedging interest rate risk with respect to any
floating rate Indebtedness that is permitted by the terms of this Indenture
to be outstanding;
(viii) the incurrence by the Company and any of its Restricted
Subsidiaries that is a Guarantor of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in
the ordinary course of business;
(ix) the incurrence by the Foreign Restricted Subsidiaries of the Company
of Indebtedness in an aggregate amount not to exceed $3.0 million at any
time outstanding;
(x) the incurrence by the Company and any of its Restricted Subsidiaries
that is a Guarantor of Indebtedness not otherwise permitted under the
Indenture in an aggregate amount not to exceed $5.0 million at any time
outstanding, less the aggregate principal amount of any Indebtedness
incurred pursuant to clause (ix) of this paragraph; and
(xi) the incurrence by the Company's Unrestricted Subsidiaries of Non-
Recourse Debt, provided that, if any such Indebtedness ceases to be Non-
Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to
constitute an incurrence of Indebtedness by a Restricted Subsidiary of the
Company.
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Liens
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, create, incur, assume or otherwise
cause or suffer to exist or become effective any Lien of any kind (other than
Permitted Liens) upon any of their property or assets, now owned or hereafter
acquired, unless all payments due under the Indenture and the Senior Notes and
the Subsidiary Guarantees, if any, are secured on an equal and ratable basis
with the obligations so secured until such time as such obligations are no
longer secured by a Lien.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (a)(i) pay
dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (A) on their Capital Interests or (B) with respect to
any other interest or participation in, or measured by, its profits, or (ii)
pay any indebtedness owed to the Company or any of its Restricted
Subsidiaries, (b) make loans or advances to the Company or any of its
Restricted Subsidiaries or (c) transfer any of its properties or assets to the
Company or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (i) Existing Indebtedness as in
effect on the date of the Indenture, (ii) any Credit Facility or Foreign
Credit Facility, provided that any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
thereto are no more restrictive with respect to such dividend and other
payment restrictions than those contained in such credit facility as in effect
on the date of its execution, (iii) the Indenture and the Senior Notes, (iv)
applicable law, (v) by reason of customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (vi) Capital Lease Obligations, mortgage financings or purchase
money obligations for property acquired in the ordinary course of business
that impose restrictions of the nature described in clause (c) above on the
property so acquired, (vii) existing with respect to any Person or the
property or assets of such Person acquired by the Company or any of its
Restricted Subsidiaries, at the time of such acquisition and not incurred in
contemplation thereof, which encumbrances or restrictions are not applicable
to any Person or the property or assets of any Person other than such Person
or the property or assets of such Person so acquired, or (viii) Permitted
Refinancing Indebtedness, provided that the restrictions contained in the
agreements governing such Permitted Refinancing Indebtedness are no more
restrictive than those contained in the agreements governing the Indebtedness
being refinanced.
Merger, Consolidation, or Sale of Assets
The Indenture will provide that neither the Company nor Capital Corp. may
consolidate or merge with or into (whether or not the Company or Capital
Corp., as the case may be, is the surviving corporation), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
its properties or assets in one or more related transactions to, another
corporation, Person or entity, unless (i) the Company or Capital Corp., as the
case may be, is the surviving Person or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company or
Capital Corp., as the case may be) or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made is
organized and existing under the laws of the United States, any state thereof
or the District of Columbia, provided that Capital Corp. may not consolidate
or merge with or into any entity other than a corporation satisfying such
requirements for so long as the Company remains a partnership; (ii) the entity
or Person formed by or surviving any such consolidation or merger (if other
than the Company or Capital Corp.) or the entity or Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of the Issuers under the Senior Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) the Company, Capital Corp. or the
entity or Person formed by or surviving any such consolidation or merger, or
to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated
Net Worth of the Company or Capital Corp. immediately preceding the
transaction and (B) will, at the time of such transaction and after
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giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described above
under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Equity Interests."
Notwithstanding the foregoing, the Indenture will permit the Company to
reorganize as a corporation in accordance with the procedures established in
the Indenture provided that such reorganization is not materially adverse to
holders of the Senior Notes (it being recognized that such reorganization
shall not be considered materially adverse to the holders of Senior Notes
solely because (a) of the accrual of deferred tax liabilities resulting from
such reorganization or (b) the successor or surviving corporation (i) is
subject to income taxation as an entity or (ii) is considered to be an
"includible corporation" of an affiliated group of corporations within the
meaning of Section 1504(a)(1) of the Code or any similar state or local law)
and certain other conditions are satisfied.
Transactions with Affiliates
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make any contract, agreement, understanding,
loan, advance or guarantee with, or for the benefit of, any Affiliate (each of
the foregoing, an "Affiliate Transaction"), unless (a) such Affiliate
Transaction is on terms that are no less favorable to the Company or the
relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (b) the Company delivers to the Trustee (i) with respect
to any Affiliate Transaction involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause
(a) above and that such Affiliate Transaction has been approved by a majority
of the disinterested members of the Board of Directors and (ii) with respect
to any Affiliate Transaction involving aggregate consideration in excess of
$7.5 million, an opinion as to the fairness to the Company or such Restricted
Subsidiary of such Affiliate Transaction from a financial point of view issued
by a nationally-recognized investment banking firm; provided that (A) any
reasonable employment arrangement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business of the Company or
such Restricted Subsidiary, (B) transactions between or among the Company
and/or its Restricted Subsidiaries, (C) following the reorganization of the
Company as a corporation, the payment of reasonable fees, expense
reimbursement and customary indemnification and other similar arrangements to
directors of the Company, (D) reasonable loans or advances to employees of the
Company and its Restricted Subsidiaries in the ordinary course of business and
(E) transactions permitted by the provisions of the Indenture described above
under the caption "--Restricted Payments," in each case, shall not be deemed
to be Affiliate Transactions.
Sale and Leaseback Transactions
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that the Company and any of its Restricted Subsidiaries
that is a Guarantor may enter into a sale and leaseback transaction if (a) the
Company or such Restricted Subsidiary could have (i) incurred Indebtedness in
an amount equal to the Attributable Debt relating to such sale and leaseback
transaction pursuant to the covenant described above under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Equity Interests" and
(ii) incurred a Lien to secure such Indebtedness pursuant to the covenant
described above under the caption "--Liens," (b) the gross cash proceeds of
such sale and leaseback transaction are at least equal to the fair market
value (as determined in good faith by the Board of Directors and set forth in
an Officers' Certificate delivered to the Trustee) of the property that is the
subject of such sale and leaseback transaction and (c) the transfer of assets
in such sale and leaseback transaction is permitted by, and the Company or
such Restricted Subsidiary applies the proceeds of such transaction in
compliance with, the covenant described above under the caption "--Asset
Sales."
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Limitation on Issuances and Sales of Capital Interests of Wholly Owned
Subsidiaries
The Indenture will provide that the Company (a) will not, and will not
permit any Wholly Owned Restricted Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Interests of any
Wholly Owned Restricted Subsidiary of the Company to any Person (other than
the Company or a Wholly Owned Restricted Subsidiary of the Company), unless
(i) such transfer, conveyance, sale, lease or other disposition is of all the
Capital Interests of such Wholly Owned Restricted Subsidiary and (ii) the cash
Net Proceeds from such transfer, conveyance, sale, lease or other disposition
are applied in accordance with the covenant described above under the caption
"--Asset Sales," and (b) will not permit any Wholly Owned Restricted
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, Capital Interests constituting directors' qualifying shares or
interests) to any Person other than to the Company or a Wholly Owned
Restricted Subsidiary of the Company; provided that, notwithstanding the
foregoing, Capital Corp. shall, at all times prior to the reorganization of
the Company as a corporation, remain a Wholly Owned Restricted Subsidiary of
the Company.
Limitations on Issuances of Guarantees of Indebtedness
The Indenture will provide that the Company will not permit any Restricted
Subsidiary, directly or indirectly, to Guarantee or secure the payment of any
other Indebtedness, unless such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for the
Guarantee of the payment of the Senior Notes by such Restricted Subsidiary,
which Guarantee shall be senior to or pari passu with such Restricted
Subsidiary's Guarantee of, or pledge to secure, such other Indebtedness.
Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary
of the Senior Notes shall provide by its terms that it shall be automatically
and unconditionally released and discharged upon either (a) the release or
discharge of such Guarantee of such Indebtedness, except a discharge by or as
a result of payment under such Guarantee, or (b) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the
Company's Capital Interests in, or all or substantially all the assets of,
such Restricted Subsidiary, which sale, exchange or transfer is made in
compliance with the applicable provisions of the Indenture. The form of such
Guarantee will be attached as an exhibit to the Indenture.
Subsidiary Guarantees
The Indenture will provide that if the Company or any of its Restricted
Subsidiaries shall, after the date of the Indenture, (a) transfer or cause to
be transferred, in one or a series of transactions (whether or not related),
any assets, businesses, divisions, real property or equipment having an
aggregate fair market value (as determined in good faith by the Board of
Directors) in excess of $1.0 million to any Domestic Subsidiary that is not a
Guarantor, (b) acquire another Domestic Subsidiary having total assets with a
fair market value (as determined in good faith by the Board of Directors) in
excess of $1.0 million or (c) redesignate an Unrestricted Subsidiary that is a
Domestic Subsidiary as a Restricted Subsidiary having total assets with a fair
market value (as determined in good faith by the Board of Directors) in excess
of $1.0 million, then such transferee or acquired or redesignated Subsidiary
shall execute a Subsidiary Guarantee and a supplemental indenture and deliver
an opinion of counsel, in accordance with the terms of the Indenture; provided
that the foregoing shall not apply to any Subsidiary that has been properly
designated as an Unrestricted Subsidiary in accordance with the Indenture for
so long as such Subsidiary continues to constitute an Unrestricted Subsidiary.
Business Activities
The Company will not, and will not permit any Subsidiary to, engage in any
business other than such business activities as the Company or its
Subsidiaries are engaged in on the date of the Indenture and such business
activities similar or reasonably related thereto.
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Limitation on Activities of Capital Corp.
In addition to the restrictions set forth under "--Incurrence of
Indebtedness and Issuance of Preferred Equity Interests," the Indenture will
provide that Capital Corp. may not incur any Indebtedness, unless (a) the
Company is a co-obligor or guarantor of such Indebtedness or (b) the net
proceeds of such Indebtedness are lent to the Company, used to acquire
outstanding debt securities issued by the Company or used directly or
indirectly to refinance or discharge Indebtedness permitted under the
limitations of this paragraph. The Indenture will also provide that Capital
Corp. may not acquire or hold any significant assets or other properties or
engage in any business activities, other than those business activities
related directly or indirectly to obtaining money or arranging financing for
the Company.
Payments for Consent
The Indenture will provide that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any holder of
any Senior Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the Indenture or the Senior Notes, unless
such consideration is offered to be paid or agreed to be paid to all holders
of the Senior Notes that consent, waive or agree to amend in the time frame
set forth in the solicitation documents relating to such consent, waiver or
agreement.
Reports
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any Senior Notes are outstanding,
the Issuers will furnish to the holders of Senior Notes (i) all quarterly and
annual financial information that would be required to be contained in a
filing with the Commission on Forms 10-Q and 10-K if the Issuers were required
to file such Forms, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Issuers' certified independent
accountants and (ii) all current reports that would be required to be filed
with the Commission on Form 8-K if the Issuers were required to file such
reports. In addition, whether or not required by the rules and regulations of
the Commission, the Issuers will file a copy of all such information and
reports with the Commission for public availability (unless the Commission
will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Senior Notes; (ii) default in the payment of all or any part of the principal,
or premium, if any, on the Senior Notes when and as the same becomes due and
payable at maturity, upon redemption, by acceleration, or otherwise,
including, without limitation, the payment of the Change of Control Payment or
the Asset Sale Offer Price, or otherwise; (iii) failure by any of the Issuers
or any of their respective Subsidiaries to observe or perform any other
covenant or agreement on the part of such Issuer or such Subsidiary contained
in the Senior Notes or the Indenture and, subject to certain exceptions, the
continuance of such failure for a period of 30 days after written notice is
given to the Issuers by the Trustee or to the Issuers and the Trustee by the
holders of at least 25% in aggregate principal amount of the Senior Notes then
outstanding, specifying such default and requiring that it be remedied; (iv)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for
money borrowed by the Company or any of its Restricted Subsidiaries (or the
payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries) whether such Indebtedness or guarantee now exists, or is created
after the date of the Indenture, which default (A) is caused by a failure to
pay principal of or premium, if any, or interest on such Indebtedness prior to
the expiration of the grace period provided in such Indebtedness on the date
of such default (a "Payment Default") or (B) results in the acceleration of
such Indebtedness prior to its express maturity and, in each case, the
principal amount of any such Indebtedness, together with the
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principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$5.0 million or more; (v) failure by the Company or any of its Subsidiaries to
pay final judgments aggregating in excess of $5.0 million, which judgments are
not paid, discharged or stayed for a period of 60 days; (vi) except as
permitted by the Indenture, any Subsidiary Guarantee shall be held in any
judicial proceeding to be unenforceable or invalid or shall cease for any
reason to be in full force and effect or any Guarantor, or any Person acting
on behalf of any Guarantor, shall deny or disaffirm its obligations under its
Subsidiary Guarantee; and (vii) certain events of bankruptcy or insolvency
with respect to the Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding Senior Notes may
declare all the Senior Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company, any
Significant Subsidiary or any group of Subsidiaries that, taken together,
would constitute a Significant Subsidiary, all outstanding Senior Notes will
become due and payable without further action or notice. Holders of the Senior
Notes may not enforce the Indenture or the Senior Notes except as provided in
the Indenture. Subject to certain limitations, holders of a majority in
principal amount of the then outstanding Senior Notes may direct the Trustee
in its exercise of any trust or power. The Trustee may withhold from holders
of the Senior Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Issuers with
the intention of avoiding payment of the premium that the Issuers would have
had to pay if the Issuers then had elected to redeem the Senior Notes pursuant
to the optional redemption provisions of the Indenture, an equivalent premium
shall also become and be immediately due and payable to the extent permitted
by law upon the acceleration of the Senior Notes. If an Event of Default
occurs prior to , 2000 by reason of any willful action (or
inaction) taken (or not taken) by or on behalf of
the Issuers with the intention of avoiding the prohibition on redemption of
the Senior Notes prior to , 2000, then the premium specified in
the Indenture shall also become immediately due and payable to the extent
permitted by law upon the acceleration of the Senior Notes.
The holders of a majority in aggregate principal amount of the Senior Notes
then outstanding by notice to the Trustee may on behalf of the holders of all
of the Senior Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Senior Notes.
The Issuers are required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuers are required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, PARTNERS AND
STOCKHOLDERS
No director, officer, employee, incorporator, partner or stockholder of any
Issuer, as such, shall have any liability for any obligations of such Issuer
under the Senior Notes or the Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each holder of Senior
Notes by accepting a Senior Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Senior
Notes. Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Issuers may, at their option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Notes ("Legal
Defeasance") except for (i) the rights of holders of outstanding Senior Notes
to receive payments in respect of the principal of, premium, if any, and
interest on such Senior Notes
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when such payments are due from the trust referred to below, (ii) the Issuers'
obligations with respect to the Senior Notes concerning issuing temporary
Senior Notes, registration of Senior Notes, mutilated, destroyed, lost or
stolen Senior Notes and the maintenance of an office or agency for payment and
money for security payments held in trust, (iii) the rights, powers, trusts,
duties and immunities of the Trustee, and the Issuers' obligations in
connection therewith and (iv) the Legal Defeasance provisions of the
Indenture. In addition, the Issuers may, at their option and at any time,
elect to have the obligations of the Issuers released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Senior Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described
under "Events of Default" will no longer constitute an Event of Default with
respect to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Issuers must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Senior Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on
the outstanding Senior Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Issuers must specify whether the
Senior Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Issuers shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Issuers have received from,
or there has been published by, the Internal Revenue Service a ruling or (B)
since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the holders of the outstanding
Senior Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Issuers shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to
the Trustee
confirming that the holders of the outstanding Senior Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of
funds to be applied to such deposit) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such Legal Defeasance or
Covenant Defeasance will not result in a breach or violation of, or constitute
a default under any material agreement or instrument (other than the
Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Issuers must
have delivered to the Trustee an opinion of counsel to the effect that after
the 91st day following the deposit, and assuming that prior to such 91st day
no voluntary or involuntary bankruptcy case has been commenced with respect to
any Issuer, such deposit will not constitute a preference as defined in
Section 547 of the U.S. Bankruptcy Code, and, assuming such a bankruptcy case
is commenced on or after such 91st day, the trust funds will not constitute
property included within the estate of the debtor; (vii) the Issuers must
deliver to the Trustee an Officers' Certificate stating that the deposit was
not made by the Issuers with the intent of preferring the holders of Senior
Notes over the other creditors of the Issuers with the intent of defeating,
hindering, delaying or defrauding creditors of the Issuers or others; and
(viii) the Issuers must deliver to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent provided for
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Senior Notes in accordance with the
Indenture. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents
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and the Issuers may require a holder to pay any taxes and fees required by law
or permitted by the Indenture. The Issuers are not required to transfer or
exchange any Senior Note selected for redemption. Also, the Issuers are not
required to transfer or exchange any Senior Note for a period of 15 days
before a selection of Senior Notes to be redeemed.
The registered holder of a Senior Note will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Senior Notes may be amended or supplemented with the consent of the
holders of at least a majority in principal amount of the Senior Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for Senior Notes), and any existing default or compliance with
any provision of the Indenture or the Senior Notes may be waived with the
consent of the holders of a majority in principal amount of the then
outstanding Senior Notes (including consents obtained in connection with a
tender offer or exchange offer for Senior Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Senior Notes held by a non-consenting holder) (i) reduce
the principal amount of Senior Notes whose holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Senior Note or alter the provisions with respect to the
redemption of the Senior Notes, (iii) reduce the rate of or change the time
for payment of interest on any Senior Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Senior Notes (except a rescission of acceleration of the Senior Notes by the
holders of at least a majority in aggregate principal amount of the Senior
Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Senior Note payable in money other than that
stated in the Senior Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of holders of
Senior Notes to receive payments of principal of or premium, if any, or
interest on the Senior Notes, (vii) waive a redemption payment with respect to
any Senior Note or (viii) make any change in the foregoing amendment and
waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of Senior
Notes, the Issuers and the Trustee may amend or supplement the Indenture or
the Senior Notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Senior Notes in addition to or in
place of certificated Senior Notes, to provide for the assumption of the
Issuers' obligations to holders of Senior Notes in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the holders of Senior Notes or that does not materially adversely
affect the legal rights under the Indenture of any such holder, to provide for
Subsidiary Guarantees of the Senior Notes or to comply with requirements of
the Commission in order to effect or maintain the qualification of the
Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of any Issuer, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The holders of a majority in principal amount of the then outstanding Senior
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Senior Notes, unless such
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holder shall have offered to the Trustee security and indemnity satisfactory
to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to Muzak Limited Partnership, 2901 Third Avenue,
Suite 400, Seattle, Washington 98121, Attention: Chief Financial Officer.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Administrative Expenses" means, with respect to the General Partner, any
general partner of the Company or the parent of the Company (in the event that
the Company is reorganized as a corporation), ordinary operating expenses
(including reasonable professional fees and expenses) in connection with (a)
complying with reporting obligations pursuant to the federal securities laws
and obligations to prepare and distribute business records in the ordinary
course of business, (b) maintaining such Person's corporate or partnership
existence and franchise (including annual franchise taxes) and (c) the payment
of reasonable fees and expense reimbursements to directors thereof.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the voting securities of
a Person shall be deemed to be control.
"Asset Sale" means (a) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback)
other than sales of inventory in the ordinary course of business consistent
with past practices (provided that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole will be governed by the provisions of
the Indenture described above under the caption "--Change of Control" and/or
the provisions described above under the caption "--Merger, Consolidation or
Sale of Assets" and not by the provisions of the Asset Sale covenant), (b) the
issuance by any Restricted Subsidiary of Equity Interests of such Restricted
Subsidiary and (c) the disposition by the Company or any of its Restricted
Subsidiaries of Equity Interests of any of the Company's Subsidiaries, in the
case of either clause (a), (b) or (c), whether in a single transaction or a
series of related transactions, (i) that have a fair market value in excess of
$2.0 million or (ii) for net proceeds in excess of $2.0 million.
Notwithstanding the foregoing, (a) a transfer of assets by the Company to a
Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary
to the Company or to another Wholly Owned Restricted Subsidiary, (b) an
issuance of Equity Interests by a Wholly Owned Restricted Subsidiary to the
Company or to another Wholly Owned Restricted Subsidiary, (c) a Restricted
Payment that is permitted by the covenant described above under the caption
"--Restricted Payments" and (d) any sale and leaseback
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transaction otherwise permitted pursuant to the covenant described above under
the caption "--Sale and Leaseback Transactions" will not be deemed to be Asset
Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Board of Directors" means the Board of Directors of the General Partner, on
behalf of the Company (or the Company, if the Company is reorganized as a
corporation), or of Capital Corp. or any authorized committee of the Board of
Directors.
"Borrowing Base" means, as of any date, an amount equal to (a) 80.0% of the
face amount of all accounts receivable owned by the Company and its Restricted
Subsidiaries as of such date that are not more than 90 days past due, plus (b)
60.0% of the book value (calculated on an average cost basis) of all inventory
owned by the Company and its Restricted Subsidiaries as of such date, minus
(c) any amount applied pursuant to the second paragraph of the covenant
described above under the caption "--Asset Sales" to permanently reduce
Indebtedness permitted to be incurred pursuant to clause (i) of the second
paragraph of the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Equity Interests," all calculated on a
consolidated basis and in accordance with GAAP. To the extent that information
is not available as to the amount of accounts receivable or inventory as of a
specific date, the Company may utilize the most recent available information
for purposes of calculating the Borrowing Base.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Interests" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits or demand deposits, in each case with any lender
party to any Credit Facility or with any domestic commercial bank having
capital and surplus in excess of $1.0 billion, (iv) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described
in clauses (ii) and (iii) above entered into with any financial institution
meeting the qualifications specified in clause (iii) above, (v) commercial
paper having the highest rating obtainable from Moody's Investors Service,
Inc. or Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc., and in each case maturing within six months after the date of
acquisition and (vi) investments in money market funds all of whose assets
comprise securities of the types described in clauses (i), (ii) and (iii)
above.
"Centre Partners" means Centre Partners L.P., a Delaware limited
partnership, the parent of Music Holdings and the general partner of MLP
Holdings.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
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"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period plus (i) an amount equal to any extraordinary loss plus any net
loss realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), plus (ii) provision for
taxes based on income or profits of such Person and its Restricted
Subsidiaries for such period, to the extent that such provision for taxes was
included in computing such Consolidated Net Income, plus (iii) consolidated
interest expense of such Person and its Restricted Subsidiaries for such
period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing
such Consolidated Net Income, plus (iv) all items classified as "depreciation"
or "amortization" on such Person's statement of operations and other non-cash
charges (including non-cash equity-based compensation charges but excluding
any non-cash charge to the extent that it represents an accrual of or reserve
for cash charges in any future period or amortization of a prepaid cash
expense that was paid in a prior period) of such Person and its Restricted
Subsidiaries for such period to the extent that such depreciation,
amortization and other non-cash charges were deducted in computing such
Consolidated Net Income, plus (v) in the case of calculations with respect to
the Company, the amount of any Tax Distributions by the Company to its
partners or, following the reorganization of the Company as a corporation, any
tax sharing payment made pursuant to a tax sharing agreement executed in
connection therewith, in each case, on a consolidated basis and determined in
accordance with GAAP. Notwithstanding the foregoing, the provision for taxes
on the income or profits of, and the depreciation and amortization and other
non-cash charges of, a Restricted Subsidiary of the referent Person shall be
added to Consolidated Net Income to compute Consolidated Cash Flow only to the
extent (and in the same proportion) that the Net Income of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Subsidiary without prior
approval (that has not been obtained), pursuant to the terms of its charter
and all agreements, instruments, judgments, decrees, orders, statutes, rules
and governmental regulations applicable to that Subsidiary or its stockholders
or partners. Notwithstanding the foregoing, the provision for taxes based on
the income or profits of, and the depreciation and amortization and other non-
cash charges of, a Subsidiary of a Person shall be added to Consolidated Net
Income to compute Consolidated Cash Flow only to the extent (and in the same
proportion) that the Net Income of such Subsidiary was included in calculating
the Consolidated Net Income of such Person and only if a corresponding amount
would be permitted at the date of determination to be dividended or
distributed to the Company by such Subsidiary without prior approval (that has
not been obtained), pursuant to the terms of its organizational documents and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Restricted Subsidiary or its
stockholders or partners.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (which
has not been obtained) or, directly or indirectly, by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or
its stockholders or partners, (iii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) in the case of calculations with respect
to the Company, Consolidated Net Income of the Company shall be reduced by the
amount of any Tax Distributions by the Company to its partners, (v) the
cumulative effect of a change in accounting principles shall be excluded, (vi)
Consolidated Net Income shall not include any gain (but not loss), together
with any related provision for taxes on such gain (but
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not loss), realized in connection with (A) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (B)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries, (vii) Consolidated Net Income shall not
include any extraordinary or nonrecurring gain (but not loss), together with
any related provision for taxes on such extraordinary or nonrecurring gain
(but not loss) and (viii) the Net Income of any Unrestricted Subsidiary shall
be excluded, whether or not distributed to the Company or one of its
Subsidiaries.
"Consolidated Net Worth" means, (a) with respect to a partnership, the
common and preferred partnership interests of such partnership and its
consolidated Subsidiaries, as determined on a consolidated basis in accordance
with GAAP, and (b) with respect to any other Person, the sum of (i) the
consolidated equity of the common stockholders of such Person and its
consolidated Subsidiaries plus (ii) the respective amounts reported on such
Person's most recent balance sheet with respect to any series of preferred
stock; provided that the preferred partnership interests or the preferred
stock, as the case may be, shall be included in Consolidated Net Worth only if
such preferred partnership interests or preferred stock (A) is not a
Disqualified Interest and (B) is not by its terms entitled to the payment of
dividends or distributions, unless such dividends or distributions may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred partnership interests or preferred
stock, less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within twelve months after the acquisition of such business)
subsequent to the date of the most recently completed fiscal quarter in the
book value of any asset owned by such Person or a consolidated subsidiary of
such Person, (y) all investments in unconsolidated Subsidiaries and in Persons
that are not Subsidiaries (except, in each case, investments in marketable
securities), and (z) all unamortized debt discount and expense and unamortized
deferred financing charges, all of the foregoing determined in accordance with
GAAP.
"Credit Facility" means any credit facility entered into by and among the
Company, any of its Subsidiaries that is a Guarantor and the lending
institutions party thereto, including any credit agreement, related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed,
refunded, replaced or refinanced from time to time.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Interests" means any Equity Interest which, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in part, on or
prior to the 91st day after the date on which the Senior Notes mature.
"Domestic Subsidiary" of a Person means any direct or indirect Subsidiary of
such Person that is not a Foreign Subsidiary.
"Equity Interests" means Capital Interests and all warrants, options or
other rights to acquire Capital Interests (but excluding any debt security
that is convertible into, or exchangeable for, Capital Interests).
"Existing Indebtedness" means the aggregate principal amount of Indebtedness
of the Company and its Subsidiaries in existence on the date of the Indenture,
until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum of
(i) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts and
other fees and
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charges incurred in respect of letter of credit or bankers' acceptance
financings, and net payments (if any) pursuant to Hedging Obligations but
excluding amortization of deferred financing fees), (ii) the consolidated
interest expense of such Person and its Restricted Subsidiaries that was
capitalized during such period, (iii) any interest expense on Indebtedness of
another Person that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon)
and (iv) the amount of dividends or distributions paid in respect of preferred
stock or preferred partnership interests of such Person, in each case, on a
consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person
and its Restricted Subsidiaries for such period. In the event that the Company
or any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems
any Indebtedness (other than revolving credit borrowings) or issues preferred
stock or preferred partnership interests subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the date on which the event for which the calculation of the Fixed Charge
Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, Guarantee or redemption of Indebtedness, or such issuance or
redemption of preferred stock or preferred partnership interests, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. For purposes of making the computation referred to above, (i)
acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter
reference period, (ii) the Consolidated Cash Flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the
obligations giving rise to such Fixed Charges will not be obligations of the
referent Person or any of its Restricted Subsidiaries following the
Calculation Date.
"Foreign Credit Facility" means any credit facility entered into by and
among any Foreign Subsidiary of the Company and the lending institutions party
thereto, including any credit agreement, related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, renewed, refunded, replaced or refinanced from
time to time.
"Foreign Restricted Subsidiary" of a Person means any Restricted Subsidiary
of such Person that is also a Foreign Subsidiary.
"Foreign Subsidiary" of a Person means any direct or indirect Subsidiary of
such Person that is organized under the laws of any jurisdiction outside the
United States, any district or territoriality thereof and The Commonwealth of
Puerto Rico.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the Indenture.
"General Partner" means Music Holdings Corp., as general partner of MLP
Acquisition, the general partner of the Company.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means any Domestic Subsidiary of the Company (other than Capital
Corp.) that executes a Subsidiary Guarantee in accordance with the provisions
of the Indenture, and their respective successors and assigns.
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"Guarantor Senior Indebtedness" means any Indebtedness permitted to be
incurred by any Guarantor under the terms of the Indenture, unless the
instrument under which such Indebtedness is incurred expressly provides that
it is subordinated in right of payment to such Guarantor's Subsidiary
Guarantee. Notwithstanding the foregoing, Guarantor Senior Indebtedness shall
not include (i) any Obligation of such Guarantor to any Subsidiary of such
Guarantor, (ii) any liability for federal, state, local or other taxes owed or
owing by such Guarantor, (iii) any accounts payable or other liability to
trade creditors arising in the ordinary course of business (including
Guarantees thereof or instruments evidencing such liabilities), (iv) any
Indebtedness, Guarantee or Obligation of the Guarantor that is contractually
subordinated or junior in any respect to any other Indebtedness, Guarantee or
Obligation of such Guarantor or (v) any Indebtedness incurred in violation of
the Indenture.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed solely to protect such Person against fluctuations in
interest rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital
Lease Obligations or the balance deferred and unpaid of the purchase price of
any property or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense or trade payable, if and to the extent any
of the foregoing indebtedness (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such
indebtedness is assumed by such Person) and, to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any other
Person.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations but
excluding advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person or its
Subsidiaries in accordance with GAAP), advances or capital contributions
(excluding commission, travel and similar advances to officers and employees
made in the ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP; provided that an acquisition of assets,
Equity Interests or other securities by the Company for consideration
consisting of common equity securities of the Company shall not be deemed to
be an Investment.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"MLP Acquisition" means MLP Acquisition L.P., a Delaware limited partnership
and the general partner of the Company.
"MLP Holdings" means MLP Holdings L.P., a Delaware limited partnership and a
limited partner of MLP Acquisition.
"Music Holdings" means Music Holdings Corp., a Delaware corporation, a
wholly owned subsidiary of Centre Partners and the general partner of MLP
Acquisition.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP.
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"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness (other than Senior Revolving Debt) secured by
a Lien on the asset or assets that were the subject of such Asset Sale and any
reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (a) as to which neither the Company
nor any of its Restricted Subsidiaries (i) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness or any agreement to maintain specified levels of financial or
operational performance), (ii) is directly or indirectly liable (as a
guarantor or otherwise), or (iii) constitutes the lender; (b) no default with
respect to which (including any rights that the holders thereof may have to
take enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and (c) as to which the lenders have been
notified in writing that they will not have any recourse to the stock or
assets of the Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Pari Passu Indebtedness" means any Indebtedness which ranks pari passu in
right of payment with, and which is not expressly by its terms subordinated in
right of payment of principal, interest or premium, if any, to, the Senior
Notes.
"Park Road" means Park Road Corporation, a Delaware corporation and the
managing general partner of Centre Partners.
"Partnership Agreement" means the Third Amended and Restated Agreement of
Limited Partnership of the Company, as amended, supplemented or otherwise
modified and as in effect from time to time.
"Permitted Investments" means (a) any Investments in the Company or in a
Wholly Owned Restricted Subsidiary of the Company that is engaged in the same
or a similar or related line of business as the Company and its Restricted
Subsidiaries were engaged in on the date of the Indenture; (b) any Investments
in Cash Equivalents; (c) Investments by the Company or any Restricted
Subsidiary of the Company in a Person, if as a result of such Investment (i)
such Person becomes a Wholly Owned Restricted Subsidiary of the Company that
is engaged in the same or a similar or related line of business as the Company
and its Restricted Subsidiaries were engaged in on the date of the Indenture
or (ii) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Wholly Owned Restricted Subsidiary of the Company that
is engaged in the same or a similar or related line of business as the Company
and its Restricted Subsidiaries were engaged in on the date of the Indenture;
(d) Restricted Investments made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "--Repurchase at the
Option of Holders--Asset Sales;" (e) Investments in endorsements of negotiable
instruments and similar negotiable documents in the ordinary course of
business; (f) Investments existing on the date of the Indenture; (g)
Investments in obligations of account debtors to the Company or any of its
Restricted Subsidiaries and stock or obligations issued to the Company or any
such Restricted Subsidiary by any Person, in each case, in connection with the
insolvency, bankruptcy, receivership or reorganization of such Person or a
composition or readjustment of such Person's Indebtedness and (h) other
Investments in any one or more Persons that do not exceed $5.0 million in the
aggregate at any time outstanding.
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"Permitted Liens" means (i) Liens on accounts receivable and inventory
securing Indebtedness permitted to be incurred under clause (i) of the second
paragraph of the covenant described above under "--Incurrence of Indebtedness
and Issuance of Preferred Equity Interests;" (ii) Liens in favor of the
Company; (iii) Liens on property of a Person existing at the time such Person
is merged into, consolidated with or acquired by the Company or any Restricted
Subsidiary of the Company; provided that such Liens were not incurred in
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with the Company;
(iv) Liens on property existing at the time of acquisition thereof by the
Company or any Subsidiary of the Company, provided that such Liens were in
existence prior to the contemplation of such acquisition; (v) Liens to secure
the performance of statutory obligations, surety or appeal bonds, performance
bonds or other obligations of a like nature incurred in the ordinary course of
business; (vi) Liens to secure Indebtedness permitted by clause (vi) of the
second paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Equity Interests" covering only the assets acquired with
such Indebtedness; (vii) Liens existing on the date of the Indenture; (viii)
Liens for taxes, assessments or governmental charges or claims that are not
yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (ix) Liens securing Permitted Refinancing
Indebtedness, provided that such Liens do not extend to or cover any assets or
property other than the collateral securing the Indebtedness to be refinanced;
(x) Liens arising by operation of law in connection with judgments, for a
period not resulting in an Event of Default with respect thereto; (xi)
easements, rights of way, zoning restrictions and other similar encumbrances
or title defects which do not materially detract from the value of the
property or the assets subject thereto or interfere with the ordinary conduct
of the business of the Company and its Restricted Subsidiaries, taken as a
whole; (xii) Liens securing Attributable Debt with respect to any sale and
leaseback transaction in an aggregate amount not to exceed the aggregate
principal amount of Attributable Debt permitted to be incurred pursuant to the
covenant described above under "--Incurrence of Indebtedness and Issuance of
Preferred Equity Interests," provided that such Liens do not extend to or
cover any assets or property other than the collateral securing such
Attributable Debt; (xiii) Liens on assets of any Foreign Restricted Subsidiary
securing Indebtedness of such Foreign Restricted Subsidiary incurred pursuant
to clause (ix) of the second paragraph of the covenant described above under
"--Incurrence of Indebtedness and Issuance of Preferred Equity Interests;"
(xiv) Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that (A) are
not incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of
business) and (B) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of business
by the Company or such Restricted Subsidiary; and (xv) Liens on accounts
receivable and inventory securing Hedging Obligations.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted
Subsidiaries; provided that (i) the principal amount of such Permitted
Refinancing Indebtedness does not exceed the principal amount of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith);
(ii) such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and has a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Senior Notes, such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and is subordinated in right of
payment to, the Senior Notes on terms at least as favorable to the holders of
Senior Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by
the Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
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"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Senior Revolving Debt" means revolving credit borrowings under any Credit
Facility.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof; provided that Capital Corp. and each Guarantor shall be deemed a
Significant Subsidiary.
"Subordinated Indebtedness" means any Indebtedness which is expressly by its
terms subordinated in right of payment of principal, interest or premium, if
any, to the Senior Notes.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of Capital Interests entitled (without regard to the occurrence
of any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (A) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (B) the only general partners of which are such Person or one or
more Subsidiaries of such Person (or any combination thereof).
"Tax Amount" means, with respect to any Person for any period, the aggregate
amount of tax distributions required to be made by the Company to its partners
under the Partnership Agreement as in effect on the date of the Indenture.
Notwithstanding anything to the contrary, Tax Amount shall not include taxes
resulting from such Person's reorganization as or change in the status to a
corporation.
"Tax Distribution" means a distribution in respect of taxes to the partners
of the Company pursuant to clause (iv) of the second paragraph of the covenant
described above under the caption "--Certain Covenants-- Restricted Payments."
"Taxable Income" means, with respect to any Person for any period, the
taxable income or loss of such Person for such period for federal income tax
purposes; provided that (i) all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a)(1) of the Code
shall be included in taxable income or loss, (ii) any basis adjustment made in
connection with an election under Section 754 of the Code shall be disregarded
and (iii) such taxable income shall be increased or such taxable loss shall be
decreased by the amount of any interest expense incurred by such Person that
is not treated as deductible for federal income tax purposes by a partner or
member of such Person.
"Unrestricted Subsidiary" means any Subsidiary (other than Capital Corp.)
that is designated by the Board of Directors as an Unrestricted Subsidiary
pursuant to a board resolution; but only to the extent that such Subsidiary
(i) has no Indebtedness other than Non-Recourse Debt; (ii) is not party to any
agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company or
such Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (iii) is a Person with respect
to which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (A) to subscribe for additional Equity Interests
or (B) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; (iv) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (v) has
at least one director on its board of directors that is
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not a director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries. Any
such designation by the Board of Directors shall be evidenced to the Trustee
by filing with the Trustee a certified copy of the board resolution giving
effect to such designation and an officers' certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "--Restricted Payments." If, at any
time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
the Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption "--
Incurrence of Indebtedness and Issuance of Preferred Equity Interests," the
Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of the Company of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (a) such Indebtedness is permitted under the
covenant described under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Equity Interests," and (b) no Default or Event of
Default would be in existence following such designation; and provided,
further, that, to the extent applicable, the Company shall cause such
Subsidiary to comply with the covenant described above under the caption "--
Subsidiary Guarantees."
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Interests or other
ownership interests of which (other than directors' qualifying shares or
interests) shall at the time be owned by such Person or by one or more Wholly
Owned Restricted Subsidiaries of such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the material federal income
tax consequences expected to result to holders of the Senior Notes. The
discussion is based on laws, regulations, rulings and judicial decisions now
in effect, all of which are subject to change, possibly on a retroactive
basis. The discussion does not cover all aspects of federal income taxation
that may be relevant to a particular holder in light of its individual
investment circumstances or to holders that may be subject to special tax
treatment (such as life insurance companies, financial institutions, tax-
exempt organizations (including qualified pension or profit sharing plans) and
foreign taxpayers), and no aspect of foreign, state or local taxation is
addressed. The discussion is limited to holders who hold their Senior Notes as
"capital assets" (generally, property held for investment) within the meaning
of Section 1221 of the Code.
EACH HOLDER IS URGED TO CONSULT ITS OWN TAX ADVISOR FOR THE FEDERAL AND
STATE INCOME AND OTHER TAX CONSEQUENCES PECULIAR TO IT FROM HOLDING OR
DISPOSING OF THE SENIOR NOTES.
INTEREST
Holders of the Senior Notes will be required to report any interest earned
on the Senior Notes as ordinary interest income for federal income tax
purposes in accordance with their method of tax accounting.
MARKET DISCOUNT
Generally, a holder who purchases a Senior Note subsequent to original
issuance at a "market discount" (i.e., at a price below the stated redemption
price at maturity) must, unless the amount thereof is de minimis, treat gain
recognized on the disposition of such Senior Note as ordinary income to the
extent market discount accrued while the Senior Note was held by the holder.
Further, if a subsequent holder makes a gift of a Senior Note, accrued market
discount, if any, will be recognized by such holder as if such Senior Note had
been sold for its fair market value. In addition, the holder may be required
to defer, until the maturity of the Senior Note or its earlier disposition in
a taxable transaction, the deduction of a portion of the interest expense on
any indebtedness incurred or continued to purchase or carry such Senior Note.
Any market discount will be considered to accrue on a straight-line basis
during the period from the date of acquisition to the maturity date of the
Senior Note, unless the holder elects to accrue market discount under a
constant interest method. A holder also may elect to include market discount
in income currently as it accrues (under either a straight-line or constant
interest method), in which case the holder would increase its adjusted tax
basis in the Senior Note by the amount includible in income and would not be
subject to the rules described above regarding the recognition of gain as
ordinary income and the deferral of interest deductions. Such an election to
include market discount in income currently would apply to all market discount
obligations acquired on or after the first day of the first taxable year of
the holder to which the election applies and may be revoked only with the
consent of the Internal Revenue Service (the "IRS").
Holders who purchase Senior Notes subsequent to original issuance should
consult their own tax advisors regarding the treatment of any market discount
with respect to their Senior Notes.
AMORTIZABLE BOND PREMIUM
If the holder's initial tax basis in the Senior Notes at acquisition exceeds
the amount payable at maturity, the excess will be treated as "amortizable
bond premium." In such case, the holder may elect under Section 171 of the
Code to amortize the bond premium annually under a constant yield method. The
holder's adjusted tax basis in the Senior Note would be decreased by the
amount of the allowable amortization. Because the Senior Notes have early call
provisions, holders must take such call provisions into account to determine
the amount of amortizable bond premium. Amortizable bond premium is treated as
an offset to interest received on the
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obligation rather than as an interest deduction, except as may be provided in
the Treasury regulations. An election to amortize bond premium would apply to
amortizable bond premium on all taxable bonds held at or acquired after the
beginning of the holder's taxable year as to which the election is made, and
may be revoked only with the consent of the IRS. Holders who acquire their
Senior Notes with amortizable bond premium should consult their own tax
advisor.
REORGANIZATION OF THE COMPANY
Any assumption of the Senior Notes by a corporate successor to the Company
upon its reorganization into a corporation, as is specifically permitted by
the Indenture, should not be a taxable event for federal income tax purposes.
As a result, holders should not recognize any gain or loss upon such
assumption of the Senior Notes. Instead, each holder should have a tax basis
in its new Senior Note of the corporate successor to the Company equal to its
basis in its old Senior Note immediately prior to the reorganization of the
Company as a corporation, and its holding period in such new Senior Note
should include the period the old Senior Note was held.
SALE, REDEMPTION AND MATURITY OF THE SENIOR NOTES
A holder will recognize gain or loss, if any, on the sale, redemption or
maturity of a Senior Note equal to the difference between the fair market
value of all consideration received (excluding amounts received that are
attributable to accrued and unpaid interest, which amounts must be included as
ordinary interest income) upon such sale, redemption or maturity of the Senior
Note and the holder's adjusted tax basis in the Senior Note. Except to the
extent of any unrecognized accrued market discount, discussed above, such gain
or loss will be capital gain or loss and will be long-term if the holder has
held the Senior Notes for more than one year.
BACKUP WITHHOLDING
A holder of Senior Notes may be subject to backup withholding at the rate of
31% with respect to interest paid on, or gross proceeds from the sale of, the
Senior Notes, unless such holder (a) is a corporation or comes within certain
other exempt categories or (b) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding
rules. A holder of Senior Notes who does not provide the Company with its
correct taxpayer identification number may be subject to penalties imposed by
the IRS. Any amounts withheld under the backup withholding rules will be
allowed as a refund or a credit against the holder's federal income tax
liability, provided that the required information is furnished to the IRS.
The Company will report to the holders of the Senior Notes and the IRS the
amount of any "reportable payments" (including any interest paid) and any
amount withheld with respect to the Senior Notes during the calendar year.
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DESCRIPTION OF THE PARTNERSHIP AGREEMENT
The Company was organized on February 18, 1992 as a limited partnership
under the RULPA. The following is a summary of certain provisions of the
Partnership Agreement. The rights and obligations of the General Partners and
of the Limited Partners (each as defined in the Partnership Agreement) are as
set forth in the Partnership Agreement. This summary does not constitute a
complete discussion of the Partnership Agreement and is qualified in its
entirety by reference to the Partnership Agreement, a copy of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is
a part.
MANAGEMENT OF THE COMPANY
The Managing General Partner (as defined in the Partnership Agreement) is
responsible for the general management and operation of the Company. The
General Partners receive no compensation for the performance of their services
under the Partnership Agreement, provided that the Managing General Partner
and its affiliates are entitled to reimbursement for expenses incurred on
behalf of the Company and for certain directors' fees and expenses of the
general partner of the Managing General Partner. In addition, the General
Partners and their affiliates are entitled to the benefit of certain
exculpatory and indemnification provisions in the Partnership Agreement. See
"Management--Limitation of Liability and Indemnification."
DISSOLUTION OF THE COMPANY
The Company will be dissolved and its affairs wound up upon the occurrence
of any of the following events: (i) the expiration of the term of the Company
on December 31, 2020 (subject to extension with the consent of the General
Partners and a majority vote of the partners); (ii) certain events of
withdrawal or bankruptcy of a General Partner under the RULPA, subject to the
right of a remaining General Partner or a successor general partner to
continue the Company in accordance with terms of the Partnership Agreement;
(iii) the consent of the General Partners and the majority vote of the
partners to dissolve the Company; (iv) an incorporation of the Company in
accordance with the Partnership Agreement; (v) a sale of all or substantially
all of the assets of the Company in one transaction or a series of related
transactions; or (vi) the entry of a decree of dissolution under Section 17-
802 of the RULPA.
DISTRIBUTIONS
Distributions by the Company generally may be made at the discretion of the
Managing General Partner from cash on hand in excess of costs and expenses of
the Company, including reserves, subject to Section 17-607(a) of the RULPA or
other applicable law and subject to any applicable contractual restrictions on
such payments. In addition, the Managing General Partner is required to make
distributions from time to time for periods in which Company exists in the
form of a partnership to the holders of equity interests in the Company (other
than the Class C Limited Partner Interest and, in certain circumstances, the
Class C-1 Limited Partner Interest) in an amount for each fiscal year equal to
the product of (A) the taxable income of the Company for any taxable year for
which the Company reports taxable income for federal income tax purposes
determined as if the Company were a separately taxable entity and (B) the sum
of (x) the highest marginal federal income tax rate applicable to individuals
in effect for such year and (y) ten percentage points; provided that no such
payments shall be permitted if any amounts due in respect of the Class C
Limited Partner Interest shall not have been paid on the required retirement
date thereof as described below.
TRANSFERABILITY OF PARTNERSHIP INTERESTS
The Partnership Agreement contains significant restrictions on the
transferability of the equity interests in the Company.
Partnership interests held by management employees of the Company are
subject to purchase at the option of the Company upon termination of
employment for a termination price equal to either the fair market value or
cost of such interests, depending on the circumstances of the termination and
subject to certain vesting criteria set forth in the Partnership Agreement.
Upon any such purchase of partnership interests of a terminated
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employee, the remaining management holders are permitted to acquire such
interests for fair market value. In addition to the foregoing, certain
interests held by management are subject to additional restrictions on
transfer prior to September 4, 1997.
Subject to limited exceptions (including transfers upon death of a Limited
Partner to his estate, transfers to family members and related trusts, certain
transfers to other Limited Partners of the Company and other transfers to
affiliates), transfers of Limited Partner interests in the Company are subject
to rights of first refusal of the Company and certain other interestholders.
In addition to the rights of first refusal, in connection with certain
transfers of equity interests the transferring holder is required to offer the
other interestholders the right to sell a ratable portion of their respective
equity interests on the same terms and at the same price as the interests
proposed to be disposed of by the transferring holder.
PUT OPTION
At any time and from time to time after September 4, 1998, the Managing
General Partner, certain affiliates of MLP and certain other non-management
interestholders have the right to cause the Company to purchase the
partnership interests held by such persons at the fair market value thereof,
provided that such purchase would not result in a material adverse change in
the business of the Company or a breach of or default under any agreement or
instrument to which the Company is party or by which it or its assets is bound
and as to which a consent or waiver thereunder for such purpose (or any
related incurrence of indebtedness) has not been obtained after all best
efforts by the Company (including consideration of a sale of the Company) and
the Company provides appropriate notice thereof to the interestholder. In
connection with any such purchase, the Company is required to retire all of
the outstanding Class C Limited Partner Interest, Class C-1 Limited Partner
Interest (unless such interests have been converted into participating
partnership interests as described below) and Preferred Limited Partner
Interests.
REGISTRATION RIGHTS
The Managing General Partner and MLP have the right to require the Company
to use best efforts to register under the Securities Act the partnership
interests held by such persons. If the Company receives such a request or
otherwise determines to effect any such registration of equity securities, the
Company is required to offer to register the equity interests held by the
other Limited Partners (other than the Class C Limited Partner Interest). The
registration rights provisions contain additional customary rights and
obligations of the parties, including holdback, indemnification and cut-back
rights, subject to certain priorities of a non-management equity holder.
INCORPORATION
The Partnership Agreement permits the Managing General Partner to
incorporate the Company pursuant to specified procedures. In the event of an
incorporation, the Partnership Agreement provides that the Managing General
Partner shall use reasonable best efforts to effectuate such arrangements as
are reasonably required to reflect substantially the same rights and
restrictions that the equityholders have pursuant to the Partnership
Agreement. In the event of any such incorporation, the Partnership Agreement
further provides for the conversion of the Preferred Limited Partner Interests
into preferred stock of the incorporated entity having substantially similar
terms and provisions as the applicable preferred interests.
LIMITED PARTNER INTERESTS
In addition to the General Partner interests, the Class A-1 Limited Partner
Interests, the Class A-2 Limited Partner Interests and the Class B Limited
Partner Interests, which are all participating limited partner interests, the
following preferred interests are provided for under the Partnership
Agreement:
Class C Limited Partner Interest. The Class C Limited Partner Interest is a
non-participating preferred limited partner interest having a liquidation
preference of $8 million plus a preferred return of 7% per annum compounding
annually from August 1992. The Company may convert the Class C Limited Partner
Interest into
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a subordinated note or retire the interest at any time. Until the retirement
of the Class C Limited Partner Interest, the Company is required to observe
certain covenants, including restrictions on dispositions of assets for less
than fair market value, certain affiliate party transactions and distributions
in respect of, or purchases or retirements of, equity interests in the
Company, subject to limited exceptions specified in the Partnership Agreement.
The Company is required to retire the Class C Limited Partner Interest on the
91st day following August 31, 2002 or, if earlier, upon the occurrence of
certain specified change of control or sale transactions. The Company will
retire the Class C Limited Partner Interest with a portion of the proceeds of
the Offering.
Class C-1 Limited Partner Interest. The Class C-1 Limited Partner Interest is
a convertible preferred limited partner interest having a liquidation
preference of $5 million plus a preferred return of 7% per annum compounded
annually from November 1994, that may be converted into 8% of the aggregate
participating Limited Partner interests in the Company at the election of the
holder in connection with an equity registration by the Company. The Class C-1
Limited Partner Interest may be converted into a convertible subordinated note
at the election of the Company and may be redeemed for its liquidation
preference in connection with specified change of control or sale
transactions, and may otherwise be redeemed for such amount subject to the
right of the holder to retain an equity purchase option to preserve its equity
conversion right until the date such interest would have been required to be
retired, unless the holder shall have had the right to convert into a
participating equity interest in connection with a proposed equity
registration by the Company but shall have elected to retain its liquidation
preference. Unless earlier converted into a participating equity interest, the
Company is obligated to retire the Class C-1 Limited Partner Interest on the
earlier of November 4, 2004 or the occurrence of certain specified change of
control or sale transactions. Until the conversion of such interest into a
participating equity security or the retirement thereof, the Company is
required to observe the same covenants as are applicable to the Class C
Limited Partner Interest.
Preferred Limited Partner Interests. The Preferred Limited Partner Interests
are convertible senior preferred limited partner interests having an aggregate
liquidation preference of $7 million plus a preferred return of 8% per annum
compounded annually from November 1994, that currently may be converted into
approximately an aggregate 23% of the participating limited partner interests
in the Company. At the option of the interest holder, the Preferred Limited
Partnership Interests may be converted at any time into units of Class B
Limited Partnership Interests. The Preferred Limited Partner Interests may be
redeemed by the Company in connection with any registration of its equity
securities, subject to the right of the holders to exercise the equity
conversion right specified above.
81
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") among the Issuers and Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") and Lazard Freres & Co. LLC ("Lazard," and
together with DLJ, the "Underwriters"), the Underwriters have agreed,
severally and not jointly, to purchase from the Issuers, and the Issuers have
agreed to sell to each of the Underwriters, the respective principal amount of
Senior Notes set forth opposite its name below, at the public offering price
set forth on the cover page of this Prospectus, less the underwriting
discounts and commissions:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER SENIOR NOTES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...........
Lazard Freres & Co. LLC.......................................
------------
Total..................................................... $100,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent. The
Underwriting Agreement also provides that the Issuers will indemnify the
Underwriters and certain persons controlling the Underwriters against certain
liabilities and expenses, including liabilities under the Securities Act or
will contribute to payments the Underwriters are required to make in respect
thereof. The nature of the Underwriters' obligations under the Underwriting
Agreement is such that they are committed to purchase all of the Senior Notes
if any of the Senior Notes are purchased.
The Underwriters have advised the Issuers that they propose to offer the
Senior Notes directly to the public initially at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of % of the principal amount of the
Senior Notes. The Underwriters may allow, and such dealers may reallow, a
concession to certain other dealers not in excess of % of the principal
amount of the Senior Notes. After the initial public offering of the Senior
Notes, the public offering price, concession and reallowance may be changed by
the Underwriters.
Under Rule 2720 of the Conduct Rules ("Rule 2720") of the National
Association of Securities Dealers, Inc. (the "NASD"), the Company may be
considered an affiliate of Lazard because affiliates of Lazard beneficially
own voting securities of the Company. This Offering is being conducted in
accordance with Rule 2720, which provides that, among other things, when an
NASD member participates in the underwriting of an affiliate's debt
securities, the yield to maturity can be no lower than that recommended by a
"qualified independent underwriter" meeting certain standards ("QIU"). In
accordance with this requirement, DLJ has assumed the responsibilities of
acting as QIU and will recommend a minimum yield to maturity in compliance
with the requirements of Rule 2720. In connection with the Offering, DLJ is
performing due diligence investigations and reviewing and participating in the
preparation of this Prospectus and the Registration Statement of which this
Prospectus forms a part. As compensation for the services of DLJ as QIU, the
Company has agreed to pay DLJ $5,000.
The Underwriters have informed the Company that they will not confirm sales
to any accounts over which they exercise discretionary authority without prior
written approval of such transactions by the customer.
82
<PAGE>
There is currently no public market for the Senior Notes, and the Issuers
have no present plan to list any of the Senior Notes on a national securities
exchange or to include any of the Senior Notes for quotation through an inter-
dealer quotation system. The Underwriters have advised the Issuers that they
currently intend to make a market in the Senior Notes, but are not obligated
to do so and may discontinue any such market-making at any time without
notice. Accordingly, there can be no assurance that an active public market
will develop for, or as to the liquidity of, the Senior Notes. In addition,
because Lazard may be deemed to be an affiliate of the Issuers, Lazard will be
required to deliver a current "market-maker" prospectus and otherwise to
comply with the registration requirements of the Securities Act in connection
with any secondary market sale of the Senior Notes, which may affect its
ability to continue market-making activities. Lazard's ability to engage in
market-making transactions will therefore be subject to the availability of a
current "market-maker" prospectus. Under certain circumstances, the Issuers
have agreed to make a "market-maker" prospectus available to Lazard to permit
it to engage in market-making transactions. Notwithstanding the foregoing, the
Issuers may allow the "market-maker" prospectus to cease to be effective and
usable if (i) the Boards of Directors of the Issuers determine in good faith
that such action is in the best interests of the Issuers, and the Issuers
notify the holders within a certain period of time after the Boards of
Directors make such determination or (ii) the "market-maker" prospectus
contains an untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. See "Risk Factors--
Absence of Public Market; Illiquidity; Market Value."
LEGAL MATTERS
Certain legal matters in connection with the Senior Notes offered hereby
will be passed upon for the Issuers by Weil, Gotshal & Manges LLP, New York,
New York. Certain legal matters in connection with the offering of the Senior
Notes will be passed upon for the Underwriters by Latham & Watkins, New York,
New York.
EXPERTS
The financial statements of Muzak Limited Partnership included in this
Prospectus and the related financial statement schedules included elsewhere in
the Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and
elsewhere in the Registration Statement. These financial statements and the
financial statement schedule have been included herein and elsewhere in the
Registration Statement in reliance upon the reports of said firm given upon
their authority as experts in accounting and auditing.
The financial statement of Muzak Capital Corporation included in this
Prospectus has been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and has been so included in reliance
upon the report of said firm given upon their authority as experts in
accounting and auditing.
The financial statements of Comcast Sound Communications, Inc. and
subsidiaries included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein
(which report expresses an unqualified opinion and includes an explanatory
paragraph referring to allocated management fees and costs), and have been so
included in reliance upon the report of said firm given upon their authority
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") pursuant to the Securities Act, covering the Senior Notes offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Statements
83
<PAGE>
made in this Prospectus as to the contents of any contract, agreement or other
document are summaries of the material terms of such contract, agreement or
document. With respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to the
exhibits for a more complete description of the matter involved. The
Registration Statement (including the exhibits and schedules thereto) filed
with the Commission by the Company may be inspected and copied (at prescribed
rates) at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission at Seven World Trade Center, 13th Floor, New York,
New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661.
The Company is not subject to the informational requirements of the Exchange
Act. The Company intends to furnish to the Trustee and the holders of the
Senior Notes annual reports containing audited financial statements certified
by its independent auditors and quarterly reports containing unaudited
financial information for the first three quarters of each fiscal year.
84
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
MUZAK LIMITED PARTNERSHIP
Independent Auditors' Report............................................ F-2
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996....... F-3
Statements of Operations for the years ended December 31, 1993, 1994,
and 1995 and the six-month periods ended June 30, 1995 and 1996........ F-4
Statements of Partners' Capital (Deficit) for the years ended December
31, 1993, 1994, and 1995 and the six-month period ended June 30, 1996.. F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994,
and 1995 and the six-month periods ended June 30, 1995 and 1996........ F-6
Notes to Financial Statements........................................... F-7
MUZAK CAPITAL CORPORATION
Independent Auditors' Report............................................ F-18
Balance Sheet as of May 8, 1996......................................... F-19
Note to Financial Statement............................................. F-20
COMCAST SOUND COMMUNICATIONS, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................ F-21
Consolidated Statement of Operations and Retained Earnings
for the year ended December 31, 1993................................... F-22
Consolidated Statement of Cash Flows for the year ended December 31,
1993................................................................... F-23
Notes to Consolidated Financial Statements.............................. F-24
MLP ACQUISITION LIMITED PARTNERSHIP
Independent Auditors' Report............................................ F-27
Balance Sheets as of December 31, 1995 and
June 30, 1996.......................................................... F-28
Notes to Financial Statements........................................... F-29
MUSIC HOLDINGS CORPORATION
Independent Auditors' Report............................................ F-30
Balance Sheets as of December 31, 1995
and June 30, 1996...................................................... F-31
Notes to Financial Statements........................................... F-32
MLP ADMINISTRATION CORPORATION
Independent Auditors' Report............................................ F-33
Balance Sheets as of December 31, 1995
and June 30, 1996...................................................... F-34
Notes to Financial Statements........................................... F-35
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
General and Limited Partners
Muzak Limited Partnership
Seattle, Washington
We have audited the accompanying balance sheets of Muzak Limited Partnership
(the "Company") as of December 31, 1995 and 1994, and the related statements
of operations, partners' capital (deficit), and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Muzak Limited Partnership as of December
31, 1995 and 1994, and the results of operations and its cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
March 6, 1996
(September 25, 1996, as to Notes 7 and 10)
F-2
<PAGE>
MUZAK LIMITED PARTNERSHIP
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................... $ 1,445 $ 1,115 $ 3,239
Accounts receivable, net of allowance for
doubtful accounts
of $736, $632 and $576........................ 15,868 15,534 14,630
Inventories.................................... 4,070 3,473 3,041
Prepaid expenses............................... 1,462 1,543 1,443
Other.......................................... 491 357 346
-------- ------- -------
Total current assets......................... 23,336 22,022 22,699
Property and equipment, net...................... 37,588 36,586 36,055
Deferred costs and intangible assets, net........ 41,435 36,706 35,357
Other............................................ 733 1,125 1,247
-------- ------- -------
Total assets................................. $103,092 $96,439 $95,358
======== ======= =======
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
CURRENT LIABILITIES:
Revolving credit facility...................... $ 6,000 $ 9,300 $10,750
Accounts payable............................... 8,085 6,818 9,048
Advance billings............................... 4,337 4,533 4,641
Accrued expenses............................... 3,525 2,902 3,990
Current portion of long-term obligations....... 4,455 5,911 6,371
-------- ------- -------
Total current liabilities.................... 26,402 29,464 34,800
Long-term obligations, net of current portion.... 52,378 47,094 44,301
Unearned installation income..................... 1,676 2,786 3,192
Commitments and contingencies (Note 7)...........
Redeemable preferred partnership interests....... 14,693 15,722 16,265
PARTNERS' CAPITAL (DEFICIT):
Limited partners' interests.................... 7,368 5,637 4,328
General partners' interests (deficiencies)..... 575 (4,264) (7,528)
-------- ------- -------
Total partners' capital (deficit)............ 7,943 1,373 (3,200)
-------- ------- -------
Total liabilities and partners' capital (def-
icit)....................................... $103,092 $96,439 $95,358
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MUZAK LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-
MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ----------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Music and other business
services....................... $36,800 $50,410 $52,489 $25,916 $26,977
Equipment and related services.. 21,741 33,006 34,392 16,646 15,179
------- ------- ------- ------- -------
Total revenues................ 58,541 83,416 86,881 42,562 42,156
------- ------- ------- ------- -------
Cost of revenues:
Music and other business
services....................... 10,611 13,685 14,465 7,063 7,501
Equipment and related services.. 16,756 23,413 23,895 11,465 10,303
------- ------- ------- ------- -------
Total cost of revenues........ 27,367 37,098 38,360 18,528 17,804
------- ------- ------- ------- -------
Gross profit...................... 31,174 46,318 48,521 24,034 24,352
Selling, general and
administrative expenses.......... 19,603 28,699 28,496 14,628 15,107
Depreciation...................... 4,349 8,211 9,382 4,669 5,155
Amortization...................... 6,942 9,622 8,909 4,443 4,463
------- ------- ------- ------- -------
Operating income (loss)......... 280 (214) 1,734 294 (373)
Interest expense.................. 3,785 6,990 7,483 3,791 3,574
Other (income) expense, net....... (30) (21) (35) (42) 228
------- ------- ------- ------- -------
Net loss........................ (3,475) (7,183) (5,714) (3,455) (4,175)
Redeemable preferred returns.... (572) (933) (1,029) (506) (543)
------- ------- ------- ------- -------
Net loss attributable to general
and limited partners........... $(4,047) $(8,116) $(6,743) $(3,961) $(4,718)
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MUZAK LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE UNAUDITED SIX-
MONTH PERIOD ENDED JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL PARTNERS' CLASS B TOTAL LIMITED
INTERESTS CLASS A CLASS B LIMITED PREFERRED PARTNERS' INTERESTS
------------------- LIMITED CLASS A LIMITED PARTNERS' LIMITED ----------------------
NUMBER PARTNERS' PUT/CALL PARTNERS' SUBSCRIPTIONS PARTNERS' NUMBER
OF UNITS AMOUNT INTERESTS OPTIONS INTERESTS RECEIVABLE INTERESTS OF UNITS AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January
1, 1993......... 9,101 $ 8,921 $ 1,315 $ 927 $ 1,628 $(592) $ -- 4,376 $ 3,278
Net loss........ (2,422) (360) (255) (438) (1,053)
Payment of
foreign income
taxes.......... (56) (8) (6) (10) (24)
Preferred return
on redeemable
preferred
interests...... (399) (59) (42) (72) (173)
Redemption of
Class B limited
partnership
interest....... (50) 25 (50) (25)
------- --------- ------- ----- ------- ----- ------ -------- ----------
Balance, December
31, 1993........ 9,101 6,044 888 624 1,058 (567) -- 4,326 2,003
Net loss........ (4,802) (887) (561) (933) (2,381)
Payment of
foreign income
taxes.......... (43) (8) (5) (8) (21)
Preferred return
on redeemable
preferred
interests...... (624) (115) (73) (121) (309)
Contributions by
partners....... 967 175 (246) 7,000 4,663 7,896
Principal
payments on
subscriptions
receivable..... 180 180
------- --------- ------- ----- ------- ----- ------ -------- ----------
Balance, December
31, 1994........ 9,101 575 (122) 952 171 (633) 7,000 8,989 7,368
Net loss........ (3,690) (682) (621) (721) (2,024)
Payment of
foreign income
taxes.......... (51) (14) (9) (12) (35)
Preferred return
on redeemable
preferred
interests...... (665) (123) (112) (129) (364)
Preferred return
on preferred
limited
partners'
interests...... (433) (80) (73) (85) 671 433
Principal
payments on
subscriptions
receivable..... 259 259
------- --------- ------- ----- ------- ----- ------ -------- ----------
Balance, December
31, 1995........ 9,101 (4,264) (1,021) 137 (776) (374) 7,671 8,989 5,637
Net loss........ (2,697) (499) (453) (526) (1,478)
Payment of
foreign income
taxes.......... (17) (3) (3) (4) (10)
Preferred return
on redeemable
preferred
interests...... (351) (65) (59) (68) (192)
Preferred return
on preferred
limited
partners'
interests...... (199) (37) (33) (39) 308 199
Principal
payments on
subscriptions
receivable..... 67 67
Contribution by
Partner........ 105 60 105
------- --------- ------- ----- ------- ----- ------ -------- ----------
Balance, June 30,
1996
(unaudited)..... 9,101 $(7,528) $(1,625) $(411) $(1,308) $(307) $7,979 9,049 $ 4,328
======= ========= ======= ===== ======= ===== ====== ======== ==========
<CAPTION>
TOTAL
-----------------
NUMBER
OF UNITS AMOUNT
<S> <C> <C>
Balance, January
1, 1993......... 13,477 $12,199
Net loss........ (3,475)
Payment of
foreign income
taxes.......... (80)
Preferred return
on redeemable
preferred
interests...... (572)
Redemption of
Class B limited
partnership
interest....... (50) (25)
-------- --------
Balance, December
31, 1993........ 13,427 8,047
Net loss........ (7,183)
Payment of
foreign income
taxes.......... (64)
Preferred return
on redeemable
preferred
interests...... (933)
Contributions by
partners....... 4,663 7,896
Principal
payments on
subscriptions
receivable..... 180
-------- --------
Balance, December
31, 1994........ 18,090 7,943
Net loss........ (5,714)
Payment of
foreign income
taxes.......... (86)
Preferred return
on redeemable
preferred
interests...... (1,029)
Preferred return
on preferred
limited
partners'
interests...... --
Principal
payments on
subscriptions
receivable..... 259
-------- --------
Balance, December
31, 1995........ 18,090 1,373
Net loss........ (4,175)
Payment of
foreign income
taxes.......... (27)
Preferred return
on redeemable
preferred
interests...... (543)
Preferred return
on preferred
limited
partners'
interests...... --
Principal
payments on
subscriptions
receivable..... 67
Contribution by
Partner........ 60 105
-------- --------
Balance, June 30,
1996
(unaudited)..... 18,150 $(3,200)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MUZAK LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-
MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ----------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................ $(3,475) $(7,183) $(5,714) $(3,455) $(4,175)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Provision for doubtful
accounts..................... 464 610 810 299 225
Depreciation.................. 4,349 8,211 9,382 4,669 5,155
Amortization, net of deferred
financing costs.............. 6,942 9,622 8,909 4,443 4,463
Deferred financing cost
amortization................. 529 1,159 1,310 658 605
Loss in equity of joint
venture...................... -- -- -- -- 117
Changes in operating assets and
liabilities:
Accounts receivable........... (3,442) (1,890) (476) 1,988 750
Inventories................... (476) (259) 597 995 220
Accounts payable.............. 1,137 1,970 (1,267) (1,631) 1,531
Accrued expenses.............. (840) 1,198 (623) (362) 1,089
Advance billings.............. 507 1,200 194 27 107
Unearned installation income.. 577 1,099 1,110 558 406
Other, net.................... 154 (79) (35) (85) 70
------- ------- ------- ------- -------
Net cash provided by operating
activities................... 6,426 15,658 14,197 8,104 10,563
------- ------- ------- ------- -------
INVESTING ACTIVITIES
Additions to property and
equipment...................... (4,537) (9,531) (8,116) (3,675) (4,546)
Additions to deferred costs and
intangible assets.............. (3,698) (4,273) (4,641) (2,368) (2,870)
Acquisitions of businesses and
ventures, net of cash
acquired....................... -- (33,294) (557) -- --
Other, net...................... 42 52 3 -- 156
------- ------- ------- ------- -------
Net cash used in investing
activities................... (8,193) (47,046) (13,311) (6,043) (7,260)
------- ------- ------- ------- -------
FINANCING ACTIVITIES
Borrowings (repayment) under
revolving notes
payable, net................... 3,250 2,250 3,300 (400) 1,450
Borrowings on term debt......... -- 34,034 -- -- --
Principal payments on term
debt........................... (900) (11,500) (4,111) (1,622) (2,490)
Borrowing (payments) on other
long-term debt................. -- (986) (30) 47 (46)
Payments under capital leases... (484) (413) (432) (246) (213)
Contributions by partners....... -- 8,076 259 48 172
Other, net...................... (104) (64) (202) (21) (52)
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities......... 1,762 31,397 (1,216) (2,194) (1,179)
------- ------- ------- ------- -------
Net increase (decrease) in
cash and cash equivalents.... (5) 9 (330) (133) 2,124
CASH AND CASH EQUIVALENTS,
beginning of period.............. 1,441 1,436 1,445 1,445 1,115
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period........................... $ 1,436 $ 1,445 $ 1,115 $ 1,312 $ 3,239
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED.)
1. THE COMPANY AND ITS BUSINESS:
Muzak Limited Partnership (the "Company") provides business music services
and also produces, markets and sells broadcast data delivery, video, audio
marketing and in-store advertising services through a network of domestic and
international franchises and owned operations. The franchisees are charged a
fee based on their revenues, as well as certain other fees, in exchange for
broadcast music, marketing, technical and administrative support. The Company
and its franchisees also sell, install and maintain electronic equipment
related to the Company's business.
The Company develops and uses proprietary techniques for blending music into
programs which have a measurable and predictable effect on listeners. The
Company's music is primarily sold for use in public areas, such as retail
establishments and restaurants, and work areas, such as business offices and
manufacturing facilities. Services are distributed through direct broadcast
satellite transmission, local broadcast transmissions and pre-recorded tapes
played on the customers' premises.
The Company is subject to certain business risks which could affect future
operations and financial performance. These risks include rapid technological
change, competitive pricing, concentrations in and dependence on satellite
delivery capabilities, and development of new services.
BUSINESS ACQUISITIONS
As of September 1, 1992, the Company commenced operations in its current
form (the "Partnership") through an acquisition (the "1992 Acquisition") of
substantially all of the assets, including the right to operate under its
current name, from a predecessor partnership (the "Seller"). The acquisition
was accounted for as a purchase with the purchase price allocated to the
individual assets, based on their estimated fair values at the date of
acquisition.
On January 31, 1994, the Company acquired substantially all the net assets
of Comcast Sound Communications, Inc. ("Comcast"), previously the Company's
largest franchisee. The net assets were acquired for approximately $33
million, including a $5 million redeemable preferred partnership interest
issued to Comcast and closing costs. The acquisition was financed through
additional bank borrowings and the contribution of certain assets by Comcast
in exchange for a redeemable preferred partnership interest. The transaction
was accounted for as a purchase with the purchase price allocated to the
individual assets based on the fair values at the date of acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial information, as of and for the six-month periods ended
June 30, 1995 and 1996, was prepared by the Company in a manner consistent
with the audited financial statements and pursuant to the rules and
requirements of the Securities and Exchange Commission. The unaudited
information, in management's opinion, reflects all adjustments which are of a
normal recurring nature and which are necessary to present fairly the results
of the periods presented. The results of operations for the six-month period
ended June 30, 1996, are not necessarily indicative of the results to be
expected for the entire year.
CASH EQUIVALENTS
Short-term investments with maturities at the date of purchase of ninety
days or less are considered cash equivalents. Their recorded amount
approximates fair value.
F-7
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
INVENTORIES
Inventories consist primarily of electronic equipment and are recorded at
the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment consist primarily of equipment provided to
subscribers and machinery and equipment, recorded at cost. Major renewals and
betterments are capitalized to the property accounts while replacements,
maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed.
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the related assets, ranging from five to forty
years. Assets acquired under capital leases and leasehold improvements are
amortized on a straight-line basis over the shorter of their estimated useful
lives or the term of the related leases.
DEFERRED COSTS AND INTANGIBLE ASSETS
Income producing contracts, acquired through acquisitions, are being charged
to amortization expense on an accelerated method over their period of expected
benefit of eight years. Deferred financing costs are being charged to interest
expense on the effective interest method over the term of the related
agreements. Other deferred costs and intangible assets are recorded at cost
and are being charged to amortization expense over their estimated useful
lives or their period of expected benefit ranging from two and one-half to ten
years.
The carrying value of long lived assets is reviewed on a regular basis for
the existence of facts or circumstances that may indicate that the carrying
amount is not recoverable. To date, no impairment has been indicated. Should
there be an impairment in the future, the Company will measure the impairment
based on the discounted expected future cash flows from the impaired assets.
REVENUE RECOGNITION
Revenues are recognized in the month that the services are provided. Fees
from franchisees are recognized as music revenues in the month that the
franchisee generates its revenues. Equipment and related services revenues are
recorded in the period that the installation is completed.
ADVANCE BILLINGS
The Company bills certain customers in advance for contracted music and
other business services. Amounts billed in advance of the service period are
deferred when billed and recognized as revenue in the period earned.
UNEARNED INSTALLATION INCOME
The Company defers recognition of income from the installation of equipment
provided to subscribers and recognizes these amounts as revenue on a straight-
line basis over the average subscriber service period.
INCOME TAXES
The income tax effects of all earnings or losses of the Company are passed
directly to the partners. Payment of foreign income taxes is reflected as a
reduction to the partners' capital accounts. Thus, no provision or benefit for
federal, state, local or foreign income taxes is required.
F-8
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Statement of Financial Accounting Standard ("SFAS") Number 123, "Accounting
for Stock-Based Compensation" was recently issued and is effective for the
Company beginning January 1, 1996. SFAS Number 123 requires expanded
disclosures of equity-based compensation arrangements with employees and does
not require, but encourages compensation cost to be measured based on fair
value of the equity instrument when awarded. The Company, as allowed, intends
to continue to measure equity-based compensation using its current method of
accounting prescribed by Accounting Principles Board Opinion Number 25 that
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will be required to disclose certain
additional information related to its stock-based compensation; however,
management believes the impact to the financial statements, as a whole, will
not be material.
3. PROPERTY AND EQUIPMENT, NET:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1994 1995 1996
<S> <C> <C> <C>
Equipment provided to subscribers............ $ 37,305 $ 42,847 $ 45,668
Machinery and equipment...................... 6,469 7,628 8,654
Vehicles..................................... 2,403 2,872 2,959
Furniture and fixtures....................... 1,948 2,133 2,205
Land and buildings........................... 1,001 858 858
Leasehold improvements....................... 710 833 850
-------- -------- --------
Total property and equipment............... 49,836 57,171 61,194
Less--accumulated depreciation and amortiza-
tion........................................ (12,248) (20,585) (25,139)
-------- -------- --------
$ 37,588 $ 36,586 $ 36,055
======== ======== ========
</TABLE>
F-9
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED.)
4. DEFERRED COSTS AND INTANGIBLE ASSETS, NET:
Deferred costs and intangible assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1994 1995 1996
<S> <C> <C> <C>
Income producing contracts................... $ 39,676 $ 39,826 $ 39,828
Deferred subscriber acquisition costs........ 4,604 7,784 9,356
Master recording rights and deferred
production costs............................ 6,310 7,770 8,664
Deferred financing costs..................... 5,661 5,783 6,508
Organization costs........................... 4,202 4,454 4,836
Non-compete agreements....................... 846 846 846
Other........................................ 634 702 722
-------- -------- --------
Total deferred costs and intangible
assets.................................... 61,933 67,165 70,760
Less--accumulated amortization............... (20,498) (30,459) (35,403)
-------- -------- --------
$ 41,435 $ 36,706 $ 35,357
======== ======== ========
</TABLE>
5. LONG-TERM OBLIGATIONS:
Long-term obligations are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
<S> <C> <C> <C>
Variable rate senior term loan................... $45,100 $40,989 $38,499
Fixed rate subordinated note, net of unamortized
discount
of $1,792, $1,536 and $1,412.................... 10,708 10,964 11,088
Capital lease obligations........................ 705 762 842
Other............................................ 320 290 243
------- ------- -------
Total long-term obligations.................... 56,833 53,005 50,672
Less--current portion............................ ( 4,455) ( 5,911) (6,371)
------- ------- -------
$52,378 $47,094 $44,301
======= ======= =======
</TABLE>
CREDIT AGREEMENTS
The variable rate senior term loan is a $46,600,000 term loan (the "Credit
Agreement") with a group of banks for which Union Bank of Switzerland (the
"Agent Bank"), an affiliate of a limited partner, is acting as agent. The
Credit Agreement also includes a $13,000,000 revolving credit facility. The
terms of the Credit Agreement, as amended, require the Company to meet certain
financial ratios and performance criteria and impose restrictions on capital
spending, the incurrence of additional debt, and distributions to partners,
among other things. Distributions to partners are limited to distributions
that offset tax liabilities to the partners resulting from the Company's
taxable income. Substantially all of the Company's assets and proceeds from
certain insurance policies are pledged as collateral under the Credit
Agreement.
The fixed rate subordinated note (the "Subordinated Note") was obtained from
a group of banks that were issued options to purchase Class A limited
partnership units (the "Put/Call Units") in connection with this credit
arrangement. The value of these Put/Call Units has been accounted for as debt
discount and amortized on the effective interest method over the term of this
note. The Subordinated Note requires the Company to maintain certain
performance criteria and covenants, similar to, but less restrictive than the
Credit Agreement. Substantially all of the Company's assets and proceeds from
certain insurance policies are pledged as collateral under this agreement.
F-10
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED.)
5. LONG-TERM OBLIGATIONS, (CONTINUED)
INTEREST RATES AND PAYMENTS
Interest under the Credit Agreement is paid at an interest rate based on the
Agent Bank's prime rate or LIBOR in quarterly installments. During the years
ended December 31, 1993, 1994 and 1995 and for the six-month periods ended
June 30, 1995 and 1996, the effective weighted average interest rates on
borrowings under the Credit Agreement were 9.1%, 10.0%, 11.2%, 11.3% and
10.6%, respectively, including the effects of the interest rate swap agreement
described below. Interest under the Subordinated Note is paid in semi-annual
installments at a rate of 12.5%, an effective rate of 14.5%, after
amortization of the debt discount. The capital lease obligations require
monthly installments of interest at a weighted average interest rate of
approximately 10.0%. Total cash paid for interest on long-term obligations was
approximately $3,340,000, $5,460,000 and $5,760,000 for the years ended
December 31, 1993, 1994 and 1995, and for the six-month periods ended June 30,
1995 and 1996 were $3,214,000 and $3,025,000, respectively.
FUTURE MATURITIES
The variable rate senior term loan under the Credit Agreement requires semi-
annual principal installments through 2001. The Subordinated Note payable is
due in semi-annual installments in 2001 and 2002. The lease obligations are
due in monthly installments through 1999. The revolving credit facility
terminates and requires final payment on January 15, 2001. Total future
maturities of long-term obligations, for the five years following December 31,
1995 are: $5,911,000 in 1996; $7,323,000 in 1997; $8,139,000 in 1998;
$8,064,000 in 1999; and $8,297,000 in 2000.
INTEREST RATE HEDGING
The Company has entered into an interest rate swap agreement with the Agent
Bank that effectively fixed the rate on $10,000,000 of the debt under the
Credit Agreement at December 31, 1995 and June 30, 1996. Net settlements are
recorded in interest expense. The risk of credit loss in the event of non-
performance by the counterparty to the swap agreement is considered by
management to be minimal.
FINANCING COSTS PAID TO RELATED PARTIES
As of December 31, 1995 and June 30, 1996, the Agent Bank was an affiliate
of a Class A limited partner. In addition, the Subordinated Note holder held
the Put/Call Units. During the years ended December 31, 1993, 1994 and 1995,
and six-month periods ended June 30, 1995 and 1996, the Company incurred
interest expense related to these credit facilities of $3,670,000, $6,888,000,
$7,367,000, $3,736,000 and $3,514,000, respectively. Of these amounts,
$1,046,000, $1,336,000 and $1,252,000 are included in accrued expenses at
December 31, 1994 and 1995 and June 30, 1996, respectively. In addition, the
Company paid fees to the holders of the senior and subordinated notes payable
of $250,000, $1,943,000 and $122,000 in 1993, 1994 and 1995, respectively,
related to amendments to the Credit Agreement and the subordinated note
agreement. During the year ended December 31, 1994, the Company paid the
general partner $474,000 for its efforts related to obtaining the Company's
credit facilities and acquiring Comcast.
FAIR VALUE
The recorded amount of the Company's long-term debt and related deferred
financing costs approximate current market prices for the same or similar
issues available to the Company for debt with similar remaining maturities.
F-11
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED.)
6. BENEFIT PLANS:
DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution savings and retirement plan
(the "Benefit Plan") that covers substantially all employees. Under the
savings portion of the Benefit Plan, eligible employees may contribute from 2%
to 14% of their compensation, subject to Internal Revenue Code limitations.
For the years ended 1993, 1994 and 1995 the Company, at its discretion, may
contribute a matching amount of up to 50% of the first 6% contributed by the
employee. Employees are 100% vested in their contribution at all times and
vest 100% in the Company portion at December 31 of the year of the
contribution. The Company recorded contribution expense for the savings
portion of the Benefit Plan of approximately $114,000, $170,000 and $181,000
for the years ended December 31, 1993, 1994 and 1995 and $90,000 and $202,000
for the six-month periods ended June 30, 1995 and 1996, respectively.
The retirement portion of the Benefit Plan is determined annually by the
Company at its discretion, but may not exceed 3% of the eligible employee's
compensation. The employees vest in the retirement portion of the Benefit Plan
ratably over five years, but become fully vested in the event of death,
disability or the attainment of the age of 65. The Company accrued $180,000,
$260,000 and $135,000 for the retirement portion of the Benefit Plan for the
years ended December 31, 1993 and 1994 and the six-month period ended June 30,
1995, respectively. No amounts were accrued for the year ending December 31,
1995, or the six-month period ended June 30, 1996.
MULTI-EMPLOYER DEFINED CONTRIBUTION PLANS
The Company participates in several multi-employer defined contribution
benefit plans that provide benefits to employees covered by certain labor
union contracts. The amount of expense related to contributions to these plans
was approximately $83,000, $110,000 and $108,000 for the years ended December
31, 1993, 1994 and 1995 and approximately $54,000 and $60,000 for the six-
month periods ended June 30, 1995 and 1996, respectively. These amounts were
determined by union contract and the Company does not administer or control
the funds.
7. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under both operating and
capital leases. In addition, the Company has entered into agreements to obtain
satellite channel capacity and subsidiary communication authorization rights
for the transmission of programs to the Company's customers. Total rental
expense under operating leases was approximately $5,590,000, $6,384,000 and
$7,698,000 for the years ended December 31, 1993, 1994 and 1995 and $3,833,000
and $3,148,000 for the six-month periods ended June 30, 1995 and 1996,
respectively.
F-12
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED.)
7. COMMITMENTS AND CONTINGENCIES, (CONTINUED)
Future annual minimum lease payments under noncancelable leases for the
years ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
1996................................................... $338 $ 6,011
1997................................................... 275 4,842
1998................................................... 147 3,955
1999................................................... 67 3,202
2000................................................... -- 2,765
Thereafter............................................. -- 6,208
---- -------
Total minimum lease payments........................... 827 $26,983
=======
Less amount representing interest...................... (65)
----
Present value of future minimum capital lease payments
included in long-term obligations..................... $762
====
</TABLE>
Assets acquired under capital leases were $135,000, $460,000 and $489,000
for the years ended December 31, 1993, 1994 and 1995, respectively. Assets
recorded under capital leases were $1,294,000, $1,141,000 and $1,412,000 with
accumulated amortization of $428,000, $307,000 and $439,000 as of December 31,
1994 and 1995 and June 30, 1996, respectively.
CONTINGENT PURCHASE CONSIDERATION
The 1992 Asset Purchase Agreement, as amended ("Purchase Agreement"),
provides for contingent payments to the Seller if certain performance levels
are achieved in the five years following the closing of the 1992 Acquisition.
If the performance levels are achieved the Company will owe the Seller
additional purchase price of $5 million to $24 million. Any such payments, if
earned, will be allocated to the assets acquired or, if applicable, recorded
as additional purchased assets. No amounts have been paid or accrued as of
December 31, 1995 or June 30, 1996 pursuant to this provision, as the
possibility of obtaining the required performance objectives has been deemed
remote by management.
TAXES
An assessment was made against the Seller resulting from an audit performed
by the Washington State Department of Revenue for sales and use and business
and occupation taxes paid for the period from 1987 through September 1992.
Under successor liability statutes in the state of Washington, the Company
could, if the Seller fails to pay its tax obligation, become liable for the
assessment outstanding against the Seller of approximately $1,700,000. This
assesment is under appeal by the Seller. The Seller and certain of its
affiliates have agreed to indemnify the Company for any liabilities in
connection with such assessment.
F-13
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED.)
7. COMMITMENTS AND CONTINGENCIES, (CONTINUED)
EMPLOYMENT AGREEMENTS
The Company has five-year employment agreements with certain senior
executive officers. These five-year agreements, expiring August 31, 1997,
provide certain benefits to the officers if involuntarily terminated by the
Company. As of December 31, 1994 and 1995 and June 30, 1996 no amounts have
been accrued related to these agreements.
LEGAL PROCEEDINGS
The Company is subject to various legal proceedings which arise in the
ordinary course of business. Company management believes none of these
proceedings, individually or in the aggregate, will have a material adverse
effect on the financial condition or results of operations of the Company.
8. REDEEMABLE PREFERRED PARTNERSHIP INTERESTS:
The redeemable preferred partnership interests are comprised of a Class C
and a C-1 preferred partnership interest. Both are non-voting interests that
do not participate in the Company's profits or losses. A summary of these
interests and their accumulated returns by period are as follows (in
thousands):
<TABLE>
<CAPTION>
CLASS C CLASS C-1 TOTAL
<S> <C> <C> <C>
Balance, January 1, 1993.......................... $ 8,188 $ -- $ 8,188
Preferred return................................. 572 -- 572
------- ------ -------
Balance, December 31, 1993........................ 8,760 -- 8,760
Class C-1 contribution........................... -- 5,000 5,000
Preferred return................................. 613 320 933
------- ------ -------
Balance, December 31, 1994........................ 9,373 5,320 14,693
Preferred return................................. 657 372 1,029
------- ------ -------
Balance, December 31, 1995........................ 10,030 5,692 15,722
Preferred return................................. 344 199 543
------- ------ -------
Balance, June 30, 1996............................ $10,374 $5,891 $16,265
======= ====== =======
</TABLE>
CLASS C INTEREST
The Class C limited partner is entitled to receive the amount of its initial
contribution of $8,000,000, plus a return of 7% compounded annually, through
November 30, 2002, the date of redemption. The Class C limited partner is
entitled to a preference in liquidation equal to its contribution plus
accumulated return. A general partner may, at its sole discretion, require the
Class C limited partner to exchange its interest for a note equal its then
aggregate liquidation preference amount. If the Class C limited partnership
units remain outstanding on November 30, 2002 the Company is required to
redeem such units for an amount equal to the Class C contribution plus
accumulated return.
CLASS C-1 INTEREST
The Class C-1 limited partner is entitled to receive the amount of its
initial contribution of $5,000,000, plus a return of 7% compounded annually,
through January 31, 2004, the date of redemption. The Class C-1 limited
partner may become, at its option, a participating partner. Upon becoming a
participating partner, the Class C-1
F-14
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED.)
8. REDEEMABLE PREFERRED PARTNERSHIP INTERESTS, (CONTINUED)
limited partner will forfeit any accrued portion of the return. If it has not
previously become a participating partner, the Class C-1 limited partner is
entitled to a preference in liquidation equal to its contribution plus
accumulated return. Unless the Class C-1 interest becomes a participating
interest, a general partner may, at its sole discretion, require the Class C-1
limited partner to exchange its interest for a note equal to its then
aggregate liquidation preference amount. If such exchange occurs prior to the
time the Class C-1 limited partner has the opportunity to obtain participation
status, the Class C-1 limited partner will also be issued an option to acquire
the participating interest on substantially the same terms as if such exchange
had not occurred. If the Class C-1 limited partner has not obtained
participation status, or has not exchanged such units for notes, on or prior
to January 31, 2004, the Company is required to redeem such units for an
amount equal to the Class C-1 contribution plus accumulated return.
9. PARTNERS' CAPITAL:
Partners' capital is comprised of two general partners ("General Partners'
Interests"); Class A limited partners and Class B limited partners ("Limited
Partners' Interests"); Put/Call Units, and; preferred limited partners'
interests.
PUT/CALL UNITS
In connection with obtaining the fixed rate subordinated note payable, the
Company issued a lender an option to purchase 1,529,898 units of Class A
limited partnership interests, for an aggregate exercise price of $10. These
units are currently exercisable. The estimated value of the Put/Call Units was
recorded as a debt discount and is being amortized as an adjustment to
interest expense over the life of the related debt obligation.
SUBSCRIPTIONS RECEIVABLE
Officers and key employees of the Company have acquired limited partnership
interests, a portion of which were financed with subscription notes. As of
December 31, 1994 and 1995 and June 30, 1996, the Class B limited partners'
capital accounts were reduced by subscription notes receivable. Interest
income on the subscriptions receivable totaled $51,000 and $49,000 for the
years ended December 31, 1994 and 1995, and $28,000 and $16,000 for the six-
month periods ended June 30, 1995 and 1996.
PREFERRED LIMITED PARTNERS' INTERESTS
The preferred limited partners' interests, which were issued on November 4,
1994, do not participate in the Company's profits or losses. Such limited
partners are entitled to receive an 8% return, compounded quarterly, on the
amount of their initial contribution and are generally entitled to a priority
on distributions from the Company. At December 31, 1995 and June 30, 1996, the
return was credited to the preferred limited partners. These limited partners
are also entitled to a preference in liquidation equal to their initial
contribution plus accumulated and unpaid return. Upon the occurrence of
certain events, the units may, at the option of the Company, be redeemed by
the Company for an amount equal to the then aggregate liquidation preference
amount. The units (and any accrued and unpaid return) may, at the option of
the holder, be converted into units of Class B limited partnership interest at
any time.
OPTION PLAN
Certain limited partners and key employees of the Company have the ability,
under certain conditions, as defined in the Management Option Plan (the
"Management Option Plan"), to exercise options to purchase partnership units.
These options vest at a rate of 20% per year, however, the scheduled vesting
rate of the options
F-15
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED.)
9. PARTNERS' CAPITAL, (CONTINUED)
will be delayed and exercise precluded, if the Company fails to meet certain
performance standards, similar to those described in Note 7.
Activity under this plan and option price information is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
OPTIONS PRICE
<S> <C> <C>
Balance, January 1, 1993............................... 1,704,545 $1.00
Options granted....................................... -- --
Options canceled...................................... (70,000) 1.00
--------- ------------
Balance, December 31, 1993............................. 1,634,545 1.00
Options granted....................................... 165,000 1.50 - 1.75
Options canceled...................................... (85,000) 1.00
--------- ------------
Balance, December 31, 1994............................. 1,714,545 1.00 - 1.75
Options granted....................................... 150,000 1.75
Options canceled...................................... (30,000) 1.00
--------- ------------
Balance, December 31, 1995............................. 1,834,545 1.00 - 1.75
--------- ------------
Options granted....................................... -- --
Options canceled...................................... -- --
--------- ------------
Balance, June 30, 1996................................. 1,834,545 $1.00 - 1.75
========= ============
</TABLE>
Non-cash compensation expense resulting from this plan, if any, will be
charged to operations over the periods subject to these conditions when
management determines that it is probable that these performance objectives
will occur. From the inception of the Management Option Plan through June 30,
1996, no options have become exercisable. As the possibility of obtaining the
required performance objectives has been deemed remote by management, no
compensation expense has been recorded.
PUT OPTION
After September 4, 1998, a general partner and certain of the Class A
limited partners can require the Company to purchase limited partnership units
held by them at fair market value. However, such right may not be exercised if
the purchase of units would have a material adverse effect on the Company or
would be in contravention of any then existing agreement to which the Company
is a party.
ALLOCATION OF PROFITS AND LOSSES
Losses are allocated among the general partners and Class A and B limited
partners based upon the total of the interests held by each individual,
including the Put/Call Units under option, as a percentage of the total of all
such interests.
10. SUBSEQUENT EVENTS:
JOINT VENTURE GUARANTEE
The Company and Alcas Holding B.V., 50/50 joint venture partners in Muzak
Europe B.V. ("Muzak Europe"), have agreed to make pro rata equity
contributions to Muzak Europe to the extent necessary to enable
F-16
<PAGE>
MUZAK LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
IS UNAUDITED.)
Muzak Europe to maintain minimum net worth requirements under its outstanding
credit facility. As of June 30, 1996, the amount outstanding under the credit
facility was $1.8 million.
PUBLIC OFFERING AND MUZAK CAPITAL CORPORATION
In May 1996, the Company organized Muzak Capital Corporation ("Capital
Corp.") (formerly Muzak, Inc.), a wholly-owned subsidiary of the Company. In
August 1996, the general and limited partners authorized a plan for the filing
of a registration statement for the underwritten public offering of the
Company's Senior Notes. In connection with this plan, Capital Corp. is being
utilized for the purpose of serving as a co-issuer of the Senior Notes in
order to facilitate the offering. The offering is expected to close in the
third quarter of 1996.
REPAYMENT OF CLASS C LIMITED PARTNER INTEREST
In conjunction with the Offering, the Company intends to use a portion of
the net proceeds therefrom to repurchase for approximately $7.5 million the
Company's Class C Limited Partner Interest with a recorded value of
approximately $10.4 million and will record a non-recurring gain of
approximately $3.0 million from the retirement of such interest at a discount.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Muzak Capital Corporation
Seattle, Washington
We have audited the accompanying balance sheet of Muzak Capital Corporation
(the "Company") as of June 30, 1996. This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of Muzak Capital Corporation as of June 30,
1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
August 27, 1996
F-18
<PAGE>
MUZAK CAPITAL CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
MAY 8, 1996 JUNE 30, 1996
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash................................................. $ 1 $ 1
==== ====
STOCKHOLDER'S EQUITY
Preferred Stock--authorized 10,000,000 shares of
$0.01 par value each; no shares issued and
outstanding......................................... $ -- $ --
Common Stock--authorized 30,000,000 shares of $0.01
par value each; 100 shares issued and outstanding... 1 1
---- ----
TOTAL.............................................. $ 1 $ 1
==== ====
</TABLE>
F-19
<PAGE>
NOTE TO FINANCIAL STATEMENT
Muzak Capital Corporation (the "Company") (formerly Muzak, Inc.), a wholly-
owned subsidiary of Muzak Limited Partnership ("MLP"), was formed on May 8,
1996. The Company intends, along with MLP, to file a registration statement
for the underwritten offering of senior notes of which the Company and MLP
will be co-issuers. The offering is expected to close in the third quarter of
1996.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Comcast Corporation
Philadelphia, Pennsylvania
General and Limited Partners
Muzak Limited Partnership
Seattle, Washington
We have audited the accompanying consolidated statements of operations and
retained earnings and cash flows of Comcast Sound Communications, Inc. (a
wholly owned subsidiary of Comcast Corporation) and subsidiaries (the
"Company") for the year ended December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Comcast Sound Communications, Inc. and subsidiaries for the year
ended December 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for postretirement benefits other than
pensions effective January 1, 1993, to conform with Statement of Financial
Accounting Standards No. 106.
As discussed in Note 5 to the consolidated financial statements, Comcast
Corporation provided financing, allocated management fees and costs, and
conducted certain other business transactions with the Company. The
accompanying consolidated financial statements may not necessarily be
indicative of the conditions that would have existed or the results of
operations if Comcast Sound Communications, Inc. and subsidiaries had been
unaffiliated with Comcast Corporation.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 10, 1994
F-21
<PAGE>
COMCAST SOUND COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
Revenues:
Music and other business services................................ $16,710,062
Equipment and related services................................... 9,410,707
-----------
Total revenue................................................... 26,120,769
Cost of revenues.................................................. 10,255,239
-----------
Gross profit.................................................... 15,865,530
Selling, general and administrative expenses...................... 12,338,877
Depreciation and amortization..................................... 3,078,293
-----------
Operating income................................................ 448,360
Interest expense.................................................. 443,201
Other income...................................................... (70,866)
-----------
Income before income taxes and cumulative effect of accounting
change......................................................... 76,025
Income taxes...................................................... (152,000)
-----------
Loss before cumulative effect of accounting change................ (75,975)
Cumulative effect of accounting change............................ (405,000)
-----------
Net loss........................................................ (480,975)
Retained earnings, beginning of year.............................. 9,060,949
-----------
Retained earnings, end of year.................................... $ 8,579,974
===========
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE>
COMCAST SOUND COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1993
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss......................................................... $ (480,975)
Noncash items included in net loss:
Cumulative effect of accounting change.......................... 405,000
Depreciation and amortization................................... 3,078,293
Deferred income taxes........................................... 242,000
----------
3,244,318
Adjustments to reconcile net income to net cash provided by oper-
ating activities:
Increase in accounts receivable, inventories, and prepaid
charges and other assets....................................... (1,515,717)
Increase in accounts payable and accrued expenses, state income
and other taxes,
and deferred revenue........................................... 327,118
----------
Net cash provided by operating activities....................... 2,055,719
----------
FINANCING ACTIVITIES
Repayment of long-term debt...................................... (11,929)
Proceeds from note payable....................................... 121,235
Net transactions with Comcast and affiliates..................... 1,668,899
----------
Net cash provided by financing activities....................... 1,778,205
----------
INVESTING ACTIVITIES
Additions to property and equipment.............................. (4,389,710)
Deferred charges and other....................................... (221,938)
----------
Net cash used in investing activities........................... (4,611,648)
----------
Net decrease in cash and cash equivalents....................... (777,724)
CASH AND CASH EQUIVALENTS, beginning of year....................... 1,397,347
----------
CASH AND CASH EQUIVALENTS, end of year............................. $ 619,623
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.................................................... $ 445,000
Income taxes paid................................................ 483,000
</TABLE>
See notes to consolidated financial statements.
F-23
<PAGE>
COMCAST SOUND COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Comcast Sound
Communications, Inc. and its subsidiaries (the "Company"). The Company
provides sound communication services in the following states: California,
Colorado, Connecticut, Florida, Illinois, Indiana, Michigan, New York,
Pennsylvania and Texas. All significant intercompany accounts and transactions
among the consolidated entities have been eliminated. Through January 31,
1994, the Company was a wholly owned subsidiary of Comcast Corporation
("Comcast") (See Note 6).
Cash and cash equivalents includes cash on deposit and overnight investments
at a financial institution.
Depreciation of property and equipment is provided by the straight-line
method over estimated useful lives of 3-25 years.
Deferred charges and other assets include contract acquisition costs and
non-compete covenants and are being amortized over estimated useful lives
ranging from 5-10 years.
Excess of costs over net assets acquired is being amortized over 40 years
except for costs arising prior to November 1, 1970 of approximately $441,000,
which are not being amortized.
Revenues from the sale, service and installation of equipment are recognized
at the time the customer receives the product or service. Revenue for audio
services to customers under five-year contracts is recognized over the
contract period when earned.
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes" (see Note 2), and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (see Note 5).
2. INCOME TAXES
The Company joins with Comcast in filing a consolidated federal income tax
return. Effective January 1, 1993, Comcast and the Company adopted SFAS No.
109. SFAS No. 109 generally provides that deferred tax assets and liabilities
be recognized for temporary differences between the financial reporting basis
and the tax basis of the Company's assets and liabilities and expected
benefits utilizing net operating loss ("NOL") carryforwards. The impact on
deferred taxes of changes in tax rates and laws, if any, applied to the years
during which temporary differences are expected to be settled is reflected in
the financial statements in the period of enactment.
Pursuant to the deferred method under Accounting Principles Board Opinion
No. 11, "Accounting for Income Taxes," which was applied in 1992 and prior
years, deferred income taxes were recognized for income and expense items that
were reported in different years for financial reporting purposes and income
tax purposes using the tax rate applicable for the year of the calculation.
Under the deferred method, deferred taxes were not adjusted for subsequent
changes in tax rates.
In 1992 and prior years, under a tax sharing arrangement between the Company
and Comcast, income taxes were computed based upon book income and were
recorded as due to Comcast and affiliates. This tax sharing arrangement was
amended with the adoption of SFAS No. 109 to require the Company to pay to
Comcast taxes currently payable as if the Company was filing separate tax
returns.
F-24
<PAGE>
COMCAST SOUND COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has determined the amount of its deferred tax liability balance
at January 1, 1993, computed on a separate return basis, using Comcast's
effective tax rate, and has adjusted the due to Comcast and affiliate to
separately report this amount as a deferred tax liability, computed under SFAS
No. 109. The cumulative effect of adopting SFAS No. 109 is not material to the
Company's results of operations. Income tax expense consists of the following
components:
<TABLE>
<CAPTION>
1993
<S> <C>
Current expense (benefit):
Federal......................................................... $(174,000)
State........................................................... 84,000
---------
(90,000)
---------
Deferred expense:
Federal......................................................... 222,000
State........................................................... 20,000
---------
242,000
---------
Income tax expense............................................... $ 152,000
=========
The effective income tax expense of the Company differs from the statutory
amount because of the effect of the following items:
<CAPTION>
1993
<S> <C>
Federal tax at statutory rate ................................... $ 26,600
State income taxes, (net federal benefit)........................ 67,600
Increase in corporate federal income tax rate from 34% to 35%.... 43,000
Other............................................................ 14,800
---------
Income tax expense............................................... $ 152,000
=========
</TABLE>
3. COMMITMENTS
The Company and its subsidiaries lease office, warehouse and distribution
space and other equipment under various noncancellable operating leases.
Certain of the lease agreements contain renewal options.
At December 31, 1993, minimum annual commitments for rentals under
noncancellable leases are:
<TABLE>
<S> <C>
1994.............................................................. $1,066,779
1995.............................................................. 853,741
1996.............................................................. 651,311
1997.............................................................. 469,926
1998.............................................................. 303,615
Thereafter........................................................ 488,176
----------
$3,833,548
==========
</TABLE>
Rental expense (including amounts charged by Comcast) was approximately
$1,399,000 in 1993.
4. RELATED PARTY TRANSACTIONS
Management fees are charged by Comcast based on the Company's recurring and
nonrecurring revenues in 1993. Under these policies, management fees of
approximately $2,601,000 were charged to the Company and recorded in selling,
general and administrative expense in 1993. The 1993 management fee included
charges to
F-25
<PAGE>
COMCAST SOUND COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company of approximately $2,000,000 for salary continuation, closing
bonuses and legal fees associated with, but not contingent upon, the
subsequent sale of certain assets and liabilities of the Company (see Note 6).
The Company has entered into cost sharing arrangements with Comcast for
certain services, including insurance, rent and employee benefits. Under these
arrangements, the Company was charged approximately $1,682,000 in 1993.
The Company incurred $428,000 of interest expense related to a note payable
of $9,500,000, bearing an interest rate of 4.5%, to an affiliate (see Note 6).
See Note 2--Income Taxes.
See Note 3--Commitments
See Note 5--Postretirement Benefits Other than Pensions.
5. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Certain employees of the Company are participants in Comcast's
postretirement benefit plans other than pensions. Effective January 1, 1993,
the Company adopted SFAS No. 106. This statement requires the Company to
accrue the estimated cost of retiree benefits earned during the years the
employee provides services. The Company previously expensed the cost of these
benefits as claims were incurred.
The Company's allocation from Comcast for the cumulative effect as of
January 1, 1993 of the adoption of SFAS No. 106 was to increase the Company's
amount due to Comcast and affiliate by approximately $675,000 and net loss by
approximately $405,000 (net of tax). The effect of SFAS No. 106 on loss before
the cumulative effect of accounting change was not significant to the
Company's 1993 results of operations.
6. SUBSEQUENT EVENT
On January 31, 1994, Comcast sold substantially all of the Company's assets
and liabilities to Muzak Limited Partnership. In connection with this sale,
the Company's $9.5 million long-term debt payable to an affiliate of Comcast
has been forgiven.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
MLP Acquisition Limited Partnership
Seattle, Washington
We have audited the accompanying balance sheet of MLP Acquisition Limited
Partnership (the "Company") as of December 31, 1995. This financial statement
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of MLP Acquisition Limited Partnership as of
December 31, 1995 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP Seattle, Washington
September 25, 1996
F-27
<PAGE>
MLP ACQUISITION LIMITED PARTNERSHIP
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
LIABILITIES AND PARTNERS' DEFICIT
<S> <C> <C>
Due to Related Party................................... $ 15 $ 15
Investment in Muzak Limited Partnership................ 4,258 7,517
Partners' Deficit
Limited Partner Interest............................. (4,232) (7,458)
General Partner Interest............................. (41) (74)
-------- --------
Total Partners' Deficit................................ (4,273) (7,532)
-------- --------
Total Liabilities and Partners' Deficit................ $ 0 $ 0
======== ========
</TABLE>
F-28
<PAGE>
MLP ACQUISITION LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
MLP Acquisition Limited Partnership (the "Company") is a general partner of
Muzak Limited Partnership ("Muzak").
INTERIM FINANCIAL INFORMATION
The interim financial information, as of June 30, 1996, was prepared by the
Company in a manner consistent with the audited financial statements and
pursuant to the rules and requirements of the Securities and Exchange
Commission. The unaudited information, in management's opinion, reflects all
adjustments which are of a normal recurring nature and which are necessary to
present fairly the financial presentation as of the period presented.
DUE TO RELATED PARTY
Amounts due to related part consist of amounts due to Muzak for
reimbursement of expenses paid by Muzak on behalf of the Company.
INVESTMENT IN MUZAK LIMITED PARTNERSHIP
Investment in Muzak is recorded under the equity method of accounting
because the Company has the ability to exercise significant influence over
Muzak's operating and financial policies. As a general partner, the Company is
responsible for 100% of the losses generated by Muzak.
PARTNERS' DEFICIT
Partners' capital is comprised of a general partner and a limited partner.
Income and losses are allocated between the general and limited partners based
upon the total of the interests held by each as a percentage of the total
interests.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Music Holdings Corporation
Seattle, Washington
We have audited the accompanying balance sheet of Music Holdings Corporation
(the "Company") as of December 31, 1995. This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of Music Holdings Corporation as of December
31, 1995 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP Seattle, Washington
September 25, 1996
F-30
<PAGE>
MUSIC HOLDINGS CORPORATION
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,1995 JUNE 30, 1996
---------------- -------------
(UNAUDITIED)
<S> <C> <C>
ASSETS
Related Party Accrued Interest Receivable....... $105 $126
---- ----
Total Assets.................................... $105 $126
==== ====
LIABILITIES AND STOCKHOLDERS'S EQUITY (DEFICIT)
Due to Related Party............................ $ 17 $ 17
Investment in MLP Acquisition Limited
Partnership.................................... 41 74
Stockholders' Equity (Deficit):
Common Stock, $.01 par value, shares issued
and outstanding - Class A, 510 shares; Class
B, 490 shares, net of Subscriptions receivable
of $335....................................... 91 91
Deficit....................................... (44) (56)
---- ----
Total Stockholders' Equity...................... 47 35
---- ----
Total Liabilities and Stockholders' Equity...... $105 $126
==== ====
</TABLE>
F-31
<PAGE>
MUSIC HOLDINGS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 IN UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
Music Holdings Corporation (the "Company") is a general partner of MLP
Acquisition Limited Partnership which is a general partner of Muzak Limited
Partnership ("Muzak") and provides general management services to MLP
Acquisition Limited Partnership.
INTERIM FINANCIAL INFORMATION
The interim financial information, as of June 30, 196, was prepared by the
Company in a manner consistent with the audited financial statements and
pursuant to the rules and requirements of the Securities and Exchange
Commission. The unaudited information, in management's opinion, reflects all
adjustments which are of a normal recurring nature and which are necessary to
present fairly the financial presentation as of the period presented.
SUBSCRIPTIONS RECEIVABLE AND RELATED PARTY ACCRUED INTEREST RECEIVABLE
A shareholder of the Company acquired its interest with a subscription
receivable that is due on demand. Interest has been accrued from the inception
of note at the prime interest rate plus 1% (9.5% December 31, 1995), and is
classified as Related Party Accrued Interest Receivable.
DUE TO RELATED PARTY
Amounts due to related part consist of amounts due to Muzak for
reimbursement of expenses paid by Muzak on behalf of the Company.
INVESTMENT IN MLP ACQUISITION LIMITED PARTNERSHIP
Investment in MLP Acquisition Limited Partnership is recorded for under the
equity method of accounting because the Company has the ability to exercise
significant influence over MLP Acquisition Limited Partnership's operating and
financial policies. As general partner, the Company is responsible for 100% of
any losses generated by MLP Acquisition Limited Partnership.
INCOME TAXES
The Company is a C Corporation and is subject to Federal and state income
taxes. No provision has been made as the Company is not profitable. Net
operating losses approximated $64,000 at December 31, 1995 and expire through
2004.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
MLP Administration Corporation
Seattle, Washington
We have audited the accompanying balance sheet of MLP Administration
Corporation (the "Company") as of December 31, 1995. This financial statement
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of MLP Administration Corporation as of
December 31, 1995 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP Seattle, Washington
September 25, 1996
F-33
<PAGE>
MLP ADMINISTRATION CORPORATION
BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
(UNAUDITIED)
<S> <C> <C>
ASSETS
Related Party Accrued Interest Receivable............ $32 $38
--- ---
Total Assets......................................... $32 $38
=== ===
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Due to Related Party................................. $17 $18
Investment in Muzak Limited Partnership.............. 6 11
Stockholders' Equity (Deficit):
Common Stock, $.01 par value; authorized 1000
shares; issued and
outstanding, 97.11 shares, net of subscriptions re-
ceivable of $100................................... 13 13
Deficit............................................ (4) (4)
Total Stockholders' Equity........................... 9 9
--- ---
Total Liabilities and Stockholders' Equity........... $32 $38
=== ===
</TABLE>
F-34
<PAGE>
MLP ADMINISTRATION CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
MLP Administration Corporation (the "Company") is a general partner of Muzak
Limited Partnership ("Muzak") and provides general management services to
Muzak.
INTERIM FINANCIAL INFORMATION
The interim financial information, as of June 30, 1996, was prepared by the
Company in a manner consistent with the audited financial statements and
pursuant to the rules and requirements of the Securities and Exchange
Commission. The unaudited information, in management's opinion, reflects all
adjustments which are of a normal recurring nature and which are necessary to
present fairly the financial presentation as of the period presented.
SUBSCRIPTIONS RECEIVABLE AND RELATED PARTY ACCRUED INTEREST RECEIVABLE
Shareholders of the Company acquired their interests with subscriptions
receivable that are due on demand. Interest has been accrued from the
inception of note at the prime interest rate plus 1% (9.5% at December 31,
1995), and is classified as Related Party Accrued Interest Receivable.
DUE TO RELATED PARTY
Amounts due to Muzak represent reimbursement of expenses paid by Muzak on
behalf of the Company.
INVESTMENT IN MUZAK LIMITED PARTNERSHIP
The investment in Muzak is recorded for under the equity method of
accounting because the Company has the ability to exercise significant
influence over Muzak's operating and financial policies. As a general partner,
the Company is responsible for 100% of any losses by Muzak.
INCOME TAXES
The Company has been an S Corporation since inception and as such the
Company's federal and state taxable income is reported in the tax returns of
its shareholders. Taxes on foreign earnings are paid by Muzak and are recorded
in the Company's investment in Muzak.
F-35
<PAGE>
[CHART OMITTED]
[Chart omitted depicting schematic representation of the Company's five
different distribution technologies linked in the center by the Company's goal
of using such technologies to meet customers' various needs.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE ISSUERS OR ANY OF THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO
BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
The Issuers.............................................................. 15
Use of Proceeds.......................................................... 15
Capitalization........................................................... 16
Unaudited Pro Forma Financial Information................................ 17
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 30
Management............................................................... 44
Certain Relationships and Related Transactions........................... 51
Security Ownership of Certain Beneficial Owners.......................... 52
Description of the Senior Notes.......................................... 53
Federal Income Tax Consequences.......................................... 77
Description of the Partnership Agreement................................. 79
Underwriting............................................................. 82
Legal Matters............................................................ 83
Experts.................................................................. 83
Available Information.................................................... 83
Index to Financial Statements............................................ F-1
</TABLE>
-----------
UNTIL , 1996 (90 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SENIOR NOTES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$100,000,000
MUZAK
MUZAK LIMITED PARTNERSHIP
MUZAK CAPITAL CORPORATION
% SENIOR NOTES DUE 2003
---------------
PROSPECTUS
---------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LAZARD FRERES & CO. LLC
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[ALTERNATE]
SUBJECT TO COMPLETION, DATED , 1996
PROSPECTUS
, 1996
$100,000,000
MUZAK
MUZAK LIMITED PARTNERSHIP
MUZAK CAPITAL CORPORATION
% SENIOR NOTES DUE 2003
The % Senior Notes due 2003 (the "Senior Notes") are being offered (the
"Offering") by Muzak Limited Partnership, a Delaware limited partnership (the
"Company"), and Muzak Capital Corporation, a Delaware corporation ("Capital
Corp.", and together with the Company, the "Issuers"). The Senior Notes are
the joint and several obligations of the Issuers. Capital Corp. is a wholly-
owned subsidiary of the Company. The Company will receive all of the net
proceeds of the Offering.
Interest on the Senior Notes is payable semi-annually in cash on and
of each year, commencing , 1997. The Senior Notes will be redeemable
at the option of the Issuers, in whole or in part, at any time on or after
, 2000, in cash at the redemption prices set forth herein, plus accrued and
unpaid interest, if any, thereon to the date of redemption. In addition,
during the first 36 months after the date of this Prospectus, the Issuers may
on any one or more occasions redeem up to 35% of the initially outstanding
aggregate principal amount of Senior Notes at a redemption price equal to %
of the principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the redemption date, with the net proceeds of one or more equity
offerings of the Issuers; provided that at least 65% of the initially
outstanding aggregate principal amount of Senior Notes remains outstanding
immediately after the occurrence of any such redemption. See "Description of
the Senior Notes--Optional Redemption." In addition, upon the occurrence of a
Change of Control (as defined herein), each holder of Senior Notes will have
the right to require the Issuers to repurchase all or any part of such
holder's Senior Notes at an offer price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, thereon to
the date of purchase. See "Description of the Senior Notes--Repurchase at the
Option of Holders--Change of Control." There can be no assurance that, in the
event of a Change of Control, the Issuers would have sufficient funds to
purchase all Senior Notes tendered. See "Risk Factors--Risk of Inability to
Satisfy Change of Control Offer."
The Senior Notes will represent unsecured senior obligations of the Issuers,
will rank senior in right of payment to all Subordinated Indebtedness (as
defined herein) of the Issuers and will rank pari passu in right of payment
with all senior indebtedness of the Issuers. At June 30, 1996, on a pro forma
basis after giving effect to the Offering and the application of the estimated
net proceeds therefrom, the Issuers would have had approximately $1.1 million
of total indebtedness, other than the Senior Notes. The Senior Notes will be
guaranteed on a senior basis by all future Domestic Subsidiaries (as defined
herein) of the Company (other than Capital Corp.). As of the date hereof, the
Company has no subsidiaries other than Capital Corp., which will be a
Restricted Subsidiary (as defined herein). The Indenture (as defined herein)
will limit the ability of the Company and its Restricted Subsidiaries to incur
additional indebtedness; however, the Company and its Restricted Subsidiaries
will be permitted to incur certain indebtedness, which may be secured. See
"Description of the Senior Notes--General" and "--Certain Covenants."
The Issuers do not intend to list the Senior Notes on any national
securities exchange or include the Senior Notes for quotation through an
inter-dealer quotation system. Although Lazard Freres & Co. LLC ("Lazard") has
indicated that it presently intends to make a market in the Senior Notes,
there can be no assurance that any market for the Senior Notes will develop
or, if any such market develops, that it would continue to exist. Such market-
making activities may be discontinued at any time. See "Risk Factors--Absence
of Public Market; Illiquidity; Market Value."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SENIOR
NOTES, INCLUDING:
.The substantial leverage of the Company and its ability to incur
additional indebtedness.
.The risk of possible future net losses from operations.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus has been prepared for use by Lazard in connection with
offers and sales of the Senior Notes which may be made by it from time to time
in market-making transactions at negotiated prices relating to prevailing
market prices at the time of sale. There is currently no public market for the
Senior Notes. Although Lazard has indicated that it presently intends to make
a market in the Senior Notes, there can be no assurance that a trading market
will develop or, if any such market develops, that it would continue to exist.
Such market-making may be discontinued at any time. Lazard may act as
principal agent in such transactions. See "Plan of Distribution."
LAZARD FRERES & CO. LLC
<PAGE>
[ALTERNATE]
ABSENCE OF PUBLIC MARKET; ILLIQUIDITY; MARKET VALUE
The Senior Notes are not listed on any national securities exchange or
included for quotation through an inter-dealer quotation system. There is
currently no public market for the Senior Notes. Therefore, an investment in
the Senior Notes may be illiquid. In addition, the Senior Notes may trade at a
discount from their initial public offering prices, depending upon prevailing
interest rates, the market for similar securities and other factors. Although
Lazard has indicated that it presently intends to make a market in the Senior
Notes, there can be no assurance that a trading market will develop or, if any
such market develops, that it would continue to exist. Such market-making may
be discontinued at any time. Any or all of the foregoing may have an adverse
effect on the market value of the Senior Notes.
<PAGE>
[ALTERNATE]
USE OF PROCEEDS
The net proceeds to the Company from the Offering were approximately $96.5
million.
Of such proceeds, approximately $49.2 million was used to repay outstanding
senior secured indebtedness payable in semi-annual installments through January
2001 and bearing interest at an effective rate of 10.6% per annum at June 30,
1996 and approximately $12.5 million was used to repay outstanding subordinated
indebtedness bearing interest at an effective rate of 14.5% per annum and due
in installments between September 2001 and September 2002. In addition,
approximately $7.5 million was used to repurchase the Company's Class C Limited
Partner Interest with a recorded value of approximately $10.4 million. The
balance of the net proceeds, approximately $27.3 million, is available for
general corporate purposes, which may include acquisitions of the Company's
franchisees to further its operating strategy, other acquisitions or investment
opportunities and working capital. The Company has no material arrangement,
commitment or understanding with respect thereto. Pending such use, the balance
of the proceeds has been invested in short-term investment grade obligations as
permitted by the Indenture.
<PAGE>
[ALTERNATE]
PLAN OF DISTRIBUTION
This Prospectus has been prepared for use by Lazard Freres & Co. LLC
("Lazard") in connection with offers and sales of the Senior Notes which may be
made by it from time to time in market-making transactions at negotiated prices
relating to prevailing market prices at the time of sale. There is currently no
public market for the Senior Notes. Although Lazard has indicated that it
presently intends to make a market in the Senior Notes, there can be no
assurance that a trading market will develop or, if any such market develops,
that it would continue to exist. Such market-making may be discontinued at any
time. Lazard may act as principal agent in such transactions.
Lazard served as an underwriter in the Offering for which it received total
underwriting discounts and commissions of $ in connections therewith.
<PAGE>
[ALTERNATE]
LEGAL MATTERS
Certain legal matters in connection with the Senior Notes offered hereby were
passed upon for the Issuers by Weil, Gotshal & Manges LLP, New York, New York.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$100,000,000
MUZAK
MUZAK LIMITED PARTNERSHIP
MUZAK CAPITAL CORPORATION
% SENIOR NOTES DUE 2003
---------------
PROSPECTUS
---------------
LAZARD FRERES & CO. LLC
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[ALTERNATE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE ISSUERS OR LAZARD FRERES & CO. LLC. THIS PROSPEC-
TUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY,
TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
The Issuers.............................................................. 15
Use of Proceeds.......................................................... 15
Capitalization........................................................... 16
Unaudited Pro Forma Financial Information................................ 17
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 30
Management............................................................... 44
Certain Relationships and Related Transactions........................... 51
Security Ownership of Certain Beneficial Owners.......................... 52
Description of the Senior Notes.......................................... 53
Federal Income Tax Consequences.......................................... 77
Description of the Partnership Agreement................................. 79
Plan of Distribution..................................................... 82
Legal Matters............................................................ 83
Experts.................................................................. 83
Available Information.................................................... 83
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the Registrants' estimated expenses in
connection with the issuance of the securities being registered, other than
underwriting discounts and commissions.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............ $ 34,483
NASD Filing Fee................................................ 10,500
Printing and Engraving Expenses................................ 100,000
Counsel Fees and Expenses...................................... 275,000
Accountants' Fees and Expenses................................. 100,000
Blue Sky Fees and Expenses..................................... 20,000
Trustee Fees................................................... 8,500
Rating Agency Fees............................................. 40,000
Miscellaneous.................................................. 11,517
--------
Total........................................................ $600,000
========
</TABLE>
All such fees and expenses have been or will be paid by the Registrants.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 17-108 of the Delaware Revised Uniform Limited Partnership Act
empowers a limited partnership to indemnify and hold harmless any partner or
other person from and against any and all claims and demands whatsoever.
The Third Amended and Restated Agreement of Limited Partnership of Muzak
Limited Partnership (the "Company"), dated as of November 4, 1994, as amended
(the "Partnership Agreement"), provides that the general partners of the
Company, their respective affiliates and all officers, partners, directors,
employees, stockholders and agents of the general partners and their
respective affiliates and all officers, agents and employees of the Company
who are partners of the Company, shall not be liable to the Company, to
limited partners or to any other person holding an interest in the Company for
any losses sustained or liabilities incurred, including monetary damages, as a
result of any act or omission of the general partners or any such other
person, if the conduct of the general partners or such other person did not
constitute fraud, willful misconduct or criminal conduct.
The Partnership Agreement also provides that the Company shall, to the
fullest extent permitted by law, indemnify and hold harmless the general
partners of the Company, their respective affiliates and the officers,
directors, employees and agents of the general partners and their respective
affiliates, from and against any and all liabilities and expenses which arise
by reason of any such person's management of the affairs of the Company or of
a general partner, or any such person's status as a general partner of the
Company or affiliate thereof, as a partner, director, officer, employee,
stockholder or agent thereof, or as a partner, director, officer, agent or
employee of the Company or a person serving at the request of such persons,
provided that such liability or expense is not the result of the fraud,
willful misconduct or criminal conduct of the indemnitee.
In the event of the filing of a public offering of securities of the Company
pursuant to a registration statement under the Securities Act, the Partnership
Agreement provides that the Company shall indemnify and hold harmless holders
of such securities participating in such registration, the directors,
officers, partners and controlling persons of such holders, and partners of
the Company for any liability which arises from such filing under the
Securities Act.
II-1
<PAGE>
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL"), the law of the state in which Muzak Capital Corporation ("Capital
Corp.") is incorporated, empowers a corporation within certain limitations to
indemnify a director, officer, employee or agent of the corporation and
certain other persons serving at the request of the corporation in related
capacities against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonable incurred by him in
connection with any action, suit or proceeding to which he is or was
threatened to be a party (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, as long as
he acted in good faith and in a manner which he reasonably believed to be in,
or not opposed to, the best interests of the corporation. With respect to any
criminal proceeding, he must have had no reasonable cause to believe his
conduct was unlawful. No such indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery of the State of Delaware or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all of the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery of the State of Delaware or such other court shall deem proper.
The Certificate of Incorporation of Capital Corp. provides that any person
may be indemnified against all expenses and liabilities to the fullest extent
permitted by the DGCL. The By-Laws of Capital Corp. allow Capital Corp. to
advance or reimburse litigation expenses upon submission by the director,
officer or employee of an undertaking to repay such advances or reimbursements
if it is ultimately determined that indemnification is not available to such
director, officer or employee and allow Capital Corp. to purchase and maintain
insurance for its directors and officers against liability asserted against
them in such capacity whether or not Capital Corp. would have the power to
indemnify them against such liability.
As permitted by Section 102 of the DGCL, the Certificate of Incorporation of
Capital Corp. provides that no director shall be liable to Capital Corp. or
its stockholders for monetary damages for breach of fiduciary duty as a
director other than (i) for breaches of the director's duty of loyalty to
Capital Corp. or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for the unlawful payment of dividends or unlawful stock purchases or
redemptions under Section 174 of the DGCL and (iv) for any transaction from
which the director derived an improper personal benefit.
The Underwriting Agreement being filed as Exhibit 1 hereto provides for
indemnification of directors and officers of the Registrants under certain
circumstances, including for liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the closing of the acquisition of the franchises of
Comcast Sound Communications, Inc. ("Comcast"), on January 31, 1994, the
Registrant issued a $5.0 million 7% preferred limited partnership interest of
the Partnership to Comcast. This transaction was exempt from registration
under Section 4(2) of the Securities Act as not involving a public offering.
No underwriter was involved in the transaction.
In November 1994, the Registrant amended its senior credit facility whereby
the Company's $10.0 million loan from Union Bank of Switzerland, New York
Branch, was repaid in full with proceeds from a subordinated financing
involving the sale of $7.0 million additional preferred partnership interests
to certain existing investors, identified below, with a pledge of the limited
partnership interests to the lenders under the senior credit facility and an
increase in the number of units subject to the option agreement of Barclays
Bank PLC, New York Branch. This transaction was exempt from registration under
Section 4(2) of the Securities Act as not involving a public offering. No
underwriter was involved in the transaction. The purchasers of the preferred
partnership interests were MLP Holdings L.P., MLP Acquisition L.P., UBS
Capital Corp., Barclays Bank PLC, John A. Hawkins, John R. Jester, James F.
Harrison, Thomas J. Gentry, Jack D. Craig, Richard Chaffe, Bruce B.
Funkhouser, L. Dale Stewart, Dino J. DeRose, J. Gary Henderson and Susan P.
Chetwin.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Registration Statement:
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
**1 --Underwriting Agreement
** 3.1 --Certificate of Incorporation of Capital Corp.
** 3.2 --By-Laws of Capital Corp.
3.3 --Certificate of Amendment to the Certificate of Incorporation of
Capital Corp.
** 3.4 --Third Amended and Restated Agreement of Limited Certificate of
Limited Partnership of Muzak Limited Partnership (formerly, MLP
Operating, L.P.), dated as of November 4, 1994, as amended
** 3.5 --Amendment to Third Amended and Restated Partnership Agreement of
Muzak Limited Partnership, dated as of April 13, 1996
** 4.1 --Indenture, dated as of , 1996, among the Registrants and First
Trust National Association, as trustee, in respect of the
Registrants' % Senior Notes due 2003
** 4.2 --Form of Senior Note (included in the form of Indenture to be filed
as Exhibit 4.2 to this Registration Statement)
5 --Opinion of Weil, Gotshal & Manges LLP
**10.1 --Asset Purchase Agreement dated as of March 11, 1992, among Muzak
Limited Partnership, Field/Muzak Inc., The Field Corporation and MLP
Operating, L.P., as amended by Muzak Limited Partnership's letters
dated April 22, 1992, August 6, 1992 and August 20, 1992, Amendment
No. 1 dated as of June 26, 1992, Amendment No. 2, dated July 31,
1992 and Amendment No. 3, dated as of August 26, 1992
**10.2 --Asset Purchase Agreement and Contribution Agreement dated as of
November 24, 1993 among Comcast Corporation, et al. and Muzak
Limited Partnership
**10.3 --Amended and Restated Credit Agreement dated as of September 4,
1992, as amended as of October 22, 1992 and as of December 15, 1993;
and as amended and restated as of January 31, 1994 among Muzak
Limited Partnership, Union Bank of Switzerland, New York Branch,
Internationale Nederlanden (U.S.) Capital Corporation and the other
Lenders parties thereto and Union Bank of Switzerland, New York
Branch, as Agent; as amended by Waiver and Agreement dated as of
February 10, 1994; Waiver and Amendment No. 1 dated as of October
31, 1994; Waiver and Amendment No. 2 dated as of November 2, 1994;
Amendment No. 3 and Consent dated as of November 4, 1994; Amendment
No. 4 to Amended and Restated Credit Agreement dated as of November
17, 1994; Waiver dated January 10, 1995; Waiver dated as of July 31,
1995; Amendment No. 5 to Amended and Restated Credit Agreement dated
as of November 7, 1995; and Waiver dated as of April 1, 1996
**10.4 --Amended and Restated Term Notes issued as of September 4, 1992,
amended and restated as of January 31, 1994
**10.5 --Subordinated Loan Agreement dated as of September 4, 1992, as
amended, between Muzak Limited Partnership and Barclays Bank PLC,
New York Branch
**10.6 --Option Agreement dated as of September 4, 1992 between Muzak
Limited Partnership and Barclays Bank PLC, New York Branch
**+10.7 --Uplink Facility Agreement dated as of December 28, 1995 between
EchoStar Satellite Corporation and Muzak Limited Partnership
**+10.8 --DBS Programming Affiliation Agreement dated as of December 28, 1995
between EchoStar Satellite Corporation and Muzak Limited Partnership
**+10.9 --Video Programming Sales Agent Agreement dated as of December 28,
1995 between EchoStar Satellite Corporation and Muzak Limited
Partnership
**+10.10 --Form of Muzak(R) Participating Affiliate Agreement
**10.11 --Third and Broad Office Lease dated June 8, 1994, between Martin
Selig and Muzak Limited Partnership
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S>
**10.12 --ASCAP License
**10.13 --Joint Venture Agreement dated August 2, 1995 between Muzak Limited
Partnership and Alcas Holdings B.V.
**10.14 --Muzak(R) Master Affiliate Agreement (Mexico) dated March 1, 1992
between Muzak Limited Partnership and Audioplan S.A.
**10.15 --Muzak(R) Master Affiliate Agreement (Canada) dated August 30, 1990
between Muzak Limited Partnership and Chum Limited, as amended--Form
of Underwriting Agreement
**10.16 --FCC Licenses
**10.17 --Form of License Agreement (New Franchise Agreement), as amended
**10.18 --Form of Music Services Agreement
**10.19 --Form of Multi-Territory Account Service Agreement
**10.20 --Form of Sales of Adjunct Services and Form of Muzak Adjunct
Services Subscriber Agreement
**+10.21 --Transponder Lease Agreement dated December 9, 1993 between
Microspace Communications Corporation and Muzak Limited Partnership
**+10.22 --Transmission Lease Agreement dated January 31, 1995 between
Microspace Communications Corporation and Muzak Limited Partnership
**+10.23 --Transponder Lease Agreement dated January 31, 1995 between
Microspace Communications Corporation and Muzak Limited Partnership
**+10.24 --Transponder Lease Agreement dated April 27, 1995 between Microspace
Communications Corporation and Muzak Limited Partnership
**+10.25 --Transponder Lease Agreement dated July 5, 1995 between Microspace
Communications Corporation and Muzak Limited Partnership
**+10.26 --Transponder Lease Agreement dated April 29, 1996 between Microspace
Communications Corporation and Muzak Limited Partnership
**+10.27 --Agreement to Provide Telecommunications Service dated August 8 and
9, 1995 between Keystone Communications Corporation and Muzak
Limited Partnership
**+10.28 --Sales Agreement and License dated September 28, 1995 between
Mainstream Data, Inc. and Muzak Limited Partnership
**10.29 --Muzak Limited Partnership Tempo Savings and Retirement Plan
**10.30 --Muzak Limited Partnership Tempo Savings and Retirement Trust
**10.31 --Muzak Limited Partnership Management Incentive Plan
**10.32 --Muzak Limited Partnership Management Option Plan
**10.35 --Employment Agreement dated August 31, 1992 of John R. Jester
**10.36 --Employment Agreement dated August 31, 1992 of James F. Harrison
**10.37 --Employment Letter dated July 7, 1995 of Kirk A. Collamer
10.38 --Amended and Restated Management Option Plan
**12 --Statement of Computations of Ratios of Earnings to Fixed Charges
**21 --List of Subsidiaries of the Registrants
23.1 --Consent of Deloitte & Touche LLP and Report on Financial Statement
Schedule of Muzak Limited Partnership
23.2 --Consent of Deloitte & Touche LLP
23.3 --Consent of Deloitte & Touche LLP
23.4 --Consent of Deloitte & Touche LLP
23.5 --Consent of Deloitte & Touche LLP
23.6 --Consent of Deloitte & Touche LLP
23.7 --Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5)
**24 --Power of Attorney (included on the signature page to this
Registration Statement)
25 --Statement of Eligibility and Qualification of First Trust National
Association, as Trustee, on Form T-1 with respect to the % Senior
Notes due 2003.
**27 --Financial Data Schedules
</TABLE>
- ---------------------
** Previously filed
+ Confidential treatment requested
II-4
<PAGE>
<TABLE>
<C> <S>
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts and Reserves
</TABLE>
All other Schedules have been omitted because the information is not
applicable or is presented in the financial statements or the notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrants hereby undertake to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrants under the General Corporation Law of
the State of Delaware or under the Delaware Revised Uniform Limited
Partnership Act or pursuant to Capital Corp.'s Certificate of Incorporation or
By-Laws or the Company's Partnership Agreement, or otherwise, the Registrants
have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrants in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrants will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrants pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i)To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement.
II-5
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section do
not apply if the registration statement is on Form S-3, Form S-8 or Form F-3,
and the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to
the Commission by the Registrants pursuant to section 13 or section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain sold at the termination of the
Offering.
(4) If any Registrant is a foreign private issuer, to file a post-effective
amendment to the Registration Statement to include any financial statements
required by (S) 210.3-19 of this chapter at the start of any delayed offering
or throughout a continuous offering. Financial statements and information
otherwise required by Section 10(a)(3) of the Securities Act need not be
furnished, provided that the Registrant includes in the prospectus, by means of
a post-effective amendment, financial statements required pursuant to this
paragraph (4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by Section
10(a)(3) of the Act or (S) 210.3-19 of this chapter if such financial
statements and information are contained in periodic reports filed with or
furnished to the Commission by the Registrants pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Form F-3.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrants
have duly caused this Registration Statement to be signed on their behalf by
the undersigned, thereunto duly authorized, in the City of Seattle, State of
Washington, on September 26, 1996.
MUZAK LIMITED PARTNERSHIP
(Registrant)
MLP Acquisition L.P.,
By __________________________________
Managing General Partner
Music Holdings Corp.,
By __________________________________
General Partner
/s/ John R. Jester
By __________________________________
John R. Jester
President
MUZAK CAPITAL CORPORATION
(Registrant)
/s/ John R. Jester
By __________________________________
John R. Jester
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ John R. Jester President and Chief
_____________________________________ Executive Officer September 26,
JOHN R. JESTER (Principal Executive 1996
Officer) of the Company
and Capital Corp. and
Director of Music
Holdings and Capital
Corp.
/s/ Kirk A. Collamer Vice President and Chief
_____________________________________ Financial Officer September 26,
KIRK A. COLLAMER (Principal Financial 1996
Officer and Principal
Accounting Officer) of
the Company and Capital
Corp.
* Director of Music
_____________________________________ Holdings and Capital September 26,
BRUCE G. POLLACK Corp. 1996
* Director of Music
_____________________________________ Holdings and Capital September 26
PAUL F. BALSER Corp. 1996
II-7
<PAGE>
* Director of Music
____________________________________ Holdings and Capital September 26,
MARK E. JENNINGS Corp. 1996
* Director of Music
____________________________________ Holdings and Capital September 26,
WILLIAM A. BOYD Corp. 1996
/s/ Kirk A. Collamer
By__________________________________
Kirk A. Collamer Attorney-in-fact
II-8
<PAGE>
MUZAK LIMITED PARTNERSHIP
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II (REG 210.12-09)
<TABLE>
<CAPTION>
ADDITIONS
--------------------- DEDUCTIONS,
BALANCE AT CHARGED TO CHARGED TO WRITE-OFFS, BALANCE
BEGINNING COSTS AND OTHER NET OF AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RECOVERIES PERIOD
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1995
Allowance for Doubtful
Accounts............... $736,000 $810,000 $(914,000) $632,000
======== ======== ========= ========
YEAR ENDED DECEMBER 31,
1994
Allowance for Doubtful
Accounts............... $558,000 $610,000 $359,000(a) $(791,000) $736,000
======== ======== ======== ========= ========
YEAR ENDED DECEMBER 31,
1993
Allowance for Doubtful
Accounts............... $648,000 $464,000 $(554,000) $558,000
======== ======== ========= ========
</TABLE>
- ---------------------
(a) Comcast Sound Communications, Inc. acquisition as of January 31, 1994.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S> <C>
** 1 --Underwriting Agreement
** 3.1 --Certificate of Incorporation of Capital Corp.
** 3.2 --By-Laws of Capital Corp.
3.3 --Certificate of Amendment to the Certificate of Incorporation
of Capital Corp.
** 3.4 --Third Amended Restated Agreement of Limited Partnership of
Muzak Limited Partnership (formerly, MLP Operating, L.P.),
dated as of November 4, 1994, as amended.
**3.5 --Amendment to Third Amended and Restated Agreement of Limited
Partnership of Muzak Limited Partnership, dated as of April
13, 1996
**4.1 --Indenture, dated as of , 1996, among the Registrant and
First Trust National Association, as trustee, in respect of
the Registrants' % Senior Notes due 2003.
**4.2 --Form of Senior Note (included in the form of Indenture to be
filed as Exhibit 4.2 to this Registration Statement)
5 --Opinion of Weil, Gotshal & Manges LLP
**10.1 --Asset Purchase Agreement dated as of March 11, 1992, among
Muzak Limited Partnership, Field/Muzak Inc., The Field
Corporation and MLP Operating, L.P., as amended by Muzak
Limited Partnership's letters dated April 22, 1992, August 6,
1992 and August 20, 1992, Amendment No. 1 dated as of June 26,
1992, Amendment No. 2, dated July 31, 1992 and Amendment No.
3, dated as of August 26, 1992
**10.2 --Asset Purchase Agreement and Contribution Agreement dated as
of November 24, 1993 among Comcast Corporation, et al. and
Muzak Limited Partnership
**10.3 --Amended and Restated Credit Agreement dated as of September
4, 1992, as amended as of October 22, 1992 and as of December
15, 1993; and as amended and restated as of January 31, 1994
among Muzak Limited Partnership, Union Bank of Switzerland,
New York Branch, Internationale Nederlanden (U.S.) Capital
Corporation and the other Lenders parties thereto and Union
Bank of Switzerland, New York Branch, as Agent; as amended by
Waiver and Agreement dated as of February 10, 1994; Waiver and
Amendment No. 1 dated as of October 31, 1994; Waiver and
Amendment No. 2 dated as of November 2, 1994; Amendment No. 3
and Consent dated as of November 4, 1994; Amendment No. 4 to
Amended and Restated Credit Agreement dated as of November 17,
1994; Waiver dated January 10, 1995; Waiver dated as of July
31, 1995; Amendment No. 5 to Amended and Restated Credit
Agreement dated as of November 7, 1995; and Waiver dated as of
April 1, 1996
**10.4 --Amended and Restated Term Notes issued as of September 4,
1992, amended and restated as of January 31, 1994
**10.5 --Subordinated Loan Agreement dated as of September 4, 1992, as
amended, between Muzak Limited Partnership and Barclays Bank
PLC, New York Branch
**10.6 --Option Agreement dated as of September 4, 1992 between Muzak
Limited Partnership and Barclays Bank PLC, New York Branch
**+10.7 --Uplink Facility Agreement dated as of December 28, 1995
between EchoStar Satellite Corporation and Muzak Limited
Partnership
**+10.8 --DBS Programming Affiliation Agreement dated as of December
28, 1995 between EchoStar Satellite Corporation and Muzak
Limited Partnership
**+10.9 --Video Programming Sales Agent Agreement dated as of December
28, 1995 between EchoStar Satellite Corporation and Muzak
Limited Partnership
**+10.10 --Form of Muzak(R) Participating Affiliate Agreement
**10.11 --Third and Broad Office Lease dated June 8, 1994, between
Martin Selig and Muzak Limited Partnership
**10.12 --ASCAP License
**10.13 --Joint Venture Agreement dated August 2, 1995 between Muzak
Limited Partnership and Alcas Holdings B.V.
**10.14 --Muzak(R) Master Affiliate Agreement (Mexico) dated March 1,
1992 between Muzak Limited Partnership and Audioplan S.A.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<C> <S> <C>
**10.15 --Muzak(R) Master Affiliate Agreement (Canada) dated August 30,
1990 between Muzak Limited Partnership and Chum Limited, as
amended--Form of Underwriting Agreement
**10.16 --FCC Licenses
**10.17 --Form of License Agreement (New Franchise Agreement), as
amended
**10.18 --Form of Music Services Agreement
**10.19 --Form of Multi-Territory Account Service Agreement
**10.20 --Form of Sales of Adjunct Services and Form of Muzak Adjunct
Services Subscriber Agreement
**+10.21 --Transponder Lease Agreement dated December 9, 1993 between
Microspace Communications Corporation and Muzak Limited
Partnership
**+10.22 --Transmission Lease Agreement dated January 31, 1995 between
Microspace Communications Corporation and Muzak Limited
Partnership
**+10.23 --Transponder Lease Agreement dated January 31, 1995 between
Microspace Communications Corporation and Muzak Limited
Partnership
**+10.24 --Transponder Lease Agreement dated April 27, 1995 between
Microspace Communications Corporation and Muzak Limited
Partnership
**+10.25 --Transponder Lease Agreement dated July 5, 1995 between
Microspace Communications Corporation and Muzak Limited
Partnership
**+10.26 --Transponder Lease Agreement dated April 29, 1996 between
Microspace Communications Corporation and Muzak Limited
Partnership
**+10.27 --Agreement to Provide Telecommunications Service dated August
8 and 9, 1995 between Keystone Communications Corporation and
Muzak Limited Partnership
**+10.28 --Sales Agreement and License dated September 28, 1995 between
Mainstream Data, Inc. and Muzak Limited Partnership
**10.29 --Muzak Limited Partnership Tempo Savings and Retirement Plan
**10.30 --Muzak Limited Partnership Tempo Savings and Retirement Trust
**10.31 --Muzak Limited Partnership Management Incentive Plan
**10.32 --Muzak Limited Partnership Management Option Plan
**10.35 --Employment Agreement dated August 31, 1992 of John R. Jester
**10.36 --Employment Agreement dated August 31, 1992 of James F.
Harrison
**10.37 --Employment Letter dated July 7, 1995 of Kirk A. Collamer
10.38 --Amended and Restated Management Option Plan
**12 --Statement of Computations of Ratios of Earnings to Fixed
Charges
**21 --List of Subsidiaries of the Registrants
23.1 --Consent of Deloitte & Touche LLP and Report on Financial
Statement Schedule of Muzak Limited Partnership
23.2 --Consent of Deloitte & Touche LLP
23.3 --Consent of Deloitte & Touche LLP
23.4 --Consent of Deloitte & Touche LLP
23.5 --Consent of Deloitte & Touche LLP
23.6 --Consent of Deloitte & Touche LLP
23.7 --Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5)
**24 --Power of Attorney (included on the signature page to this
Registration Statement)
25 --Statement of Eligibility and Qualification of First Trust
National Association, as Trustee, on Form T-1 with respect to
the % Senior Notes due 2003
**27 --Financial Data Schedules
</TABLE>
- -------------------
** Previously filed
+ Confidential treatment requested
<PAGE>
FIRST AMENDMENT
to
CERTIFICATE OF INCORPORATION
of
MUZAK, INC.
This First Amendment to Certificate of Incorporation of Muzak, Inc.,
a Delaware corporation (the "Corporation"), has been duly prepared and executed
for filing in the State of Delaware in accordance with the provisions of Section
242 of the Delaware General Corporation Law.
1. Article I of the Certificate of Incorporation is hereby amended
to read in its entirety as follows:
"ARTICLE I
NAME
The name of the corporation is "Muzak Capital Corporation" (the
"Corporation")."
IN WITNESS WHEREOF, the undersigned has executed this amendment as of
the 27th day of August, 1996.
By: /s/ John R. Jester
-----------------------------
Name: John R. Jester
Title: President and Chief
Executive Officer
<PAGE>
================================================================================
Muzak Limited Partnership
Muzak Capital Corporation
$100,000,000
Aggregate Principal Amount
of ___% Senior Notes due 2003
INDENTURE
Dated as of _____________, 1996
First Trust National Association
--------------------------------
Trustee
================================================================================
<PAGE>
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
Trust Indenture
Act Section Indenture Section
<S> <C>
310 (a)(1).............................................................. 7.10
(a)(2).............................................................. 7.10
(a)(3) ............................................................. N.A.
(a)(4).............................................................. N.A.
(a)(5).............................................................. 7.10
(b) ................................................................ 7.10
(c) ................................................................ N.A.
311 (a) ................................................................ 7.11
(b) ................................................................ 7.11
(c) ................................................................ N.A.
312 (a)................................................................. 2.05
(b)................................................................. 11.03
(c) ................................................................ 11.03
313 (a) ................................................................ 7.06
(b)(1) ............................................................. N.A.
(b)(2) ............................................................. 7.06
(c) ................................................................ 7.06;11.02
(d)................................................................. 7.06
314 (a) ................................................................ 4.03;11.05
(b) ................................................................ N.A.
(c)(1) ............................................................. 11.04
(c)(2) ............................................................. 11.04
(c)(3) ............................................................. N.A.
(d)................................................................. N.A.
(e) ............................................................... 11.05
(f)................................................................. N.A.
315 (a)................................................................. 7.01
(b)................................................................. 7.05,11.02
(c) ............................................................... 7.01
(d)................................................................. 7.01
(e)................................................................. 6.11
316 (a)(last sentence) ................................................. N.A.
(a)(1)(A)........................................................... 6.05
(a)(1)(B) .......................................................... 6.04
(a)(2) ............................................................. N.A.
(b) ................................................................ 6.07
(c) ................................................................ 2.13
317 (a)(1) ............................................................. 6.08
(a)(2).............................................................. 6.09
(b) ................................................................ 2.04
318 (a)................................................................. 11.01
(b)................................................................. N.A.
(c)................................................................. 11.01
</TABLE>
N.A. means not applicable.
*This Cross-Reference Table is not part of the Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
<S> <C> <C>
Section 1.01. Definitions.......................................................... 1
Section 1.02. Other Definitions.................................................... 13
Section 1.03. Incorporation by Reference of Trust Indenture Act.................... 14
Section 1.04. Rules of Construction................................................ 14
ARTICLE 2
THE SENIOR NOTES
Section 2.01. Form and Dating...................................................... 14
Section 2.02. Execution and Authentication......................................... 15
Section 2.03. Registrar and Paying Agent........................................... 15
Section 2.04. Paying Agent to Hold Money in Trust.................................. 16
Section 2.05. Lists of Holders of the Senior Notes................................. 16
Section 2.06. Transfer and Exchange................................................ 16
Section 2.07. Replacement Senior Notes............................................. 17
Section 2.08. Outstanding Senior Notes............................................. 17
Section 2.09. Treasury Senior Notes................................................ 17
Section 2.10. Temporary Senior Notes............................................... 18
Section 2.11. Cancellation......................................................... 18
Section 2.12. Defaulted Interest................................................... 18
Section 2.13. Record Date.......................................................... 18
Section 2.14. CUSIP Number......................................................... 18
ARTICLE 3
REDEMPTION
Section 3.01. Notices to Trustee................................................... 19
Section 3.02. Selection of Senior Notes to Be Redeemed............................. 19
Section 3.03. Notice of Redemption................................................. 19
Section 3.04. Effect of Notice of Redemption....................................... 20
Section 3.05. Deposit of Redemption Price.......................................... 20
Section 3.06. Senior Notes Redeemed in Part........................................ 21
Section 3.07. Optional Redemption.................................................. 21
Section 3.08. Mandatory Redemption................................................. 21
Section 3.09. Offer to Purchase by Application of Excess Proceeds.................. 21
ARTICLE 4
COVENANTS
Section 4.01. Payment of Senior Notes.............................................. 23
Section 4.02. Maintenance of Office or Agency...................................... 23
Section 4.03. Reports.............................................................. 24
Section 4.04. Compliance Certificate............................................... 24
Section 4.05. Taxes................................................................ 25
Section 4.06. Stay, Extension and Usury Laws....................................... 25
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
Section 4.07. Restricted Payments.................................................. 25
Section 4.08. Dividend and Other Payment Restrictions
Affecting Subsidiaries............................................... 28
Section 4.09. Incurrence of Indebtedness and Issuance
of Preferred Equity Interests........................................ 28
Section 4.10. Asset Sales.......................................................... 30
Section 4.11. Transactions with Affiliates......................................... 31
Section 4.12. Liens................................................................ 31
Section 4.13. Sale and Leaseback Transactions...................................... 31
Section 4.14. Limitation on Issuances and Sales of Capital
Interests of Wholly Owned Subsidiaries................................32
Section 4.15. Limitations on Issuances of Guarantees of Indebtedness............... 32
Section 4.16. Subsidiary Guarantees................................................ 32
Section 4.17. Line of Business..................................................... 33
Section 4.18. Offer to Repurchase Upon Change of Control........................... 33
Section 4.19. Corporate Existence.................................................. 33
Section 4.20. Reorganization of the Company as a Partnership....................... 34
Section 4.21. Limitation on Activities of Capital Corp............................. 34
ARTICLE 5
SUCCESSORS
Section 5.01. Merger, Consolidation, or Sale of Assets............................. 35
Section 5.02. Successor Corporation Substituted.................................... 35
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.01. Events of Default.................................................... 36
Section 6.02. Acceleration......................................................... 37
Section 6.03. Other Remedies....................................................... 38
Section 6.04. Waiver of Past Defaults.............................................. 38
Section 6.05. Control by Majority.................................................. 39
Section 6.06. Limitation on Suits.................................................. 39
Section 6.07. Rights of Holders of Senior Notes to Receive Payment................. 39
Section 6.08. Collection Suit by Trustee........................................... 39
Section 6.09. Trustee May File Proofs of Claim..................................... 40
Section 6.10. Priorities........................................................... 40
Section 6.11. Undertaking for Costs................................................ 40
ARTICLE 7
TRUSTEE
Section 7.01. Duties of Trustee.................................................... 41
Section 7.02. Rights of Trustee.................................................... 42
Section 7.03. Individual Rights of Trustee......................................... 42
Section 7.04. Trustee's Disclaimer................................................. 42
Section 7.05. Notice of Defaults................................................... 43
Section 7.06. Reports by Trustee to Holders of the Senior Notes.................... 43
Section 7.07. Compensation and Indemnity........................................... 43
Section 7.08. Replacement of Trustee............................................... 44
Section 7.09. Successor Trustee by Merger, etc..................................... 45
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
Section 7.10. Eligibility; Disqualification........................................ 45
Section 7.11. Preferential Collection of Claims Against Company.................... 45
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.01. Option to Effect Legal Defeasance or Covenant Defeasance............. 45
Section 8.02. Legal Defeasance and Discharge....................................... 45
Section 8.03. Covenant Defeasance.................................................. 46
Section 8.04. Conditions to Legal or Covenant Defeasance........................... 46
Section 8.05. Deposited Money and Government Securities to be Held in Trust;
Other Miscellaneous Provisions....................................... 48
Section 8.06. Repayment to Issuers ................................................ 48
Section 8.07. Reinstatement........................................................ 48
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
Section 9.01. Without Consent of Holders of Senior Notes........................... 49
Section 9.02. With Consent of Holders of Senior Notes.............................. 49
Section 9.03. Compliance with Trust Indenture Act.................................. 51
Section 9.04. Revocation and Effect of Consents.................................... 51
Section 9.05. Notation on or Exchange of Senior Notes.............................. 51
Section 9.06. Trustee to Sign Amendments, etc...................................... 51
ARTICLE 10
GUARANTEE OF SENIOR NOTES
Section 10.01. Guarantee............................................................ 52
Section 10.02. Limitation of the Guarantors' Liability.............................. 53
Section 10.03. Release of the Guarantors............................................ 53
Section 10.04. Merger, Consolidation or Sale of Assets.............................. 53
Section 10.05. Execution and Delivery of Guarantees................................. 53
ARTICLE 11
MISCELLANEOUS
Section 11.01. Trust Indenture Act Controls......................................... 54
Section 11.02. Notices.............................................................. 54
Section 11.03. Communication by Holders of Senior Notes with
Other Holders of Senior Notes........................................ 55
Section 11.04. Certificate and Opinion as to Conditions Precedent................... 55
Section 11.05. Statements Required in Certificate or Opinion........................ 56
Section 11.06. Rules by Trustee and Agents.......................................... 56
Section 11.07. No Personal Liability of Directors, Officers,
Employees and Stockholders........................................... 56
Section 11.08. Governing Law........................................................ 56
Section 11.09. No Adverse Interpretation of Other Agreements........................ 56
Section 11.10. Successors........................................................... 57
Section 11.11. Severability......................................................... 57
Section 11.12. Counterpart Originals................................................ 57
Section 11.13. Table of Contents, Headings, etc..................................... 57
</TABLE>
iii
<PAGE>
EXHIBITS
Exhibit A Form of Senior Note
Exhibit B Form of Guarantee
Exhibit C Form of Supplemental Indenture
iv
<PAGE>
EXHIBIT 4.1
INDENTURE dated as of ___________, 1996 among Muzak Limited Partnership, a
Delaware limited partnership (the "Company"), and Muzak Capital Corporation, a
Delaware corporation ("Capital Corp." and, together with the Company, the
"Issuers"), as joint and several obligors and First Trust National Association,
as trustee (the "Trustee").
The Issuers and the Trustee agree as follows for the benefit of each other
and for the equal and ratable benefit of the Holders of the ___% Senior Notes
due 2003 (the "Senior Notes"):
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
Section 1.01. Definitions.
"Acquired Debt" means, with respect to any specified Person, (i) Indebtedness
of any other Person existing at the time such other Person is merged with or
into or became a Subsidiary of such specified Person, including, without
limitation, Indebtedness incurred in connection with, or in contemplation of,
such other Person merging with or into or becoming a Subsidiary of such
specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset
acquired by such specified Person.
"Administrative Expenses" means, with respect to the General Partner, any
general partner of the Company or the parent of the Company (in the event that
the Company is reorganized as a corporation), ordinary operating expenses
(including reasonable professional fees and expenses) in connection with (a)
complying with reporting obligations pursuant to the federal securities laws and
obligations to prepare and distribute business records in the ordinary course of
business, (b) maintaining such Person's corporate or partnership existence and
franchise (including annual franchise taxes) and (c) the payment of reasonable
fees and expense reimbursements to directors thereof.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Asset Sale" means (a) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback) other
than sales of inventory in the ordinary course of business consistent with past
practices (provided that the sale, lease, conveyance or other disposition of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole shall be governed by the provisions of Section
4.18 and/or Section 5.01 hereof and not by the provisions of Section 4.10
hereof), (b) the issuance by any Restricted Subsidiary of Equity Interests of
such Restricted Subsidiary and (c) the disposition by the Company or any of its
Restricted Subsidiaries of Equity Interests of any of the Company's
Subsidiaries, in the case of either clause (a), (b) or (c), whether in a single
transaction or a series of related transactions, (i) that have a fair market
value in excess of $2.0 million or (ii) for net proceeds in excess of $2.0
million. Notwithstanding the foregoing, (a) a transfer of assets by the Company
to a Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary, (b)
an issuance of Equity Interests by a Wholly Owned
<PAGE>
Restricted Subsidiary to the Company or to another Wholly Owned Restricted
Subsidiary, (c) a Restricted Payment that is permitted by the Section 4.07
hereof and (d) any sale and leaseback transaction otherwise permitted pursuant
to Section 4.13 hereof shall not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of interest
implicit in such transaction, determined in accordance with GAAP) of the
obligation of the lessee for net rental payments during the remaining term of
the lease included in such sale and leaseback transaction (including any period
for which such lease has been extended or may, at the option of the lessor, be
extended).
"Board of Directors" means the Board of Directors of the General Partner, on
behalf of the Company (or the Company, if the Company is reorganized as a
corporation), or of Capital Corp. or any authorized committee of the Board of
Directors.
"Borrowing Base" means, as of any date, an amount equal to (a) 80.0% of the
face amount of all accounts receivable owned by the Company and its Restricted
Subsidiaries as of such date that are not more than 90 days past due, plus (b)
60.0% of the book value (calculated on an average cost basis) of all inventory
owned by the Company and its Restricted Subsidiaries as of such date, minus (c)
any amount applied pursuant to Section 4.10(b) hereof to permanently reduce
Indebtedness permitted to be incurred pursuant to Section 4.09(b)(i) hereof, all
calculated on a consolidated basis and in accordance with GAAP. To the extent
that information is not available as to the amount of accounts receivable or
inventory as of a specific date, the Company may utilize the most recent
available information for purposes of calculating the Borrowing Base.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any determination thereof is to
be made, the amount of the liability in respect of a capital lease that would at
such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Interests" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued or
directly and fully guaranteed or insured by the United States government or any
agency or instrumentality thereof having maturities of not more than six months
from the date of acquisition, (iii) certificates of deposit and eurodollar time
deposits with maturities of six months or less from the date of acquisition,
bankers' acceptances with maturities not exceeding six months and overnight bank
deposits or demand deposits, in each case with any lender party to any Credit
Facility or with any domestic commercial bank having capital and surplus in
excess of $1.0 billion, (iv) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clauses (ii) and
(iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above, (v) commercial paper having the
highest rating obtainable from Moody's Investors Service, Inc. or Standard &
Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc., and in
each case maturing within six months after the date of acquisition and (vi)
investments in money market funds all of whose assets comprise securities of the
types described in clauses (i), (ii) and (iii) above.
2
<PAGE>
"Centre Partners" means Centre Partners L.P., a Delaware limited partnership.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) other than the Principals or their Related Parties (as defined
below), (ii) the adoption of a plan relating to the liquidation or dissolution
of the Company (other than as part of the reorganization of the Company as a
corporation), (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Principals and their Related
Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3
and Rule 13d-5 under the Exchange Act), directly or indirectly, of more than a
majority of the voting Capital Interests of the Company, (iv) the first day on
which a majority of the members of the Board of Directors are not Continuing
Directors or (v) prior to the reorganization of the Company as a corporation,
the first day on which the Company ceases to own 100% of the outstanding Equity
Interests of Capital Corp. For purposes of this definition, any transfer of an
equity interest of an entity that was formed for the purpose of acquiring voting
Capital Interests of the Company shall be deemed to be a transfer of such
portion of such voting Capital Interests as corresponds to the portion of the
equity of such entity that has been so transferred. Notwithstanding the
foregoing, the reorganization of the Company as a corporation shall not be
deemed to constitute a Change of Control, so long as such reorganization does
not result in any of the occurrences described above under clauses (i) through
(v).
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period plus (i) an amount equal to any extraordinary loss plus any net loss
realized in connection with an Asset Sale (to the extent such losses were
deducted in computing such Consolidated Net Income), plus (ii) provision for
taxes based on income or profits of such Person and its Restricted Subsidiaries
for such period, to the extent that such provision for taxes was included in
computing such Consolidated Net Income, plus (iii) consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without limitation,
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, imputed interest with
respect to Attributable Debt, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
all items classified as "depreciation" or "amortization" on such Person's
statement of operations and other non-cash charges (including non-cash, equity-
based compensation charges, but excluding any non-cash charge to the extent that
it represents an accrual of or reserve for cash charges in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of such
Person and its Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash charges were deducted in
computing such Consolidated Net Income, plus (v) in the case of calculations
with respect to the Company, the amount of any Tax Distributions by the Company
to its partners, or, following the reorganization of the Company as a
corporation, any tax sharing payment made pursuant to a tax sharing agreement
executed in connection therewith, in each case, on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the
provision for taxes on the income or profits of, and the depreciation
3
<PAGE>
and amortization and other non-cash charges of, a Restricted Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person and only if a corresponding amount would
be permitted at the date of determination to be dividended to the Company by
such Restricted Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders or partners. Notwithstanding the
foregoing, the provision for taxes based on the income or profits of, and the
depreciation and amortization and other non-cash charges of, a Subsidiary of a
Person shall be added to Consolidated Net Income to compute Consolidated Cash
Flow only to the extent (and in the same proportion) that the Net Income of such
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended or distributed to the Company by such Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its organizational documents and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders or partners.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (which
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted Subsidiary or its
stockholders or partners, (iii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iv) in the case of calculations with respect to
the Company, Consolidated Net Income of the Company shall be reduced by the
amount of any Tax Distributions by the Company to its partners, (v) the
cumulative effect of a change in accounting principles shall be excluded, (vi)
Consolidated Net Income shall not include any gain (but not loss), together with
any related provision for taxes on such gain (but not loss), realized in
connection with (A) any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback transactions) or (B) the disposition of any
securities by such Person or any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries, (vii) Consolidated Net Income shall not include any extraordinary
or nonrecurring gain (but not loss), together with any related provision for
taxes on such extraordinary or nonrecurring gain (but not loss) and (viii) the
Net Income of any Unrestricted Subsidiary shall be excluded, whether or not
distributed to the Company or one of its Subsidiaries.
"Consolidated Net Worth" means, (a) with respect to a partnership, the common
and preferred partnership interests of such partnership and its consolidated
Subsidiaries, as determined on a consolidated basis in accordance with GAAP, and
(b) with respect to any other Person, the sum of (i) the consolidated equity of
the common stockholders of such Person and its consolidated Subsidiaries plus
(ii) the respective amounts reported on such Person's most recent balance sheet
with respect to any series of preferred stock; provided that the preferred
partnership interests or the preferred stock, as the case may be, shall be
included in Consolidated Net Worth only if such preferred partnership interests
or preferred stock (A) is not a Disqualified Interest and (B) is not by its
terms entitled to the payment of dividends or distributions,
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unless such dividends or distributions may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only to the
extent of any cash received by such Person upon issuance of such preferred
partnership interests or preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within twelve months after the
acquisition of such business) subsequent to the date of the most recently
completed fiscal quarter in the book value of any asset owned by such Person or
a consolidated Subsidiary of such Person, (y) all investments in unconsolidated
Subsidiaries and in Persons that are not Subsidiaries (except, in each case,
investments in marketable securities), and (z) all unamortized debt discount and
expense and unamortized deferred financing charges, all of the foregoing
determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors who (i) was a member of such Board of Directors on the
date hereof or (ii) was nominated for election or elected to such Board of
Directors with the approval of the Principals and their Related Parties or a
majority of the Continuing Directors who were members of such Board of Directors
at the time of such nomination or election.
"Credit Facility" means any credit facility entered into by and among the
Company, any of its Subsidiaries that is a Guarantor and the lending
institutions party thereto, including any credit agreement, related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Interests" means any Equity Interest which, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
91st day after the date on which the Senior Notes mature.
"Domestic Subsidiary" of a Person means any direct or indirect Subsidiary of
such Person that is not a Foreign Subsidiary.
"Equity Interests" means Capital Interests and all warrants, options or other
rights to acquire Capital Interests (but excluding any debt security that is
convertible into, or exchangeable for, Capital Interests).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Existing Indebtedness" means the aggregate principal amount of Indebtedness
of the Company and its Subsidiaries in existence on the date hereof, until such
amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum of
(i) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations, imputed
interest with respect to Attributable Debt, commissions, discounts
5
<PAGE>
and other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging Obligations
but excluding amortization of deferred financing fees), (ii) the consolidated
interest expense of such Person and its Restricted Subsidiaries that was
capitalized during such period, (iii) any interest expense on Indebtedness of
another Person that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of its
Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon)
and (iv) the amount of dividends or distributions paid in respect of preferred
stock or preferred partnership interests of such Person, in each case, on a
consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person and its
Restricted Subsidiaries for such period to the Fixed Charges of such Person and
its Restricted Subsidiaries for such period. In the event that the Company or
any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
or preferred partnership interests subsequent to the commencement of the period
for which the Fixed Charge Coverage Ratio is being calculated but prior to the
date on which the event for which the calculation of the Fixed Charge Coverage
Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio
shall be calculated giving pro forma effect to such incurrence, assumption,
Guarantee or redemption of Indebtedness, or such issuance or redemption of
preferred stock or preferred partnership interests, as if the same had occurred
at the beginning of the applicable four-quarter reference period. For purposes
of making the computation referred to above, (i) acquisitions that have been
made by the Company or any of its Restricted Subsidiaries, including through
mergers or consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be deemed to have occurred on the
first day of the four-quarter reference period, (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, and (iii) the Fixed Charges attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, but only to the extent that
the obligations giving rise to such Fixed Charges shall not be obligations of
the referent Person or any of its Restricted Subsidiaries following the
Calculation Date.
"Foreign Credit Facility" means any credit facility entered into by and among
any Foreign Subsidiary of the Company and the lending institutions party
thereto, including any credit agreement, related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, renewed, refunded, replaced or refinanced from
time to time.
"Foreign Restricted Subsidiary" of a Person means any Restricted Subsidiary
of such Person that is also a Foreign Subsidiary.
"Foreign Subsidiary" of a Person means any direct or indirect Subsidiary of
such Person that is organized under the laws of any jurisdiction outside the
United States, any district or territoriality thereof and The Commonwealth of
Puerto Rico.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date hereof.
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"General Partner" means Music Holdings, as general partner of MLP
Acquisition, the managing general partner of the Company.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States of America is
pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means any Domestic Subsidiary of the Company (other than Capital
Corp.) that executes a Subsidiary Guarantee in accordance with the provisions
hereof, and their respective successors and assigns.
"Guarantor Senior Indebtedness" means any Indebtedness permitted to be
incurred by any Guarantor under the terms hereof, unless the instrument under
which such Indebtedness is incurred expressly provides that it is subordinated
in right of payment to such Guarantor's Subsidiary Guarantee. Notwithstanding
the foregoing, Guarantor Senior Indebtedness shall not include (i) any
Obligation of such Guarantor to any Subsidiary of such Guarantor, (ii) any
liability for federal, state, local or other taxes owed or owing by such
Guarantor, (iii) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities), (iv) any Indebtedness, Guarantee or
Obligation of the Guarantor that is contractually subordinated or junior in any
respect to any other Indebtedness, Guarantee or Obligation of such Guarantor or
(v) any Indebtedness incurred in violation hereof.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed solely to protect such Person against fluctuations in
interest rates.
"Holder" means a Person in whose name a Senior Note is registered.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person.
"Indenture" means this Indenture, as amended or supplemented from time to
time.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations but
excluding advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person or its
Subsidiaries in accordance with GAAP),
7
<PAGE>
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York, in the city of the principal corporate
trust office of the Trustee or at a place of payment are authorized by law,
regulation or executive order to remain closed. If a payment date is a Legal
Holiday, payment may be made on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"MLP Acquisition" means MLP Acquisition L.P., a Delaware limited partnership
and the general partner of the Company.
"MLP Holdings" means MLP Holdings L.P., a Delaware limited partnership and a
limited partner of MLP Acquisition.
"Music Holdings" means Music Holdings Corp., a Delaware corporation, wholly-
owned by Centre Partners and MLP Holdings; and the general partner of MLP
Acquisition.
"Net Income" means, with respect to any Person, the net income (loss) of such
Person, determined in accordance with GAAP.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
(other than Senior Revolving Debt) secured by a Lien on the asset or assets that
were the subject of such Asset Sale and any reserve for adjustment in respect of
the sale price of such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (a) as to which neither the Company
nor any of its Restricted Subsidiaries (i) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness or any agreement to maintain specified levels of financial or
operational performance), (ii) is directly or indirectly liable (as a guarantor
or otherwise), or (iii) constitutes the lender; (b) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare
8
<PAGE>
a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (c) as to which the
lenders have been notified in writing that they shall not have any recourse to
the stock or assets of the Company or any of its Restricted Subsidiaries.
"Notes" means the Senior Notes described above and issued under this
Indenture, as amended or supplemented from time to time pursuant to the terms
hereof.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means, with respect to any Person, the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer, the Treasurer, any Assistant Treasurer, Controller, Secretary
or any Vice-President of such Person, or, if such Person is a partnership, any
such officer of the general partner or the general partner of the general
partner of such Person.
"Officers' Certificate" means a certificate signed on behalf of the Company
by two Officers of the Company, one of whom must be the principal executive
officer, principal financial officer, treasurer or principal accounting officer
of the Company.
"Opinion of Counsel" means an opinion from legal counsel who is reasonably
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company, any Subsidiary of the Company or the Trustee.
"Pari Passu Indebtedness" means any Indebtedness which ranks pari passu in
right of payment with, and which is not expressly by its terms subordinated in
right of payment of principal, interest or premium, if any, to, the Senior
Notes.
"Park Road" means Park Road Corporation, a Delaware corporation and the
managing general partner of Centre Partners.
"Partnership Agreement" means the Third Amended and Restated Agreement of
Limited Partnership of the Company, as amended, supplemented or otherwise
modified and as in effect from time to time.
"Permitted Investments" means (a) any Investments in the Company or in a
Wholly Owned Restricted Subsidiary of the Company that is engaged in the same or
a similar or related line of business as the Company and its Restricted
Subsidiaries were engaged in on the date hereof; (b) any Investments in Cash
Equivalents; (c) Investments by the Company or any Restricted Subsidiary of the
Company in a Person, if as a result of such Investment (i) such Person becomes a
Wholly Owned Restricted Subsidiary of the Company that is engaged in the same or
a similar or related line of business as the Company and its Restricted
Subsidiaries were engaged in on the date hereof or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or a Wholly Owned
Restricted Subsidiary of the Company that is engaged in the same or a similar or
related line of business as the Company and its Restricted Subsidiaries were
engaged in on the date hereof; (d) Restricted Investments made as a result of
the receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with Section 4.10 hereof; (e) Investments in endorsements
of negotiable instruments and similar negotiable documents in the ordinary
course of business; (f) Investments existing on the date hereof; (g) Investments
in obligations of account debtors to the Company or any of its Restricted
Subsidiaries and stock or obligations issued to the Company or any such
Restricted Subsidiary by any Person, in each case, in connection with the
insolvency, bankruptcy, receivership or reorganization of such Person or a
composition
9
<PAGE>
or readjustment of such Person's Indebtedness and (h) other Investments in any
one or more Persons that do not exceed $5.0 million in the aggregate at any time
outstanding.
"Permitted Liens" means (i) Liens on accounts receivable and inventory
securing Indebtedness permitted to be incurred under Section 4.09(b)(i) hereof;
(ii) Liens in favor of the Company; (iii) Liens on property of a Person existing
at the time such Person is merged into, consolidated with or acquired by the
Company or any Restricted Subsidiary of the Company; provided that such Liens
were not incurred in contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company; (iv) Liens on property existing at the time of acquisition
thereof by the Company or any Subsidiary of the Company, provided that such
Liens were in existence prior to the contemplation of such acquisition; (v)
Liens to secure the performance of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in the
ordinary course of business; (vi) Liens to secure Indebtedness permitted by
Section 4.09(b)(vi) hereof covering only the assets acquired with such
Indebtedness; (vii) Liens existing on the date hereof; (viii) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (ix) Liens securing Permitted Refinancing Indebtedness,
provided that such Liens do not extend to or cover any assets or property other
than the collateral securing the Indebtedness to be refinanced; (x) Liens
arising by operation of law in connection with judgments, for a period not
resulting in an Event of Default with respect thereto; (xi) easements, rights of
way, zoning restrictions and other similar encumbrances or title defects which
do not materially detract from the value of the property or the assets subject
thereto or interfere with the ordinary conduct of the business of the Company
and its Restricted Subsidiaries, taken as a whole; (xii) Liens securing
Attributable Debt with respect to any sale and leaseback transaction in an
aggregate amount not to exceed the aggregate principal amount of Attributable
Debt permitted to be incurred pursuant to Section 4.09 hereof, provided that
such Liens do not extend to or cover any assets or property other than the
collateral securing such Attributable Debt; (xiii) Liens on assets of any
Foreign Restricted Subsidiary securing Indebtedness of such Foreign Restricted
Subsidiary incurred pursuant to Section 4.09(b)(ix) hereof; (xiv) Liens incurred
in the ordinary course of business of the Company or any Restricted Subsidiary
of the Company with respect to obligations that (A) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (B) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary; and (xv) Liens on accounts receivable and inventory
securing Hedging Obligations.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Restricted Subsidiaries; provided that
(i) the principal amount of such Permitted Refinancing Indebtedness does not
exceed the principal amount of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness
has a final maturity date later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iii) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right of
payment to the Senior Notes, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is subordinated in
right of payment to, the Senior Notes on terms at least as favorable to the
holders
10
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of Senior Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust or unincorporated organization
(including any subdivision or ongoing business of any such entity or
substantially all of the assets of any such entity, subdivision or business).
"Principals" means MLP Acquisition, MLP Holdings, Music Holdings, Centre
Partners and Park Road.
"Related Party" with respect to any Principal means (a) any controlling
stockholder or general partner, 80% (or more) owned Subsidiary, or spouse or
immediate family member (in the case of an individual) of such Principal or (b)
any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or Persons beneficially holding an 80% or more
controlling interest of which consist of such Principal and/or such other
Persons referred to in the immediately preceding clause (a), or (c) any Person
employed by the Company in a management capacity as of the date hereof.
"Responsible Officer," when used with respect to the Trustee, means any
officer within the Corporate Trust Administration of the Trustee (or any
successor group of the Trustee) or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Senior Revolving Debt" means revolving credit borrowings under any Credit
Facility.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date
hereof; provided that Capital Corp. and each Guarantor shall be deemed a
Significant Subsidiary.
"Subordinated Indebtedness" means any Indebtedness which is expressly by its
terms subordinated in right of payment of principal, interest or premium, if
any, to the Senior Notes.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of Capital Interests entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by such Person or
one or more of the other Subsidiaries
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of that Person (or a combination thereof) and (ii) any partnership (A) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (B) the only general partners of which are such
Person or one or more Subsidiaries of such Person (or any combination thereof).
"Tax Amount" means, with respect to any Person for any period, the aggregate
amount of tax distributions required to be made by the Company to its partners
under the Partnership Agreement as in effect on the date hereof.
Notwithstanding anything to the contrary, Tax Amount shall not include taxes
resulting from such Person's reorganization as or change in the status to a
corporation.
"Tax Distribution" means a distribution in respect of taxes to the partners
of the Company pursuant to Section 4.07(b)(iv) hereof.
"Taxable Income" means, with respect to any Person for any period, the
taxable income or loss of such Person for such period for federal income tax
purposes; provided that (i) all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a)(1) of the Code shall
be included in taxable income or loss, (ii) any basis adjustment made in
connection with an election under Section 754 of the Code shall be disregarded
and (iii) such taxable income shall be increased or such taxable loss shall be
decreased by the amount of any interest expense incurred by such Person that is
not treated as deductible for federal income tax purposes by a partner or member
of such Person.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-77bbbb)
as in effect on the date on which this Indenture is qualified under the TIA.
"Trustee" means the party named as such above until a successor replaces it
in accordance with the applicable provisions of this Indenture and thereafter
means the successor serving hereunder.
"Unrestricted Subsidiary" means any Subsidiary (other than Capital Corp.)
that is designated by the Board of Directors as an Unrestricted Subsidiary
pursuant to a board resolution; but only to the extent that such Subsidiary (i)
has no Indebtedness other than Non-Recourse Debt; (ii) is not party to any
agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company or
such Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (iii) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any direct
or indirect obligation (A) to subscribe for additional Equity Interests or (B)
to maintain or preserve such Person's financial condition or to cause such
Person to achieve any specified levels of operating results; (iv) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (v) has
at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Company or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors shall be evidenced to the Trustee by filing with the Trustee
a certified copy of the board resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by Section 4.07 hereof. If, at any time,
any Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of this Indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under Section 4.09 hereof, the Company shall be in
default of such covenant). The Board of Directors of the Company may at any time
designate any
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<PAGE>
Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (a) such Indebtedness is permitted under Section 4.09 hereof, and
(b) no Default or Event of Default would be in existence following such
designation; and provided, further, that, to the extent applicable, the Company
shall cause such Subsidiary to comply with Section 4.16 hereof.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) that shall elapse
between such date and the making of such payment, by (b) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Interests or other
ownership interests of which (other than directors' qualifying shares or
interests) shall at the time be owned by such Person or by one or more Wholly
Owned Restricted Subsidiaries of such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
<TABLE>
<CAPTION>
Section 1.02. Other Definitions.
<S> <C>
Defined in
Term Section
"Affiliate Transaction"........... 4.11
"Asset Sale Offer"................ 4.10
"Asset Sale Offer Price".......... 4.10
"Bankruptcy Law".................. 6.01
"Change of Control Offer"......... 4.18
"Change of Control Payment"....... 4.18
"Change of Control Payment Date".. 4.18
"Covenant Defeasance"............. 8.03
"Custodian"....................... 6.01
"Event of Default"................ 6.01
"Excess Proceeds"................. 4.10
"incur"........................... 4.09
"Legal Defeasance"................ 8.02
"Offer Amount".................... 4.10
"Offer Period".................... 3.09
"Paying Agent".................... 2.03
"Payment Default"................. 6.01
"Purchase Date"................... 3.09
"Registrar"....................... 2.03
"Restricted Payments"............. 4.07
"Subsidiary Guarantee"............ 4.16
</TABLE>
Section 1.03. Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture.
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<PAGE>
The following TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Senior Notes;
"indenture security holder" means a Holder of a Senior Note;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee;
"obligor" on the Senior Notes means the Issuers, as joint and several
obligors, and any successor obligor upon the Senior Notes.
All other terms used in this Indenture that are defined by the TIA, defined
by TIA reference to another statute or defined by Commission rule under the TIA
have the meanings so assigned to them.
Section 1.04. Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the plural include
the singular; and
(5) provisions apply to successive events and transactions.
ARTICLE 2
THE SENIOR NOTES
Section 2.01. Form and Dating.
The Senior Notes and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit A hereto, the terms of which are
incorporated in and made a part of this Indenture. The Senior Notes may have
notations, legends or endorsements approved as to form by the Issuers and
required by law, stock exchange rule, agreements to which the Issuers are
subject or usage. Each Senior Note shall be dated the date of its
authentication. The Senior Notes shall be issuable only in denominations of
$1,000 and integral multiples thereof.
Section 2.02. Execution and Authentication.
An Officer of the General Partner, on behalf of the Company (or the Company,
if the Company is a corporation), and Capital Corp. shall sign the Senior Notes
for each of the Company and Capital Corp.
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<PAGE>
by manual or facsimile signature. The Company's seal shall be reproduced on the
Senior Notes and may be in facsimile form.
If an Officer whose signature is on a Senior Note no longer holds that office
at the time the Senior Note is authenticated, the Senior Note shall nevertheless
be valid.
A Senior Note shall not be valid until authenticated by the manual signature
of the Trustee. The signature of the Trustee shall be conclusive evidence that
the Senior Note has been authenticated under this Indenture. The form of
Trustee's certificate of authentication to be borne by the Senior Notes shall be
substantially as set forth in Exhibit A hereto.
The Trustee shall, upon a written order of the Issuers signed by an Officer
of each of the General Partner, on behalf of the Company (or the Company, if the
Company is a corporation), and Capital Corp., authenticate Senior Notes for
original issue up to an aggregate principal amount stated in paragraph 4 of the
Senior Notes. The aggregate principal amount of Senior Notes outstanding at any
time shall not exceed the amount set forth herein except as provided in Section
2.07 hereof.
The Trustee may appoint an authenticating agent acceptable to the Issuers to
authenticate Senior Notes. Unless limited by the terms of such appointment, an
authenticating agent may authenticate Senior Notes whenever the Trustee may do
so. Each reference in this Indenture to authentication by the Trustee includes
authentication by such agent. An authenticating agent has the same rights as an
Agent to deal with the Issuers or an Affiliate of the Issuers.
Section 2.03. Registrar and Paying Agent.
The Issuers shall maintain (i) an office or agency where Senior Notes may be
presented for registration of transfer or for exchange (including any co-
registrar, the "Registrar") and (ii) an office or agency where Senior Notes may
be presented for payment ("Paying Agent"). The Registrar shall keep a register
of the Senior Notes and of their transfer and exchange. The Issuers may appoint
one or more co-registrars and one or more additional paying agents. The term
"Paying Agent" includes any additional paying agent. The Issuers may change any
Paying Agent, Registrar or co-registrar without prior notice to any Holder of a
Senior Note. The Issuers shall notify the Trustee, and the Trustee shall notify
the Holders of the Senior Notes, of the name and address of any Agent not a
party to this Indenture. The Issuers or any Subsidiary of the Company may act as
Paying Agent, Registrar or co-registrar. The Company shall enter into an
appropriate agency agreement with any Agent not a party to this Indenture, which
shall incorporate the provisions of the TIA. The agreement shall implement the
provisions of this Indenture that relate to such Agent. The Issuers shall notify
the Trustee of the name and address of any such Agent. If the Issuers fail to
maintain a Registrar or Paying Agent, or fail to give the foregoing notice, the
Trustee shall act as such, and shall be entitled to appropriate compensation in
accordance with Section 7.07 hereof.
The Issuers initially appoint the Trustee as Registrar, Paying Agent and
agent for service of notices and demands in connection with the Senior Notes.
Section 2.05. Paying Agent to Hold Money in Trust.
The Issuers shall require each Paying Agent other than the Trustee to agree
in writing that the Paying Agent shall hold in trust for the benefit of the
Holders of the Senior Notes or the Trustee all money held by the Paying Agent
for the payment of principal of, premium, if any, and interest on the Senior
Notes, and shall notify the Trustee of any Default by the Issuers in making any
such payment. While any such
15
<PAGE>
Default continues, the Trustee may require a Paying Agent to pay all money held
by it to the Trustee. The Issuers at any time may require a Paying Agent to pay
all money held by it to the Trustee. Upon payment over to the Trustee, the
Paying Agent (if other than the Issuers or any of their Subsidiaries) shall have
no further liability for the money delivered to the Trustee. If either Issuer or
any of their Subsidiaries acts as Paying Agent, it shall segregate and hold in a
separate trust fund for the benefit of the Holders of the Senior Notes all money
held by it as Paying Agent.
Section 2.05. Lists of Holders of the Senior Notes.
The Trustee shall preserve in as current a form as is reasonably practicable
the most recent list available to it of the names and addresses of Holders of
the Senior Notes and shall otherwise comply with TIA (S) 312(a). If the Trustee
is not the Registrar, the Issuers shall furnish to the Trustee at least seven
Business Days before each interest payment date and at such other times as the
Trustee may request in writing a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of Holders of the
Senior Notes, including the aggregate principal amount of the Senior Notes held
by each thereof, and the Company shall otherwise comply with TIA (S) 312(a).
Section 2.06. Transfer and Exchange.
When Senior Notes are presented to the Registrar with a request to register
the transfer or to ex change them for an equal principal amount of Senior Notes
of other denominations, the Registrar shall register the transfer or make the
exchange if its requirements for such transactions are met; provided that any
Senior Note presented or surrendered for registration of transfer or exchange
shall be duly endorsed or accompanied by a written instruction of transfer in
form satisfactory to the Registrar and the Trustee duly executed by the Holder
thereof or by his attorney duly authorized in writing. To permit registrations
of transfer and exchanges, the Issuers shall issue and the Trustee shall
authenticate Senior Notes at the Registrar's request, subject to such rules as
the Trustee may reasonably require.
Neither the Issuers nor the Registrar shall be required to (i) issue,
register the transfer of or exchange Senior Notes during a period beginning at
the opening of business on a Business Day 15 days before the day of any
selection of Senior Notes for redemption under Section 3.02 or (ii) register the
transfer of or exchange any Senior Note so selected for redemption in whole or
in part, except the unredeemed portion of any Senior Note being redeemed in
part.
No service charge shall be made to any Holder of a Senior Note for any
registration of transfer or exchange (except as otherwise expressly permitted
herein), but the Issuers may require payment of a sum sufficient to cover any
transfer tax or similar governmental charge payable in connection therewith
(other than such transfer tax or similar governmental charge payable upon
exchanges pursuant to Sections 2.10, 3.06 or 9.05 hereof, which shall be paid by
the Issuers).
Prior to due presentment to the Trustee for registration of the transfer of
any Senior Note, the Trustee, any Agent and the Issuers may deem and treat the
Person in whose name any Senior Note is registered as the absolute owner of such
Senior Note for the purpose of receiving payment of principal of, premium, if
any, and interest on such Senior Note and for all other purposes whatsoever,
whether or not such Senior Note is overdue, and neither the Trustee, any Agent
nor the Company shall be affected by notice to the contrary. The registered
Holder of a Senior Note shall be treated as its owner for all purposes.
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<PAGE>
Section 2.07. Replacement Senior Notes.
If any mutilated Senior Note is surrendered to the Trustee, or the Issuers
and the Trustee receive evidence to their satisfaction of the destruction, loss
or theft of any Senior Note, the Issuers shall issue and the Trustee, upon the
written order of the Issuers signed by an Officer of each of the General
Partner, on behalf of the Company (or the Company, if the Company is a
corporation), and Capital Corp. shall authenticate a replacement Senior Note if
the Trustee's requirements for replacements of Senior Notes are met. If
required by the Trustee or the Issuers, an indemnity bond must be supplied by
the Holder that is sufficient in the judgment of the Trustee and the Issuers to
protect the Issuers, the Trustee, any Agent or any authenticating agent from any
loss which any of them may suffer if a Senior Note is replaced. The Issuers and
the Trustee may charge for its expenses in replacing a Senior Note.
Every replacement Senior Note is an additional obligation of the Issuers, and
shall be entitled to all of the benefits of this Indenture equally and ratably
with all other Senior Notes duly issued hereunder.
Section 2.08. Outstanding Senior Notes.
The Senior Notes outstanding at any time are all the Senior Notes
authenticated by the Trustee except for those cancelled by it, those delivered
to it for cancellation and those described in this Section as not outstanding.
If a Senior Note is replaced pursuant to Section 2.07 hereof, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Senior Note is held by a bona fide purchaser. If the principal amount
of any Senior Note is considered paid under Section 4.01 hereof, it ceases to be
outstanding and interest on it ceases to accrue. Subject to Section 2.09
hereof, a Senior Note does not cease to be outstanding because any Issuer, a
Subsidiary of any Issuer or an Affiliate of any Issuer holds the Senior Note.
Section 2.09. Treasury Senior Notes.
In determining whether the Holders of the required principal amount of Senior
Notes have concurred in any direction, waiver or consent, Senior Notes owned by
any Issuer, any Subsidiary of any Issuer or any Affiliate of any Issuer shall be
considered as though not outstanding, except that for purposes of determining
whether the Trustee shall be protected in relying on any such direction, waiver
or consent, only Senior Notes which a Responsible Officer knows to be so owned
shall be so considered. Notwithstanding the foregoing, Senior Notes that are to
be acquired by any Issuer, any Subsidiary of any Issuer or an Affiliate of any
Issuer pursuant to an exchange offer, tender offer or other agreement shall not
be deemed to be owned by such Issuer, such Subsidiary of such Issuer or an
Affiliate of such Issuer until legal title to such Senior Notes passes to such
Issuer, such Subsidiary or Affiliate, as the case may be.
Section 2.10. Temporary Senior Notes.
Until definitive Senior Notes are ready for delivery, the Issuers may prepare
and the Trustee shall authenticate temporary Senior Notes. Temporary Senior
Notes shall be substantially in the form of definitive Senior Notes but may have
variations that the Company and the Trustee consider appropriate for temporary
Senior Notes. Without unreasonable delay, the Issuers shall prepare and the
Trustee, upon receipt of the written order of the Company signed by an Officer
of each of the General Partner, on behalf of the Company (or the Company, if the
Company is a corporation), and Capital Corp., shall authenticate definitive
Senior Notes in exchange for temporary Senior Notes. Until such exchange,
temporary Senior Notes shall be entitled to the same rights, benefits and
privileges as definitive Senior Notes.
17
<PAGE>
Section 2.11. Cancellation.
The Issuers at any time may deliver Senior Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Senior Notes surrendered to them for registration of transfer, exchange or
payment. The Trustee shall cancel all Senior Notes surrendered for registration
of transfer, exchange, payment, replacement or cancellation and shall destroy
cancelled Senior Notes (subject to the record retention requirement of the
Exchange Act), unless the Company directs that cancelled Senior Notes be
returned to it. The Issuers may not issue new Senior Notes to replace Senior
Notes that it has redeemed or paid or that have been delivered to the Trustee
for cancellation. All cancelled Senior Notes held by the Trustee shall be
destroyed and certification of their destruction delivered to the Issuers,
unless by a written order, signed by an Officer of each of the General Partner,
on behalf of the Company (or the Company, if the Company is a corporation), and
Capital Corp., the Issuers shall direct that cancelled Senior Notes be returned
to it.
Section 2.12. Defaulted Interest.
If the Issuers default in a payment of interest on the Senior Notes, they
shall pay the defaulted interest in any lawful manner plus, to the extent
lawful, interest payable on the defaulted interest, to the Persons who are
Holders of the Senior Notes on a subsequent special record date, which date
shall be at the earliest practicable date but in all events at least five
Business Days prior to the payment date, in each case at the rate provided in
the Senior Notes and in Section 4.01 hereof. The Issuers shall, with the
consent of the Trustee, fix or cause to be fixed each such special record date
and payment date. At least 15 days before the special record date, the Issuers
(or the Trustee, in the name of and at the expense of the Issuers) shall mail to
Holders of the Senior Notes a notice that states the special record date, the
related payment date and the amount of such interest to be paid.
Section 2.13. Record Date.
The record date for purposes of determining the identity of Holders of the
Senior Notes entitled to vote or consent to any action by vote or consent
authorized or permitted under this Indenture shall be determined as provided for
in TIA (S) 316(c).
Section 2.14. CUSIP Number.
The Company in issuing the Senior Notes may use a "CUSIP" number and, if it
does so, the Trustee shall use the CUSIP number in notices of redemption or
exchange as a convenience to Holders; provided that any such notice may state
that no representation is made as to the correctness or accuracy of the CUSIP
number printed in the notice or on the Senior Notes and that reliance may be
placed only on the other identification numbers printed on the Senior Notes.
The Issuers shall promptly notify the Trustee of any change in the CUSIP number.
ARTICLE 3
REDEMPTION
Section 3.01. Notices to Trustee.
If the Issuers elect to redeem Senior Notes pursuant to the optional
redemption provisions of Section 3.07 hereof, they shall furnish to the Trustee,
at least 45 days but not more than 60 days before a redemption date, an
Officers' Certificate setting forth (i) the Section of this Indenture pursuant
to which
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<PAGE>
the redemption shall occur, (ii) the redemption date, (iii) the principal amount
of Senior Notes to be redeemed and (iv) the redemption price.
Section 3.02. Selection of Senior Notes to Be Redeemed.
If less than all of the Senior Notes are to be redeemed at any time,
selection of Senior Notes for redemption shall be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Senior Notes are listed, or, if the Senior Notes are not so
listed, on a pro rata basis, by lot or by such method as the Trustee shall deem
fair and appropriate, provided that no Senior Notes of $1,000 or less shall be
redeemed in part. Notices of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each Holder of
Senior Notes to be redeemed at its registered address. If any Senior Note is to
be redeemed in part only, the notice of redemption that relates to such Senior
Note shall state the portion of the principal amount thereof to be redeemed. A
new Senior Note in principal amount equal to the unredeemed portion thereof
shall be issued in the name of the Holder thereof upon cancellation of the
original Senior Note. On and after the redemption date, interest ceases to
accrue on Senior Notes or portions of them called for redemption unless the
Issuers default in making such redemption payment.
The Trustee shall promptly notify the Issuers in writing of the Senior Notes
selected for redemption and, in the case of any Senior Note selected for partial
redemption, the principal amount thereof to be redeemed. Senior Notes and
portions of them selected shall be in amounts of $1,000 or whole multiples of
$1,000; except that if all of the Senior Notes of a Holder are to be redeemed,
the entire outstanding amount of Senior Notes held by such Holder, even if not a
multiple of $1,000, shall be redeemed. Except as provided in the preceding
sentence, provisions of this Indenture that apply to Senior Notes called for
redemption also apply to portions of Senior Notes called for redemption.
Section 3.03. Notice of Redemption.
Subject to the provisions of Section 3.09 hereof, at least 30 days but not
more than 60 days before a redemption date, the Issuers shall mail or cause to
be mailed, by first class mail, a notice of redemption to each Holder whose
Senior Notes are to be redeemed at its registered address.
The notice shall identify the Senior Notes to be redeemed and shall state:
(a) the redemption date;
(b) the redemption price;
(c) if any Senior Note is being redeemed in part, the portion of the
principal amount of such Senior Note to be redeemed and that, after the
redemption date upon surrender of such Senior Note, a new Senior Note or
Senior Notes in principal amount equal to the unredeemed portion shall be
issued;
(d) the name and address of the Paying Agent;
(e) that Senior Notes called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
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<PAGE>
(f) that, unless the Issuers default in making such redemption payment,
interest on Senior Notes called for redemption ceases to accrue on and after
the redemption date;
(g) the paragraph of the Senior Notes and/or Section of this Indenture
pursuant to which the Senior Notes called for redemption are being redeemed;
and
(h) that no representation is made as to the correctness or accuracy of
the CUSIP number, if any, listed in such notice or printed on the Senior
Notes.
At the Issuers' request, the Trustee shall give the notice of redemption in
the name of the Issuers and at their expense; provided that the Issuers shall
have delivered to the Trustee, at least 45 days prior to the redemption date, an
Officers' Certificate requesting that the Trustee give such notice and setting
forth the information to be stated in such notice as provided in the preceding
paragraph.
Section 3.04. Effect of Notice of Redemption.
Once notice of redemption is mailed in accordance with Section 3.03 hereof,
Senior Notes called for redemption become due and payable on the redemption date
at the redemption price.
Section 3.05. Deposit of Redemption Price.
One Business Day prior to the redemption date, the Issuers shall deposit with
the Trustee or with the Paying Agent money sufficient to pay the redemption
price of and accrued interest on all Senior Notes to be redeemed on that date.
The Trustee or the Paying Agent shall promptly return to the Issuers any money
deposited with the Trustee or the Paying Agent by the Issuers in excess of the
amounts necessary to pay the redemption price of, and accrued interest on, all
Senior Notes to be redeemed.
On and after the redemption date, interest shall cease to accrue on the
Senior Notes or the portions of Senior Notes called for redemption. If a Senior
Note is redeemed on or after an interest record date but on or prior to the
related interest payment date, then any accrued and unpaid interest shall be
paid to the Person in whose name such Senior Note was registered at the close of
business on such record date. If any Senior Note called for redemption shall
not be so paid upon surrender for redemption because of the failure of the
Issuers to comply with the preceding paragraph, interest shall be paid on the
unpaid principal, from the redemption date until such principal is paid, and to
the extent lawful on any interest not paid on such unpaid principal, in each
case at the rate provided in the Senior Notes and in Section 4.01 hereof.
Section 3.06. Senior Notes Redeemed in Part.
Upon surrender of a Senior Note that is redeemed in part, the Issuers shall
issue and the Trustee shall authenticate for the Holder of the Senior Notes at
the expense of the Issuers a new Senior Note equal in principal amount to the
unredeemed portion of the Senior Note surrendered.
Section 3.07. Optional Redemption.
(a) The Senior Notes shall not be redeemable at the Issuers' option prior to
__________, 2000. Thereafter, the Senior Notes shall be subject to redemption
at the option of the Issuers, in whole or in part, upon not less than 30 nor
more than 60 days' notice, in cash at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest, if any, thereon to the
20
<PAGE>
applicable redemption date, if redeemed during
the twelve-month period beginning on __________ of the years indicated below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2000..................................... %
2001..................................... %
2002 and thereafter...................... 100.000%
</TABLE>
(b) Notwithstanding the foregoing, during the first 36 months after the date
of this Prospectus, the Issuers may on any one or more occasions redeem up to
35% of the initially outstanding aggregate principal amount of Senior Notes at a
redemption price equal to ___% of the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the redemption date, with the net proceeds
of one or more equity offerings of the Issuers generating in each case net
proceeds of at least $15.0 million; provided that at least 65% of the initially
outstanding aggregate principal amount of Senior Notes remains outstanding
immediately after the occurrence of any such redemption; and provided, further,
that such redemption shall occur within 60 days of the date of the closing of
any such equity offering of the Issuers.
Section 3.08. Mandatory Redemption.
Except as set forth under Sections 4.10 and 4.18 of this Indenture, the
Issuers shall not be required to make mandatory redemption or sinking fund
payments with respect to the Senior Notes.
Section 3.09. Offer to Purchase by Application of Excess Proceeds.
In the event that, pursuant to Section 4.10 hereof, the Company shall
commence an Asset Sale Offer, it shall follow the procedures specified below:
The Asset Sale Offer shall remain open for a period of 20 Business Days
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "Offer Period"). No later than five
Business Days after the termination of the Offer Period (the "Purchase Date"),
the Company shall purchase the Offer Amount or, if less than the Offer Amount
has been tendered, all Senior Notes tendered in response to the Asset Sale
Offer.
If the Purchase Date is on or after an interest record date and on or before
the related interest payment date, any accrued interest shall be paid to the
Person in whose name a Senior Note is registered at the close of business on
such record date, and no additional interest shall be payable to Holders who
tender Senior Notes pursuant to the Asset Sale Offer.
Upon the commencement of any Asset Sale Offer, the Company shall send, by
first class mail, a notice to the Trustee and each of the Holders of the Senior
Notes, with a copy to the Trustee. The notice shall contain all instructions
and materials necessary to enable such Holders to tender Senior Notes pursuant
to the Asset Sale Offer. The notice, which shall govern the terms of the Asset
Sale Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to this Section
3.09 and Section 4.10 and the length of time the Asset Sale Offer shall
remain open;
(b) the Offer Amount, the purchase price pursuant to Section 4.10 and
the Purchase Date;
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<PAGE>
(c) that any Senior Note not tendered or accepted for payment shall
continue to accrue interest;
(d) that any Senior Note accepted for payment pursuant to the Asset
Sale Offer shall cease to accrue interest after the Purchase Date unless the
Company defaults in making such payment;
(e) that Holders electing to have a Senior Note purchased pursuant to
any Asset Sale Offer shall be required to surrender the Senior Note, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the
Senior Note completed, to the Company, a depositary, if appointed by the
Company, or a Paying Agent at the address specified in the notice at least
three days before the Purchase Date;
(f) that Holders shall be entitled to withdraw their election if the
Company, depositary or Paying Agent, as the case may be, receives, not later
than the expiration of the Offer Period, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Senior Note the Holder delivered for purchase and a statement
that such Holder is withdrawing his election to have the Senior Note
purchased;
(g) that, if the aggregate principal amount of Senior Notes surrendered
by Holders exceeds the Offer Amount, the Company shall select the Senior
Notes to be purchased on a pro rata basis (with such adjustments as may be
deemed appropriate by the Company so that only Senior Notes in denominations
of $1,000, or integral multiples thereof, shall be purchased); and
(h) that Holders whose Senior Notes were purchased only in part shall
be issued new Senior Notes equal in principal amount to the unpurchased
portion of the Senior Notes surrendered.
On or before the Purchase Date, the Company shall, to the extent lawful,
accept for payment, on a pro rata basis to the extent necessary, the Offer
Amount of Senior Notes or portions thereof tendered pursuant to the Asset Sale
Offer, or if less than the Offer Amount has been tendered, all Senior Notes or
portions thereof tendered, and deliver to the Trustee an Officers' Certificate
stating that such Senior Notes or portions thereof were accepted for payment by
the Company in accordance with the terms of this Section 3.09. The Company,
depository or Paying Agent, as the case may be, shall promptly (but in any case
not later than five days after the Purchase Date) mail or deliver to each
tendering Holder an amount equal to the purchase price of the Senior Note
tendered by such Holder and accepted by the Company for purchase, and the
Company shall promptly issue a new Senior Note, and the Trustee shall
authenticate and mail or deliver such new Senior Note to such Holder equal in
principal amount to any unpurchased portion of the Senior Note surrendered. Any
Senior Note not so accepted shall be promptly mailed or delivered by the Company
to the Holder thereof. The Company shall publicly announce the results of the
Asset Offer on the Purchase Date.
Other than as specifically provided in this Section 3.09, any purchase
pursuant to this Section 3.09 shall be made pursuant to the provisions of
Sections 3.01 through 3.06 hereof.
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ARTICLE 4
COVENANTS
Section 4.01. Payment of Senior Notes.
The Issuers shall pay or cause to be paid the principal of, premium, if any,
and interest on the Senior Notes on the dates and in the manner provided in the
Senior Notes. Principal, premium, if any, and interest shall be considered paid
on the date due if the Paying Agent, if other than the Issuers, holds as of
10:00 a.m. Eastern Time on the due date money deposited by the Issuers in
immediately available funds and designated for and sufficient to pay all
principal, premium, if any, and interest then due.
The Issuers shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue principal at the rate equal to
the then applicable interest rate on the Senior Notes to the extent lawful; it
shall pay interest (including post-petition interest in any proceeding under any
Bankruptcy Law) on overdue installments of interest (without regard to any
applicable grace period) at the same rate to the extent lawful.
Section 4.02. Maintenance of Office or Agency.
The Issuers shall maintain in the Borough of Manhattan, the City of New York,
an office or agency (which may be an office of the Trustee or an affiliate of
the Trustee, Registrar or co-registrar) where Senior Notes may be surrendered
for registration of transfer or exchange and where notices and demands to or
upon the Company in respect of the Senior Notes and this Indenture may be
served. The Issuers shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Issuers shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee.
The Issuers may also from time to time designate one or more other offices or
agencies where the Senior Notes may be presented or surrendered for any or all
such purposes and may from time to time rescind such designations; provided that
no such designation or rescission shall in any manner relieve the Issuers of
their obligation to maintain an office or agency in the Borough of Manhattan,
the City of New York for such purposes. The Issuers shall give prompt written
notice to the Trustee of any such designation or rescission and of any change in
the location of any such other office or agency.
The Issuers hereby designate the Corporate Trust Office of the Trustee as one
such office or agency of the Issuers in accordance with Section 2.03.
Section 4.03. Reports.
(a) So long as any of the Senior Notes remain outstanding, the Issuers are
shall submit copies of all quarterly and annual financial reports and of the
information, documents, and other reports (or copies of such portions of any of
the foregoing as the Commission may by rules and regulations prescribe) which
the Issuers are required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act to be filed with the Trustee and mailed to the Holders
at their addresses appearing in the register of Senior Notes maintained by the
Registrar, in each case, within 15 days of filing with the Commission. If the
Issuers are not subject to the requirements of such Section 13 or 15(d) of the
Exchange Act, the Issuers are shall nevertheless continue to submit the annual
and quarterly financial statements, including any notes thereto (and, with
respect to annual reports, an auditors' report by an accounting firm of
established national reputation) and a "Management's Discussion and Analysis of
Financial Condition and Results of
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Operations," comparable to that which would have been required to appear in
annual or quarterly reports filed under Section 13 or 15(d) of the Exchange Act
to be so filed with the Commission for public availability and the Trustee and
mailed to the Holders within 120 days after the end of the Issuers' fiscal years
and within 60 days after the end of each of the first three quarters of each
such fiscal year. The Issuers shall make such information available to
securities analysts and prospective investors upon request. The Issuers shall
also comply with the provisions of TIA (S) 314(a).
(b) The Issuers shall provide the Trustee with a sufficient number of copies
of all reports and other documents and information that the Trustee may be
required to deliver to the Holders of the Senior Notes under this Section 4.03.
Section 4.04. Compliance Certificate.
(a) The Company shall deliver to the Trustee, within 120 days after the end
of each fiscal year, an Officers' Certificate stating that a review of the
activities of the Company and its Subsidiaries during the preceding fiscal year
has been made under the supervision of the signing Officers with a view to
determining whether each has kept, observed, performed and fulfilled its
obligations under this Indenture, and further stating, as to each such Officer
signing such certificate, that to the best of his or her knowledge each entity
has kept, observed, performed and fulfilled each and every covenant contained in
this Indenture and is not in default in the performance or observance of any of
the terms, provisions and conditions of this Indenture (or, if a Default or
Event of Default shall have occurred, describing all such Defaults or Events of
Default of which he or she may have knowledge and what action each is taking or
proposes to take with respect thereto) and that to the best of his or her
knowledge no event has occurred and remains in existence by reason of which
payments on account of the principal of or interest, if any, on the Senior Notes
is prohibited or if such event has occurred, a description of the event and what
action each is taking or proposes to take with respect thereto.
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 4.03 above shall be accompanied by a
written statement of the Company's independent public accountants (who shall be
a firm of established national reputation) that in making the examination
necessary for certification of such financial statements, nothing has come to
their attention which would lead them to believe that the Company has violated
any provisions of Sections 4.01, 4.05, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13,
4.14, 4.15, 4.16, 4.17, 4.18, 4.19 or 4.21 hereof or Article 5 of this Indenture
or, if any such violation has occurred, specifying the nature and period of
existence thereof, it being understood that such accountants shall not be liable
directly or indirectly to any Person for any failure to obtain knowledge of any
such violation.
(c) Each Issuer shall, so long as any of the Senior Notes are outstanding,
deliver to the Trustee, forthwith upon any Officer becoming aware of (i) any
Default or Event of Default or (ii) any event of default under any Indebtedness
referred to in Section 6.01(d) hereof, an Officers' Certificate specifying such
Default, Event of Default or default and what action the Issuers are taking or
proposes to take with respect thereto.
Section 4.05. Taxes.
Each Issuer shall pay, and shall cause each of its Subsidiaries to pay, prior
to delinquency, all material taxes, assessments, and governmental levies except
as contested in good faith and by appropriate
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proceedings or where the failure to effect such payment is not adverse in any
material respect to the Holders of the Senior Notes.
Section 4.06. Stay, Extension and Usury Laws.
Each Issuer covenants (to the extent that it may lawfully do so) that it
shall not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, that may affect the covenants or
the performance of this Indenture; and each Issuer (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it shall not, by resort to any such law, hinder, delay
or impede the execution of any power herein granted to the Trustee, but shall
suffer and permit the execution of every such power as though no such law has
been enacted.
Section 4.07. Restricted Payments.
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, (i) declare or pay any dividend or make
any distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any such
distribution by such Persons in connection with any merger or consolidation
involving the Company or Capital Corp. but excluding any such distribution
directly relating to the reorganization of the Company as a corporation)(other
than dividends or distributions payable in Equity Interests (other than
Disqualified Interests) of the Company or dividends or distributions payable to
the Company or any Wholly Owned Restricted Subsidiary of the Company); (ii)
purchase, redeem or otherwise acquire or retire for value any Equity Interests
of the Company or any direct or indirect parent of the Company; (iii) make any
principal payment on, or purchase, redeem, defease or otherwise acquire or
retire for value any Subordinated Indebtedness, except at final maturity; or
(iv) make any Restricted Investment (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(A) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(B) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the most recently ended four fiscal quarters for which
financial statements are available, have been permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in Section 4.09(a) hereof; and
(C) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries after
the date hereof (excluding Restricted Payments permitted by clauses (ii),
(iii), (iv), (vi) and (vii) of Section 4.07(b) hereof), is less than
the sum of (1) 50% of the Consolidated Net Income of the Company for the
period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date hereof to the end of the Company's
most recently ended fiscal quarter for which internal financial statements
are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus (2) 100% of the aggregate net cash proceeds received by the
Company from the issuance or sale since the date hereof of Equity Interests
of the Company or of debt securities of the Company that have been converted
into such Equity Interests (other than Equity Interests (or convertible debt
securities) sold to a Subsidiary of the Company and
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other than Disqualified Interests or debt securities that have been converted
into Disqualified Interests), plus (3) to the extent that any Restricted
Investment that was made after the date hereof is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (x) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition, if
any) and (y) the initial amount of such Restricted Investment.
(b) The foregoing provisions shall not prohibit (i) the payment of any
dividend or distribution within 60 days after the date of declaration thereof,
if at said date of declaration such payment would have complied with the
provisions hereof; (ii) the redemption, repurchase, retirement or other
acquisition of any Equity Interests of the Company in exchange for, or out of
the proceeds of, the substantially concurrent sale (other than to a Subsidiary
of the Company) of other Equity Interests of the Company (other than any
Disqualified Interests); provided that the amount of any such net cash proceeds
that are utilized for any such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (C)(2) of Section 4.07(a) hereof;
(iii) the defeasance, redemption or repurchase of Subordinated Indebtedness with
the net cash proceeds from an incurrence of Permitted Refinancing Indebtedness
or the substantially concurrent sale (other than to a Subsidiary of the Company)
of Equity Interests of the Company (other than Disqualified Interests); provided
that the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement or other acquisition shall be excluded from
clause (C)(2) of Section 4.07(a) hereof; (iv) distributions not more frequently
than quarterly in accordance with the Code in respect of partners' income tax
liability in an amount not to exceed the Tax Amount; (v) the repurchase,
redemption or other acquisition or retirement for value of any Equity Interests
of the Company or any Restricted Subsidiary of the Company held by any member of
the Company's (or any of its Restricted Subsidiaries') management pursuant to
the Partnership Agreement or any management equity subscription agreement or
stock option agreement in effect as of the date hereof or any successor
arrangement entered into in connection with the reorganization of the Company as
a corporation (provided that such successor arrangement is on terms
substantially similar to those of the arrangement so replaced); provided that
the aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $500,000 in each twelve-month period, plus the
amount of any such amounts which remain unused at the end of the two prior
twelve-month periods, but in no event shall such aggregate amount exceed $1.5
million in any such twelve-month period, plus the aggregate cash proceeds
received by the Company during such twelve-month period from any reissuance of
Equity Interests by the Company to members of management of the Company and its
Restricted Subsidiaries; and no Default or Event of Default shall have occurred
and be continuing immediately after such transaction; (vi) prior to the
reorganization of the Company as a corporation, distributions or payments to
partners of the Company in an aggregate amount not to exceed $750,000 in any
fiscal year in respect of Administrative Expenses; and (vii) following the
reorganization of the Company as a corporation, (A) payments by the Company to
its parent pursuant to any tax sharing agreement between the Company and such
parent, (B) reimbursement payments by the Company to such parent in respect of
out-of-pocket insurance payments made by such parent on behalf of the Company
and its Restricted Subsidiaries and (C) payments by the Company to such parent
in respect of Administrative Expenses.
(c) The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated shall be deemed to be Restricted Payments at the
time of such designation and shall reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments shall be deemed to constitute Investments in an amount equal to
the fair market value of such Investments at the time of such
designation.
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Such designation shall only be permitted if such Restricted Payment would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
(d) The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
Section 4.07(a) hereof were computed, which calculations may be based upon the
Issuers' latest available financial statements.
Section 4.08. Dividend and Other Payment Restrictions Affecting Subsidiaries.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (a)(i) pay dividends or make any other distributions to
the Company or any of its Restricted Subsidiaries (A) on their Capital Interests
or (B) with respect to any other interest or participation in, or measured by,
its profits, or (ii) pay any Indebtedness owed to the Company or any of its
Restricted Subsidiaries, (b) make loans or advances to the Company or any of its
Restricted Subsidiaries or (c) transfer any of its properties or assets to the
Company or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (i) Existing Indebtedness as in
effect on the date hereof, (ii) any credit facility or Foreign Credit Facility,
provided that any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereto are no more
restrictive with respect to such dividend and other payment restrictions than
those contained in such Credit Facility as in effect on the date of its
execution, (iii) the Indenture and the Senior Notes, (iv) applicable law, (v) by
reason of customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices, (vi) Capital
Lease Obligations, mortgage financings or purchase money obligations for
property acquired in the ordinary course of business that impose restrictions of
the nature described in clause (c) above on the property so acquired, (vii)
existing with respect to any Person or the property or assets of such Person
acquired by the Company or any of its Restricted Subsidiaries, at the time of
such acquisition and not incurred in contemplation thereof, which encumbrances
or restrictions are not applicable to any Person or the property or assets of
any Person other than such Person or the property or assets of such Person so
acquired, or (viii) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced.
Section 4.09. Incurrence of Indebtedness and Issuance of Preferred Stock.
(a) The Company shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guaranty or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt) and the
Company shall not issue any Disqualified Interests and shall not permit any of
its Subsidiaries to issue any shares of preferred stock or preferred partnership
interests; provided that the Company and any of its Restricted Subsidiaries that
is a Guarantor may incur Indebtedness (including Acquired Debt) or issue
Disqualified Interests, if the Fixed Charge Coverage Ratio for the Company's
most recently ended four
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full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Interests are issued would have been at least (a) 2.0 to 1,
on or prior to December 31, 1998, and (b) 2.25 to 1, thereafter, in each case,
determined on a pro forma basis (including a pro forma application of the net
proceeds therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Interests had been issued, as the case may be, at the beginning of
such four-quarter period.
(b) The foregoing provisions shall not apply to:
(i) the incurrence by the Company and any of its Restricted Subsidiaries
that is a Guarantor of Senior Revolving Debt and letters of credit pursuant
to any Credit Facility for working capital purposes (with letters of credit
being deemed to have a principal amount equal to the maximum potential
liability of the Company thereunder) in an aggregate principal amount not to
exceed the amount of the Borrowing Base;
(ii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness and the Company's Class C-1 Limited Partner Interest
outstanding as of the date hereof and any conversion of such interest in
accordance with the terms of the Partnership Agreement;
(iii) the incurrence by the Company and Capital Corp. of the Indebtedness
represented by the Senior Notes and the incurrence by any Guarantor of the
Indebtedness represented by its Subsidiary Guarantee;
(iv) the incurrence by the Company and any of its Restricted Subsidiaries
that is a Guarantor of Permitted Refinancing Indebtedness in exchange for, or
the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund, Indebtedness that was permitted hereby to be incurred;
(v) the incurrence by the Company or any of its Restricted Subsidiaries of
intercompany Indebtedness between or among the Company and any of its Wholly
Owned Restricted Subsidiaries; provided that (A) any subsequent issuance or
transfer of Equity Interests that results in any such Indebtedness being held
by a Person other than a Wholly Owned Restricted Subsidiary and (B) any sale
or other transfer of any such Indebtedness to a Person that is not either the
Company or a Wholly Owned Restricted Subsidiary shall be deemed, in each
case, to constitute an incurrence of such Indebtedness by the Company or such
Restricted Subsidiary, as the case may be;
(vi) the incurrence by the Company and any of its Restricted Subsidiaries
that is a Guarantor of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred for
the purpose of financing up to all or any part of the purchase price or cost
of construction or improvement of property used in the business of the
Company or such Restricted Subsidiary, in an aggregate principal amount not
to exceed $2.0 million at any time outstanding;
(vii) the incurrence by the Company and any of its Restricted
Subsidiaries that is a Guarantor of Hedging Obligations that are incurred for
the purpose of fixing or hedging interest rate risk with respect to any
floating rate Indebtedness that is permitted by the terms of this Indenture
to be outstanding;
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(viii) the incurrence by the Company and any of its Restricted
Subsidiaries that is a Guarantor of statutory obligations, surety or appeal
bonds, performance bonds or other obligations of a like nature incurred in
the ordinary course of business;
(ix) the incurrence by the Foreign Restricted Subsidiaries of the Company
of Indebtedness in an aggregate amount not to exceed $3.0 million at any time
outstanding;
(x) the incurrence by the Company and any of its Restricted Subsidiaries
that is a Guarantor of Indebtedness not otherwise permitted hereunder in an
aggregate amount not to exceed $5.0 million at any time outstanding, less the
aggregate principal amount of any Indebtedness incurred pursuant to clause
(ix) of this paragraph; and
(xi) the incurrence by the Company's Unrestricted Subsidiaries of Non-
Recourse Debt, provided that, if any such Indebtedness ceases to be Non-
Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to
constitute an incurrence of Indebtedness by a Restricted Subsidiary of the
Company.
Section 4.10. Asset Sales.
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, engage in an Asset Sale, unless (a) the Company (or the
Restricted Subsidiary, as the case may be) receives consideration at the time of
such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of and (b) at least 75% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of cash or
Cash Equivalents; provided that the amount of (i) any liabilities (as shown on
the Company's or such Restricted Subsidiary's most recent balance sheet or in
the notes thereto), of the Company or any Restricted Subsidiary (other than
liabilities that are by their terms subordinated to the Senior Notes or any
guarantee thereof) that are assumed by the transferee of any such assets and
(ii) any notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash (to the extent of the cash
received), shall be deemed to be cash for purposes of this provision; and
provided, further, that the limitation in clause (b) above shall not apply to
any Asset Sale in which the cash portion of the consideration received therefor,
determined in accordance with foregoing proviso, is equal to or greater than
what the after-tax net proceeds would have been had such Asset Sale complied
with the aforementioned limitation.
(b) Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Issuers may apply such Net Proceeds (a) to permanently reduce Pari Passu
Indebtedness, (b) to permanently reduce Indebtedness permitted to be incurred
pursuant to Section 4.09(b)(i) hereof or (c) to an investment in another
business, the making of a capital expenditure or the acquisition of other
tangible assets, in each case, in the same or a similar or related line of
business as the Issuers were engaged in on the date hereof. Pending the final
application of any such Net Proceeds, the Company and its Restricted
Subsidiaries may temporarily reduce Senior Revolving Debt or otherwise invest
such Net Proceeds in any manner that is not prohibited hereby. Any Net Proceeds
from Asset Sales that are not applied or invested as provided in the first
sentence of this paragraph shall be deemed to constitute "Excess Proceeds." When
the aggregate amount of Excess Proceeds exceeds $10.0 million, the Company shall
be required to make an offer to all holders of Senior Notes (an "Asset Sale
Offer") to purchase the maximum principal amount of Senior Notes that may be
purchased out of the Excess Proceeds (the "Offer Amount"), at an offer price in
cash in an amount equal to 101% of the principal amount thereof, plus accrued
and unpaid interest thereon to the date of purchase
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(the "Asset Sale Offer Price"), in accordance with the procedures set forth
herein. To the extent that the aggregate amount of Senior Notes tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
and its Restricted Subsidiaries may use any remaining Excess Proceeds for
general corporate purposes. If the aggregate principal amount of Senior Notes
surrendered by holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Senior Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
Section 4.11. Transactions with Affiliates.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make any contract, agreement, understanding, loan, advance or guarantee with,
or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (a) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (b) the Company delivers to
the Trustee (i) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $1.0 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (a) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and (ii) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $7.5 million, an opinion as to the fairness to the
Company or such Restricted Subsidiary of such Affiliate Transaction from a
financial point of view issued by a nationally-recognized investment banking
firm; provided that (A) any reasonable employment arrangement entered into by
the Company or any of its Restricted Subsidiaries in the ordinary course of
business of the Company or such Restricted Subsidiary, (B) transactions between
or among the Company and/or its Restricted Subsidiaries, (C) following the
reorganization of the Company as a corporation, the payment of reasonable fees,
expense reimbursement and customary indemnification and other similar
arrangements to directors of the Company, (D) reasonable loans or advances to
employees of the Company and its Restricted Subsidiaries in the ordinary course
of business and (E) transactions permitted by Section 4.07 hereof, in each case,
shall not be deemed to be Affiliate Transactions.
Section 4.12. Liens.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, create, incur, assume or otherwise cause or suffer to exist or
become effective any Lien of any kind (other than Permitted Liens) upon any of
their property or assets, now owned or hereafter acquired, unless all payments
due under this Indenture and the Senior Notes and the Subsidiary Guarantees, if
any, are secured on an equal and ratable basis with the obligations so secured
until such time as such obligations are no longer secured by a Lien.
Section 4.13. Sale and Leaseback Transactions
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
the Company and any of its Restricted Subsidiaries that is a Guarantor may enter
into a sale and leaseback transaction if (a) the Company or such Restricted
Subsidiary could have (i) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback transaction pursuant to
Section 4.09 hereof and (ii) incurred a Lien to secure such Indebtedness
pursuant to Section 4.12 hereof, (b) the gross cash proceeds of such sale and
leaseback transaction are at least equal to the fair market value (as determined
in good faith by the Board of Directors and set forth in an Officers'
Certificate delivered to the Trustee) of the property that is the subject of
such sale and
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leaseback transaction and (c) the transfer of assets in such sale and leaseback
transaction is permitted by, and the Company or such Restricted Subsidiary
applies the proceeds of such transaction in compliance with, Section 4.10
hereof.
Section 4.14. Limitation on Issuances and Sales of Capital Interests of Wholly
Owned Subsidiaries
The Company (a) shall not, and shall not permit any Wholly Owned Restricted
Subsidiary of the Company to, transfer, convey, sell, lease or otherwise dispose
of any Capital Interests of any Wholly Owned Restricted Subsidiary of the
Company to any Person (other than the Company or a Wholly Owned Restricted
Subsidiary of the Company), unless (i) such transfer, conveyance, sale, lease or
other disposition is of all the Capital Interests of such Wholly Owned
Restricted Subsidiary and (ii) the cash Net Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with
Section 4.10 hereof, and (b) shall not permit any Wholly Owned Restricted
Subsidiary of the Company to issue any of its Equity Interests (other than, if
necessary, Capital Interests constituting directors' qualifying shares or
interests) to any Person other than to the Company or a Wholly Owned Restricted
Subsidiary of the Company; provided that, notwithstanding the foregoing, Capital
Corp. shall, at all times prior to the reorganization of the Company as a
corporation, remain a Wholly Owned Restricted Subsidiary of the Company.
Section 4.15. Limitations on Issuances of Guarantees of Indebtedness
The Company shall not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee or secure the payment of any other Indebtedness, unless
such Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to this Indenture providing for the Guarantee of the payment of the
Senior Notes by such Restricted Subsidiary, which Guarantee shall be senior to
or pari passu with such Restricted Subsidiary's Guarantee of, or pledge to
secure, such other Indebtedness. Notwithstanding the foregoing, any such
Guarantee by a Restricted Subsidiary of the Senior Notes shall provide by its
terms that it shall be automatically and unconditionally released and discharged
upon either (a) the release or discharge of such Guarantee of such Indebtedness,
except a discharge by or as a result of payment under such Guarantee, or (b) any
sale, exchange or transfer, to any Person not an Affiliate of the Company, of
all of the Company's Capital Interests in, or all or substantially all the
assets of, such Restricted Subsidiary, which sale, exchange or transfer is made
in compliance with the applicable provisions hereof. The form of such Guarantee
is attached as Exhibit B hereto.
Section 4.16. Subsidiary Guarantees
If the Company or any of its Restricted Subsidiaries shall, after the date
hereof, (a) transfer or cause to be transferred, in one or a series of
transactions (whether or not related), any assets, businesses, divisions, real
property or equipment having an aggregate fair market value (as determined in
good faith by the Board of Directors) in excess of $1.0 million to any Domestic
Subsidiary that is not a Guarantor, (b) acquire another Domestic Subsidiary
having total assets with a fair market value (as determined in good faith by the
Board of Directors) in excess of $1.0 million or (c) redesignate an Unrestricted
Subsidiary that is a Domestic Subsidiary as a Restricted Subsidiary having
total assets with a fair market value (as determined in good faith by the Board
of Directors) in excess of $1.0 million, then such transferee or acquired or
redesignated Subsidiary shall execute a guarantee of the Senior Notes in the
form attached hereto as Exhibit B (each, a "Subsidiary Guarantee") and a
supplemental indenture in the form attached hereto as Exhibit C and deliver an
Opinion of Counsel, in accordance with the terms hereof; provided that the
foregoing shall not apply to any Subsidiary that has been properly designated as
an Unrestricted
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Subsidiary in accordance herewith for so long as such Subsidiary continues to
constitute an Unrestricted Subsidiary.
Section 4.17. Line of Business.
The Company shall not, and shall not permit any Subsidiary to, engage in any
business, other than such business activities as the Company or its Subsidiaries
are engaged in on the date hereof and such business activities similar or
reasonably related thereto.
Section 4.18. Offer to Repurchase Upon Change of Control
(a) Upon the occurrence of a Change of Control, each holder of Senior Notes
shall have the right to require the Issuers to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such holder's Senior Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest, if any, thereon to the date of purchase (the
"Change of Control Payment"). Within ten days following any Change of Control,
the Issuers shall mail a notice to each holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Senior Notes pursuant to the procedures required hereby and described in such
notice. The Issuers shall comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Senior Notes as a result of a Change of Control.
(b) On the payment date set forth in the Change of Control Offer (the "Change
of Control Payment Date"), the Issuers shall, to the extent lawful, (i) accept
for payment all Senior Notes or portions thereof properly tendered pursuant to
the Change of Control Offer, (ii) deposit with the Paying Agent an amount equal
to the Change of Control Payment in respect of all Senior Notes or portions
thereof so tendered and (iii) deliver or cause to be delivered to the Trustee
the Senior Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Senior Notes or portions thereof being purchased
by the Issuers. The Paying Agent shall promptly mail to each holder of Senior
Notes so tendered the Change of Control Payment for such Senior Notes, and the
Trustee shall promptly authenticate and mail (or cause to be transferred by book
entry) to each holder a new Senior Note equal in principal amount to any
unpurchased portion of the Senior Notes surrendered, if any; provided that each
such new Senior Note shall be in a principal amount of $1,000 or an integral
multiple thereof. The Issuers shall publicly announce the results of the Change
of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
Section 4.19. Corporate Existence.
Subject to Article 5 hereof, each Issuer shall do or cause to be done all
things necessary to preserve and keep in full force and effect (i) its
partnership or corporate existence, and the corporate, partnership or other
existence of any Subsidiary, in accordance with the respective organizational
documents (as the same may be amended from time to time) of such Issuer or any
such Subsidiary and (ii) their rights (charter and statutory), licenses and
franchises; provided that the Issuers shall not be required to preserve any such
right, license or franchise, or the corporate, partnership or other existence of
any Subsidiary, if the Board of Directors of each of the General Partner, on
behalf of the Company (or the Company, if the Company is a corporation), and
Capital Corp. shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Issuers and their respective
Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any
material respect to the Holders of the Senior Notes and provided, further, that
following the reorganization of the Company as a corporation, Capital Corp. may
be merged into or consolidated with the Company.
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Section 4.20. Reorganization of the Company as a Partnership
Notwithstanding anything else contained in the Senior Notes or this
Indenture, the Company is permitted to reorganize as a corporation, provided
that:
(a) the successor or surviving corporation is organized and existing under
the laws of the United States, any state thereof or the District of Columbia;
(b) such reorganization is not materially adverse to Holders of the Senior
Notes; provided that such reorganization shall not be considered materially
adverse to Holders of the Senior Notes solely because (i) of the accrual of
deferred tax liabilities resulting from such reorganization or (ii) the
successor or surviving corporation (A) is subject to income taxation as an
entity or (B) is considered to be an "includible corporation" of an
affiliated group of corporations within the meaning of Section 1504(a)(1) of
the Code or any similar state or local law;
(c) immediately after giving effect to such transaction, no Default or
Event of Default exists;
(d) the Company's obligations under the Partnership Agreement terminate
prior to such reorganization, unless (i) the successor or surviving
corporation is not a party to the Partnership Agreement and (ii) the
successor or surviving corporation will neither assume nor be subject to, is
not currently, and will never be, liable and/or responsible for any
obligations and/or duties under the Partnership Agreement;
(e) such reorganization itself will not result in a material tax liability
to the successor or surviving corporation; and
(f) the successor or surviving corporation has assumed all obligations of
the Company under the Senior Notes and this Indenture.
The successor or surviving corporation shall execute a supplemental indenture
in a form reasonably satisfactory to the Trustee to the effect set forth in
paragraph (f) above. The Issuers shall deliver to the Trustee prior to such
reorganization an Officers' Certificate covering paragraphs (a) through (f)
above and an Opinion of Counsel covering paragraphs (a), (c), (d), (e) and (f)
above (in the case of paragraph (c), to such counsel's knowledge), stating that
such reorganization and such supplemental indenture and Collateral Documents
comply with this Indenture. The Trustee shall be entitled to conclusively rely
upon such Officers' Certificate and Opinion of Counsel.
Section 4.21. Limitation on Activities of Capital Corp.
In addition to the restrictions set forth under Section 4.09 hereof, Capital
Corp. shall not incur any Indebtedness, unless (a) the Company is a co-obligor
or guarantor of such Indebtedness or (b) the net proceeds of such Indebtedness
are lent to the Company, used to acquire outstanding debt securities issued by
the Company or used directly or indirectly to refinance or discharge
Indebtedness permitted under the limitations of this paragraph. Capital Corp.
shall not acquire or hold any significant assets or other properties or engage
in any business activities, other than those business activities related
directly or indirectly to obtaining money or arranging financing for the
Company.
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Section 4.22. Payments for Consent.
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Senior Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Senior Notes, unless such consideration is offered to be
paid or agreed to be paid to all holders of the Senior Notes that consent, waive
or agree to amend in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
ARTICLE 5
SUCCESSORS
Section 5.01. Merger, Consolidation, or Sale of Assets
(a) Neither the Company nor Capital Corp. may consolidate or merge with or
into (whether or not the Company or Capital Corp., as the case may be, is the
surviving corporation), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions to, another corporation, Person or entity, unless (i) the
Company or Capital Corp., as the case may be, is the surviving Person or the
entity or the Person formed by or surviving any such consolidation or merger (if
other than the Company or Capital Corp., as the case may be) or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made is organized and existing under the laws of the United States, any
state thereof or the District of Columbia, provided that Capital Corp. may not
consolidate or merge with or into any entity other than a corporation satisfying
such requirements for so long as the Company remains a partnership; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company or Capital Corp.) or the entity or Person to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made assumes all the obligations of the Issuers under the Senior Notes and
this Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no Default
or Event of Default exists; and (iv) the Company, Capital Corp. or the entity or
Person formed by or surviving any such consolidation or merger, or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made (A) shall have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
or Capital Corp. immediately preceding the transaction and (B) shall, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter period,
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in Section 4.09(a) hereof. Following
the reorganization of the Company as a corporation, the foregoing provision
shall not apply to any consolidation or merger of Capital Corp. with or into the
Company.
(b) The Company shall deliver to the Trustee prior to the consummation of the
proposed transaction an Officers' Certificate to the foregoing effect and an
Opinion of Counsel stating that the proposed transaction and such Supplemental
Indenture comply with this Indenture. The Trustee shall be entitled to
conclusively rely upon such Officers' Certificate and Opinion of Counsel.
Section 5.02. Successor Corporation Substituted.
Upon (a) any consolidation or merger, or any sale, lease, conveyance or other
disposition of all or substantially all of the assets of any Issuer in
accordance with Section 5.01 hereof, or (b) the reorganization of the Company as
a corporation in accordance with Section 4.20 hereof, the successor corporation
formed by such consolidation or into or with which such Issuer is merged or to
which such sale, lease, conveyance
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or other disposition is made, or formed by such reorganization, as the case may
be, shall succeed to, and be substituted for and may exercise every right and
power of such Issuer under this Indenture and the Senior Notes with the same
effect as if such successor Person has been named as such Issuer herein; and it
is contemplated that, if upon a reorganization in accordance with Section 4.20
hereof, or at any time after such reorganization, the successor or surviving
corporation is an includible corporation (other than a common parent) of an
affiliated group of corporations within the meaning of Section 1504(a)(1) of the
Code, a tax sharing agreement shall be entered into consistent with the terms
hereof.
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.01. Events of Default.
Each of the following constitutes an "Event of Default":
(a) default by the Issuers for 30 days in the payment when due of interest
on the Senior Notes;
(b) default by the Issuers in the payment of all or any part of the
principal, or premium, if any, on the Senior Notes when and as the same
becomes due and payable at maturity, upon redemption, by acceleration, or
otherwise, including, without limitation, the payment of the Change of
Control Payment or the Asset Sale Offer Price, or otherwise;
(c) failure by any of the Issuers or any of their respective Subsidiaries
to observe or perform any other covenant or agreement on the part of such
Issuer or such Subsidiary contained in the Senior Notes or this Indenture and
the continuance of such failure for a period of 30 days after written notice
is given to the Issuers by the Trustee or to the Issuers and the Trustee by
the holders of at least 25% in aggregate principal amount of the Senior Notes
then outstanding, specifying such default, requiring that it be remedied and
stating that such notice is a "Notice of Default;"
(d) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness
for money borrowed by the Company or any of its Restricted Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries) whether such Indebtedness or guarantee now exists, or is
created after the date hereof, which default (A) is caused by a failure to
pay principal of or premium, if any, or interest on such Indebtedness prior
to the expiration of the grace period provided in such Indebtedness on the
date of such default (a "Payment Default") or (B) results in the acceleration
of such Indebtedness prior to its express maturity and, in each case, the
principal amount of any such Indebtedness, together with the principal amount
of any other such Indebtedness under which there has been a Payment Default
or the maturity of which has been so accelerated, aggregates $5.0 million or
more;
(e) failure by the Company or any of its Subsidiaries to pay one or more
final judgments aggregating in excess of $5.0 million entered by courts of
competent jurisdiction which judgments are not paid, discharged or stayed
within 60 days after their entry;
(f) except as permitted hereby, any Subsidiary Guarantee shall be held in
any judicial proceeding to be unenforceable or invalid or shall cease for any
reason to be in full force and effect
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or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny
or disaffirm its obligations under its Subsidiary Guarantee;
(g) the Company or any of its Significant Subsidiaries pursuant to or
within the meaning of Bankruptcy Law:
(i) commences a voluntary case;
(ii) consents to the entry of an order for relief against it in an
involuntary case;
(iii) consents to the appointment of a Custodian of it or for all or
substantially all of its property; or
(iv) makes a general assignment for the benefit of its creditors; and
(h) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:
(i) is for relief against the Company or any Significant Subsidiary of
the Company in an involuntary case;
(ii) appoints a Custodian of the Company or any Significant Subsidiary
of the Company or for all or substantially all of the property of the Company
or any Significant Subsidiary of the Company; or
(iii) orders the liquidation of the Company or any Significant
Subsidiary of the Company,
and the order or decree remains unstayed and in effect for 60 consecutive
days.
The term "Bankruptcy Law" means title 11, U.S. Code or any similar Federal or
state law for the relief of debtors. The term "Custodian" means any receiver,
trustee, assignee, liquidator or similar official under any Bankruptcy Law.
Section 6.02. Acceleration.
(a) If an Event of Default (other than an Event of Default specified in
clause (g) or (h) of Section 6.01 relating to the Company, any Significant
Subsidiary or any group of Subsidiaries of the Company that, taken together,
would constitute a Significant Subsidiary) occurs and is continuing, the Trustee
by notice to the Issuers, or the Holders of not less than 25% in aggregate
principal amount of the then outstanding Senior Notes by written notice to the
Issuers and the Trustee, may declare the unpaid principal of, premium, if any,
and any accrued and unpaid interest on all the Senior Notes to be due and
payable. Upon such declaration the principal, premium, if any, and interest
shall be due and payable immediately. If an Event of Default specified in
clause (g) or (h) of Section 6.01 occurs relating to the Company, any
Significant Subsidiary or any group of Subsidiaries of the Company that, taken
together,
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would constitute a Significant Subsidiary, such an amount shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder. The Holders of a majority in
aggregate principal amount of the then outstanding Senior Notes, by written
notice to the Trustee, may on behalf of all of the Holders rescind an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default (except nonpayment of
principal, interest or premium that has become due solely because of the
acceleration) have been cured or waived.
(b) In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Issuers with
the intention of avoiding payment of the premium that the Issuers would have had
to pay if the Issuers then had elected to redeem the Senior Notes pursuant to
Section 3.07 hereof, an equivalent premium shall also become and be immediately
due and payable to the extent permitted by law upon acceleration of the Senior
Notes. If an Event of Default occurs prior to __________, 2000 by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of the Issuers
with the intention of avoiding the prohibition on redemption of the Senior Notes
prior to ___________, 2000 pursuant to Section 3.07, then the premium payable
for purposes of this paragraph for each of the years beginning on _____________
of the years set forth below shall be as set forth in the following table,
expressed as a percentage of the amount that would otherwise be due but for the
provisions of this paragraph, plus accrued interest, if any, to the date of
payment:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
1997...................... _______%
1998...................... _______%
1999...................... _______%
</TABLE>
Section 6.03. Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may pursue any
available remedy to collect the payment of principal, premium, if any, and
interest on the Senior Notes or to enforce the performance of any provision of
the Senior Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of
the Senior Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder of a Senior Note in exercising any right
or remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. All remedies
are cumulative to the extent permitted by law.
Section 6.04. Waiver of Past Defaults.
Holders of not less than a majority in aggregate principal amount of the
then outstanding Senior Notes by notice to the Trustee may on behalf of the
Holders of all of the Senior Notes waive an existing Default or Event of Default
and its consequences, except a continuing Default or Event of Default in the
payment of the principal of, premium, if any, or interest on, the Senior Notes.
Upon any such waiver, such Default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
Default or impair any right consequent thereon.
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Section 6.05. Control by Majority.
Holders of a majority in principal amount of the then outstanding Senior
Notes may direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee or exercising any trust or power
conferred on it. However, the Trustee may refuse to follow any direction that
conflicts with the law or this Indenture, that the Trustee determines may be
unduly prejudicial to the rights of other Holders of Senior Notes or that may
involve the Trustee in personal liability.
Section 6.06. Limitation on Suits.
A Holder of a Senior Note may pursue a remedy with respect to this
Indenture or the Senior Notes only if:
(a) the Holder of a Senior Note gives to the Trustee written notice of
a continuing Event of Default;
(b) the Holders of at least 25% in principal amount of the then
outstanding Senior Notes make a written request to the Trustee to pursue
the remedy;
(c) such Holder of a Senior Note or Holders of Senior Notes offer and,
if requested, provide to the Trustee indemnity satisfactory to the Trustee
against any loss, liability or expense;
(d) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer and, if requested, the provision of
indemnity; and
(e) during such 60-day period the Holders of a majority in principal
amount of the then outstanding Senior Notes do not give the Trustee a
direction inconsistent with the request.
A Holder of a Senior Note may not use this Indenture to prejudice the
rights of another Holder of a Senior Note or to obtain a preference or priority
over another Holder of a Senior Note.
Section 6.07. Rights of Holders of Senior Notes to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Senior Note to receive payment of principal, premium, if any, and
interest on the Senior Note, on or after the respective due dates expressed in
the Senior Note, or to bring suit for the enforcement of any such payment on or
after such respective dates, shall not be impaired or affected without the
consent of the Holder of the Senior Note.
Section 6.08. Collection Suit by Trustee.
If an Event of Default specified in Section 6.01(a) or (b) occurs and is
continuing, the Trustee is authorized to recover judgment in its own name and as
trustee of an express trust against the Issuers for the whole amount of
principal of, premium, if any, and interest remaining unpaid on the Senior Notes
and interest on overdue principal and, to the extent lawful, interest and such
further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel.
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Section 6.09. Trustee May File Proofs of Claim.
The Trustee is authorized to file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders of the Senior Notes allowed in any judicial proceedings relative to the
Issuers (or any other obligor upon the Senior Notes), its creditors or its
property and shall be entitled and empowered to collect, receive and distribute
any money or other property payable or deliverable on any such claims and any
custodian in any such judicial proceeding is hereby authorized by each Holder of
a Senior Note to make such payments to the Trustee, and in the event that the
Trustee shall consent to the making of such payments directly to the Holders of
the Senior Notes, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 7.07 hereof.
To the extent that the payment of any such compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel, and any other amounts due
the Trustee under Section 7.07 hereof out of the estate in any such proceeding,
shall be denied for any reason, payment of the same shall be secured by a Lien
on, and shall be paid out of, any and all distributions, dividends, money,
securities and other properties which the Holders of the Senior Notes may be
entitled to receive in such proceeding whether in liquidation or under any plan
of reorganization or arrangement or otherwise. Nothing herein contained shall
be deemed to authorize the Trustee to authorize or consent to or accept or adopt
on behalf of any Holder of a Senior Note any plan of reorganization,
arrangement, adjustment or composition affecting the Senior Notes or the rights
of any Holder of a Senior Note thereof, or to authorize the Trustee to vote in
respect of the claim of any Holder of a Senior Note in any such proceeding.
Section 6.10. Priorities.
If the Trustee collects any money pursuant to this Article, it shall pay
out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts due under
Section 7.07, including payment of all compensation, expense and
liabilities incurred, and all advances made, by the Trustee and the costs
and expenses of collection;
Second: to Holders of Senior Notes for amounts due and unpaid on the
Senior Notes for principal, premium, if any, and interest, ratably, without
preference or priority of any kind, according to the amounts due and
payable on the Senior Notes for principal, premium, if any and interest,
respectively; and
Third: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Holders of Senior Notes.
Section 6.11. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this Indenture
or in any suit against the Trustee for any action taken or omitted by it as a
Trustee, a court in its discretion may require the filing by any party litigant
in the suit of an undertaking to pay the costs of the suit, and the court in its
discretion may assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in the suit,
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having due regard to the merits and good faith of the claims or
defenses made by the party litigant. This Section does not apply to a suit by
the Trustee, a suit by a Holder of a Senior Note pursuant to Section 6.07, or a
suit by Holders of more than 10% in principal amount of the then outstanding
Senior Notes.
ARTICLE 7
TRUSTEE
Section 7.01. Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined solely by the
express provisions of this Indenture and the Trustee need perform only
those duties that are specifically set forth in this Indenture and no
others, and no implied covenants or obligations shall be read into this
Indenture against the Trustee, and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. However,
the Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture.
(c) the Trustee may not be relieved from liabilities for its own negligent
action, its own negligent failure to act, or its own willful misconduct, except
that:
(i) this paragraph does not limit the effect of paragraph (b) of this
Section;
(ii) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it is proved that the Trustee
was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05 hereof.
(d) Whether or not therein expressly so provided, every provision of this
Indenture that in any way relates to the Trustee is subject to paragraphs (a),
(b), and (c) of this Section.
(e) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or incur any liability. The Trustee shall be under no
obligation to exercise any of its rights and powers under this Indenture at the
request of any Holders of Senior Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
(f) The Trustee shall not be liable for interest on any money received by
it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
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Section 7.02. Rights of Trustee.
(a) The Trustee may conclusively rely upon any document believed by it to
be genuine and to have been signed or presented by the proper Person. The
Trustee need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
such Officers' Certificate or Opinion of Counsel. The Trustee may consult with
counsel and the written advice of such counsel or any Opinion of Counsel shall
be full and complete authorization and protection from liability in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon.
(c) The Trustee may act through its attorneys and agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture, any demand,
request, direction or notice from the Issuers shall be sufficient if signed by
an Officer of each of the General Partner, on behalf of the Company (or the
Company, if the Company is a corporation), and Capital Corp.
(f) The Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Holders unless such Holders shall have offered to the Trustee reasonable
security or indemnity against costs, expenses and liabilities that might be
incurred by it in compliance with such request or direction.
Section 7.03. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the owner or
pledgee of Senior Notes and may otherwise deal with any Issuer or any Affiliate
of any Issuer with the same rights it would have if it were not Trustee.
However, in the event that the Trustee acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue as trustee or resign. Any Agent may do the same with like rights
and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof.
Section 7.04. Trustee's Disclaimer.
The Trustee shall not be responsible for and makes no representation as to
the validity or adequacy of this Indenture or the Senior Notes, it shall not be
accountable for the Issuers' use of the proceeds from the Senior Notes or any
money paid to the Issuers or upon the Issuers' direction under any provision of
this Indenture, it shall not be responsible for the use or application of any
money received by any Paying Agent other than the Trustee, and it shall not be
responsible for any statement or recital herein or any statement in the Senior
Notes or any other document in connection with the sale of the Senior Notes or
pursuant to this Indenture other than its certificate of authentication.
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Section 7.05. Notice of Defaults.
If a Default or Event of Default occurs and is continuing and if it is
known to the Trustee, the Trustee shall mail to Holders of Senior Notes a notice
of the Default or Event of Default within 90 days after it occurs. Except in
the case of a Default or Event of Default in payment of principal of, premium,
if any, or interest on any Senior Note, the Trustee may withhold the notice if
and so long as a committee of its Responsible Officers in good faith determines
that withholding the notice is in the interests of the Holders of the Senior
Notes.
Section 7.06. Reports by Trustee to Holders of the Senior Notes.
Within 60 days after each May 15 beginning with the May 15 following the
date of this Indenture and for so long as Senior Notes remain outstanding, the
Trustee shall mail to the Holders of the Senior Notes a brief report dated as of
such reporting date that complies with TIA (S) 313(a) (but if no event described
in TIA (S) 313(a) has occurred within the twelve months preceding the reporting
date, no report need be transmitted). The Trustee also shall comply with TIA
(S) 313(b)(2). The Trustee shall also transmit by mail all reports as required
by TIA (S) 313(c).
A copy of each report at the time of its mailing to the Holders of Senior
Notes shall be mailed to the Issuers and filed with the Commission and each
stock exchange on which the Senior Notes are listed. The Issuers shall promptly
notify the Trustee when the Senior Notes are listed on any stock exchange.
Section 7.07. Compensation and Indemnity.
The Issuers shall pay to the Trustee from time to time reasonable
compensation for its acceptance of this Indenture and services hereunder. The
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Issuers shall reimburse the Trustee promptly
upon request for all reasonable disbursements, advances and expenses incurred or
made by it in addition to the compensation for its services. Such expenses
shall include the reasonable compensation, disbursements and expenses of the
Trustee's agents and counsel.
The Issuers shall indemnify the Trustee against any and all losses,
liabilities or expenses incurred by it arising out of or in connection with the
acceptance or administration of its duties under this Indenture without
negligence or bad faith on its part. The Trustee shall notify the Issuers
promptly of any claim for which it may seek indemnity. Failure by the Trustee to
so notify the Issuers shall not relieve the Issuers of their obligations
hereunder, except to the extent of actual prejudice to the Issuers resulting
from such failure. The Issuers shall defend the claim and the Trustee shall
cooperate in the defense. The Trustee may have separate counsel and the Issuers
shall pay the reasonable fees and expenses of such counsel. The Issuers need not
pay for any settlement made without their consent, which consent shall not be
unreasonably withheld.
The obligations of the Issuers under this Section 7.07 shall survive the
satisfaction and discharge of this Indenture.
To secure the Issuers' payment obligations in this Section, the Trustee
shall have a Lien prior to the Senior Notes on all money or property held or
collected by the Trustee, except that held in trust to pay principal and
interest on particular Senior Notes. Such Lien shall survive the satisfaction
and discharge of this Indenture.
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When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.01 (g) or (h) hereof occurs, the expenses and the
compensation for the services (including the fees and expenses of its agents and
counsel) are intended to constitute expenses of administration under any
Bankruptcy Law.
Section 7.08. Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section.
The Trustee may resign in writing at any time and be discharged from the
trust hereby created by so notifying the Issuers. The Holders of Senior Notes
of a majority in principal amount of the then outstanding Senior Notes may
remove the Trustee by so notifying the Trustee and the Issuers in writing. The
Issuers may remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an order for
relief is entered with respect to the Trustee under any Bankruptcy Law;
(c) a Custodian or public officer takes charge of the Trustee or its
property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Issuers shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Senior Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Issuers.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Issuers or the
Holders of Senior Notes of at least 10% in principal amount of the then
outstanding Senior Notes may petition any court of competent jurisdiction for
the appointment of a successor Trustee.
If the Trustee after written request by any Holder of a Senior Note who has
been a Holder of a Senior Note for at least six months fails to comply with
Section 7.10, such Holder of a Senior Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Issuers. Thereupon, the resignation or
removal of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and duties of the Trustee under this
Indenture. The successor Trustee shall mail a notice of its succession to
Holders of the Senior Notes. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, provided all sums owing
to the Trustee hereunder have been paid and subject to the Lien provided for in
Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this
Section 7.08, the Issuers' obligations under Section 7.07 hereof shall continue
for the benefit of the retiring Trustee.
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Section 7.09. Successor Trustee by Merger, etc.
If the Trustee consolidates, merges or converts into, or transfers all or
substantially all of its corporate trust business to, another corporation, the
successor corporation without any further act shall be the successor Trustee.
Section 7.10. Eligibility; Disqualification.
There shall at all times be a Trustee hereunder which shall be a
corporation organized and doing business under the laws of the United States of
America or of any state thereof authorized under such laws to exercise corporate
trustee power, shall be subject to supervision or examination by federal or
state authority and shall have a combined capital and surplus of at least $100
million as set forth in its most recent published annual report of condition.
This Indenture shall always have a Trustee who satisfies the requirements
of TIA (S) 310(a)(1), (2) and (5). The Trustee is subject to TIA (S) 310(b).
Section 7.11. Preferential Collection of Claims Against Company.
The Trustee is subject to TIA (S) 311(a), excluding any creditor
relationship listed in TIA (S) 311(b). A Trustee who has resigned or been
removed shall be subject to TIA (S) 311(a) to the extent indicated therein.
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.01. Option to Effect Legal Defeasance or Covenant Defeasance.
The Issuers may, at the option of its Board of Directors evidenced by a
resolution set forth in an Officers' Certificate, at any time, with respect to
the Senior Notes, elect to have either Section 8.02 or 8.03 be applied to all
outstanding Senior Notes upon compliance with the conditions set forth below in
this Article 8.
Section 8.02. Legal Defeasance and Discharge.
Upon the Issuers' exercise under Section 8.01 of the option applicable to
this Section 8.02, the Issuers shall be deemed to have been discharged from
their obligations with respect to all outstanding Senior Notes on the date the
conditions set forth below are satisfied (hereinafter, "Legal Defeasance"). For
this purpose, such Legal Defeasance means that the Issuers shall be deemed to
have paid and discharged the entire Indebtedness represented by the outstanding
Senior Notes, which shall thereafter be deemed to be "outstanding" only for the
purposes of Section 8.05 and the other Sections of this Indenture referred to in
(a) and (b) below, and to have satisfied all their other obligations under such
Senior Notes and this Indenture (and the Trustee, on demand of and at the
expense of the Issuers, shall execute proper instruments acknowledging the
same), except for the following which shall survive until otherwise terminated
or discharged hereunder: (a) the rights of Holders of outstanding Senior Notes
to receive solely from the trust fund described in Section 8.04, and as more
fully set forth in such Section,
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payments in respect of the principal of, premium, if any, and interest on such
Senior Notes when such payments are due, (b) the Issuers' obligations with
respect to such Senior Notes under Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.10
and 4.02, (c) the rights, powers, trusts, duties and immunities of the Trustee
hereunder and the Company's obligations in connection therewith and (d) this
Article 8. Subject to compliance with this Article 8, the Issuers may exercise
their option under this Section 8.02 notwithstanding the prior exercise of their
option under Section 8.03 with respect to the Senior Notes.
Section 8.03. Covenant Defeasance.
Upon the Issuers' exercise under Section 8.01 of the option applicable to
this Section 8.03, the Issuers shall be released from their obligations under
the covenants contained in Sections 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13,
4.14, 4.15, 4.16, 4.17, 4,18, 4,19, 4,20, 4,21 and 4.22 and Article Five with
respect to the outstanding Senior Notes on and after the date the conditions set
forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Senior
Notes shall thereafter be deemed not "outstanding" for the purposes of any
direction, waiver, consent or declaration or act of Holders (and the
consequences of any thereof) in connection with such covenants, but shall
continue to be deemed "outstanding" for all other purposes hereunder (it being
understood that such Senior Notes shall not be deemed outstanding for accounting
purposes). For this purpose, such Covenant Defeasance means that, with respect
to the outstanding Senior Notes, the Issuers may omit to comply with and shall
have no liability in respect of any term, condition or limitation set forth in
any such covenant, whether directly or indirectly, by reason of any reference
elsewhere herein to any such covenant or by reason of any reference in any such
covenant to any other provision herein or in any other document and such
omission to comply shall not constitute a Default or an Event of Default under
Section 6.01, but, except as specified above, the remainder of this Indenture
and such Senior Notes shall be unaffected thereby. In addition, upon the
Issuers' exercise under Section 8.01 of the option applicable to this Section
8.03, Sections 6.01(d) and 6.01(e) shall not constitute Events of Default.
Section 8.04. Conditions to Legal or Covenant Defeasance.
The following shall be the conditions to application of either Section 8.02
or Section 8.03 to the outstanding Senior Notes:
(a) The Issuers shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements
of Section 7.10 who shall agree to comply with the provisions of this
Article Eight applicable to it) as trust funds in trust for the purpose of
making the following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of such Senior Notes, (i)
cash in U.S. Dollars in an amount, (ii) non-callable Government Securities
which through the scheduled payment of principal and interest in respect
thereof in accordance with their terms shall provide, not later than one
day before the due date of any payment, cash in U.S. Dollars in an amount,
or (iii) a combination thereof, in such amounts, as will be sufficient, in
the opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to the
Trustee, to pay and discharge and which shall be applied by the Trustee (or
other qualifying trustee) to pay and discharge (A) the principal of,
premium, if any, and interest on the outstanding Senior Notes on the stated
maturity or on the applicable redemption date, as the case may be, of such
principal or installment of principal, premium, if any, or interest and (B)
any mandatory sinking fund payments or analogous payments applicable to the
outstanding Senior Notes on the day on which such payments are due and
payable in accordance with the terms of this Indenture and of such Senior
Notes; provided that the Trustee shall have been irrevocably instructed to
apply such
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money or the proceeds of such non-callable Government Securities to said
payments with respect to the Senior Notes.
(b) In the case of an election under Section 8.02, the Issuers shall
have delivered to the Trustee an Opinion of Counsel in the United States
reasonably satisfactory to the Trustee confirming that (i) the Issuers have
received from, or there has been published by, the Internal Revenue Service
a ruling or (ii) since the date hereof, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such Opinion of Counsel shall confirm that, the Holders of
the outstanding Senior Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will
be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal Defeasance
has not occurred;
(c) In the case of an election under Section 8.03, the Issuers shall
have delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee to the effect that the Holders of the
outstanding Senior Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax in the same amount, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred;
(d) No Default or Event of Default with respect to the Senior Notes
shall have occurred and be continuing on the date of such deposit (other
than a Default or Event of Default resulting from the borrowing of funds to
be applied to such deposit) or, insofar as Subsection 6.01(g) or 6.01(h) is
concerned, at any time in the period ending on the 91st day after the date
of such deposit (it being understood that this condition shall not be
deemed satisfied until the expiration of such period);
(e) Such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any other material
agreement or instrument (other than this Indenture) to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(f) In the case of an election under either Section 8.02 or 8.03, the
Issuers shall have delivered to the Trustee an Opinion of Counsel to the
effect that after the 91st day following the deposit, and assuming that
prior to such 91st day no voluntary or involuntary bankruptcy case has been
commenced with respect to any Issuer, such deposit will not constitute a
preference as defined in Section 547 of the U.S. Bankruptcy Code, and,
assuming such a bankruptcy case is commenced on or after such 91st day, the
trust funds will not constitute property included within the estate of the
debtor.
(g) In the case of an election under either Section 8.02 or 8.03, the
Issuers shall have delivered to the Trustee an Officers' Certificate
stating that the deposit made by the Issuers pursuant to their election
under Section 8.02 or 8.03 was not made by the Issuers with the intent of
preferring the Holders over other creditors of the Issuers or with the
intent of defeating, hindering, delaying or defrauding creditors of the
Issuers or others; and
(h) The Issuers shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel in the United States, each stating
that all conditions precedent provided for
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relating to either the Legal Defeasance under Section 8.02 or the Covenant
Defeasance under Section 8.03 (as the case may be) have been complied with
as contemplated by this Section 8.04.
Section 8.05. Deposited Money and Government Securities to be Held in Trust;
Other Miscellaneous Provisions.
Subject to Section 8.06, all money and non-callable Government Securities
(including the proceeds thereof) deposited with the Trustee (or other qualifying
trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant
to Section 8.04 in respect of the outstanding Senior Notes shall be held in
trust and applied by the Trustee, in accordance with the provisions of such
Senior Notes and this Indenture, to the payment, either directly or through any
Paying Agent (including any Issuer or a Subsidiary Guarantor, if any, acting as
Paying Agent) as the Trustee may determine, to the Holders of such Senior Notes
of all sums due and to become due thereon in respect of principal, premium, if
any, and interest, but such money need not be segregated from other funds except
to the extent required by law.
The Issuers shall pay and indemnify the Trustee against any tax, fee or other
charge imposed on or assessed against the cash or non-callable Government
Securities deposited pursuant to Section 8.04 or the principal and interest
received in respect thereof other than any such tax, fee or other charge which
by law is for the account of the Holders of the outstanding Senior Notes.
Anything in this Article Eight to the contrary notwithstanding, the Trustee
shall deliver or pay to the Issuers from time to time upon the Issuers' request
any money or non-callable Government Securities held by it as provided in
Section 8.04 which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee (which may be the opinion delivered under Section
8.04(a)), are in excess of the amount thereof which would then be required to be
deposited to effect an equivalent Legal Defeasance or Covenant Defeasance.
Section 8.06. Repayment to Issuers.
Any money deposited with the Trustee or any Paying Agent, or then held by the
Issuers in trust for the payment of the principal of, premium, if any, or
interest on any Senior Note and remaining unclaimed for two years after such
principal, and premium, if any, or interest has become due and payable shall be
paid to the Issuers on their request or (if then held by the Issuers) shall be
discharged from such trust; and the Holder of such Senior Note shall thereafter,
as an unsecured general creditor, look only to the Issuers for payment thereof,
and all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Issuers as trustee thereof, shall thereupon
cease; provided that the Trustee or such Paying Agent, before being required to
make any such repayment, may at the expense of the Company cause to be published
once, in the New York Times and The Wall Street Journal (national edition),
notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such notification
or publication, any unclaimed balance of such money then remaining shall be
repaid to the Issuers.
Section 8.07. Reinstatement.
If the Trustee or Paying Agent is unable to apply any U.S. Dollars or non-
callable Government Securities in accordance with Section 8.02 or 8.03, as the
case may be, by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, then
the Issuers' obligations under this Indenture and the Senior Notes shall be
revived and
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reinstated as though no deposit had occurred pursuant to Section 8.02 or 8.03
until such time as the Trustee or Paying Agent is permitted to apply all such
money in accordance with Section 8.02 or 8.03, as the case may be; provided
that, if the Issuers make any payment of principal of, premium, if any, or
interest on any Senior Note following the reinstatement of its obligations, the
Issuers shall be subrogated to the rights of the Holders of such Senior Notes to
receive such payment from the money held by the Trustee or Paying Agent.
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
Section 9.01. Without Consent of Holders of Senior Notes.
Notwithstanding Section 9.02 of this Indenture, the Issuers and the Trustee
may amend or supplement this Indenture, the Senior Notes or any Subsidiary
Guarantee without the consent of any Hold er of a Senior Note:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Senior Notes in addition to or in place
of certificated Senior Notes;
(c) to provide for the assumption of the Issuers' obligations to the
Holders of the Senior Notes in the case of a merger, consolidation or sale of
all or substantially all of the Issuers' assets pursuant to Article 5 or
Section 10.02 hereof;
(d) to make any change that would provide any additional rights or
benefits to the Holders of the Senior Notes or that does not materially
adversely affect the legal rights hereunder of any Holder of the Senior Note;
(e) to provide for Subsidiary Guarantees of the Senior Notes; or
(f) to comply with requirements of the Commission in order to effect or
maintain the qualification of this Indenture under the TIA.
Upon the request of the Issuers accompanied by resolutions of the boards of
directors of each of the General Partner, on behalf of the Company (or the
Company, if the Company is a corporation), and Capital Corp. authorizing the
execution of any such amended or supplemental Indenture and upon receipt by the
Trustee of the documents described in Section 9.06 hereof, the Trustee shall
join with the Issuers in the execution of any amended or supplemental Indenture
authorized or permitted by the terms of this Indenture and to make any further
appropriate agreements and stipulations which may be therein contained, but the
Trustee shall not be obligated to enter into such amended or supplemental
Indenture which affects its own rights, duties or immunities under this
Indenture or otherwise.
Section 9.02. With Consent of Holders of Senior Notes.
Except as provided below in this Section 9.02, the Issuers and the Trustee
may amend or supplement this Indenture or the Senior Notes or any amended or
supplemental Indenture with the written consent of the Holders of Senior Notes
of not less than a majority in aggregate principal amount of the Senior Notes
then outstanding (including consents obtained in connection with a tender offer
or exchange offer
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for the Senior Notes), and, subject to Sections 6.04 and 6.07 hereof, any
existing Default or Event of Default and its consequences (other than a Default
or Event of Default in the payment of the principal of, premium, if any, or
interest on the Senior Notes, except a payment default resulting from an
acceleration that has been rescinded) or compliance with any provision of this
Indenture or the Senior Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Senior Notes (including
consents obtained in connection with a tender offer or exchange offer for the
Senior Notes).
Upon the request of the Issuers accompanied by resolutions of the boards of
directors of each of the General Partner, on behalf of the Company (or the
Company, if the Company is a corporation), and Capital Corp. authorizing the
execution of any such amended or supplemental Indenture, and upon the filing
with the Trustee of evidence satisfactory to the Trustee of the consent of the
Holders of Senior Notes as aforesaid, and upon receipt by the Trustee of the
documents described in Section 9.06 hereof, the Trustee shall join with the
Issuers in the execution of such amended or supplemental Indenture unless such
amended or supplemental Indenture affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise, in which case the Trustee may in
its discretion, but shall not be obligated to, enter into such amended or
supplemental Indenture.
It shall not be necessary for the consent of the Holders of Senior Notes
under this Section 9.02 to approve the particular form of any proposed amendment
or waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Issuers shall mail to the Holders of Senior Notes affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Issuers to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such amended or
supplemental Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the
Holders of a majority in aggregate principal amount of the Senior Notes then
outstanding may waive compliance in a particular instance by the Issuers with
any provision of this Indenture or the Senior Notes. However, without the
consent of each Holder affected, an amendment or waiver may not (with respect to
any Senior Notes held by a non-consenting Holder of Senior Notes):
(a) reduce the principal amount of Senior Notes whose Holders must consent
to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any Senior
Note, alter the provisions with respect to the redemption of the Senior Notes
or waive a redemption payment with respect to any Senior Note;
(c) reduce the rate of or change the time for payment of interest,
including default interest, on any Senior Note;
(d) waive a Default or Event of Default in the payment of principal of,
premium, if any, or interest on the Senior Notes (except a rescission of
acceleration of the Senior Notes by the Holders of at least a majority in
aggregate principal amount of the then outstanding Senior Notes and a waiver
of the payment default that resulted from such acceleration);
(e) make any Senior Note payable in money other than that stated in the
Senior Notes;
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(f) make any change in Section 6.04 or 6.07 hereof or in the provisions of
this Indenture relating to the rights of Holders of Senior Notes to receive
payments of principal of, premium, if any, or interest on the Senior Notes;
or
(g) make any change in this sentence of this Section 9.02.
Section 9.03. Compliance with Trust Indenture Act.
Every amendment or supplement to this Indenture or the Senior Notes shall be
set forth in a amended or supplemental Indenture that complies with the TIA as
then in effect.
Section 9.04. Revocation and Effect of Consents.
Until an amendment, supplement or waiver becomes effective, a consent to it
by a Holder of a Senior Note is a continuing consent by the Holder of a Senior
Note and every subsequent Holder of a Senior Note or portion of a Senior Note
that evidences the same debt as the consenting Holder's Senior Note, even if
notation of the consent is not made on any Senior Note. However, any such
Holder of a Senior Note or subsequent Holder of a Senior Note may revoke the
consent as to its Senior Note if the Trustee receives written notice of
revocation before the date the waiver, supplement or amendment becomes
effective. An amendment, supplement or waiver becomes effective in accordance
with its terms and thereafter binds every Holder of a Senior Note.
Section 9.05. Notation on or Exchange of Senior Notes.
The Trustee may place an appropriate notation about an amendment, supplement
or waiver on any Senior Note thereafter authenticated. The Issuers in exchange
for all Senior Notes may issue and the Trustee shall authenticate new Senior
Notes that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Senior Note shall not
affect the validity and effect of such amendment, supplement or waiver.
Section 9.06. Trustee to Sign Amendments, etc.
The Trustee shall sign any amended or supplemental Indenture authorized
pursuant to this Article 9 if the amendment or supplement does not adversely
affect the rights, duties, liabilities or immunities of the Trustee. The
Issuers may not sign an amendment or supplemental Indenture until Board of
Directors each of the General Partner, on behalf of the Company (or the Company,
if the Company is a corporation), and Capital Corp. approves it, and no
Guarantor may sign such an amendment or supplemental Indenture until its board
of directors approves it. The Trustee shall be entitled to receive, and shall
be fully protected in relying upon, an Officer's Certificate and an Opinion of
Counsel stating that such amendment or supplement is authorized or permitted by
this Indenture, that all conditions precedent to the execution of the amendment
or supplement by the parties thereto have been complied with and that the
amendment or supplement is valid and binding upon the Issuers and any Guarantor
in accordance with its terms.
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ARTICLE 10
GUARANTEE OF SENIOR NOTES
Section 10.01. Guarantee.
Subject to the provisions of this Article 10, each Guarantor hereby, jointly
and severally, unconditionally guarantees, on a senior unsubordinated basis, to
each Holder of a Senior Note authenticated and delivered by the Trustee and to
the Trustee and its successors and assigns, irrespective of the validity and
enforceability of this Indenture, the Senior Notes or the Obligations of the
Issuers to the Holders or the Trustee hereunder or under the Senior Notes, that
(a) the principal of, premium, if any, and any accrued and unpaid interest on
the Senior Notes shall be duly and punctually paid in full when due, whether at
maturity, by acceleration or otherwise, and interest on overdue principal of,
premium, if any, and (to the extent permitted by law) interest on the Senior
Notes and all other Obligations of the Issuers to the Holders or the Trustee
hereunder or under the Senior Notes (including fees, expenses or other) shall be
promptly paid in full or performed, all in accordance with the terms hereof and
thereof; (b) in case of any extension of time of payment or renewal of any
Senior Notes or any of such other Obligations, the same shall be promptly paid
in full when due or performed in accordance with the terms of the extension or
renewal, whether at stated maturity, by acceleration or otherwise; and (c) any
and all costs and expenses (including, without limitation, reasonable attorneys'
fees and expenses) incurred by the Trustee or its agents or any Holder of Senior
Notes in enforcing any rights under any Guarantee shall be promptly paid in full
when due. Failing payment when due of any amount so guaranteed or failing
performance of any other Obligation of the Issuers to the Holders, for whatever
reason, each Guarantor shall be obligated to pay, or to perform or to cause the
performance of, the same immediately. Each Guarantor agrees that this is a
Guarantee of payment and not a Guarantee of collection. An Event of Default
under this Indenture or the Senior Notes shall constitute an event of default
under this Guarantee, and shall entitle the Holders of Senior Notes to
accelerate the Obligations of the Guarantors hereunder in the same manner and to
the same extent as the Obligations of the Issuers. Each Guarantor hereby agrees
that its Obligations hereunder shall be unconditional, irrespective of the
validity, regularity or enforceability of the Senior Notes or this Indenture,
the absence of any action to enforce the same, any waiver or consent by any
Holder of Senior Notes with respect to any provisions hereof or thereof, the
recovery of any judgment against the Issuers, any action to enforce the same or
any other circumstance which might otherwise constitute a legal or equitable
discharge or defense of a guarantor. Each Guarantor hereby waives diligence,
presentment, demand of payment, filing of claims with a court in the event of
insolvency or bankruptcy of either or any of the Issuers and such Guarantor,
protest, notice and all demands whatsoever and covenants that its Guarantee
shall not be discharged except by complete performance of all Obligations under
the Senior Notes and this Indenture, except as specified in Section 10.03. If
any Holder or the Trustee is required by any court or otherwise to return to the
Issuers or such Guarantor, or any custodian, trustee, liquidator or other
similar official acting in relation to either the Issuers or such Guarantor, any
amount paid by any such entity to the Trustee or such Holder, such Guarantor's
Guarantee, to the extent theretofore discharged, shall be reinstated in full
force and effect. Each Guarantor agrees that it shall not be entitled to any
right of subrogation in relation to the Holders in respect of any Obligations
guaranteed hereby until payment in full of all Obligations guaranteed hereby.
Each Guarantor agrees that, as between the Guarantors, on the one hand, and the
Holders of Senior Notes and the Trustee, on the other hand, (x) the maturity of
the Obligations guaranteed hereby may be accelerated as provided in Article 6
hereof for the purposes of its Guarantee, notwithstanding any stay, injunction
or other prohibition preventing such acceleration in respect of the Obligations
guaranteed hereby, and (y) in the event of any acceleration of such Obligations
as provided in Article 6 hereof, such Obligations (whether or not due and
payable) shall forthwith become due and payable by such Guarantor for the
purpose of its Guarantee. The obligations of each Guarantor shall rank pari
passu in right of payment with all Guarantor Senior Indebtedness of such
Guarantor.
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Section 10.02. Limitation of the Guarantors' Liability.
Each Guarantor and, by its acceptance hereof, each beneficiary hereof, hereby
confirms that it is the intention and agreement of all such parties that such
Guarantor's Guarantee not constitute a fraudulent transfer or conveyance for
purposes of any Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the
Uniform Fraudulent Transfer Act or any similar Federal or state law (including,
without limitation, the Debtor and Creditor Law of the State of New York). To
effectuate the foregoing intention, each such Person hereby irrevocably agrees
that the Obligations of the Guarantors under this Article 10 shall be limited to
the maximum amount as will, after giving effect to all other contingent and
fixed liabilities of such Guarantor, result in the Obligations of such Guarantor
under its Guarantee not constituting a fraudulent transfer or conveyance.
Section 10.03. Release of the Guarantors.
In the event of a sale or other disposition of all of the assets of any
Guarantor, by way of merger, consolidation or otherwise, or a sale or other
disposition of all of the capital stock of any Guarantor, such Guarantor (in the
event of a sale or other disposition, by way of such a merger, consolidation or
otherwise, of all of the capital stock of such Guarantor) or the corporation
acquiring the property (in the event of a sale or other disposition of all of
the assets of such Guarantor) will be released and relieved of any obligations
under its Subsidiary Guarantee; provided that the Net Proceeds of such sale or
other disposition are applied in accordance with Section 4.10 hereof. The
Trustee shall deliver an appropriate instrument evidencing such release upon
receipt of a request of the Issuers accompanied by an Officers' Certificate and
Opinion of Counsel certifying as to the compliance with this Section 10.03. Any
Guarantor not released from its Obligations under its Guarantee shall remain
liable for the full amount of principal of, premium, if any, and accrued and
unpaid interest on the Senior Notes and for the other Obligations of such
Guarantor under this Indenture as provided in this Article 10.
Section 10.04. Merger, Consolidation or Sale of Assets.
No Guarantor may consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another corporation, Person or entity
whether or not affiliated with such Guarantor (other than a Restricted
Subsidiary of the Company that is a Guarantor) unless (i) subject to Section
10.03 hereof, the Person formed by or surviving any such consolidation or merger
(if other than such Guarantor) assumes all the obligations of such Guarantor
pursuant to a supplemental indenture in form and substance reasonably
satisfactory to the Trustee, under the Senior Notes and the Indenture, (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists and (iii) such Guarantor, or any Person formed by or surviving
any such consolidation or merger, would be permitted by virtue of the Company's
pro forma Fixed Charge Coverage Ratio to incur, immediately after giving effect
to such transaction, at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in Section 4.09(a) hereof; provided
that the foregoing provisions shall not apply to any Asset Sale subject to
Section 4.10 hereof.
Section 10.05. Execution and Delivery of Guarantees.
To evidence its Guarantee set forth in this Article 10, each Guarantor hereby
agrees that a notation of such Guarantee substantially in the form of Exhibit B
shall be endorsed by an Officer of such Guarantor on each Senior Note
authenticated and delivered thereafter by the Trustee, and, to the extent not a
party to this Indenture on the date hereof, each Guarantor shall execute and
deliver to the Trustee a supplemental indenture in the form of Exhibit C hereto,
pursuant to which such Subsidiary shall become
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a Guarantor under this Article 10 and shall guarantee the Obligations of the
Issuers under this Indenture and the Senior Notes. Concurrently with the
execution and delivery of such supplemental indenture, the Issuers shall deliver
to the Trustee an Opinion of Counsel reasonably satisfactory to the Trustee to
the effect that such supplemental indenture has been duly authorized, executed
and delivered by such Guarantor and that, subject to the application of
bankruptcy, insolvency, moratorium and other similar laws relating to creditors'
rights generally and to general principles of equity, whether considered in a
proceeding at law or in equity, and to the discretion of the court before which
any proceeding therefor may be brought, the Guarantee of each such Guarantor
contained herein (subject to the limitations set forth in Section 10.02) is a
legal, valid and binding obligation of such Guarantor, enforceable against such
Guarantor in accordance with its terms.
Each Guarantor hereby agrees that its Guarantee set forth in this Article 10
shall remain in full force and effect and apply to all of the Senior Notes
notwithstanding any failure to endorse on each Senior Note a notation of such
Guarantee. The delivery of any Senior Note by the Trustee, after the
authentication thereof hereunder, shall constitute due delivery of the Guarantee
set forth in this Indenture on behalf of each Guarantor.
ARTICLE 11
MISCELLANEOUS
Section 11.01. Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies or conflicts with the
duties imposed by TIA (S)318(c), the imposed duties shall control.
Section 11.02. Notices.
Any notice or communication by the Issuers, any Guarantor or the Trustee to
the others is duly given if in writing and delivered in person or mailed by
first class mail (registered or certified, return receipt requested), telex,
telecopier or overnight air courier guaranteeing next day delivery, to the
others' address:
If to the Issuers:
Muzak Limited Partnership
2901 Third Avenue, Suite 400
Seattle, Washington 98121
Telecopier No.: (206) 633-6210
Attention: Chief Financial Officer
With a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Telecopier No.: (212) 310-8007
Attention: Norman D. Chirite, Esq.
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If to the Trustee:
First Trust National Association
Telecopier No.: (___) __________
Attention: Corporate Trust Administration
The Issuers, any Guarantor or the Trustee, by notice to the others, may
designate additional or different addresses for subsequent notices or
communications.
All notices and communications (other than those sent to Holders of Senior
Notes) shall be deemed to have been duly given: at the time delivered by hand,
if personally delivered; five Business Days after being deposited in the mail,
postage prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied; and the next Business Day after timely delivery to
the courier, if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder of a Senior Note shall be mailed by
first class mail or by overnight air courier guaranteeing next day delivery to
its address shown on the register kept by the Registrar. Any notice or
communication shall also be so mailed to any Person described in TIA (S) 313(c),
to the extent required by the TIA. Failure to mail a notice or communication to
a Holder of a Senior Note or any defect in it shall not affect its sufficiency
with respect to other Holders of Senior Notes.
If a notice or communication is mailed in the manner provided above within
the time prescribed, it is duly given, whether or not the addressee receives it.
If the Issuers mail a notice or communication to Holders of Senior Notes,
they shall mail a copy to the Trustee and each Agent at the same time.
Section 11.03. Communication by Holders of Senior Notes with Other Holders of
Senior Notes.
Holders of the Senior Notes may communicate pursuant to TIA (S) 312(b) with
other Holders of Senior Notes with respect to their rights under this Indenture
or the Senior Notes. The Issuers, any Guarantor, the Trustee, the Registrar and
anyone else shall have the protection of TIA (S) 312(c).
Section 11.04. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Issuers to the Trustee to take any
action under this Indenture, the Issuers shall furnish to the Trustee:
(a) an Officers' Certificate in form and substance reasonably satisfactory
to the Trustee (which shall include the statements set forth in Section 10.05
hereof) stating that, in the opinion of the signers, all conditions precedent
and covenants, if any, provided for in this Indenture relating to the
proposed action have been satisfied; and
(b) an Opinion of Counsel in form and substance reasonably satisfactory to
the Trustee (which shall include the statements set forth in Section 10.05
hereof) stating that, in the opinion of such counsel, all such conditions
precedent and covenants have been satisfied.
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Section 11.05. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture (other than a certificate provided
pursuant to TIA (S) 314(a)(4)) shall comply with the provisions of TIA (S)314(e)
and shall include:
(a) a statement that the person making such certificate or opinion has
read such covenant or condition;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of such person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
satisfied; and
(d) a statement as to whether or not, in the opinion of such person, such
condition or covenant has been satisfied.
Section 11.06. Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or at a meeting of
Holders of Senior Notes. The Registrar or Paying Agent may make reasonable
rules and set reasonable requirements for its functions.
Section 11.07. No Personal Liability of Directors, Officers, Employees,
Partners and Stockholders.
No director, officer, employee, incorporator, partner or stockholder of any
Issuer, as such, shall have any liability for any obligations of the Issuers
under the Senior Notes or this Indenture or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder of the
Senior Notes by accepting a Senior Note waives and releases all such liability.
The waiver and release are part of the consideration for issuance of the Senior
Notes. Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
Section 11.08. Governing Law.
THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO
CONSTRUE THIS INDENTURE, THE SENIOR NOTES AND ANY SUBSIDIARY GUARANTEE.
Section 11.09. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or debt
agreement of any Issuer or its Subsidiaries. Any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
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Section 11.10. Successors.
All agreements of the Issuers in this Indenture and the Senior Notes shall
bind their successors. All agreements of the Trustee in this Indenture shall
bind its successor.
Section 11.11. Severability.
In case any provision in this Indenture or in the Senior Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 11.12. Counterpart Originals.
The parties may sign any number of copies of this Indenture. Each signed
copy shall be an original, but all of them together represent the same
agreement.
Section 11.13. Table of Contents, Headings, etc.
The Table of Contents, Cross-Reference Table and Headings of the Articles and
Sections of this Indenture have been inserted for convenience of reference only,
are not to be considered a part of this Indenture and shall in no way modify or
restrict any of the terms or provisions hereof.
[Signatures on following page]
56
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SIGNATURES
Dated as of ____________, 1996 Muzak Limited Partnership
By MLP Acquisition L.P., its General Partner
By Music Holdings Corp., its General Partner
By:_____________________________
Name:
Title:
Muzak Capital Corporation
By:_____________________________
Name:
Title:
First Trust National Association,
as Trustee
By:_____________________________
Name:
Title:
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EXHIBIT A
(Form of Face of Senior Note)
___% Senior Note due 2003
No. $__________
MUZAK LIMITED PARTNERSHIP
MUZAK CAPITAL CORPORATION
promises to pay to
____________________
or its registered assigns
the principal sum of
Dollars on ________________, 2003.
Interest Payment Dates: __________ and __________, commencing __________, 1997.
Record Dates: ________ and ________ (whether or not a Business Day).
Dated: ____________,1996
Muzak Limited Partnership
By MLP Acquisition L.P., its General Partner
By Music Holdings Corp., its General Partner
By: _____________________________________
Name:
Title:
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Muzak Capital Corporation
By: _______________________________
Name:
Title:
(SEAL)
This is one of the Senior Notes
referred to in the within-
mentioned Indenture:
First Trust National Association, as Trustee
By: ____________________________________
(Authorized Signature)
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(Form of Reverse Side of Senior Note)
___% Senior Note due 2003
Capitalized terms used herein have the meanings assigned to them in the
Indenture (as defined) unless otherwise indicated.
1. Interest. Muzak Limited Partnership, a Delaware limited partnership (the
"Company"), and Muzak Capital Corporation, a Delaware corporation ("Capital
Corp." and, together with the Company, the "Issuers"), jointly and severally,
promise to pay interest on the principal amount of this Senior Note at the rate
and in the manner specified below. The Issuers shall pay interest on the
principal amount of this Senior Note in cash at the rate per annum of ___%. The
Issuers will pay interest semi-annually on __________ and ___________ of each
year, commencing _____________, 1997, or, if any such day is not a Business Day,
on the next succeeding Business Day (each, an "Interest Payment Date") to
Holders of record on the immediately preceding __________ and ___________.
Interest will be computed on the basis of a 360-day year consisting of twelve
30-day months. Interest shall accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of the
original issuance of the Senior Notes. To the extent lawful, the Issuers shall
pay interest on overdue principal at the rate of the then applicable interest
rate on the Senior Notes; they shall pay interest on overdue installments of
interest (without regard to any applicable grace periods) at the same rate to
the extent lawful.
2. Method of Payment. The Issuers will pay interest on the Senior Notes
(except defaulted interest) to the Persons who are registered Holders of Senior
Notes at the close of business on the record date next preceding the Interest
Payment Date, even if such Senior Notes are cancelled after such record date and
on or before such Interest Payment Date. The Holder hereof must surrender this
Senior Note to a Paying Agent to collect principal payments. The Issuers will
pay principal and interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts. The Issuers
however, may pay principal, premium, if any, and interest by check payable in
such money. The Senior Notes will be payable as to principal, premium and
interest at the office or agency of the Issuers maintained for such purpose
within the City and State of New York or, at the option of the Issuers, payment
of interest may be made by check mailed to the Holders of Senior Notes at their
respective addresses set forth in the register of Holders of Senior Notes.
Unless otherwise designated by the Issuers, the Issuers' office or agency in New
York, New York will be the office of the Trustee maintained for such a purpose.
3. Paying Agent and Registrar. Initially, the Trustee will act as Paying
Agent and Registrar. The Issuers may change any Paying Agent, Registrar or co-
registrar without prior notice to any Holder of a Senior Note. The Company or
any Subsidiary may act in any such capacity.
4. Indenture. The Issuers issued the Senior Notes under an Indenture, dated
as of _____________ , 1996 (the "Indenture"), between the Company and the
Trustee. The terms of the Senior Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (15 U.S. Code (S)(S) 77aaa-77bbbb), as in effect on the date of
the Indenture. The Senior Notes are subject to all such terms, and Holders of
Senior Notes are referred to the Indenture and such act for a statement of such
terms. The terms of the Indenture shall govern any inconsistencies between the
Indenture and the Senior Notes. The Senior Notes are senior unsecured
obligations of the Issuers limited to $100,000,000 in aggregate principal
amount.
5. Optional Redemption. The Senior Notes will not be redeemable at the
Issuers' option prior to __________, 2000. Thereafter, the Senior Notes will be
subject to redemption at the option of the
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Issuers, in whole or in part, upon not less than 30 nor more than 60 days'
notice, in cash at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest, if any, thereon to
the applicable redemption date, if redeemed during the twelve-month period
beginning on __________ of the years indicated below:
Redemption
Year Price
---- ----------
2000 ............................... %
2001 ............................... %
2002 and thereafter ................ 100.000%
Notwithstanding the foregoing, during the first 36 months after the date of
this Prospectus, the Issuers may on any one or more occasions redeem up to 35%
of the initially outstanding aggregate principal amount of Senior Notes at a
redemption price equal to ___% of the principal amount thereof, plus accrued and
unpaid interest, if any, thereon to the redemption date, with the net proceeds
of one or more equity offerings of the Issuers generating in each case net
proceeds of at least $15.0 million; provided that at least 65% of the initially
outstanding aggregate principal amount of Senior Notes remains outstanding
immediately after the occurrence of any such redemption; and provided, further,
that such redemption shall occur within 60 days of the date of the closing of
any such equity offering of the Issuers.
6. Mandatory Redemption. Except as set forth in Sections 4.10 and 4.18 of
the Indenture, the Company is not required to make mandatory redemption or
sinking fund payments with respect to the Senior Notes.
7. Repurchase at Option of Holder. (a) Upon the occurrence of a Change of
Control, each Holder of Senior Notes will have the right to require the Issuers
to repurchase all or any part (equal to $1,000 or an integral multiple thereof)
of such Holder's Senior Notes at an offer price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the date of purchase. Holders of Senior Notes that are subject to an
offer to purchase will receive a Change of Control Offer from the Company prior
to any related Change of Control Payment Date and may elect to have such Senior
Notes purchased by completing the form entitled "Option of Holder to Elect
Purchase" appearing below.
(b) If the Company or a Restricted Subsidiary consummates any Asset Sales,
and when the aggregate amount of Excess Proceeds from such Asset Sales exceeds
$10.0 million, the Company will be required to make an offer to all holders of
Senior Notes to purchase the maximum principal amount of Senior Notes that may
be purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 101% of the principal amount thereof, plus accrued and unpaid interest
thereon to the date of purchase, in accordance with the procedures set forth in
the Indenture. If the aggregate principal amount of Senior Notes surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Senior Notes to be purchased on a pro rata basis. Holders of Senior Notes
that are the subject of an offer to purchase will receive an Asset Sale Offer
from the Company prior to any related purchase date and may elect to have such
Senior Notes purchased by completing the form entitled "Option of Holder to
Elect Purchase" appearing below.
8. Notice of Redemption. Notice of redemption shall be mailed at least 30
days but not more than 60 days before the redemption date to each Holder whose
Senior Notes are to be redeemed at its registered address. Senior Notes may be
redeemed in part but only in whole multiples of $1,000, unless all of the Senior
Notes held by a Holder of Senior Notes are to be redeemed. On and after the
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<PAGE>
redemption date, interest ceases to accrue on Senior Notes or portions of them
called for redemption unless the Issuers default in making such redemption
payment.
9. Denominations, Transfer, Exchange. The Senior Notes are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000. The transfer of Senior Notes may be registered and Senior Notes may be
exchanged as provided in the Indenture. The Registrar and the Trustee may
require a Holder of a Senior Note, among other things, to furnish appropriate
endorsements and transfer documents and to pay any taxes and fees required by
law or permitted by the Indenture. The Registrar need not exchange or register
the transfer of any Senior Note or portion of a Senior Note se lected for
redemption. Also, it need not exchange or register the transfer of any Senior
Notes for a period of 15 days before a selection of Senior Notes to be redeemed.
10. Persons Deemed Owners. Prior to due presentment to the Trustee for
registration of the transfer of this Senior Note, the Trustee, any Agent and the
Issuers may deem and treat the Person in whose name this Senior Note is
registered as its absolute owner for the purpose of receiving payment of
principal of, premium, if any, and interest on this Senior Note and for all
other purposes whatsoever, whether or not this Senior Note is overdue, and
neither the Trustee, any Agent nor the Issuers shall be affected by notice to
the contrary. The registered Holder of a Senior Note shall be treated as its
owner for all purposes.
11. Amendments, Supplement and Waivers. Subject to certain exceptions, the
Indenture or the Senior Notes may be amended or supplemented with the consent of
the holders of at least a majority in principal amount of the Senior Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for Senior Notes), and any existing default or compliance with
any provision of the Indenture or the Senior Notes may be waived with the
consent of the holders of a majority in principal amount of the then outstanding
Senior Notes (including consents obtained in connection with a tender offer or
exchange offer for Senior Notes). Without the consent of each holder affected,
an amendment or waiver may not (with respect to any Senior Notes held by a non-
consenting holder) (i) reduce the principal amount of Senior Notes whose holders
must consent to an amendment, supplement or waiver, (ii) reduce the principal of
or change the fixed maturity of any Senior Note or alter the provisions with
respect to the redemption of the Senior Notes, (iii) reduce the rate of or
change the time for payment of interest on any Senior Note, (iv) waive a Default
or Event of Default in the payment of principal of or premium, if any, or
interest on the Senior Notes (except a rescission of acceleration of the Senior
Notes by the holders of at least a majority in aggregate principal amount of the
Senior Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Senior Note payable in money other than that stated
in the Senior Notes, (vi) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of holders of Senior Notes to
receive payments of principal of or premium, if any, or interest on the Senior
Notes, (vii) waive a redemption payment with respect to any Senior Note or
(viii) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of Senior
Notes, the Issuers and the Trustee may amend or supplement the Indenture or the
Senior Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Senior Notes in addition to or in place of certificated Senior
Notes, to provide for the assumption of the Issuers' obligations to holders of
Senior Notes in the case of a merger or consolidation, to make any change that
would provide any additional rights or benefits to the holders of Senior Notes
or that does not materially adversely affect the legal rights under the
Indenture of any such holder, to provide for Subsidiary Guarantees of the Senior
Notes or to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
12. Defaults and Remedies. Each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Senior Notes; (ii) default in the payment of all or any
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<PAGE>
part of the principal, or premium, if any, on the Senior Notes when and as the
same becomes due and payable at maturity, upon redemption, by acceleration, or
otherwise, including, without limitation, the payment of the Change of Control
Payment or the Asset Sale Offer Price, or otherwise; (iii) failure by any of the
Issuers or any of their respective Subsidiaries to observe or perform any other
covenant or agreement on the part of such Issuer or such Subsidiary contained in
the Senior Notes or the Indenture and the continuance of such failure for a
period of 30 days after written notice is given to the Issuers by the Trustee or
to the Issuers and the Trustee by the holders of at least 25% in aggregate
principal amount of the Senior Notes then outstanding, specifying such default;
requiring that it be remedied and stating that such notice is a "Notice of
Default"; (iv) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or
is created after the date of the Indenture, which default (A) is caused by a
failure to pay principal of or premium, if any, or interest on such Indebtedness
prior to the expiration of the grace period provided in such Indebtedness on the
date of such default (a "Payment Default") or (B) results in the acceleration of
such Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any other
such Indebtedness under which there has been a Payment Default or the maturity
of which has been so accelerated, aggregates $5.0 million or more; (v) failure
by the Company or any of its Subsidiaries to pay final judgments aggregating in
excess of $5.0 million, which judgments are not paid, discharged or stayed for a
period of 60 days; (vi) except as permitted by the Indenture, any Subsidiary
Guarantee shall be held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or any
Guarantor, or any Person acting on behalf of any Guarantor, shall deny or
disaffirm its obligations under its Subsidiary Guarantee; and (vii) certain
events of bankruptcy or insolvency with respect to the Company or any of its
Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Senior Notes may
declare all the Senior Notes to be due and payable immediately. Notwithstanding
the foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute a
Significant Subsidiary, all outstanding Senior Notes will become due and payable
without further action or notice. Holders of the Senior Notes may not enforce
the Indenture or the Senior Notes except as provided in the Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the then
outstanding Senior Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the Senior Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest. The Holders of a majority in aggregate
principal amount of the Senior Notes then outstanding, by notice to the Trustee,
may on behalf of the Holders of all of the Senior Notes waive any existing
Default or Event of Default and its consequences under the Indenture except a
continuing Default or Event of Default in the payment of principal of, premium,
if any, and interest on, the Senior Notes and except as to Sections 4.10 and
4.18 of the Indenture. The Issuers are required to deliver to the Trustee
annually a statement regarding compliance with the Indenture, and the Issuers
are required upon becoming aware of any Default or Event of Default, to deliver
to the Trustee a statement specifying such Default or Event of Default.
13. Trustee Dealings with Issuers. The Trustee under the Indenture, in its
individual or any other capacity, may make loans to, accept deposits from, and
perform services for the Issuers or their Affiliates, and may otherwise deal
with the Issuers or their Affiliates, as if it were not Trustee; however, if the
Trustee acquires any conflicting interest it must eliminate such conflict within
90 days, apply to the Commission for permission to continue as Trustee or
resign.
A-6
<PAGE>
14. No Personal Liabilities of Directors, Officers, Employees, Partners and
Stockholders. No director, officer, employee, manager, incorporator, partner or
stockholder or other Affiliate of the Issuers shall have any liability for any
obligations of the Issuers under the Senior Notes or the Indenture or for any
claim based on, in respect of or by reason of such obligations or their
creation. Each Holder of a Senior Note by accepting a Senior Note waives and
releases all such liability. The waiver and release are part of the
consideration for the issuance of the Senior Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
15. Authentication. This Senior Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticating agent.
16. Abbreviations. Customary abbreviations may be used in the name of a
Holder of a Senior Note or an assignee, such as: TEN COM (= tenants in common),
TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (=
Uniform Gifts to Minors Act).
17. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Senior Notes and has directed the Trustee to
use CUSIP numbers in notices of redemption as a convenience to Holders of Senior
Notes. No representation is made as to the accuracy of such numbers either as
printed on the Senior Notes or as contained in any notice of redemption and
reliance may be placed only on the other identification numbers placed thereon.
18. Governing Law. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN
AND BE USED TO CONSTRUE THE INDENTURE, THE SENIOR NOTES AND ANY SUBSIDIARY
GUARANTEE.
The Issuers will furnish to any Holder of a Senior Note upon written request
and without charge a copy of the Indenture. Request may be made to:
Muzak Limited Partnership
Muzak Capital Corporation
2901 Third Avenue, Suite 400
Seattle, Washington 98121
Telecopier No.: (206) 633-6210
Attention: Chief Financial Officer
A-7
<PAGE>
ASSIGNMENT FORM
To assign this Senior Note, fill in the form below: (I) or (we) assign and
transfer this Senior Note to
- -------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint _______________________________________________________
agent to transfer this Senior Note on the books of the Issuers. The agent may
substitute another to act for him.
- --------------------------------------------------------------------------------
Date: ______________
Your Signature: ________________________________
(Sign exactly as your name appears on the face of
this Senior Note)
Signature Guarantee.
A-8
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have all or any part of this Senior Note purchased
by the Issuers pursuant to Section 4.10 or Section 4.18 of the Indenture check
the appropriate box:
[_] Section 4.10 [_] Section 4.18
If you want to have only part of the Senior Note purchased by the
Issuers pursuant to Section 4.10 or Section 4.18 of the Indenture, state the
amount (in integral multiples of $1,000) you elect to have purchased:
$ _______________
Date:____________
Your Signature: _________________________________
(Sign exactly as your name appears on the face of
this Senior Note)
Signature Guarantee.
A-9
<PAGE>
EXHIBIT B
GUARANTEE
---------
Each Guarantor (which term includes any successor or assign under the
Indenture) hereby, jointly and severally, unconditionally guarantees, on a
senior unsubordinated basis, to each Holder of a Senior Note authenticated and
delivered by the Trustee and to the Trustee and its successors and assigns,
irrespective of the validity and enforceability of the Indenture, the Senior
Notes or the Obligations of the Issuers to the Holders or the Trustee under the
Indenture or under the Senior Notes, that (a) the principal of, premium, if any,
and any accrued and unpaid interest on the Senior Notes shall be duly and
punctually paid in full when due, whether at maturity, by acceleration or
otherwise, and interest on overdue principal of, premium, if any, and (to the
extent permitted by law) interest on the Senior Notes and all other Obligations
of the Issuers to the Holders or the Trustee under the Indenture or under the
Senior Notes (including fees, expenses or other) shall be promptly paid in full
or performed, all in accordance with the terms hereof and thereof; (b) in case
of any extension of time of payment or renewal of any Senior Notes or any of
such other Obligations, the same shall be promptly paid in full when due or
performed in accordance with the terms of the extension or renewal, whether at
stated maturity, by acceleration or otherwise; and (c) any and all costs and
expenses (including, without limitation, reasonable attorneys' fees and
expenses) incurred by the Trustee or its agents or any Holder of Senior Notes in
enforcing any rights under any Guarantee shall be promptly paid in full when
due.
The obligations of each Guarantor to the Holders of Senior Notes and to the
Trustee pursuant to this Guarantee and the Indenture are expressly set forth in
Article 10 of the Indenture and reference is hereby made to such Indenture for
the precise terms of this Guarantee. THE TERMS OF ARTICLE 10 OF THE INDENTURE
ARE INCORPORATED HEREIN BY REFERENCE. In the case of any discrepancy between
this writing and Article 10 of the Indenture, Article 10 of the Indenture shall
control.
This is a continuing Guarantee and shall remain in full force and effect
and shall be binding upon each Guarantor and its successors and assigns until
full, final and indefeasible payment of all of the Issuers' obligations under
the Senior Notes and the Indenture (subject to Section 10.05 of the Indenture)
and shall inure to the benefit of the successors and assigns of the Trustee and
the Holders of Senior Notes and, in the event of any transfer or assignment of
rights by any Holder of Senior Notes or the Trustee, the rights and privileges
herein conferred upon the party shall automatically extend to and be vested in
such transferee or assignee, all subject to the terms and conditions hereof.
This is a Guarantee of payment and not a Guarantee of collection.
Each Guarantor and, by its acceptance hereof, each beneficiary hereof,
hereby confirms that it is the intention and agreement of all such parties that
this Guarantee not constitute a fraudulent transfer or conveyance for purposes
of any Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform
Fraudulent Transfer Act or any similar Federal or state law (including, without
limitation, the Debtor and Creditor Law of the State of New York). To
effectuate the foregoing intention, each such Person hereby irrevocably agrees
that the Obligations of each Guarantor under Article 10 of the Indenture shall
be limited to the maximum amount as will, after giving effect to all other
contingent and fixed liabilities of such Guarantor, result in the Obligations of
such Guarantor under its Guarantee not constituting a fraudulent transfer or
conveyance.
This Guarantee shall not be valid or obligatory for any purpose until the
certificate of authentication on the Senior Note upon which this Guarantee is
noted shall have been executed by the Trustee under the Indenture by the manual
signature of one of its authorized officers.
B-10
<PAGE>
[Guarantor]
By: _____________________________
Name:
Title:
Attest:
________________________________
Name:
Title:
B-11
<PAGE>
EXHIBIT C
FORM OF SUPPLEMENTAL INDENTURE
Supplemental Indenture (this "Supplemental Indenture"), dated as of
____________________, ____, between _____________________________ (the
"Guarantor"), a subsidiary of Muzak Limited Partnership, a Delaware limited
partnership (the "Company"), and First Trust National Association, as trustee
under the indenture referred to below (the "Trustee").
W I T N E S S E T H
WHEREAS, the Issuers have heretofore executed and delivered to the Trustee
an indenture (the "Indenture"), dated as of _____________, 1996, providing for
the issuance of an aggregate principal amount of $100,000,000 of ___% Senior
Notes due 2003 (the "Senior Notes");
WHEREAS, Section 4.16 of the Indenture provides that under certain
circumstances the Issuers are required to cause the Guarantor to execute and
deliver to the Trustee a supplemental indenture pursuant to which the Guarantor
shall unconditionally guarantee all of the Issuers' obligations under the Senior
Notes pursuant to a Guarantee on the terms and conditions set forth in Article
10 of the Indenture; and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Guarantor and the Trustee mutually covenant and agree for the equal and ratable
benefit of the holders of the Senior Notes as follows:
(a) Capitalized Terms. Capitalized terms used herein without definition
shall have the meanings assigned to them in the Indenture.
(b) Agreement to Guarantee. The Guarantor hereby agrees, jointly and
severally with all other Guarantors, to guarantee, on a senior unsubordinated
basis, the Issuers' Obligations under the Senior Notes on the terms and subject
to the conditions set forth in Article 10 of the Indenture and to be bound by
all other applicable provisions of the Indenture.
(c) No Recourse Against Others. No officer, employee, director or
stockholder of the Guarantor shall have any liability for any Obligations of the
Issuers or any Guarantor under the Senior Notes, any Guarantee, the Indenture or
this Supplemental Indenture or for any claim based on, in respect of, or by
reason of, such Obligations or their creation of any such Obligation. Each
Holder by accepting a Senior Note waives and releases all such liability, and
such waiver and release is part of the consideration for the issuance of the
Senior Notes.
(d) Governing Law. The internal laws of the State of New York shall govern
this Supplemental Indenture, without regard to the conflict of laws provisions
thereof.
(e) Counterparts. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
C-12
<PAGE>
(f) Effect of Headings. The Section headings herein are for convenience
only and shall not affect the construction hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed and attested, all as of the date first above
written.
Dated: _______________ ___, ______
[Guarantor]
By: _____________________________
Name:
Title:
Attest:
________________________________
Name:
Title:
First Trust National Association,
as Trustee
By: _____________________________
Name:
Title:
Attest:
________________________________
Name:
Title:
C-13
<PAGE>
September 26, 1996
Muzak Limited Partnership
Muzak Capital Corporation
2901 Third Avenue
Suite 400
Seattle, Washington 98121
Re: Muzak Limited Partnership and
Muzak Capital Corporation
Registration Statement on Form S-1
(Nos. 333-03741 and 333-03741-01)
----------------------------------
Gentlemen:
We have acted as counsel to Muzak Limited Partnership (the "Company")
and Muzak Capital Corporation ("Capital Corp" and, together with the Company,
the "Issuers") in connection with the preparation and filing with the Securities
and Exchange Commission of the Company's Registration Statement on Form S-1,
File Nos. 333-03741 and 333-03741-01 (as amended, the "Registration Statement"),
under the Securities Act of 1933, as amended, relating to $100,000,000 principal
amount of the Issuers' Senior Notes due 2003 (the "Securities").
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the Registration Statement, the
form of Underwriting Agreement (the "Underwriting Agreement") between the
Issuers and Donaldson, Lufkin & Jenrette Securities Corporation and Lazard
Freres & Co. LLC, the form of Indenture (the "Indenture") between the Company
and First Trust National Association, as Trustee, pursuant to which the
Securities will be issued, and such corporate records, agreements, documents and
other instruments, and such certificates or comparable documents of public
officials and of officers and representatives of the Issuers, and have made such
inquiries of such officers and representatives as we have deemed relevant and
necessary as a basis for the opinions hereinafter set forth.
<PAGE>
Muzak Limited Partnership
Muzak Capital Corporation
September 26, 1996
Page 2
In such examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, the
conformity to original documents of documents submitted to us as certified or
photostatic copies and the authenticity of the originals of such latter
documents. As to all questions of fact material to this opinion that have not
been independently established, we have relied upon certificates or comparable
documents of officers and representatives of the Company.
Based on the foregoing, and subject to the qualifications stated
herein, we are of the opinion that the Securities are duly authorized and, when
duly executed on behalf of the Issuers, authenticated by the Trustee under the
Indenture and issued and sold in accordance with the terms of the Underwriting
Agreement and as described in the Registration Statement, will be validly issued
and will constitute legal and binding obligations of the Issuers in accordance
with their terms and the terms of the Indenture, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally and subject, as
to enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair-dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity).
The opinions expressed herein are limited to the laws of the State of
Delaware and the federal laws of the United States, and we express no opinion as
to the effect on the matters covered by this opinion of the laws of any other
jurisdiction.
The opinions expressed herein are rendered solely for your benefit in
connection with the transactions described herein. Those opinions may not be
used or relied upon by any other person, nor may this letter or any copies
thereof be furnished to a third party, filed with a governmental agency, quoted,
cited or otherwise referred to without our prior written consent. We hereby
consent to the use of this letter as an exhibit to the Registration Statement.
We further consent to any and all references to our firm in the Prospectus which
is a part of said Registration Statement.
Very truly yours,
/s/ Weil, Gotshal & Manges
<PAGE>
AMENDED AND RESTATED
MANAGEMENT OPTION PLAN
(Effective September __, 1996)
1. Purpose. This Amended and Restated Management Option Plan (the "Amended
-------
and Restated Plan" or the "Plan") amends and restates the Management Option Plan
of Muzak Limited Partnership (the "Partnership") effective August 31, 1992. The
purpose of this Plan is to further the best interests of the Partnership by
encouraging key employees of the Partnership to continue association with the
Partnership and by providing additional incentive for unusual industry and
efficiency through offering them an opportunity to acquire on reasonable terms a
proprietary stake in the Partnership and its future growth. The Partnership
believes that this goal best may be achieved by granting options (the "Options")
to acquire units (the "Units") of limited partnership interest in the
Partnership to employees of the Partnership (the "Optionees").
The options to be granted pursuant to the Amended and Restated Plan shall
not be Incentive Stock Options (as defined in Section 422(b) of the Internal
Revenue Code of 1986, as amended (the "Code")).
2. Option Units. The Units which may be made subject to Options granted
------------
pursuant to the Plan shall be a total maximum of 1,840,000 units of the Class B
limited partnership interest (the "Class B Interests"). If any Options expire or
terminate for any reason without having been exercised in full, the unpurchased
Units subject thereto shall again be available for the purposes of the Plan.
3. Effective Date of Plan. The Amended and Restated Plan shall take effect
----------------------
on September __, 1996.
4. Administration of the Plan. The Plan shall be administered by MLP
--------------------------
Acquisition, L.P., the managing general partner of the Partnership (the
"Managing General Partner"). The interpretation and construction by the Managing
General Partner of any provisions of the Plan or of any Options granted
hereunder shall be final, binding and conclusive. The Managing General Partner
shall not be liable for any action or determination made in good faith with
respect to the Plan or any Options granted hereunder.
5. Eligibility. The persons eligible to participate in the Plan as
-----------
recipients of Options shall include only the employees of the Partnership who
hold executive or other responsible positions in the management of the affairs
of the Partnership.
1
<PAGE>
6. Grant of Options. Options heretofore granted to eligible persons
----------------
selected by the Managing General Partner, as indicated on Exhibit A hereto,
shall continue to be outstanding under the Amended and Restated Plan, and shall
be subject to all of the terms and conditions of the Amended and Restated Plan.
In the event any Options shall expire or terminate prior to the termination of
the Plan for any reason without having been exercised in full, the Managing
General Partner may grant new Options with respect to the Units covered by such
expired or terminated Options to such eligible persons as may be selected by the
Managing General Partner and subject to the provisions of the Plan. Each grant
of an option pursuant to the Plan shall be made in writing and upon such terms
and conditions as may be determined by the Managing General Partner at the time
of grant, subject to the provisions and limitations set forth in the Plan. The
grant of such Option shall be evidenced by a written agreement or certificate
executed by the Managing General Partner.
7. Option Price. The purchase price (the "Option Exercise Price") for each
------------
Unit placed under option pursuant to the Plan shall be (a) with respect to
Options heretofore granted by the Managing General Partner, the Option Exercise
Price specified on Exhibit A hereto, and (b) with respect to Options granted
after the date hereof, "Fair Market Value" (as such term is defined in the
Amended and Restated Agreement of Limited Partnership of the Partnership (the
"Partnership Agreement")) on the date the Option is granted.
8. Duration of Options. (a) The period (the "Option Period") for which
-------------------
each Option granted hereunder shall be effective shall commence upon the date of
the grant of such Option and shall continue until such option shall be
terminated according to its terms or as hereinafter provided, but in the absence
of any terms to the contrary, all Options shall expire seven (7) years from the
date hereof.
(b) Upon any termination of employment of any Optionee with the
Partnership, other than for "Cause" (as hereinafter defined), death or
"Disability" (as hereinafter defined), (i) unvested Options owned by such
Optionee shall immediately terminate and become null and void, and (ii) vested
Options owned by such Optionee shall terminate, to the extent not previously
exercised, upon the occurrence of the first of the following events: (A) the
expiration of the Option Period, as determined in accordance with Section 8(a)
above; or (B) the sixtieth day after the date on which such Option becomes
exercisable.
(c) Upon any termination of employment of any Optionee with the
Partnership by reason of death or Disability, (i) unvested Options owned by such
Optionee shall immediately terminate and become null and void, and (ii) vested
Options owned by such Optionee shall terminate, to the extent not previously
exercised, upon the occurrence of the first of the following events: (A) the
expiration of the Option Period, as determined in accordance with Section 8(a)
above; or (B) the later of (x) the sixtieth day after the date on which such
Option became exercisable or (y) the expiration of one year from the date of
death or termination of employment by reason of Disability. If an Optionee's
employment is terminated by death, any Option held by the Optionee shall be
exercisable only by the person or persons to whom such Optionee's rights under
such
2
<PAGE>
Option shall pass by the Optionee's will or by the laws of descent and
distribution of the state or county of the Optionee's domicile at the time of
death.
(d) Upon any termination of employment of any Optionee with the Partnership
for Cause, all Options owned by such Optionee shall immediately terminate and
become null and void.
(e) For the purposes of the Plan, the term "Cause" shall mean, except as
otherwise provided in any employment agreement between the Optionee and the
Partnership (in which case the term "Cause" as used herein with respect to such
Optionee shall have the meaning ascribed to it therein), (i) the willful and
continued failure by such Optionee to perform substantially his or her duties to
the Partnership (other than any such failure arising from his or her Disability)
within thirty days after a written demand for substantial performance is
delivered to such Optionee by the Partnership, which demand specifically
identifies the manner in which the Partnership believes that such Optionee has
not substantially performed his or her duties, (ii) the conviction by a court of
competent jurisdiction of such Optionee of any offense, regardless of
classification, related to such Optionee's duties and responsibilities to the
Partnership, (iii) the negligent performance by such Optionee of his or her
duties to the Partnership if such negligent performance is reasonably determined
by the Partnership to have had or be reasonably likely to have a material
adverse affect on the business, assets, prospects or financial condition of the
Partnership, or (iv) the conviction of such Optionee by a court of competent
jurisdiction of a felony.
(f) For purposes of this Plan, "Disability" shall mean, except as otherwise
provided in any employment agreement between the Optionee and the Partnership
(in which case the term "Disability" as used herein with respect to such
Optionee shall have the meaning ascribed to it therein) the inability of such
Optionee to perform substantially his or her duties or responsibilities to the
Partnership by reason of a physical or mental disability or infirmity (i) for a
continuous period of four months or longer or (ii) at such earlier time as such
Optionee submits satisfactory medical evidence that such Optionee has a physical
or mental disability or infirmity that will likely prevent such Optionee from
substantially performing his duties and responsibilities for four months or
longer.
(g) Neither the existence of the Plan nor the grant of any Option shall
limit whatever right the Partnership might otherwise have to terminate the
employment of any Optionee.
9. Vesting. Each Option granted under the Plan shall vest according to
-------
the following schedule:
(a) Ten percent (10%) of each Option shall vest as follows, and shall
be referred to herein as the "First Tranche":
(i) One-half of the First Tranche shall vest on the first
anniversary of the effectiveness of a registered debt offering of the
Partnership (a "Debt Offering").
3
<PAGE>
(ii) One-half of the First Tranche shall vest on the second
anniversary of a Debt Offering.
(b) Forty-five percent (45%) of each Option shall vest as follows,
and shall be referred to herein as "Second Tranche":
<TABLE>
<CAPTION>
Calendar Year End Percentage Vested
----------------- -----------------
<S> <C>
12/31/97 20%
12/31/98 40%
12/31/99 60%
12/31/00 80%
12/31/01 100%
</TABLE>
(c) Forty-five percent (45%) of each Option shall vest as follows,
and shall be referred to herein as the "Third Tranche":
<TABLE>
<CAPTION>
Calendar Year End Percentage Vested
----------------- -----------------
<S> <C>
12/31/97 20%
12/31/98 40%
12/31/99 60%
12/31/00 80%
12/31/01 100%
</TABLE>
10. Non-Transferability. Options granted pursuant to the Plan shall not
-------------------
be transferred by the Optionee except to a deceased Optionee's executors, legal
heirs, administrators or testamentary trustees and beneficiaries. During the
lifetime of the Optionee, the Options may be exercised only by him or her.
11. Termination of the Plan. The Plan shall terminate upon the close of
-----------------------
business on the seventh anniversary of the date hereof unless it shall have
sooner terminated by there having been granted and fully exercised Options
covering all of the Units subject to the Plan. Any Option outstanding under the
Plan at the time of the termination of the Plan shall remain in effect until
such Option shall have been exercised or shall have expired in accordance with
its terms.
12. Termination of Employment. The employment of an Optionee shall not
--------------------------
be deemed to have terminated if the Optionee is absent upon a bona fide leave of
absence.
13. Exercisability of Options. (a) The First Tranche of each Option
-------------------------
granted under the Plan shall become exercisable with respect to the vested
percentage of the Units covered thereby upon a Debt Offering.
4
<PAGE>
(b) The Second Tranche of each Option granted under the Plan shall
become exercisable with respect to the vested percentage of the Units covered
thereby if the Partnership's cumulative "EBITDA" (as hereinafter defined) equals
or exceeds $56.1 million (as such amount may be adjusted as provided in Section
17(b) for the period from October 1, 1996 to December 31, 1998 (the "Second
Tranche EBITDA Target"). "EBITDA" shall mean, with respect to any period,
"Consolidated Cash Flow" as defined in that certain Indenture dated ______, 1996
among the Partnership, Muzak Capital Corporation and First Trust National
Association, as trustee.
(c) The Third Tranche of each Option granted under the Plan, and, if
the Second Tranche EBITDA Target is not achieved, the Second Tranche of each
Option granted under the Plan, shall become exercisable with respect to the
vested percentage of the Units covered thereby if the Partnership's cumulative
EBITDA equals or exceeds $167.5 million (as such amount may be adjusted as
provided in Section 17(b)) for the period from October 1, 1996 to December 31,
2001 (the "Third Tranche EBITDA Target").
14. Change In Control. (a) In the event of a "Change of Control" (as
-----------------
defined below) at any time prior to the expiration of an Option hereunder, the
Second Tranche of each Option shall become immediately vested and exercisable
if, as of the last day of the calendar quarter immediately preceding such Change
of Control, the Partnership's cumulative EBITDA is consistent with that
necessary to achieve the Second Tranche EBITDA Target, as determined by the
board of directors of the general partner of the Managing General Partner in its
reasonable discretion, based on the five-year plan attached hereto as Exhibit B.
In addition, in the event of a Change of Control after December 31, 1998, the
Third Tranche of each Option shall become immediately vested and exercisable if,
as of the last day of the calender quarter immediately preceding such Change of
Control, the Partnership's cumulative EBITDA is consistent with that necessary
to achieve the Third Tranche EBITDA Target, as determined by the board of
directors of the general partner of the Managing General Partner in its
reasonable discretion, based on the five-year plan attached hereto as Exhibit B.
(b) A "Change of Control" shall mean (i) a Transfer (as such term is
defined in the Partnership Agreement) of substantially all of the assets of the
Partnership, (ii) a change in control of the board of directors of the general
partner of the Managing General Partner (or, if the Partnership is
incorporated, of the board of directors of the successor corporation) pursuant
to which any single Person or group of Persons acting in concert other than an
Affiliate or Affiliates (as such terms are defined in the Partnership
Agreement) of the Partnership acquires control of such board of directors or
(iii) the Transfer of at least 51% or more of the voting equity interests in the
Partnership (or any parent entity of the Partnership), whether by sale, merger
or consolidation to any single Person or Group of Persons acting in concert
other than an Affiliate or Affiliates; provided, however, that a "Change of
Control" shall not include (a) a change of control of Centre Capital Investors
L.P. ("CCI") or Centre Partners L.P. ("Centre Partners") or their successors
(unless at the time of such change of control, substantially all the operating
assets of
5
<PAGE>
CCI or Centre Partners directly or indirectly, consist of assets of the
Partnership), (b) any Transfer of the voting equity interests in the Partnership
or CCI or the Managing General Partner to each other and/or to an Affiliate or
one or more partners of CCI, the Managing General Partner or Centre Partners, or
(c) a Transfer of substantially all of the assets of the Partnership in
connection with an incorporation of the Partnership and its business and assets
in accordance with the provisions of the Partnership Agreement.
15. Procedure for Exercise and Payment for Units. (a) Exercise of an
--------------------------------------------
Option shall be made by the giving of written notice to the Partnership by the
Optionee. Such written notice shall be deemed sufficient for this purpose only
if delivered to the Partnership at its principal offices and only if such
written notice states the number of Units with respect to which the Option is
being exercised and, further states the date, not more than ninety (90) days
after the date of such notice, upon which the Units shall be purchased and
payment therefor shall be made. The payments for Units purchased pursuant to
exercise of an Option shall be made at the principal offices of the Partnership.
Upon the exercise of any Option, in compliance with the provisions of this
paragraph and upon receipt by the Partnership of the payment for the Units so
purchased together with the payment of the amount of any taxes (the "Withholding
Taxes") required to be collected or withheld as a result of the exercise of such
Option together with an executed copy of the Partnership Agreement, unless such
Optionee is already a party thereto, the Partnership shall deliver or cause to
be delivered to the Optionee so exercising an Option a certificate or
certificates for the number of Units with respect to which the Option is so
exercised and payment is so made. The Units shall be registered in the name of
the exercising Optionee, provided that, in no event shall any Units be issued
pursuant to exercise of an Option until full payment therefor shall have been
made by cash or certified or bank cashier's check and not until the Units have
been issued shall the exercising Optionee have any of the rights of a limited
partner of the Partnership (other than the rights that such Optionee has by
virtue of his already being a limited partner). For purposes of this paragraph,
the date of issuance shall be the date upon which payment in full has been
received by the Partnership as provided herein. In the event of the death of an
Optionee, a condition of exercising any Option shall be the delivery to the
Partnership of such tax waivers and other documents as the Managing General
Partner shall reasonably determine.
(b) Notwithstanding any other provision of the Plan, if an Optionee
determines to exercise an Option, the Partnership may notify an Optionee, after
the Partnership's receipt of the notice by the Optionee pursuant to Section
15(a), that the Partnership will settle such Option in cash, or a "Permitted
Security" (as defined in the Partnership Agreement) if the Partnership is then
prohibited from making payment in cash, by paying the Optionee on a date (the
"Settlement Date") to occur as soon as practicable after such notification, and
in all events within ninety (90) days after the date of such notice, an amount
equal to (A) the difference between (i) the aggregate Fair Market Value on the
Settlement Date of the Units with respect to which the Optionee requested the
exercise of the Option and (ii) the aggregate Option Exercise Price for such
Units, less (B) any Withholding Taxes with respect to such payment less (C) an
amount (the "Promissory Note Amount") equal to (i) the then outstanding
principal amount of the Optionee's Promissory Note, together with accrued
interest thereon, if any, minus (ii) an amount equal to the price to be
6
<PAGE>
paid by such Optionee for Units pursuant to the last sentence of this Section
15, provided, that if the Partnership is to pay for such settled Option with a
--------
Permitted Security, the Partnership may only elect to do so with the consent of
the Optionee (and if the Optionee does not so consent, the Option shall be
settled with Units in accordance with the provisions of Section 15(a)). The
Partnership shall apply the Promissory Note Amount to the repayment of the
Optionee's Promissory Note. In the event that the Partnership determines
(subject to the limitation imposed in the proviso to the previous sentence) to
settle an Option in cash or a Permitted Security, the Optionee shall thereafter
have the right to purchase such Units from the Partnership at a price equal to
the Fair Market Value on the Settlement Date, in accordance with the provisions
of Section 11.12 of the Partnership Agreement.
16. Requirements of Law and of Certain Agreements. If any law or any
---------------------------------------------
regulation of any commission or agency of competent jurisdiction shall require
the Partnership or the exercising Optionee to take any action with respect to
the Units acquired by the exercise of an Option, then the date upon which the
Partnership shall issue the Units shall be postponed until full compliance has
been made with all such requirements of law or regulation; provided, that the
--------
Partnership shall use its best efforts to promptly take all necessary action to
comply with such requirements of law or regulation. Further, if requested by
the Partnership, at or before the time of the issuance of the Units with respect
to which exercise of an Option has been made, the exercising Optionee shall
deliver to the Partnership his written statements satisfactory in form and
content to the Partnership, that he intends to hold the Units so acquired by him
on exercise of his Option for investment and not with a view to resale or other
distribution thereof to the public in violation of the Securities Act of 1933.
Moreover, in the event that the Partnership shall determine that, in compliance
with the Securities Act of 1933 or other applicable statutes or regulations, it
is necessary to register any of the Units with respect to which an exercise of
an Option has been made, or to qualify any such Units for exemption from any of
the requirements of the Securities Act of 1933 or any other applicable statute
or regulation, no Options may be exercised (and any resulting delay will not
otherwise derogate from the rights of the Optionee to exercise the Option
thereafter) and no Units shall be issued to the exercising Optionee until the
required action has been completed; provided, that the Partnership shall use its
--------
best efforts promptly to take all necessary action to comply with such
requirements of law or regulation.
17. Adjustments. (a) In the event that a distribution shall be declared
-----------
on the Class B Interest payable in units of the Class B Interest, the number of
Units then subject to any Option shall be adjusted by adding the number of units
of Class B Interest which would be distributable thereon if such Units had been
outstanding on the date fixed for determining the limited partners entitled to
receive such Class B Interest. In the event of a split-up of the Class B
Interests there shall be substituted for each Unit of the Class B Interests
then subject to any Option the number of units of Class B Interest into which
each outstanding unit of Class B Interest shall be so changed. In the event
that there shall be any change, other than as specified in this Section 17(a),
in the number or kind of outstanding units of the Class B Interest, or other
securities into which the Class B Interest shall have been changed, or for which
it shall have been exchanged, then, if the Managing General Partner shall, in
the reasonable exercise of its judgment, determine that
7
<PAGE>
such change equitably requires an adjustment in the number or kind of Units then
subject to any Option, such adjustment shall be made by the Managing General
Partner and shall be conclusive, effective and binding for all purposes of the
Plan.
(b) If the Partnership purchases any substantial productive assets,
sells any substantial productive assets or makes a significant change in its
business (an "Adjustment Event") and as a result the cumulative EBITDA amounts
set forth in Section 13 above and set forth on Exhibit A do not operate so as to
achieve their intended purposes, equitable adjustments to the Plan shall be made
as follows: (i) the Managing General Partner shall in good faith estimate the
aggregate amount (the "Aggregate Adjustment Amount") of EBITDA attributable to
the purchased or sold assets or change in business with respect to each period
referred to in Section 13 above and Exhibit A; and (ii) the cumulative EBITDA
amounts set forth in Section 13 above and on Exhibit A shall be increased or
decreased, as appropriate, by allocating the Aggregate Adjustment Amount pro
rata among all of the remaining periods (or portions of such periods) set forth
in Section 13 and Exhibit A. Any adjustment(s) made pursuant to this Section
17(b) shall be made by action of the Managing General Partner, whose
determination shall be conclusive, effective and binding for all purposes of the
Plan.
18. Amendment or Discontinuance of the Plan. The Managing General Partner
---------------------------------------
may, insofar as permitted by law, amend, suspend, or discontinue the Plan at any
time without restriction; provided, however, that (i) neither the Managing
-------- -------
General Partner nor the Partnership may alter, amend, suspend or discontinue or
revoke or otherwise impair the rights of any holder of any outstanding Options
which have been granted pursuant to the Plan and which remain unexercised,
except as contemplated by Section 17 above, or except in the event that there is
secured the written consent of such holder, (ii) neither the Managing General
Partner nor the Partnership may alter or amend Exhibit A hereto, except as
contemplated by Section 17 above, or except in the event that there is secured
the written consent of each of the holders of the then outstanding Options, and
(iii) the Managing General Partner may not amend, alter or revise the Plan to
change the number of Units subject to the Plan or change the description of the
class of employees eligible to receive Options. Nothing contained in this
paragraph, however, shall in any way condition or limit the termination of an
Option as hereinabove provided where reference is made to termination of
employment of an Optionee. The Option Period of any outstanding Option shall not
be extended by any amendment or suspension or discontinuance of the Plan.
19. Liquidation of the Partnership. In the event of the complete
------------------------------
liquidation or dissolution of the Partnership, any Options granted pursuant to
the Plan and remaining unexercised shall be deemed cancelled without regard to
or limitation by any other provision of the Plan, provided that if the
Partnership and its business and assets shall be incorporated, such successor
corporation shall adopt a management Option plan which shall contain
substantially the same terms as the Plan, including, without limitation, terms
which define the type of events and conditions that will constitute a Change of
Control (it being understood that (i) a change in control of the board of
directors of the general partner of the Managing General Partner shall,
following an incorporation of the Partnership, mean a change in control of the
board of directors
8
<PAGE>
of such successor corporation pursuant to which a single Person or group of
Persons acting in concert other than an Affiliate or Affiliates of the successor
corporation acquires control of such board of directors, and (ii) the
acquisition of 51% or more of the voting equity interests in the successor
corporation by multiple public shareholders shall not be considered an
acquisition by a group of Persons acting in concert), and such successor
corporation's plan shall provide for the continuation of any Options previously
granted pursuant to the Plan and remaining unexercised at the time of such
incorporation.
20. Specified Debt Agreements. Notwithstanding anything to the contrary
-------------------------
set forth herein, it is acknowledged that the Specified Debt Agreements (as such
term is defined in the Partnership Agreement) place certain limitations and/or
restrictions on the exercise of the rights, powers, and privileges set forth
herein, and, by acceptance of an Option, an Optionee expressly agrees that
notwithstanding any other provision herein, such rights, powers and privileges
hereunder are subject to such limitations and/or restrictions set forth in the
Specified Debt Agreements and that the payment of obligations hereunder shall
not be made at any time at which the provisions of the Specified Debt Agreements
prohibit such payment or if such payment would constitute a default thereunder.
By accepting an Option, Optionee expressly agrees not to assert, participate in
or bring any action, suit or proceeding (including, without limitation, any
bankruptcy or insolvency proceedings) either at law or in equity against the
Partnership, any other Partner or any of their respective properties or assets,
for the enforcement, collection or realization of any of such obligations.
9
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
===================================================================
Name No. of Class B Options Excercise Price
-------------------------------------------------------------------
<S> <C> <C>
John R. Jester 325,000 $1.00
-------------------------------------------------------------------
James F. Harrison 205,000 $1.00
-------------------------------------------------------------------
Kirk A. Collamer 150,000 $1.75
-------------------------------------------------------------------
Thomas J. Gentry 140,000 $1.00
-------------------------------------------------------------------
John A. Neal 140,000 $1.00
-------------------------------------------------------------------
Wallace R. Borgeson 140,000 $1.00
-------------------------------------------------------------------
Jack D. Craig 65,000 $1.00
-------------------------------------------------------------------
Richard Chaffee 35,000 $1.00
-------------------------------------------------------------------
Bruce B. Funkhouser 65,000 $1.00
-------------------------------------------------------------------
L. Dale Stewart 65,000 $1.00
-------------------------------------------------------------------
Daniel Lee Hart 30,000 $1.00
-------------------------------------------------------------------
Robert E. Crowe 40,000 $1.00
-------------------------------------------------------------------
Dino J. DeRose 65,000 $1.00
-------------------------------------------------------------------
James G. Henderson 100,000 $1.50
-------------------------------------------------------------------
Roger Fairchild 65,000 $1.75
-------------------------------------------------------------------
Steven Tracy 30,000 $1.00
-------------------------------------------------------------------
Susan P. Chetwin 24,545 $1.00
-------------------------------------------------------------------
Thomas J. Gantert 20,000 $1.00
-------------------------------------------------------------------
Stephen F. Ward 15,000 $1.00
-------------------------------------------------------------------
Douglas Alvin Collis 15,000 $1.00
-------------------------------------------------------------------
Leslie A. Ritter 15,000 $1.00
-------------------------------------------------------------------
Terry L. Johnson 15,000 $1.00
-------------------------------------------------------------------
Jonathan S. McKinnon 15,000 $1.00
-------------------------------------------------------------------
Harry J. Kuhman 20,000 $1.00
-------------------------------------------------------------------
Jeffrey P. Kelly 20,000 $1.00
===================================================================
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON FINANCIAL STATEMENT SCHEDULE OF
MUZAK LIMITED PARTNERSHIP
We consent to the use in this Registration Statement relating to the sale of
Senior Notes by Muzak Limited Partnership and Muzak Capital Corporation on
Amendment No. 5 to Form S-1 of our report dated March 6, 1996 (September 25,
1996, as to Notes 7 and 10) on the financial statements of Muzak Limited
Partnership as of December 31, 1995 and 1994, and for each of the three years
in the period ended December 31, 1995, appearing in the Prospectus, which is a
part of this Registration Statement, and to the references to us under the
headings "Selected Financial Data" and "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Muzak Limited
Partnership, listed in Item 16(b). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
September 26, 1996
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement relating to the sale of
Senior Notes of Muzak Limited Partnership and Muzak Capital Corporation on
Amendment No. 5 to Form S-1 of our report dated August 27, 1996 on the
financial statement of Muzak Capital Corporation as of June 30, 1996,
appearing in the Prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
September 26, 1996
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement relating to the sale of
Senior Notes of Muzak Limited Partnership and Muzak Capital Corporation on
Amendment No. 5 to Form S-1 of our report dated February 10, 1994 on the
financial statements of Comcast Sound Communications, Inc. and subsidiaries
for the year ended December 31, 1993, appearing in the Prospectus, which is
part of this Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Philadelphia, Pennsylvania
September 26, 1996
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement relating to the sale of
Senior Notes of Muzak Limited Partnership and Muzak Capital Corporation on
Amendment No. 5 to Form S-1 of our report dated September 25, 1996 on the
financial statement of Music Holdings Corporation as of June 30, 1996,
appearing in the Prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
September 26, 1996
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement relating to the sale of
Senior Notes of Muzak Limited Partnership and Muzak Capital Corporation on
Amendment No. 5 to Form S-1 of our report dated September 25, 1996 on the
financial statement of MLP Acquisition Limited Partnership as of December 31,
1995, appearing in the Prospectus, which is part of this Registration
Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Philadelphia, Pennsylvania
September 26, 1996
<PAGE>
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement relating to the sale of
Senior Notes of Muzak Limited Partnership and Muzak Capital Corporation on
Amendment No. 5 to Form S-1 of our report dated September 25, 1996 on the
financial statement of MLP Administration Corporation as of December 31, 1995,
appearing in the Prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Seattle, Washington
September 26, 1996
<PAGE>
Registration No.___________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
----------------------
Check if an Application to Determine Eligibility of a Trustee Pursuant to
Section 305(b)(2) [_]
FIRST TRUST NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
Not Applicable 91-1587893
(Jurisdiction of incorporation or organization (I.R.S. employer
if not a U.S. national bank) identification number)
601 Union Street 98101
Suite 2120 (Zip Code)
Seattle, WA 98101
(Address of principal executive offices)
Not Applicable
(Name, address and telephone number of agent for service)
----------------------
MUZAK LIMITED PARTNERSHIP
MUZAK CAPITAL CORPORATION
(Exact name of obligors as specified in their charters)
Delaware Delaware
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization incorporation or organization
of Muzak Limited Partnership) of Muzak Capital Corporation)
13-3647593 91-1722302
(I.R.S. Employer Identification (I.R.S. Employer Identification
Number of Muzak Limited Partnership) Number of Muzak Capital Corporation)
2901 Third Avenue
Suite 400
Seattle, Washington
(206) 633-3000
(Address and telephone number of
principal executive offices)
98121
(Zip Code)
__% Senior Notes Due ____
(Title of the indenture securities)
- ------------------------------------------------------------------------------
<PAGE>
GENERAL
Item 1. General Information.
-------------------
Furnish the following information as to the trustee --
(a) Name and address of each examining or supervising authority to which it is
subject.
Comptroller of the Currency, Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with Obligors.
--------------------------
If any obligor is an affiliate of the trustee, describe each such affiliation.
None. (See Note 1 on page 8.)
Item 3. Voting Securities of the Trustee.
--------------------------------
Furnish the following information as to each class of voting securities of the
trustee:
As of September 25, 1996
================================================================================
Col. A Col. B
- --------------------------------------------------------------------------------
Title of Class Amount outstanding
- --------------------------------------------------------------------------------
Common Stock 10,000 Shares
2
<PAGE>
Item 4. Trusteeships under Other Indentures.
-----------------------------------
If the trustee is a trustee under another indenture under which any other
securities, or certificates of interest or participation in any other
securities, of any obligor are outstanding, furnish the following information:
(a) Title of the securities outstanding under each such other indenture.
None
(b) A brief statement of the facts relied upon as a basis for the claim that no
conflicting interest within the meaning of Section 310(b)(1) of the Act
arises as a result of the trusteeship under any such other indenture,
including a statement as to how the indenture securities will rank as
compared with the securities under such other indenture.
Not Applicable.
Item 5. Interlocking Directorates and Similar Relationships with the Obligors
---------------------------------------------------------------------
or Underwriters.
---------------
If the trustee or any of the directors or executive officers of the trustee is a
director, officer, partner, employee, appointee, or representative of any
obligor or of any underwriter for any obligor, identify each such person having
any such connection and state the nature of each such connection.
None. (See Note 1 on page 8.)
Item 6. Voting Securities of the Trustee Owned by the Obligors or their
---------------------------------------------------------------
Officials.
---------
Furnish the following information as to the voting securities of the trustee
owned beneficially by the obligors and each director, partner and executive
officer of the obligors:
As of September 25, 1996
================================================================================
Col. A Col. B Col. C Col. D
- --------------------------------------------------------------------------------
Percentage of voting
securities represented
Amount owned by amount given
Name of owner Title of Class beneficially in Col. C.
- --------------------------------------------------------------------------------
None.
3
<PAGE>
Item 7. Voting Securities of the Trustee Owned by Underwriters or their
---------------------------------------------------------------
Officials.
---------
Furnish the following information as to the voting securities of the trustee
owned beneficially by each underwriter for the obligors and each director,
partner and executive officer of each such underwriter.
As of September 25, 1996
================================================================================
Col. A Col. B Col. C Col. D
- --------------------------------------------------------------------------------
Percentage of voting
securities represented
Amount owned by amount given
Name of owner Title of Class beneficially in Col. C.
- --------------------------------------------------------------------------------
None.
Item 8. Securities of the Obligors Owned or Held by the Trustee.
-------------------------------------------------------
Furnish the following information as to securities of the obligors owned
beneficially or held as collateral security for obligations in default by the
trustee:
As of September 25, 1996
================================================================================
Col. A Col. B Col. C Col. D
- --------------------------------------------------------------------------------
Amount owned bene-
Whether the ficially or held as
securities collateral Amount of Class
are voting or security for represented by
nonvoting obligations in amount given in
Title of Class securities default Col. C.
- --------------------------------------------------------------------------------
None. (See Note 1 on Page 8.)
4
<PAGE>
Item 9. Securities of Underwriters Owned or Held by the Trustee.
-------------------------------------------------------
If the trustee owns beneficially or holds as collateral security for obligations
in default any securities of an underwriter for the obligors, furnish the
following information as to each class of securities of such underwriter any of
which are so owned or held by the trustee:
As of September 25, 1996
================================================================================
Col. A Col. B Col. C Col. D
- --------------------------------------------------------------------------------
Amount owned bene-
ficially or held Percentage of class
as collateral security represented by
Name of issuer and Amount for obligations amount given
title of class outstanding in default by trustee in Col. C.
- --------------------------------------------------------------------------------
None. (See Note 1 on Page 8.)
Item 10. Ownership or Holdings by the Trustee of Voting Securities of Certain
--------------------------------------------------------------------
Affiliates or Security Holders of the Obligors.
----------------------------------------------
If the trustee owns beneficially or holds as collateral security for obligations
in default voting securities of a person who, to the knowledge of the Trustee
(1) owns 10 percent or more of the voting securities of any obligor or (2) is an
affiliate, other than a subsidiary, of any obligor, furnish the following
information as to the voting securities of such person.
As of September 25, 1996
================================================================================
Col. A Col. B Col. C Col. D
- --------------------------------------------------------------------------------
Amount owned bene-
ficially or held Percentage of class
as collateral security represented by
Name of issuer and Amount for obligations in amount given
title of class outstanding default by trustee in Col. C.
- --------------------------------------------------------------------------------
None.
5
<PAGE>
Item 11. Ownership or Holdings by the Trustee of any Securities of a Person
------------------------------------------------------------------
Owning 50 Percent or More of the Voting Securities of the Obligors.
------------------------------------------------------------------
If the trustee owns beneficially or holds as collateral security for obligations
in default any securities of a person who, to the knowledge of the trustee, owns
50 percent or more of the voting securities of any obligor, furnish the
following information as to each class of securities of such person any of which
are so owned or held by the trustee.
As of September 25, 1996
================================================================================
Col. A Col. B Col. C Col. D
- --------------------------------------------------------------------------------
Amount owned bene-
ficially or held Percentage of class
as collateral security represented by
Name of issuer and Amount for obligations in amount given
title of class outstanding default by trustee in Col. C.
- --------------------------------------------------------------------------------
None. (See Note 1 on Page 8.)
Item 12. Indebtedness of the Obligors to the Trustee.
-------------------------------------------
Except as noted in the instructions, if any obligor is indebted to the trustee,
furnish the following information:
As of September 25, 1996
================================================================================
Col. A Col. B Col. C
- --------------------------------------------------------------------------------
Nature of Indebtedness Amount Outstanding Date Due
- --------------------------------------------------------------------------------
None. (See Note 1 on Page 8.)
6
<PAGE>
Item 13. Defaults by the Obligors.
------------------------
(a) State whether there is or has been a default with respect to the securities
under this indenture. Explain the nature of any such default.
There has not been any such default.
(b) If the trustee is a trustee under another indenture under which any other
securities, or certificates of interest or participation in any other
securities, of any obligor are outstanding, or is trustee for more than one
outstanding series of securities under the indenture, state whether there
has been a default under any such indenture or series, identify the
indenture or series affected, and explain the nature of any such default.
Not applicable.
Item 14. Affiliations with the Underwriters.
----------------------------------
If any underwriter is an affiliate of the trustee, describe each such
affiliation.
None. (See Note 1 on Page 8.)
Item 15. Foreign Trustee.
---------------
Identify the order or rule pursuant to which the foreign trustee is authorized
to act as sole trustee under indentures qualified or to be qualified under the
Act.
Not applicable.
7
<PAGE>
Item 16. List of Exhibits.
----------------
List below all exhibits filed as part of this statement of eligibility.
Exhibit
Number
------
1. A copy of the articles of association of the trustee, as now in
effect.
2. A copy of the certificate of authority of the trustee to commence
business.
3. A copy of the authorization of the trustee to exercise corporate
trust powers.
4. A copy of the bylaws of the trustee, as now in effect.
5. Not applicable.
6. The consent of the trustee required by Section 321(b) of the Act.
7. A copy of the report of condition of the trustee as of the close of
business on June 30, 1996 published pursuant to the requirements of
the Comptroller of the Currency.
8. Not applicable.
9. Not applicable.
- ----------
Note 1. At the date hereof, it is anticipated that Donaldson, Lufkin & Jenrette
Securities Corporation and Lazard Freres & Co. LLC will be the only
underwriters of the securities proposed to be offered and the Trustee
has been advised of the names of all underwriters of securities of the
obligors in the past year. Since this Form T-1 is filed prior to
ascertainment by the Trustee of all facts upon which to base responsive
answers to Item 2, 5, 7, 8, 9, 10, 11, 12 and 14, the answers to said
Items are based upon incomplete information. Upon ascertainment by the
Trustee of such facts, the answers to such Items will be amended, if
necessary, to reflect any facts which differ from those stated and which
would have been required to be stated if known at the date hereof.
8
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
FIRST TRUST NATIONAL ASSOCIATION, a national banking association organized and
existing under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Seattle and State of Washington on
the 25 day of September, 1996.
FIRST TRUST NATIONAL ASSOCIATION
By: /s/ Mary Bator
----------------------------
Name: Mary Bator
--------------------------
Title: Trust Officer
-------------------------
9
<PAGE>
FIRST TRUST NATIONAL ASSOCIATION
ARTICLES OF ASSOCIATION
-----------------------
For the purpose of organizing an association to perform any lawful
activities of national banks, the undersigned do enter into the following
Articles of Association:
FIRST. The title of this Association shall be "First Trust National
Association."
SECOND. The main office of this Association shall be in the City of
Seattle, County of King and State of Washington. The business of this
Association will be limited of that of a national trust bank, and to support
activities incidental thereto. This Association will not amend these Articles
of Association to expand the scope of or alter its business beyond that stated
in this Article Second without the prior approval of the Comptroller of the
Currency. Prior to the transfer of any stock of the Association, the
Association will seek the prior approval of the appropriate federal depository
institution regulatory agency.
THIRD. The board of directors of this Association shall consist of not
less than five nor more than twenty-five persons, the exact number to be fixed
and determined from time to time by resolution of a majority of the full board
of directors or by resolution of a majority of the shareholders at any annual or
special meeting thereof. Each director shall own common or preferred stock of
this Association with an aggregate par value of not less than $1,000, or common
or preferred stock of First Bank System, Inc. with an aggregate par, fair
market, or equity value of not less than $1,000, as of either (i) the date of
purchase, (ii) the date the person became a director or (iii) the date of that
person's most recent election to the board of directors, whichever is more
recent. Any combination of common or preferred stock of this Association or
First Bank System, Inc. may be used.
Any vacancy of the board of directors may be filled by action of a
majority of the remaining directors between meetings of shareholders. The
board of directors may not increase the number of directors between meetings of
shareholders to a number that (1) exceeds by more than two the number of
directors last elected by shareholders where the number was fifteen or less; and
(2) exceeds by more than four the number of directors last elected by
shareholders where the number was sixteen or more, but in no event shall the
number of directors exceed twenty-five.
<PAGE>
Terms of directors, including directors selected to fill vacancies,
shall expire at the next regular meeting of shareholders at which directors are
elected, unless the directors resign or are removed from office.
Despite the expiration of a director's term, the director shall continue
to serve until his or her successor is elected and qualifies or until there is a
decrease in the number of directors and his or her position is eliminated.
Honorary or advisory members of the board of directors, without voting
power or power of final decision in matters concerning the business of this
Association, may be appointed by resolution of a majority of the full board of
directors, or by resolution of shareholders at any annual or special meeting.
Honorary or advisory directors shall not be counted for purposes of determining
the number of directors of this Association or the presence of a quorum in
connection with any board action, and shall not be required to own qualifying
shares.
FOURTH. There shall be an annual meeting of the shareholders to elect
directors and transact whatever other business may be brought before the
meeting. It shall be held at the main office or any other convenient place the
board of directors may designate, on the day of each year specified therefore in
the bylaws, or if that day falls on a legal holiday in the State in which this
Association is located, on the next following banking day. If no election is
held on the day fixed, or in event of a legal holiday, an election may be held
on any subsequent day within sixty days of the day fixed, to be designated by
the board of directors, or, if the directors fail to fix the day, by
shareholders representing two-thirds of the shares issued and outstanding. In
all cases at least ten-days advance notice of the meeting shall be given to the
shareholders by first class mail.
A director may resign at any time by delivering written or oral notice
to the board of directors, its chairperson, or to this Association, which
resignation shall be effective when the notice is delivered unless the notice
specifies a later effective date.
A director may be removed by shareholders at a meeting called to remove
him or her, when notice of the meeting stating that the purpose or one of the
purposes is to remove him or her is provided, if there is failure to fulfill one
of the affirmative requirements for qualification, or for cause; provided,
--------
however, that a director may not be removed if the number of votes sufficient to
- -------
elect him or her under cumulative voting is voted against his or her removal.
FIFTH. The authorized amount of capital stock of this Association shall
be 10,000 shares of common stock of the par value of one-hundred dollars
($100.00) each; but said capital stock may be increased or decreased from time
to time according to the provisions of the laws of the United States.
-2-
<PAGE>
No holder of shares of the capital stock of any class of this
Association shall have any preemptive or preferential right of subscription to
any shares of any class of stock of this Association, whether now or hereafter
authorized, or to any obligations convertible into stock of this Association,
issued, or sold, nor any right of subscription to any thereof other than such,
if any, as the board of directors, in its discretion may from time to time
determine and at such price as the board of directors may from time to time fix.
Unless otherwise specified in these Articles of Association or required
by law, (1) all matters requiring shareholder action, including amendments to
the Articles of Association must be approved by shareholders owning a majority
voting interest in the outstanding voting stock, and (2) each shareholder shall
be entitled to one vote per share.
Unless otherwise provided in the bylaws, the record date for determining
shareholders entitled to notice of and to vote at any meeting is the close of
business on the day before the first notice is mailed or otherwise sent to the
shareholders, provided that in no event may a record date be more than seventy
days before the meeting.
SIXTH. The board of directors shall appoint one of its members
president of this Association and one of its members chairperson of the board.
The board of directors shall also have the power to appoint one or more vice
presidents, a secretary who shall keep minutes of the directors' and
shareholders' meetings and be responsible for authenticating the records of this
Association, and such other officers and employees as may be required to
transact the business of this Association. A duly appointed officer may appoint
one or more officers or assistant officers if authorized by the board of
directors in accordance with the bylaws.
The board of directors shall have the power to:
(1) Define the duties of the officers, employees, and agents of
this Association.
(2) Delegate the performance of its duties, but not the responsibility
for its duties, to the officers, employees, and agents of this
Association.
(3) Fix the compensation and enter into employment contracts with its
officers and employees upon reasonable terms and conditions,
consistent with applicable law.
(4) Dismiss officers and employees.
-3-
<PAGE>
(5) Require bonds from officers and employees and to fix the penalty
thereof.
(6) Ratify written policies authorized by this Association's
management or committees of the board.
(7) Regulate the manner in which any increase or decrease of the
capital of this Association shall be made; provided, however,
-------- -------
that nothing herein shall restrict the power of shareholders to
increase or decrease the capital of this Association in
accordance with law, and nothing shall raise or lower from two-
thirds the percentage required for shareholder approval to
increase or reduce the capital.
(8) Manage and administer the business and affairs of this
Association.
(9) Adopt bylaws, not inconsistent with law or these Articles of
Association, for managing the business and regulating the affairs
of this Association.
(10) Amend or repeal bylaws, except to the extent that the Articles
of Association reserve this power in whole or in part to
shareholders.
(11) Make contracts.
(12) Generally to perform all acts that are legal for a board of
directors to perform.
SEVENTH. The board of directors shall have the power to change the
location of the main office to any other place within the limits of the City of
Seattle without the approval of the shareholders, and shall have the power to
establish or change the location of any branch or branches of this Association
to any other location permitted under applicable law, without the approval of
the shareholders, subject to approval by the Comptroller of the Currency.
EIGHTH. The corporate existence of this Association shall continue
until terminated according to the laws of the United States.
NINTH. The board of directors of this Association, or any three (3)
or more shareholders owning, in the aggregate, not less than twenty-five
percent (25%) of the stock of this Association, may call a special meeting of
shareholders at any time. Unless otherwise provided by the bylaws or the laws of
the United States, or waived by shareholders, a notice of the time, place, and
purpose of every annual and special meeting of the shareholders shall be given
by first-class mail, postage prepaid, mailed at least ten, and no more than
sixty, days prior to the date of the meeting to each shareholder of record at
his/her address as shown upon the books
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<PAGE>
of this Association. Unless otherwise provided by these Articles of Association
or the bylaws, any action requiring approval of shareholders must be effected at
a duly called annual or special meeting.
TENTH. Any action required to be taken at a meeting of the shareholders
or directors or any action that may be taken at a meeting of the shareholders or
directors may be taken without a meeting if consent in writing, setting forth
the action as taken shall be signed by all the shareholders or directors
entitled to vote with respect to the matter thereof. Such action shall be
effective on the date on which the last signature is placed on the writing, or
such earlier date as is set forth therein.
ELEVENTH. Meetings of the board of directors or shareholders, regular or
special, may be held by means of conference telephone or similar communication
equipment by means of which all persons participating in the meeting can
simultaneously hear each other, and participation in such meeting by such
aforementioned means shall constitute presence in person at such meeting.
TWELFTH: (a) Any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than any action
by or in the right of the Association) by reason of the fact that he is or was a
director, officer, employee or agent of the Association, or is or was serving at
the request of the Association as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall be indemnified by the Association, unless similar indemnification is
provided by such other corporation, partnership, joint venture, trust or other
enterprise (any funds received by any person as a result of the provisions of
this Article being deemed an advance against his receipt of any such other
indemnification from any such other corporation, partnership, joint venture,
trust or other enterprise), against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interest of the Association, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
---- ----------
equivalent, shall not, of itself, create a presumption that the person seeking
indemnification did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Association, and,
with respect to any criminal
-5-
<PAGE>
action or proceeding, had reasonable cause to believe that his conduct was
unlawful.
(b) An person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
Association to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the Association, or
is or was serving at the request of the Association as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other corporation, partnership, joint venture, trust or other enterprise shall
be indemnified by the Association, unless similar indemnification is provided by
such other corporation, partnership, joint venture, trust or other enterprise
(any funds received by any person as a result of the provisions of this Article
being deemed an advance against his receipt of any such other indemnification
from any such other corporation, partnership, joint venture, trust or other
enterprise), against expenses (including attorney's fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Association and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Association
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
of the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
Association has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in paragraphs (a) and (b), or in defense
of any claim, issue or matter therein, such person shall be indemnified by the
Association against expenses (including attorney's fees) actually and reasonably
incurred by such person in connection therewith.
(d) Except as set forth in paragraph (c) of this Article, any
indemnification under paragraphs (a) and (b) of this Article (unless ordered by
the court), shall be made by the Association only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because such person has met the
applicable standard of conduct set forth in paragraphs (a) and (b) of this
Article. Such determination shall be made (1) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) if there are no such directors, of if such directors
so
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<PAGE>
direct, by independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses (including attorney's fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Association in advance of the
final disposition of such action, suit or proceeding upon receipt of any
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Association. Such expenses (including attorneys' fees) incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the Board of Directors deems appropriate.
(f) The indemnification and advancement of expenses provided by this
Article shall not be deemed exclusive of any other rights to which those seeking
indemnification or seeking advancement of expenses may be entitled under any
by-law, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in an official capacity and as to action in another capacity
while holding such office.
(g) By action of the Board of Directors, notwithstanding any interest of
the directors in the action, the Association may purchase and maintain
insurance, in such amounts as the Board of Directors deems appropriate, on
behalf of any person who is or was a director, officer, employee or agent of the
Association, or is or was serving at the request of the Association as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Association shall have the power to indemnify him against
such liability under the provisions of this Article.
(h) For purpose of this Article, references to "the Association" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents, so that any
person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
this Article with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
-7-
<PAGE>
(i) For purposes of this Article, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to an employee benefit
plan; and references to "serving at the request of the Association" shall
include any service as a director, officer, employee or agent of the
Association which imposes duties on, or involves services by, such
director, officer, employee or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the
Association" as referred to in this Article.
(j) The indemnification and advancement of expenses hereby provided
shall, unless otherwise provided when authorized or ratified, continue as
to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of
such person.
THIRTEENTH. These Articles of Association may be amended at any
regular or special meeting of the shareholders by the affirmative vote of the
holders of a majority of the stock of this Association, unless the vote of the
holders of a greater amount of stock is required by law, and in that case by the
vote of the holders of such greater amount. This Association's board of
directors may propose one or more amendments to these Articles of Association
for submission to the shareholders.
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<PAGE>
IN WITNESS WHEREOF, we have hereunto set our hands as of the 28th day of
June, 1996, effective as of the acceptance thereof by the Comptroller of the
Currency.
/s/ Peter E. Raskind /s/ Lawrence J. Bell
- ------------------------- -------------------------
Peter E. Raskind Lawrence J. Bell
/s/ Terry L. McRoberts /s/ Dyan M. Huhta
- ------------------------- -------------------------
Terry L. McRoberts Dyan M. Huhta
/s/ Dennis M. Egan /s/ Nancy D. Stahl
- ------------------------- -------------------------
Dennis M. Egan Nancy D. Stahl
/s/ Diana Woodard
-------------------------
Diana Woodard
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<PAGE>
Comptroller of the Currency
TREASURY DEPARTMENT [CLIP ART] OF THE UNITED STATES
Washington, D.C.
Whereas, satisfactory evidence has been presented to the Comptroller of the
Currency that FIRST TRUST WASHINGTON
located in SEATTLE State of WASHINGTON has complied
with all provisions of the statutes of the United States required to be
complied with, before being authorized to commence the business of banking as a
National Banking Association.
Now therefore, I hereby certify that the above-named association is
authorized to commence the business of banking as a National Banking
Association under the title "FIRST TRUST NATIONAL ASSOCIATION"
effective July 15, 1996
In testimony whereof, witness my signature and
seal of office this 15th day of July 1996
/s/ Robert R. Klinzing
Charter No. 23133 Robert R. Klinzing
Deputy Comptroller of the Currency
Midwestern District
<PAGE>
Comptroller of the Currency
Administrator of National Banks
Midwestern District Office
2345 Grand Blvd., Suite 700
Kansas City, Missouri 64108-2625
TRUST PERMIT
WHEREAS, First Trust National Association, located in Seattle, Washington, being
a national banking association, organized under the statutes of the United
States, has made application for authority to act as fiduciary;
AND WHEREAS, applicable provisions of the statutes of the United States
authorize the grant of such authority;
NOW THEREFORE, I hereby certify that the said association is authorized to act
in all fiduciary capacities permitted by such statutes, effective July 15, 1996.
IN TESTIMONY WHEREOF, witness my
signature and seal of the OCC on July 15, 1996
[SIGNATURE APPEARS HERE]
-------------------------------------------
Robert R. Klinzing
Deputy Comptroller
Midwestern District Office
Charter No. 23133
<PAGE>
AMENDED BYLAWS
OF
FIRST TRUST NATIONAL ASSOCIATION
ARTICLE I
---------
Meetings of Shareholders
------------------------
Section 1.1 Annual Meeting. The annual meeting of the shareholders, for
--------------
the election of directors and the transaction of other business, shall be held
at a time and place as the Chairman or President may designate. Notice of such
meeting shall be given at least ten days prior to the date thereof, to each
shareholder of the Association. If, for any reason, an election of directors
is not made on the designated day, the election shall be held on some subsequent
day, as soon thereafter as practicable, with prior notice thereof.
Section 1.2 Special Meetings. Except as otherwise specifically provided
----------------
by law, special meetings of shareholders may be called for any purpose, at any
time by a majority of the board of directors, or by any shareholder or group of
shareholders owning at least ten percent of the outstanding stock. Every such
meeting, unless otherwise provided by law, shall be called upon not less than
ten days prior notice stating the purpose of the meeting.
Section 1.3 Nominations for Directors. Nominations for election to the
-------------------------
board of directors may be made by the board of directors or by any shareholder.
Section 1.4 Proxies. Shareholders may vote at any meeting of the
-------
shareholders by proxies duly authorized in writing. Proxies shall be valid only
for one meeting and any adjournments of such meeting and shall be filed with the
records of the meeting.
Section 1.5 Quorum. A majority of the outstanding capital stock,
------
represented in person or by proxy, shall constitute a quorum at any meeting of
shareholders, unless otherwise provided by law. A majority of the votes cast
shall decide every question or matter submitted to the shareholders at any
meeting, unless otherwise provided by law of by the Articles of Association.
ARTICLE II
----------
Directors
---------
Section 2.1 Board of Directors. The Board of Directors (hereinafter
------------------
referred to as the "board"), shall have power to manage and administer the
business and affairs of the Association. All authorized corporate powers of the
Association shall be vested in and may be exercised by the board.
August 20, 1996
<PAGE>
Section 2.2 Powers. In addition to the foregoing, the board of directors
------
shall have and may exercise all of the powers granted to or conferred upon it by
the Articles of Association, the Bylaws and by law.
Section 2.3 Number. The Board shall consist of a number of members to be
------
fixed and determined from time to time by resolution of the board or the
shareholders at any meeting thereof, in accordance with the Articles of
Association.
Section 2.4 Organization Meeting. The newly elected board shall meet for
--------------------
the purpose of organizing the new board and electing and appointing such
officers of the Association as may be appropriate. Such meeting shall be held
on the day of the election or as soon thereafter as practicable, and, in any
event, within thirty days thereafter. If, at the time fixed for such meeting,
there shall not be a quorum present, the directors present may adjourn the
meeting until a quorum is obtained.
Section 2.5 Regular Meetings. The regular meetings of the board shall be
----------------
held, without notice, as the Chairman or President may designate and deem
suitable.
Section 2.6 Special Meetings. Special meetings of the board may be called
----------------
by the Chairman or the President of the Association, or at the request of two or
more directors. Each member of the board shall be given notice stating the time
and place of each such meeting.
Section 2.7 Quorum. A majority of the directors shall constitute a quorum
------
at any meeting, except when otherwise provided by law, but fewer may adjourn any
meeting. Unless otherwise provided, once a quorum is established, any act by a
majority of those constituting the quorum shall be the act of the board.
Section 2.8 Vacancies. When any vacancy occurs among the directors, the
---------
remaining members of the board may appoint a director to fill such vacancy at
any regular meeting of the board, or at a special meeting called for that
purpose.
ARTICLE II
----------
Committees
----------
Section 3.1 Advisory Board of Directors. The board may appoint persons,
---------------------------
who need not be directors, to serve as advisory directors on an advisory board
of directors established with respect to the business affairs of either this
Association alone or the business affairs of a group of affiliated organizations
of which this Association is one. Advisory directors shall have such powers and
duties as may be determined by the board, provided that the board's
responsibility for the business and affairs of this Association shall in no
respect be delegated or diminished.
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August 20, 1996
38
<PAGE>
Section 3.2 Audit Committee. The board shall appoint an Audit Committee
---------------
which shall consist of at least two Directors. If legally permissible, the board
may determine to name itself as the Audit Committee. The Audit Committee shall
direct and review audits of the Association's fiduciary activities.
The members of the Audit Committee shall be appointed by the board and
shall continue to act until their successors are named. The Audit Committee
shall have power to adopt its own rules and procedures and to do those things
which in the judgement of such Committee are necessary or helpful with respect
to the exercise of its functions or the satisfaction of its responsibilities.
Section 3.3 Executive Committee. The board may appoint an Executive
-------------------
Committee, which shall consist of at least three directors and which shall have,
and may exercise, all the powers of the board between meetings of the board or
otherwise when the board is not meeting.
Section 3.4 Other Committees. The board may appoint, from time to time,
----------------
committees of one or more persons who need not be directors, for such purposes
and with such powers as the board may determine. In addition, either the
Chairman or the President may appoint, from time to time, committees of one or
more officers, employees, agents or other persons, for such purposes and with
such powers as either the Chairman or the President deems appropriate and
proper.
Whether appointed by the board, the Chairman, or the President, any
such Committee shall at all times be subject to the direction and control of the
board.
Section 3.5 Meetings, Minutes and Rules. An advisory board of directors
---------------------------
and/or committee shall meet as necessary in consideration of the purpose of the
advisory board of directors or committee, and shall maintain minutes in
sufficient detail to indicate actions taken or recommendations made; unless
required by the members, discussions, votes, or other specific details need not
be reported. An advisory board of directors or a committee may, in consideration
of its purpose, adopt its own rules for the exercise of any of its functions or
authority.
ARTICLE IV
----------
Officers and Employees
----------------------
Section 4.1 Chairman of the Board. The board may appoint one of its
---------------------
members to be Chairman of the board to serve at the pleasure of the board. The
Chairman shall supervise the carrying out of the policies adopted or approved by
the board; shall have general executive powers, as well as the specific powers
conferred by these Bylaws; shall also have and may exercise such powers and
duties as from time to time may be conferred upon or assigned by the board.
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<PAGE>
Section 4.2 President. The board may appoint one of its members to be
---------
President of the Association. In the absence of the Chairman, the President
shall preside at any meeting of the board. The President shall have general
executive powers, and shall have and may exercise any and all other powers and
duties pertaining by law, regulation or practice, to the Office of President, or
imposed by these Bylaws. The President shall also have and may exercise such
powers and duties as from time to time may be conferred or assigned by the
board.
Section 4.3 Vice President. The board may appoint one or more Vice
--------------
Presidents who shall have such powers and duties as may be assigned by the board
and to perform the duties of the President on those occasions when the President
is absent, including presiding at any meeting of the board in the absence of
both the Chairman and President.
Section 4.4 Secretary. The board shall appoint a Secretary, or other
---------
designated officer who shall be Secretary of the board and of the Association,
and shall keep accurate minutes of all meetings. The Secretary shall attend to
the giving of all notices required by these Bylaws to be given; shall be
custodian of the corporate seal, records, documents and papers of the
Association; shall provide for the keeping of proper records of all transactions
of the Association; shall have and may exercise any and all other powers and
duties pertaining by law, regulation or practice, to the Secretary, or imposed
by these Bylaws; and shall also perform such other duties as may be assigned
from time to time, by the board.
Section 4.5 Other Officers. The board may appoint, and may authorize the
--------------
Chairman or the President to appoint, any officer as from time to time may
appear to the board, the Chairman or the President to be required or desirable
to transact the business of the Association. Such officers shall exercise such
powers and perform such duties as pertain to their several offices, or as may
be conferred upon or assigned to them by the Bylaws, the board, the Chairman or
the President.
Section 4.6 Tenure of Office. The Chairman or the President and all other
----------------
officers shall hold office for the current year for which the board was elected,
unless they shall resign, become disqualified, or be removed. Any vacancy
occurring in the Office of Chairman or President shall be filled promptly by the
board.
Any officer elected by the board or appointed by the Chairman or the
President may be removed at any time, with or without cause, by the affirmative
vote of a majority of the board or, if such officer was appointed by the
Chairman or the President, by the Chairman or the President, respectively.
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August 20, 1996
<PAGE>
ARTICLE V
---------
Stock
-----
Section 5.1. Shares of stock shall be transferable on the books of the
Association, and a transfer book shall be kept in which all transfers of stock
shall be recorded. Every person becoming a shareholder by such transfer shall,
in proportion to such person's shares, succeed to all rights of the prior holder
of such shares. Each certificate of stock shall recite on its face that the
stock represented thereby is transferable only upon the books and records of the
Association properly endorsed.
ARTICLE VI
----------
Corporate Seal
--------------
Section 6.1. The Chairman, the President, the Secretary, any Assistant
Secretary or other officer designated by the board, the Chairman, or the
President, shall have authority to affix the corporate seal to any document
requiring such seal, and to attest the same. Such seal shall be substantially in
the following form:
ARTICLE VII
-----------
Miscellaneous Provisions
------------------------
Section 7.1 Execution of Instruments. All agreements, checks, drafts,
------------------------
orders, indentures, notes, mortgages, deeds, conveyances, transfers,
endorsements, assignments, certificates, declarations, receipts, discharges,
releases, satisfactions, settlements, petitions, schedules, accounts,
affidavits, bonds, undertakings, guarantees, proxies and other instruments or
documents may be signed, countersigned, executed, acknowledged, endorsed,
verified, delivered or accepted on behalf of the Association, whether in a
fiduciary capacity or otherwise, by an officer of the Association, or such
employee or agent as may be designated from time to time by the board by
resolution, or by the Chairman or the President by written instrument, which
resolution or instrument shall be certified as in effect by the Secretary or an
Assistant Secretary of the Association. The provisions of this section are
supplementary to any other provisions of the Articles of Association or Bylaws.
-5-
August 20,1996
<PAGE>
Section 7.2 Records. The Articles of Association, the Bylaws, and the
-------
proceedings of all meetings of the shareholders, the board, the standing
committees of the board, shall be recorded in appropriate minute books provided
for the purpose. The minutes of each meeting shall be signed by the Secretary,
or other officer appointed to act as Secretary of the meeting.
Section 7.3 Trust Files. There shall be maintained in the Association files
-----------
all fiduciary records necessary to assure that its fiduciary responsibilities
have been properly undertaken and discharged.
Section 7.4 Trust Investments. Funds held in a fiduciary capacity shall be
-----------------
invested according to the instrument establishing the fiduciary relationship and
according to law. Where such instrument does not specify the character and class
of investments to be made and does not vest in the Association a discretion in
the matter, funds held pursuant to such instrument shall be invested
in investments in which corporate fiduciaries may invest under law.
Section 7.5 Notice. Whenever notice is required by the Articles of
------
Association, the Bylaws or law, such notice shall be by mail, postage prepaid,
telegram, in person, or by any other means by which such notice can reasonably
be expected to be received, using the address of the person to receive such
notice, or such other personal data, as may appear on the records of the
Association. Prior notice shall be proper if given not more than 30 days nor
less than 10 days prior to the event for which notice is given.
ARTICLE VIII
------------
Indemnification
---------------
Section 8.1. The Association shall indemnify to the full extent permitted
by, and in the manner permissible under, the Articles of Association and the
laws of the United States of America, as applicable and as amended from time to
time, any person made, or threatened to be made, a party to any action, suit or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact that such person is or was a director, advisory director, officer or
employee of the Association, or any predecessor of the Association, or served
any other enterprise as a director or officer at the request of the Association
or any predecessor of the Association.
Section 8.2 The board in its direction may, on behalf of the Association,
indemnify any person, other than a director, advisory director, officer or
employee, made a party to any action, suit or proceeding by reason of the fact
that such person is or was an agent of the Association or any predecessor of the
Association serving in such capacity at the request of the Association or any
predecessor of the Association.
-6-
August 20, 1996
<PAGE>
ARTICLE IX
----------
Bylaws: Interpretation and Amendment
------------------------------------
Section 9.1. These Bylaws shall be interpreted in accordance with and
subject to appropriate provisions of law, and may be amended, altered or
repealed, at any regular or special meeting of the board.
Section 9.2. A copy of the Bylaws, with all amendments, shall at all times
be kept in a convenient place at the main office of the Association, and shall
be open for inspection to all shareholders during Association hours.
-7-
August 20, 1996
<PAGE>
Exhibit 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939 in connection with the proposed issuance by Muzak Limited Partnership and
Muzak Capital Corporation of Senior Notes, we hereby consent that reports of
examinations by federal, state, territorial and district authorities may be
furnished by such authorities to the Securities and Exchange Commission upon its
request therefor.
FIRST TRUST NATIONAL ASSOCIATION
By /s/ Mary Bator
------------------------------
Dated: September 25, 1996
------------------
<PAGE>
TRUST COMPANY
STATEMENT OF CONDITION
Statement of Condition of First Trust Washington in the State of Washington,
King County, as of the quarter ending June 30, 1996
-------------
================================================================================
ASSETS DOLLAR AMOUNTS IN THOUSANDS
- --------------------------------------------------------------------------------
1. Cash and Due From Banks........................... 79,306
----------------------
2. U.S. Treasury Obligations......................... 0
----------------------
3. Obligations of U.S. Gov't Agencies................ 0
----------------------
4. Obligations of States & political subdiv.......... 0
----------------------
5. Other securities.................................. 0
(Includes $______ corporate stock) ----------------------
6. (a) Loans......................................... 0
----------------------
(b) Less: Reserve for possible Loan Losses........ 0
----------------------
(c) Net Loans..................................... 0
----------------------
7. Fixed Assets...................................... 154
----------------------
8. Other real estate owned........................... 0
----------------------
9. Other Assets...................................... 26,665
----------------------
10. TOTAL ASSETS...................................... 106,128
----------------------
LIABILITIES
11. Total deposits.................................... 0
----------------------
12. Liabilities for borrowed money.................... 0
----------------------
13. Mortgaged indebted................................ 0
----------------------
14. Other Liabilities................................. 3,539
----------------------
15. TOTAL LIABILITIES................................. 3,539
----------------------
SHAREHOLDER EQUITY
16. Capital........................................... 100
----------------------
17. Surplus........................................... 104,468
----------------------
18. Undivided profits................................. -1,981
----------------------
19. Reserves.......................................... 0
----------------------
20. TOTAL CAPITAL ACCOUNTS............................ 102,587
----------------------
21. TOTAL LIABILITIES AND CAPITAL ACCOUNTS............ 106,126
----------------------
- --------------------------------------------------------------------------------
I, Merita D. Schollmeier, Assistant Secretary (Official Title) of the above
named trust company do solemnly swear that the above statement is true and that
this Report of Condition (including the Trust Supplemental Information Report)
is true to the best of my knowledge and belief.
/s/ Merita D. Schollmeier
-----------------------------------------
Correct-Attest: /s/ [SIGNATURE APPEARS HERE] (Director)
------------------------------
/s/ [SIGNATURE APPEARS HERE] (Director)
------------------------------
/s/ [SIGNATURE APPEARS HERE] (Director)
------------------------------
STATE OF MINNESOTA, County of Hennepin
-----------------------
Sworn to and subscribed before me this 26 day of July, 1996.
-- ---- ----
/s/ Lynn Willemsen
---------------------------------------------------------------
Notary Public in and for the State of MN
-----------------,
residing at Hennepin
------------------------------
[AFFIX NOTARY SEAL ------------------------------------------
HERE APPEARS HERE] [SEAL OF LYNN M. WILLEMSEN
NOTARY NOTARY PUBLIC - MINNESOTA
PUBLIC MY COMMISSION EXPIRES
APPEARS JANUARY 31, 2000
HERE]
------------------------------------------
<PAGE>
TRUST - SUPPLEMENTAL INFORMATION REPORT
(Round Dollar Amounts to Nearest Thousands - 000)
OF First Trust Washington AS OF June 30, 1996
-------------------------------------------- -----------------------
PROFIT AND LOSS FROM FIDUCIARY ACTIVITIES
All Report of Income schedules are to be reported on a
calendar year to date basis.
QUARTER ENDED: June 30, 1996
-----------------------
<TABLE>
<S> <C>
INCOME RELATED TO FIDUCIARY ACTIVITIES:
Trust Fee Income.............................$ 2032
-----------------------
Investment Income............................. 0
-----------------------
All other income.............................. 370
-----------------------
Total Fiduciary Income....... 2402
-----------------------
EXPENSES RELATED TO FIDUCIARY ACTIVITIES:
Salaries & Employee Benefits.................. 1248
-----------------------
Occupancy Expense............................. 135
-----------------------
Interest Expense.............................. 0
-----------------------
Legal Expense................................. 0
-----------------------
All Other Expense............................. 4555
-----------------------
Provision for Trust Loss...................... 0
-----------------------
Total Fiduciary Expense....... 5935
-----------------------
NET PROFIT BEFORE TAXES............................ (3536)
-----------------------
Tax Provision................................. 1237
-----------------------
NET PROFIT......................................... (2299)
-----------------------
</TABLE>
- -----------------------------------------------------------------------------
Note: Signed supporting schedules may be attached where additional space is
necessary. Indicate if market/cost:
---------------------
0 Total number of discretionary accounts.
- --------------------
0 Dollar amount of assets of discretionary accounts.
- --------------------
0 Total number of nondiscretionary accounts.
- --------------------
0 Dollar amount of assets of nondiscretionary accounts.
- --------------------
0 Number of accounts with pending litigation.
- --------------------Amount: 0
--------------------
Yes Does the trust company Blanket Bond coverage?
- --------------------Amount: 75,000,000.00
--------------------
Yes Does the trust department have Errors and Omissions
- --------------------coverage?
Amount: 20,000,000.00
--------------------
No Is there a guarantee by a parent or affiliate to maintain
- --------------------capital of the company?
Amount of Guarantee: 0
--------------------
* $ 625,442,377.00 Corporate trusts administered, if applicable.
- --------------------
* $ 524,673,370.00 Paying and escrow agencies.
- --------------------
Report any personnel changes in trust officers or administrators since the last
quarterly report:
None
- --------------------
*These accounts are held by First Bank National Association, Minneapolis,
Minnesota, an affiliate. The type of accounts include Corporate Trust and Paying
Agency accounts of municipalities and corporations. First Trust Washington
functions as a service provider pursuant to agreement for First Bank National
Association, Minneapolis, Minnesota, in administering these accounts.
<PAGE>
ANNUAL STATEMENT OF THE TRUST DEPARTMENT/COMPANY
Of First Trust Washington, at Seattle, in the State of Washington, King County,
at the close of business June 30, 1996 , Capital of Bank/Trust
Company $___0___.
<TABLE>
<CAPTION>
================================================================================
FIDUCIARY STATEMENT
- --------------------------------------------------------------------------------
ASSETS DOLLAR AMOUNTS IN THOUSANDS
- --------------------------------------------------------------------------------
<S> <C>
1. Cash................................................ 0
----------------------
2. Investments:
(a) Bonds....................................... 0
----------------------
(b) Stocks...................................... 0
----------------------
(c) Real Estate Loans........................... 0
----------------------
(d) Other Loans................................. 0
----------------------
(e) Real Estate................................. 0
----------------------
(f) Miscellaneous............................... 0
----------------------
3. Time Deposits:
(a) Own Bank.................................... 0
----------------------
(b) Other Banks................................. 0
----------------------
4. Demand Deposits:
(a) Own Bank.................................... 0
----------------------
(b) Other Banks................................. 21,600
----------------------
5. Corporate Investments............................... 4,947,984
----------------------
6. Agency, Safekeeping, Custodian, & Escrow Invest..... 5,566,732
----------------------
7. Advances to trust or overdrafts..................... 0
----------------------
8. Other real estate owned............................. 0
----------------------
9. TOTAL ASSETS........................................ 10,536,216
----------------------
LIABILITIES
10. Fiduciary Accounts:
(a) Court Trusts................................ 0
----------------------
(b) Personal Living Trusts...................... 0
----------------------
(c) Employee Benefit Trusts..................... 0
----------------------
(d) Collective Investment Funds................. 0
----------------------
(e) Less Units of Collective Investment Funds... 0
----------------------
(f) Total Fiduciary accounts--Net total of above
(a) through (e)............................. 0
----------------------
11. Corporate Accounts.................................. 4,956,954
----------------------
12. Agency, Safekeeping, Custodian, & Escrow............ 5,579,262
----------------------
13. Due to Commercial Dept. or Bank Advances............ 0
----------------------
14. TOTAL LIABILITIES................................... 10,536,216
----------------------
- --------------------------------------------------------------------------------
</TABLE>
I, Merita D. Schollmeier, Assistant Secretary (Official Title) of the above
named bank or trust company do solemnly swear that the above statement is true
and that the schedules and answers attached hereto fully and correctly represent
the true state of the several matters therein contained to the best of my
knowledge and belief.
/s/ Merita D. Schollmeier
----------------------------------------
Correct--Attest: [SIGNATURE APPEARS HERE] (Director)
----------------------------
[SIGNATURE APPEARS HERE] (Director)
----------------------------
[SIGNATURE APPEARS HERE] (Director)
----------------------------
STATE OF Minnesota County of Hennepin
Sworn to and subscribed before me this 26th of July, 1996.
---- ---- --
/s/ Lynn Willemsen
----------------------------------------
Notary Public in and for the State of MN
--
residing at Hennepin
----------------------------
[SEAL OF NOTARY Lynn M. Willemsen
PUBLIC APPEARS HERE] Notary Public - Minnesota
My Commission Expires
January 31, 2000
<PAGE>
First Trust Washington
--------------------------------
(Name of Trust Company)
CERTIFICATE OF ORIGINAL REPORT OF CONDITION
June 30, 1996
Due Date: July 30, 1996
-------------
The undersigned hereby certify that the enclosed two (2) duplicate Reports of
Condition are true and complete copies of the original Report of condition as
of June 30, 1996 and that such report has been prepared in
conformance with the official instructions and is true to the best of our
knowledge and belief.
As required by RCW 30.08.092, the number of authorized shares issued shares of
the trust company as of the reporting date are:
Authorized Shares 1,000
--------------
Issued Shares 1,000
--------------
/s/Signature appears here
--------------------------
President or Manager or Cashier
[SEAL OF LYNN M. WILLEMSEN /s/Signature appears here
NOTARY PUBLIC-MINNESOTA --------------------------
APPEARS HERE] Director
/s/Signature appears here
--------------------------
Assistant Secretary
State of Minnesota
County of Hennepin
--------
Sworn to and described before
me this 26 day of July, 1996
-- ---- --
and I hereby certify that I am
not an officer or director of
this bank.
/s/Lynn Willemsen
-----------------------
Notary Public
My appointment expires: 1-31-00
-------
