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,
1996
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
Incorporation or Organization) No.)
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 [_] No [x]
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 November
14, 1996: Muzak Capital Corporation - 100.
MUZAK LIMITED PARTNERSHIP
Consolidated Balance Sheets
(In thousands)
September 30, December 31,
1996 1995
---- ----
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $1,574 $1,115
Accounts receivable, net of allowance for doubtful
accounts of $608 and $632 . . . . . . . . . . . . . . . . 14,946 15,534
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 3,267 3,473
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . 1,439 1,543
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291 357
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . 21,517 22,022
Property and equipment, net . . . . . . . . . . . . . . . . . 36,145 36,586
Deferred costs and intangible assets, net . . . . . . . . . . 35,370 36,706
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,222 1,125
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $94,254 $96,439
======== ========
Liabilities and Partners' Capital (Deficit)
Current Liabilities:
Revolving credit facility . . . . . . . . . . . . . . . . . . $12,800 $9,300
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 10,713 6,818
Advance billings . . . . . . . . . . . . . . . . . . . . . . 4,596 4,533
Advance expenses . . . . . . . . . . . . . . . . . . . . . . 3,485 2,902
Current portion of long-term obligations . . . . . . . . . . 7,342 5,911
------- -------
Total current liabilities . . . . . . . . . . . . . . . . 38,936 29,464
Long-term obligations, net of current portion . . . . . . . . 40,439 47,094
Unearned installation income . . . . . . . . . . . . . . . . 3,418 2,786
Commitments and contingencies . . . . . . . . . . . . . . . . - -
Redeemable preferred partnership Interests . . . . . . . . . 16,539 15,722
Partners' Capital (Deficit):
Limited partners' interests . . . . . . . . . . . . . . . . . 3,849 5,637
General partner's interests (deficiencies) . . . . . . . . . (8,927) (4,264)
------- -------
Total partners' capital (deficit) . . . . . . . . . . . . (5,078) 1,373
------- -------
Total liabilities and partners' capital (deficit) . . . . $94,254 $96,439
======= =======
The accompanying notes are an integral part of
these financial statements.
MUZAK LIMITED PARTNERSHIP
Consolidated Statement of Operations
(Unaudited)
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Music and other business services . . . . . . . . . . $13,619 $12,934 $40,596 $38,850
Equipment and related services . . . . . . . . . . . . 8,785 8,772 23,964 25,418
------- ------- ------- -------
Total revenues . . . . . . . . . . . . . . . . . . 22,404 21,706 64,560 64,268
------- ------- ------- -------
Cost of revenues:
Music and other business services . . . . . . . . . . 3,792 3,623 11,293 10,685
Equipment and related services . . . . . . . . . . . . 5,789 6,048 16,093 17,514
------- ------- ------- -------
Total cost of revenues . . . . . . . . . . . . . . 9,581 9,671 27,386 28,199
------- ------- ------- -------
Gross profit . . . . . . . . . . . . . . . . . . . . . . 12,823 12,035 37,174 36,069
Selling, general and administrative expenses . . . . . . 7,645 7,112 22,751 21,740
Depreciation . . . . . . . . . . . . . . . . . . . . . . 2,677 2,430 7,832 7,099
Amortization . . . . . . . . . . . . . . . . . . . . . . 2,384 2,302 6,847 6,745
------- ------- ------- -------
Operating Income (loss) . . . . . . . . . . . . . . 117 191 (256) 485
Interest expense . . . . . . . . . . . . . . . . . . . . 1,819 1,832 5,393 5,623
Other (income) expense, net . . . . . . . . . . . . . . . 25 (2) 253 (44)
------- ------- ------- -------
Net loss . . . . . . . . . . . . . . . . . . . . . (1,727) (1,639) (5,902) (5,094)
Redeemable preferred returns . . . . . . . . . . . (276) (258) (817) (763)
------- ------ ------- -------
Net loss attributable to general and
limited partners . . . . . . . . . . . . . . . . ($2,003) ($1,897) ($6,719) ($5,857)
======= ======= ======= =======
The accompanying notes are an integral part of
these financial statements.
MUZAK LIMITED PARTNERSHIP
Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended
September 30
1996 1995
---- ----
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($5,902) ($5,094)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . 380 461
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,832 7,099
Amortization, net of deferred financing cost . . . . . . . . . . . . 6,847 6,745
Deferred financing cost amortization . . . . . . . . . . . . . . . . 905 984
Loss in equity of joint venture . . . . . . . . . . . . . . . . . . 142 0
Change in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 208 832
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) 493
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 2,995 (308)
Advanced billings . . . . . . . . . . . . . . . . . . . . . . . . . 63 (9)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 583 79
Unearned installation income . . . . . . . . . . . . . . . . . . . . 633 850
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 214
------- -------
Net cash provided by operating activities . . . . . . . . . . . . . 14,941 12,346
------- -------
INVESTING ACTIVITIES
Additions to property and equipment . . . . . . . . . . . . . . . . . . (7,150) (5,674)
Additions to deferred costs and intangible assets . . . . . . . . . . . (5,304) (3,714)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 (87)
-------- -------
Net cash used in investing activities . . . . . . . . . . . . . . . (12,325) (9,475)
-------- -------
FINANCING ACTIVITIES
Borrowings (repayment) under revolving notes
payable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500 1,250
Principal payments on term debt . . . . . . . . . . . . . . . . . . . . (5,480) (4,112)
Payments on other long-term debt . . . . . . . . . . . . . . . . . . . . (126) (30)
Payments under capital leases . . . . . . . . . . . . . . . . . . . . . (293) (363)
Contributions by partners . . . . . . . . . . . . . . . . . . . . . . . 312 256
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (70) (52)
-------- -------
Net cash used in financing activities . . . . . . . . . . . . . . . (2,157) (3,051)
-------- -------
Net increase (decrease) in cash and cash equivalents . . . . . . . . 459 (180)
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . . . . 1,115 1,445
-------- -------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . . . . $ 1,574 $ 1,265
======== =======
The accompanying notes are an integral part of
these financial statements.
MUZAK LIMITED PARTNERSHIP
FORM 10-Q
Notes to Consolidated Financial Statements
Nine months ended September 30, 1996 and 1995
(Unaudited)
NOTE 1. FINANCIAL STATEMENT PREPARATION
The consolidated financial statements as of September 30, 1996 and
December 31, 1995 and for the three and nine month periods ended
September 30, 1996 and 1995 have been prepared by Muzak Limited
Partnership (the "Company") pursuant to the rules and regulations of
the Securities and Exchange Commission. The financial information for
the three and nine month periods ended September 30, 1996 and 1995 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. These
consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the financial
statements filed with the Securities and Exchange Commission on
September 27, 1996 as part of the Company's Form S-1 Registration
Statement (the "Registration Statement").
The results of operations for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of the Company's
results of operations for the entire fiscal year ended December 31,
1996.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation. The accompanying consolidated financial
statements of the Company include the accounts of the Company and its
wholly-owned subsidiary, Muzak Capital Corporation. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
NOTE 3. PROPERTY AND EQUIPMENT, NET:
Property and equipment consist of the following (in thousands):
September 30, December 31,
1996 1995
---------- -----------
Equipment provided to subscribers . . . . . $47,245 $42,847
Machinery and equipment . . . . . . . . . . 9,363 7,628
Vehicles . . . . . . . . . . . . . . . . . 3,055 2,872
Furniture and fixtures . . . . . . . . . . 2,220 2,133
Land and buildings . . . . . . . . . . . . 858 858
Leasehold improvements . . . . . . . . . . 915 833
------- -------
Total property and equipment . . . . . 63,656 $57,171
Less: Accumulated depreciation
and amortization . . . . . . . . . (27,511) (20,585)
-------- --------
$36,145 $36,586
======== ========
NOTE 4. DEFERRED COSTS AND INTANGIBLE ASSETS, NET:
Deferred costs and intangible assets consist of the following (in thousands):
September 30, December 31,
1996 1995
------------ -------------
Income producing contracts . . . . . . . . $39,828 $39,826
Deferred subscriber acquisition costs . . . 10,168 7,784
Master recording rights and deferred . . .
production costs . . . . . . . . . . . 9,238 7,770
Deferred financing costs . . . . . . . . . 5,809 5,783
Organization costs . . . . . . . . . . . . 6,766 4,454
Non-compete agreements . . . . . . . . . . 846 846
Other . . . . . . . . . . . . . . . . . . . 740 702
-------- --------
Total deferred costs and
intangible assets . . . . . . . . . 73,395 67,165
Less: Accumulated amortization . . . . . . (38,025) (30,459)
-------- --------
$35,370 $36,706
======== ========
If an initial public offering of the Company's equity securities
does not occur in the fourth quarter of 1996, the Company will
write-off $1.75 million in organization costs associated with the
unconsummated offering in the fourth quarter of 1996.
NOTE 5. LONG-TERM OBLIGATIONS:
Long-term obligations are summarized as follows (in thousands):
September 30, December 31,
1996 1995
------------ ------------
Variable rate senior term loan . . . . . . $35,509 $40,989
Fixed rate subordinated note, net of
unamortized discount of
$1,536 and $1,349 . . . . . . . . . . 11,151 10,964
Capital lease obligations . . . . . . . . . 957 762
Other . . . . . . . . . . . . . . . . . . . 164 290
------- -------
Total long-term obligations . . . . . 47,781 53,005
Less: Current portion . . . . . . . . . . (7,342) (5,911)
------- -------
$40,439 $47,094
======= =======
NOTE 6. SUBSEQUENT EVENTS:
On October 2, 1996, the Company completed a $100 million offering (the
"Offering") of its 10% Senior Notes due 2003 (the "Senior Notes").
Approximately $69 million of the proceeds from the Offering were used
to pay off the Company's senior and subordinated bank debt and retire
certain preferred partnership interests of the Company. The balance
of the proceeds 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.
In accordance with Staff Accounting Bulletin Number 98 of the
Securities and Exchange Commission, the Company will report an
extraordinary loss of approximately $3.7 million on the write-off of
deferred financing costs and loan discount in connection with the
extinguishment of the bank debt in the fourth quarter of 1996. In
addition, an extraordinary gain of approximately $3.1 million will be
recorded during that same quarter as a result of the retirement of
certain redeemable preferred partnership units of the Company.
The Company formally approved the Amended and Restated Management
Option Plan ("Amended and Restated Plan") in the fourth quarter of
1996. The Amended and Restated Plan will result in non-cash
compensation being recorded in the fourth quarter of 1996 and in
subsequent periods.
NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest expense for the nine month periods ended
September 30, 1996 and 1995 was approximately $5,320,000 and
$4,615,000, respectively.
Non-cash items for the nine month periods ended September 30, 1996 and
1995 include the transfer of inventory, prepaid expenses, and
machinery and equipment with a book value of $394,000 from a business
segment in exchange for a note receivable in April 1996, organization
costs of $900,000 related to an unconsummated equity financing and the
Offering of Senior Notes which are capitalized and included in accounts
payable during the second and third quarters of 1996, and purchases of
vehicles acquired under capital leases during the nine month periods
ended September 30, 1996 and 1995 of approximately $488,000 and $258,000,
respectively.
MUZAK CAPITAL CORPORATION
BALANCE SHEET
September 30, 1996
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 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
----
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1
====
NOTE TO FINANCIAL STATEMENT
Muzak Capital Corporation ("Capital Corp."), a wholly-owned
subsidiary of Muzak Limited Partnership (the "Company"), was formed
on May 8, 1996. Capital Corp. has no independent operations and is
dependent on the cash flow of the Company to meet its sole obligation
as co-issuer with the Company of the 10% Senior Notes due 2003,
the payment of principal and interest thereon when due.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of
Operations included in the Registration Statement.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30, 1996. Cash and cash equivalents
increased from $1.1 million as of December 31, 1995 to $1.6 million as
of September 30, 1996. The Company's operating cash flow during this
period was $14.9 million, including a decline in operational working
capital of $5.0 million. The operating cash flow was used to pay down
bank debt by $2.0 million, fund capital requirements associated with
new subscriber additions and the conversion of existing subscribers to
services more beneficial to the Company, fund new uplink facilities in
Wyoming associated with the Company's contractual arrangements with
EchoStar Satellite Corporation ("EchoStar") and fund capital
requirements to establish the Company's internet service known as
MusicServersm.
Public Debt Offering. On October 2, 1996, the Company completed the
Offering of its Senior Notes. A portion of the proceeds from the
Offering were used to pay off senior and subordinated bank debt of the
Company and retire certain redeemable preferred partnership interests of
the Company. The remainder 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. During the fourth quarter of 1996, the Company
will report an extraordinary loss of approximately $3.7 million on the
write-off of deferred financing costs and loan discount in connection
with the extinguishment of the bank debt. In addition, an
extraordinary gain of approximately $3.1 million will be recorded as a
result of the retirement of certain redeemable preferred partnership units
of the Company.
Outlook. The Company believes that its cash and cash equivalents, after
giving effect to the proceeds from the Offering, plus future cash
generated from operations will be sufficient to finance capital
requirements for its core business and its current plans for expansion
through December 1998. If the Company engages in one or more material
acquisitions, joint ventures, alliances or other major business
initiatives requiring significant cash commitments, or incurs
unanticipated expenses, additional financing could be required.
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 that follows
due to its lack of significant assets and lack of operations.
RESULTS OF OPERATIONS
Revenues. Total revenues increased 3.2% and 0.5% for the three and
nine month periods ended September 30, 1996, respectively, as compared
with the same periods in 1995. These increases were largely due to
a net increase in monthly recurring service billings, partially offset by
lower equipment and installation revenues during the 1996 period.
Monthly recurring service billings increased by $10,000 and $76,000
over the three and nine month periods ended September 30, 1996,
respectively. The decrease in equipment and installation revenues
during the nine month period ended September 30, 1996 was the result
of the Company's focus on recurring services, related equipment and
labor installations, while moving away from the lower margin large
labor and equipment installations relating to non-recurring services.
Gross Profits. Gross margins as a percentage of revenues increased in
both the three and nine month periods ended September 30, 1996, as
compared to the same periods in 1995. Gross margins for the three and
nine month periods ended September 30, 1996 were 57.2% and 57.6% as
compared to 55.4% and 56.1% for the same periods in 1995. This
improved performance was principally due to the relatively fixed
nature of the costs of producing and distributing the Company's core
products, leveraged against the growth in recurring service billings.
Also contributing to the improved margins was the Company's increased
focus on the smaller, higher margin equipment and labor installations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased as a percentage of revenues for the
three and nine month periods ended September 30, 1996, as compared to
the same periods in 1995. These expenses, as a percentage of
revenues, were 34.1% and 35.2% for the three and nine month periods
ended September 30, 1996, as compared to 32.8% and 33.8% for the same
periods in 1995. Sales and marketing costs increased due to the
Company's strategy of employing additional sales personnel in the
beginning of 1996, with the intent of increasing sales of
its monthly recurring services. General and administrative
expenses increased for the three month period ended September 30, 1996
when compared with the same period for 1995, primarily as a result
of certain retrospective workers' compensation premium credits
received in the three-month period ended September 30, 1995. The
increase for the nine month period ended September 30, 1996 reflects
this variance as well as increased occupancy costs associated
with new branches in New York and San Jose, California and
consulting expenses related to the EchoStar agreements and the
Company's MusicServersm service.
Depreciation and Amortization. Depreciation and Amortization expenses
increased for both the three and nine month periods ended September
30, 1996, as compared to the same periods for 1995. These increases
were primarily the result of recent capital investments in customer
premises equipment made for the purpose of increasing recurring
billings and investments in other business opportunities, such as
costs of the new EchoStar uplink facility and the costs of
establishing the Company's MusicServersm service.
Interest Expense and Other Income. Interest expense, net of other
income was approximately $1.8 million for each of the three month
periods ended September 30, 1996 and 1995, respectively, and was
approximately $5.6 million for each of the nine month periods ended
September 30, 1996 and 1995, respectively.
Net Loss. Net loss increased to $2.0 million and $6.7 million,
respectively, for both the three month and nine month periods ended
September 30, 1996, as compared to $1.9 million and $5.9 million,
respectively, for the same periods in 1995.
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.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On August 27, 1996, the Board of Directors of Music Holdings
Corp. ("Music Holdings"), the general partner of MLP Acquisition L.P.,
the managing general partner of the Company, resolved by unanimous
written consent to appoint William A. Boyd a director of Music
Holdings and Centre Partners L.P., the sole voting stockholder of
Music Holdings, gave its written consent to the appointment of William
A. Boyd as a director of Music Holdings.
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.
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: MLP ACQUISITION L.P.,
-------------------------
Managing General Partner
By: MUSIC HOLDINGS CORP.
--------------------
General Partner
By: /s/ Kirk A. Collamer
--------------------
Date: November 14, 1996 Kirk A. Collamer
Vice President of Finance
and Chief Financial Officer
(Principal Financial
Officer and
Chief Accounting Officer)
MUZAK CAPITAL CORPORATION
Date: November 14, 1996 By: /s/ Kirk A. Collamer
--------------------
Kirk A. Collamer
Vice President of Finance
and Chief Financial Officer
(Principal Financial Officer and
Chief Accounting Officer)
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule of Muzak Limited Partnership
27.2 Financial Data Schedule of Muzak Capital Corporation
NYFS08...:\63\64563\0004\1777\FRMN106R.52C