<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
---------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ___________ to
___________
Commission file number: 333-03741
333-03741-01
MUZAK LIMITED PARTNERSHIP
MUZAK CAPITAL CORPORATION
(Exact Name of Registrants as Specified in their Charter)
DELAWARE 13-3647593
DELAWARE 91-1722302
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2901 THIRD AVE., SUITE 400
SEATTLE, WA 98121
(206) 633-3000
(Address, Including Zip Code, and Telephone Number, Including Area Code
of Registrants' Principal Executive Offices)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject
to such filing requirements for the past 90 days.
Yes [x] No [_]
Muzak Capital Corporation meets the conditions set forth in General
Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this
form with the reduced disclosure format.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrants have filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, at August 14,
1998: Muzak Capital Corporation - 100.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MUZAK LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 4,436 $ 8,524
Accounts receivable, net of allowance for doubtful
accounts of $905 and $501. . . . . . . . . . . . . . . . . . 19,992 16,790
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 4,898 3,850
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 1,339 1,400
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477 1,116
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . 31,142 31,680
Property and equipment, net. . . . . . . . . . . . . . . . . . . 41,759 39,659
Deferred costs and intangible assets, net. . . . . . . . . . . . 37,565 31,694
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 930 1,362
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $111,396 $104,395
-------- --------
-------- --------
Liabilities and Partners' Deficit
Current Liabilities:
Credit facility. . . . . . . . . . . . . . . . . . . . . . . . $ 250 $ -
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 10,013 8,435
Advance billings . . . . . . . . . . . . . . . . . . . . . . . 5,377 5,216
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . 5,000 2,500
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 3,781 2,556
Current portion of long-term obligations . . . . . . . . . . . 984 469
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . 25,405 19,176
Long-term obligations, net of current portion. . . . . . . . . . 102,430 100,575
Unearned installation income . . . . . . . . . . . . . . . . . . 4,617 4,249
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . 2,002 -
Redeemable preferred partnership interests . . . . . . . . . . . 6,830 6,490
Partners' Deficit:
Limited partners' deficit. . . . . . . . . . . . . . . . . . . (3,205) (3,597)
General partners' deficit. . . . . . . . . . . . . . . . . . . (26,683) (22,498)
-------- --------
Total partners' deficit. . . . . . . . . . . . . . . . . . (29,888) (26,095)
-------- --------
Total liabilities and partners' deficit. . . . . . . . . . $111,396 $104,395
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
MUZAK LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Music and other business services. . . . . . . . . . . . . . . . . . $16,614 $14,977 $48,312 $44,007
Equipment and related services . . . . . . . . . . . . . . . . . . . 8,694 8,256 24,355 23,091
------- ------- ------- -------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . 25,308 23,233 72,667 67,098
------- ------- ------- -------
Cost of revenues:
Music and other business services. . . . . . . . . . . . . . . . . . 4,802 4,954 14,493 13,575
Equipment and related services . . . . . . . . . . . . . . . . . . . 5,996 6,110 16,898 16,076
------- ------- ------- -------
Total cost of revenues . . . . . . . . . . . . . . . . . . . . . 10,798 11,064 31,391 29,651
------- ------- ------- -------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,510 12,169 41,276 37,447
Selling, general and administrative expenses . . . . . . . . . . . . . 8,681 7,762 23,915 24,275
Equity based compensation. . . . . . . . . . . . . . . . . . . . . . . 600 50 1,467 150
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,260 2,687 6,985 8,491
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,914 2,425 8,093 7,370
------- ------- ------- -------
Operating income (loss). . . . . . . . . . . . . . . . . . . . . . . 55 (755) 816 (2,839)
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . (2,746) (2,696) (8,146) (8,071)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . 66 264 206 874
Equity in losses of joint venture. . . . . . . . . . . . . . . . . . 0 (194) (45) (688)
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . (2) (16) 146 339
------- ------- ------- -------
Net loss before minority interest and preferred return . . . . . . . . (2,627) (3,397) (7,023) (10,385)
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . 120 - 120 -
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,507) (3,397) (6,903) (10,385)
Redeemable preferred return. . . . . . . . . . . . . . . . . . . . . (113) (100) (340) (299)
------- ------- ------- -------
Comprehensive loss attributable to general and limited partners. . . ($2,620) ($3,497) ($7,243) ($10,684)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
MUZAK LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6,903) $(10,385)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . . . . . . . . 405 361
Provision for inventory obsolescence . . . . . . . . . . . . . . . . . . . . . . . - 350
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,985 8,491
Amortization, net of deferred financing costs. . . . . . . . . . . . . . . . . . . 8,092 7,372
Deferred financing cost amortization . . . . . . . . . . . . . . . . . . . . . . . 474 495
Equity in losses of joint venture. . . . . . . . . . . . . . . . . . . . . . . . . 45 688
Minority interest losses of subsidiary . . . . . . . . . . . . . . . . . . . . . . (120) -
Gain on sale of affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (389)
Write-off of national account installation costs . . . . . . . . . . . . . . . . . - 180
Noncash incentive compensation. .. . . . . . . . . . . . . . . . . . . . . . . . . 1,467 177
Changes in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,919) (711)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,048) (94)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,578 (1,138)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,225 1,166
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 2,500
Advance billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 240
Unearned installation income . . . . . . . . . . . . . . . . . . . . . . . . . . . 368 418
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 188
-------- --------
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . 12,390 9,909
-------- --------
INVESTING ACTIVITIES
Additions to property and equipment. . . . . . . . . . . . . . . . . . . . . . . . (8,772) (9,418)
Additions to deferred costs and intangible assets. . . . . . . . . . . . . . . . . (4,962) (4,437)
Acquisitions of businesses and ventures. . . . . . . . . . . . . . . . . . . . . . (7,148) (3,185)
Disposition of businesses and ventures . . . . . . . . . . . . . . . . . . . . . . 1,115 1,260
Additions to non-compete agreements. . . . . . . . . . . . . . . . . . . . . . . . (500) -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (118) (240)
-------- --------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . (20,385) (16,020)
-------- --------
FINANCING ACTIVITIES
Borrowings under credit facility . . . . . . . . . . . . . . . . . . . . . . . . . 250 -
Principal payments on term debt. . . . . . . . . . . . . . . . . . . . . . . . . . (14) (92)
Payments under capital leases. . . . . . . . . . . . . . . . . . . . . . . . . . . (431) (323)
Contributions by partners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 953 331
Withdrawals by partners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (215) (2,357)
Proceeds from sale of subsidiary, net of costs . . . . . . . . . . . . . . . . . . 3,418 -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (54) (54)
-------- --------
Net cash provided by (used in) financing activities. . . . . . . . . . . . . . . . 3,907 (2,495)
-------- --------
Net decrease in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . (4,088) (8,606)
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . . . . . . . . . 8,524 25,685
-------- --------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . . . . . . . . . $ 4,436 $ 17,079
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
MUZAK LIMITED PARTNERSHIP
FORM 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
NOTE 1. FINANCIAL STATEMENT PREPARATION:
The consolidated financial statements as of September 30, 1998 and December 31,
1997 and for the three and nine month periods ended September 30, 1998 and 1997
have been prepared by Muzak Limited Partnership (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission (Commission).
The financial information for the three and nine month periods ended September
30, 1998 and 1997 is unaudited, but, in the opinion of management, reflects all
adjustments (consisting only of normal recurring adjustments and accruals)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods. Certain information and note
disclosures normally included in the Company's annual financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted in accordance with the rules and regulations of the
Commission. These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
The results of operations for the three and nine month periods ended September
30, 1998 are not necessarily indicative of the Company's results of operations
for the entire fiscal year ended December 31, 1998.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
of the Company include the accounts of the Company its wholly-owned subsidiary
Muzak Capital Corporation and its partially-owned subsidiary Enso Audio Imaging
Corporation ("EAIC"). All significant intercompany accounts and transactions
have been eliminated in consolidation.
NEW ACCOUNTING PRONOUNCEMENTS - The Company has adopted Financial Accounting
Standard No. 130, REPORTING COMPREHENSIVE INCOME, which became effective for
fiscal years beginning after December 15, 1997. This statement requires
comprehensive income and its components to be reported in the financial
statements in the period in which they are recognized. Components of
comprehensive income include redeemable preferred returns. Financial Accounting
Standard No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, was issued and is effective for fiscal years beginning after
December 15, 1997. This statement requires the reporting and disclosure of
certain financial and descriptive information about operating segments of the
Company. This statement will not have a material effect on the Company's
financial statements and will be adopted for the fiscal year ended December 31,
1998.
In March 1998, the Accounting Standards Executive Committee of the AICPA
Issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which requires
that certain software costs be capitalized and amortized over the period of
use. The SOP is effective for financial statements for fiscal years beginning
after December 15, 1998. The Company will adopt SOP 98-1 in fiscal 1999 and
has not yet determined its impact.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Startup Activities" which requires costs of start-up activities and
organization costs to be expensed as incurred. This SOP applies is effective
for financial statements for fiscal years beginning after December 15, 1998.
The Company will adopt SOP 98-5 in fiscal 1999 and has not yet determined its
impact.
<PAGE>
NOTE 3. PROPERTY AND EQUIPMENT, NET:
PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING (IN THOUSANDS):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Equipment provided to subscribers. . . . . . . . . . . . . . . . . . . . . . . . $ 64,016 $ 57,393
Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,205 13,129
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,638 3,337
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,643 2,546
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 894 865
Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 858 858
-------- --------
Total property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 86,254 78,128
Less: Accumulated depreciation and amortization. . . . . . . . . . . . . . . . . (44,495) (38,469)
-------- --------
$ 41,759 $ 39,659
-------- --------
-------- --------
</TABLE>
NOTE 4. DEFERRED COSTS AND INTANGIBLE ASSETS, NET:
DEFERRED COSTS AND INTANGIBLE ASSETS CONSIST OF THE FOLLOWING (IN THOUSANDS):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Income producing contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,186 $ 42,152
Deferred subscriber acquisition costs. . . . . . . . . . . . . . . . . . . . . . 17,035 14,593
Master recording rights and deferred production costs. . . . . . . . . . . . . . 14,321 12,125
Organization costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,569 4,501
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,341 4,341
Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,864 860
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781 343
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468 468
-------- --------
Total deferred costs and intangible assets . . . . . . . . . . . . . . . . . . 93,565 79,383
Less: Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . (56,000) (47,689)
-------- --------
$ 37,565 $ 31,694
-------- --------
-------- --------
</TABLE>
<PAGE>
NOTE 5. LONG-TERM OBLIGATIONS:
LONG-TERM OBLIGATIONS ARE SUMMARIZED AS FOLLOWS (IN THOUSANDS):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 $100,000
Capital lease obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 849 969
Promissory note. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,504 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 75
-------- --------
Total long-term obligations. . . . . . . . . . . . . . . . . . . . . . . . . . 103,414 101,044
Less: Current portion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (984) (469)
-------- --------
$102,430 $100,575
-------- --------
-------- --------
</TABLE>
NOTE 6. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest expense for the nine month periods ended September 30,
1998 and 1997 was approximately $5.6 million and $5.5 million, respectively.
Assets acquired under capital leases was $311,000 for the nine month period
ended September 30, 1998.
In connection with the acquisition of a competitor's business music accounts in
April 1998 the Company signed a $3.0 million promissory note due April 2006.
This note requires annual payments of $510,000 per year starting in April 1998
and bears an interest rate of 10% per annum.
NOTE 7. SUBSEQUENT EVENTS:
Subsequent to September 30, 1998, the Company entered into a letter of intent
and a purchase agreement to purchase the subscriber accounts from certain
competing business music distributors for a total approximate cash consideration
of $14.5 million. The Company has also entered into a letter of intent for
financing of up to $20.0 million, to finance these acquisitions, that will be
secured by the Company's inventories and accounts receivable.
NOTE 8. EUROPEAN JOINT VENTURE:
On April 16, 1998 the Company entered into an agreement with its joint
venture partner in Muzak Europe that effectively liquidated the Company's
interest in Muzak Europe in exchange for a seven year $800,000 promissory
note, which bears interest at eight percent (8%) per annum, and the right of
the Company to participate in five percent (5%) of the business service
revenues of the European venture in its new role as franchisor. No gain or
loss was recognized for this transaction for the nine month period ended
September 30, 1998.
NOTE 9. ACQUISITIONS:
During third quarter of 1998 the Company acquired one of its competitors'
business music distributors for a total consideration of $76,000.
<PAGE>
NOTE 10. CREDIT FACILITY:
In March 1998, the Company obtained a credit facility for working capital
purposes with an initial availability of $3.0 million, increasing to
$5.0 million upon the attainment of certain cash flow related targets. In
July of 1998 the Company met the required cash flow targets required to
increase the available cash to $5.0 million. The credit facility is secured
by the inventories and receivables of the Company and expires on September 30,
1999. Amounts outstanding under the facility bear a variable rate of
interest, to be paid quarterly, based on the lender's prime rate or LIBOR
plus 2%. The terms of the credit facility require the Company to maintain
certain performance standards and covenants that, among other things, limit
the Company's capital spending and acquisitions of other businesses, as well
as the Company's ability to incur additional debt and make distributions to
partners. As of September 30, 1998, the Company's had $.3 million
outstanding at an 8.75% interest rate under this credit facility.
NOTE 11. EQUITY BASED COMPENSATION:
Equity based compensation was $600,000 and $1,467,000 for the three and nine
month periods ended September 30, 1998, as compared to $50,000 and $150,000
for the same periods in 1997. This increase reflects the accretion in value
related to options granted under the 1996 amended and restated option plan
along with the grant of performance based options to certain executive
management members during 1997 and management's estimate of the increasing
partnership unit price.
NOTE 12. PURCHASE COMMITMENTS:
In June 1998, the Company entered into a purchase commitment agreement with a
drive-through equipment vendor which guarantees that the Company's owned or
independent affiliates will purchase at least $2.0 million dollars of drive-
through and related equipment by April 30, 1999.
NOTE 13. EAIC CORPORATION:
On July 10, 1998 EAIC Corp., a formerly wholly owned subsidiary of the
Company, consummated a recapitalization and equity financing agreement
pursuant to which the shares held by the Company were converted to 100,000
shares of series A non-voting common stock and 73,500 shares of series A
voting preferred stock of EAIC Corp., were issued to a related party investor
for a total consideration of $3.4 million, net of costs, which represents a
42% interest. After January 5, 1999, an additional 26,250 shares of Class B
preferred stock can be purchased by the related party investor for $2.5 million
if certain performance criteria is met by EAIC Corp.
An affiliate of the Company was issued 100 shares of super voting series C
common stock which has voting rights equal to 1,000 votes per share. The
series C common stock is convertible to an equal number of class A voting
common stock at the option of the holder.
The series A preferred stock is convertible at the option of the holder into
one share of series A common stock. Further, both the series A preferred
stock and the Class C common stock are automatically convertible to Class A
voting common stock under certain circumstances as defined in the EAIC
certificate of incorporation.
The series A preferred stock has voting rights, certain liquidation and
redemption features, and accrues dividends annually at a rate of 7% of the
base liquidation preference as defined in the EAIC certification of
incorporation.
NOTE 14. CHANGES IN EQUITY:
In February 1998, $8,000 was paid on the subscription notes receivable by
certain management.
On April 10, 1998, the Company issued a total of 230,000 Class A-2 limited
partnership units to two third party sellers in exchange for certain assets, of
a competing business music provider, with an estimated value of $747,500. The
sale of the 230,000 Class A-2 limited partnership units was made in a
transaction exempt from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof.
On April 13, 1998, the Company issued a total of 45,382 Class A-2 limited
partnership units to a third party seller in exchange for certain assets, of a
competing business music provider, with an estimated value of $147,491. The
sales of the 45,382 Class A-2 limited partnership units was made in a
transaction exempt from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof.
On July 1, 1998, the Company repurchased a total of 100,000 Class B limited
partnership units, from a former member of management, for a total repurchase
price of $215,000.
On August 1, 1998, the Company issued 21,400 Class B limited partnership units,
to various member of management, for a total consideration of $49,862. Also,
the company has entered into agreements to sell an additional 78,600 Class B
limited partnership units to certain management members for total consideration
of $183,138.
<PAGE>
MUZAK CAPITAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ 1
------- -------
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>
The accompanying note is an integral part of these financial statements.
<PAGE>
MUZAK CAPITAL CORPORATION
NOTE TO FINANCIAL STATEMENTS
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 filed a registration statement along with MLP for the
underwritten offering of senior notes of which the Company and MLP are
co-issuers. The offering closed in October 1996. The Company is dependent upon
results of operations and cash flow of MLP to meet debt service obligations of
the senior notes. No activity has occurred from May 8, 1996 (date of inception)
through September 30, 1998; therefore, statements of operations and cash flows
have not been included herein.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
registrant's Form 10-K filed with the Securities and Exchange Commission on
March 31, 1998.
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings by the
Company, as defined below, and Capital Corp., as defined below, with the
Securities and Exchange Commission, in the Company's and Capital Corp's press
releases or other public communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "believes,"
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. The Company and Capital Corp. wish to caution readers not
to place undo reliance on any such forward-looking statements, which speak only
as of the date made, and to advise readers that various factors, including rapid
technological change, competitive pricing, concentrations in and dependence on
satellite delivery capabilities, and development of new services could affect
the Company's and Capital Corp.'s financial performance and could cause the
Company's and Capital Corp.'s actual results for future periods to differ
materially from those anticipated or projected.
The Company and Capital Corp. do not undertake and specifically disclaim any
obligation to update any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
RESULTS OF OPERATIONS
REVENUES. Total revenues increased 8.9% and 8.3% for the three and nine month
periods ended September 30, 1998, respectively, as compared to the same periods
in 1997. These revenue increases were primarily due to the acquisition of
competitor's music service accounts and one-time equipment and related service
revenues associated with non-acquisition growth. Exclusive of the impact from
acquisitions, our recurring music and other services monthly billing has
increased by approximately $266,000 year to date through September 30, 1998,
whereas the growth in our monthly billing for 1997 was approximately half of
this rate. Each month the Company is billing over $266,000 per month more than
it was at the beginning of the year as a result of the sales of recurring
services made during 1998. Music and other business services revenue increased
by $1.6 and $4.3 million over the three and nine month periods ended September
30, 1998, respectively, as compared to the same periods in 1997. Equipment and
related revenues increased by 5.3% and 5.5% for the three and nine month periods
ended September 30, 1998.
On May 19, 1998, Galaxy 4, the satellite that carries approximately 60% of
the Company's subscribers, had a mechanical failure that caused it to spin
uncontrollably out of orbit. A tremendous amount of resources within the
Company was needed to continue to provide service to our valuable customers,
which involved the repointing to our new satellite, Galaxy 3r of over 100,000
satellite dishes located at customer locations across the country.
This event resulted in additional equipment and related services costs of
$546,000 and $1,120,000 for the three and nine months ended September 30,
1998. Additionally the Company issued music and business services revenue
credits for the one to two week service outage period of $143,000 and
$327,000 for the three and nine months ended September 30, 1998.
The Company also estimates that equipment and related services billings for
installation and service visits were adversely affected by $60,000 and
$526,000 for the three and nine months ended September 30, 1998.
GROSS PROFIT. Gross profit increased 19.2% and 10.2% over the three and nine
month periods ended September 30, 1998, respectively, as compared to the same
periods in 1997. Gross margins for the three and nine month periods ended
September 30, 1998 were 57.3% and 56.8%, respectively, an increase from the
52.4% and 55.8% for the same periods during 1997. The increase in gross profit
is due to the acquisition of our competitors business music service accounts
combined with the increase in the sales of monthly recurring services as
compared to the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, as a percentage of revenues, were 34.3% and 36.2%
for the three and nine month periods ended September 30, 1998, as compared to
33.4% and 32.9% for the same periods in 1997. The increase for the three
month period is due to increased sales costs incurred to generate the
increases in monthly recurring services billings as compared to the same
period last year. As commissions are paid based on the future value of these
new contracts, these sales costs are incurred prior to the benefits derived
from the recurring revenues. Because of this, as long as the Company
continues to experience high sales levels, sales costs associated with these
recurring sales will continue to negatively impact immediate operating
results. The nine month
<PAGE>
period decrease was the result of approximately $750,000 in severance charges
during the second quarter of 1997 related to certain management changes.
EQUITY BASED COMPENSATION. Equity based compensation was $600,000 and
$1,467,000 for the three and nine month periods ended September 30, 1998, as
compared to $50,000 and $150,000 for the same periods in 1997. This increase
reflects the accretion in value related to options granted under the 1996
amended and restated option plan along with the grant of performance based
options to certain executive management members during 1997 and management's
estimate of the increasing partnership unit price.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
$62,000 for the three month period ended September 30, 1998, and decreased
$783,000 for the nine month period ended September 30, 1998, as compared to the
same periods in 1997. The increase for the three month period is primarily due
to increased amortization expense related to the acquisition of competitor
business music accounts. The decrease for the nine month period was the result
of assets related to the 1992 MLP acquisition of Muzak that were fully
depreciated in the third quarter of 1997.
OTHER INCOME(EXPENSE). Interest expense net of interest income, equity in
losses of joint venture and other income and expense increased $40,000 and
$293,000 for the three and nine month periods ended September 30, 1998,
respectively, as compared to the same periods during 1997. These increases were
primarily the result of a reduction in interest income as the Company's cash
balance has declined from $17.1 million in September 1997 to $4.4 million for
the same period in 1998. See liquidity and capital resources section.
NET LOSS. Net loss due to the afore mentioned items decreased to $2.5 and
$6.9 million for the three and nine month periods ended September 30, 1998,
respectively, as compared to $3.4 and $10.4 million for the same periods in
1997.
MUZAK CAPITAL CORPORATION. Muzak Capital Corporation ("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 due to its lack of significant assets and lack of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from $8.5 million as of December 31, 1997 to
$4.4 million as of September 30, 1998. The Company's operating cash flow during
this period was $12.4 million, including a net change in operating assets and
liabilities of $2.0 million. The operating cash flow was primarily used to fund
capital requirements associated with new subscriber additions and acquisitions
of its competitors' business music accounts.
In March 1998, the Company obtained a credit facility for working capital
purposes with an initial availability of $3.0 million, increasing to
$5.0 million upon the attainment of certain cash flow related targets. In
July of 1998 the Company met the required cash flow targets required to
increase the available cash to $5.0 million. The credit facility is secured
by the inventories and receivables of the Company and expires on September 30,
1999. Amounts outstanding under the facility bear a variable rate of
interest, to be paid quarterly, based on the lender's prime rate or LIBOR
plus 2%. The terms of the credit facility require the Company to maintain
certain performance standards and covenants that, among other things, limit
the Company's capital spending and acquisitions of other businesses, as well
as the Company's ability to incur additional debt and make distributions to
partners. As of September 30, 1998, the Company's had $.3 million outstanding
at an 8.75% interest rate under this credit facility.
In connection with the acquisition of a competitor's business music accounts in
April 1998 the Company signed a $3.0 million promissory note due April 2006.
This note requires annual payments of $510,000 per year starting in April 1998
and bears an interest rate of 10% per annum.
On April 16, 1998, the Company entered into a agreement with its joint venture
partner in Muzak Europe that effectively liquidated the Company's interest in
Muzak Europe in exchange for a seven year $800,000 promissory note, which bears
interest at eight percent (8%) per annum, and the right of the Company to
participate in five percent (5%) of the business service revenues of the
European venture in its new role as franchisor.
On July 10, 1998 EAIC Corp., a formerly wholly owned subsidiary of the
Company, consummated a recapitalization and equity financing agreement
pursuant to which the shares held by the Company became non-voting securities
and 73,500
<PAGE>
shares of Class A preferred stock of EAIC Corp., were issued to a related
party investor for a total consideration of $3.4 million which represents a
43% interest. After January 5, 1999, an additional 26,250 shares of Class B
preferred stock can be purchased by the related party investor for 2.5 million
if certain performance criteria is met by EAIC Corp.
In September 1998, the Company entered into a purchase commitment agreement with
a drive-through equipment vendor which guarantees that the Company's owned or
independent affiliates will purchase at least $2.0 million dollars of drive-
through and related equipment by April 30, 1999.
Subsequent to September 30, 1998, the Company entered into a letter of intent
and a purchase agreement to purchase the subscriber accounts from certain
competing business music distributors for a total approximate cash consideration
of $14.5 million.
The Company believes that 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 1999. 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.
YEAR 2000 CONVERSION
The Company is currently in the process of upgrading all of its computer
systems to be year 2000 compliant. Management's original estimate was to
have all of the Company's systems year 2000 compliant by the end of third
quarter 1998. This original goal was not achieved, but management is fully
confident that the Company's systems will be year 2000 compliant by the end
of the year 1999. While currently the Company is not dependent on one vendor
for any one service or supply, failure of one of the broadcast satellites
used by the Company would have a material adverse effect on the Company.
Once the Company's main operating system is converted the Company will be
dependent on the services of the system developer for support of this system.
The Company has received confirmation from all of its satellite space
providers that they are year 2000 compliant. Management is currently
developing a contingency plan to address year 2000 system failures for both
internal and external service providers.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is subject to various proceedings arising in the normal 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.
ITEM 2. CHANGES IN SECURITIES.
On April 10, 1998, the Company issued a total of 230,000 Class A-2 limited
partnership units to two third party sellers in exchange for certain assets,
of a competing business music provider, with an estimated value of $747,500.
The sale of the 230,000 Class A-2 limited partnership units was made in a
transaction exempt from the registration requirements of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof.
On April 13, 1998, the Company issued a total of 45,382 Class A-2 limited
partnership units to a third party seller in exchange for certain assets, of a
competing business music provider, with an estimated value of $147,491. The
sales of the 45,382 Class A-2 limited partnership units was made in a
transaction exempt from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof.
<PAGE>
On July 1, 1998, the Company repurchased a total of 100,000 class B limited
partnership units, from a former member of management, for a total repurchase
price of $215,000.
On August 1, 1998, the Company issued 21,400 class B limited partnership units,
to various members of management, for a total consideration of $49,862. Also,
the company has entered into agreements to sell an additional 78,600 class B
limited partnership units to certain management members for total consideration
of $183,138.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule of Muzak Limited Partnership
27.2 Financial Data Schedule of Muzak Capital Corporation
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized.
MUZAK LIMITED PARTNERSHIP
By: /s/ Brad D. Bodenman
------------------------------
Date: November 16, 1998 Brad D. Bodenman
Vice President, Finance
and Administration
(Principal Financial
Officer and Chief
Accounting Officer of Muzak
Limited Partnership)
MUZAK CAPITAL CORPORATION
By: /s/ Brad D. Bodenman
------------------------------
Date: November 16, 1998 Brad D. Bodenman
Vice President, Finance
and Administration
(Principal Financial
Officer and Chief
Accounting Officer of Muzak
Limited Partnership
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------ -----------
<S> <C>
27.1 Financial Data Schedule of Muzak Limited Partnership
27.2 Financial Data Schedule of Muzak Capital Corporation
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-Q OF
MUZAK LIMITED PARTNERHIP AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000891983
<NAME> MUZAK LIMITED PARTNERSHIP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,436
<SECURITIES> 0
<RECEIVABLES> 20,897
<ALLOWANCES> 905
<INVENTORY> 4,898
<CURRENT-ASSETS> 31,142
<PP&E> 86,254
<DEPRECIATION> 44,495
<TOTAL-ASSETS> 111,396
<CURRENT-LIABILITIES> 25,405
<BONDS> 102,430
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 111,396
<SALES> 17,134
<TOTAL-REVENUES> 72,667
<CGS> 6,788
<TOTAL-COSTS> 31,391
<OTHER-EXPENSES> 26,005
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,146
<INCOME-PRETAX> (6,903)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,903)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,903)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-Q OF
MUZAK CAPITAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001013763
<NAME> MUZAK CAPITAL CORPORATION
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
