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 March 31, 2000.
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _________ to
__________.
Commission file number: 333-78573
333-78571-01
MUZAK HOLDINGS LLC
MUZAK HOLDINGS FINANCE CORP.
(Exact Name of Registrants as Specified in their charter)
DELAWARE 04-3433730
DELAWARE 04-3433728
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporated or Organization)
5550 77 CENTER DRIVE SUITE 380
CHARLOTTE, NC 28217
(704) 559-5277
(Address, Including Zip Code and Telephone Number including Area Code of
Registrants' Principal Executive Offices)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrants have filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [X ] No [ ]
Muzak Holdings Finance Corp meets the conditions set forth in General
Instruction H(1) (a) and (b) of Form 10-Q and is therefore filing this form with
the reduced disclosure format.
Muzak Holdings Finance Corp. had 100 shares of outstanding common stock as of
May 12, 2000.
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MUZAK HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2000 1999
(UNAUDITED)
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 3,370 $ 2,275
Accounts receivable, net................................... 38,684 39,203
Inventory.................................................. 11,182 12,283
Prepaid expenses and other assets.......................... 2,179 2,304
------------- ------------
Total current assets................................... 55,415 56,065
Property and equipment, net..................................... 99,548 95,050
Intangible assets, net.......................................... 331,928 314,364
Deposit and other assets, net................................... 35,370 31,836
------------- ------------
TOTAL ASSETS........................................... $522,261 $ 497,315
============= ============
LIABILITIES AND MEMBER'S INTEREST
Current liabilities:
Revolving credit facility.................................. $ 24,692 $ 25,000
Current maturities of long term debt....................... 3,692 4,197
Current maturities of other liabilities.................... 1,400 1,394
Accounts payable........................................... 15,567 15,123
Accrued expenses........................................... 17,862 34,433
Advance billings........................................... 11,905 11,171
------------- ------------
Total current liabilities.............................. 75,118 91,318
Long-term debt.................................................. 360,597 323,131
Related party notes............................................. 30,000 30,000
Other liabilities............................................... 12,825 9,798
Commitments and contingencies (Note 9)..........................
Members' interest:
Class A units................................................. 82,493 70,599
Class B units.................................................. 2,822 2,822
Accumulated deficit...................................... (41,594) (30,353)
------------- ------------
Total members' interest................................ 43,721 43,068
------------- ------------
TOTAL LIABILITIES AND MEMBERS' INTEREST................ $522,261 $497,315
============= ============
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
2
MUZAK HOLDINGS LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
QUARTER QUARTER
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
--------------- ---------------
Revenues:
Music and other business services.......................................... $ 32,259 $ 8,179
Equipment and related services............................................. 11,436 3,972
------- -------
Total revenues......................................................... 43,695 12,151
Cost of revenues:
Music and other business services.......................................... 6,773 1,599
Equipment and related services............................................. 8,931 2,872
------- -------
Total cost of revenues................................................. 15,704 4,471
------- -------
Gross profit........................................................... 27,991 7,680
------- -------
Selling, general and administrative expenses.................................... 14,182 2,947
Depreciation and amortization expense........................................... 13,954 3,197
------- -------
Income (loss) from operations.......................................... (145) 1,536
Other income (expense):
Interest expense, net...................................................... (11,083) (2,331)
Other, net................................................................. 7 (21)
------- -------
Loss before income taxes....................................................... (11,221) (816)
Income tax provision........................................................... 20 --
Net loss............................................................... $ (11,241) $ (816)
========= =======
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
3
MUZAK HOLDINGS LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR UNITS)
TOTAL
CLASS A CLASS B ACCUMULATED MEMBERS'
UNITS DOLLARS UNITS DOLLARS DEFICIT EQUITY
------------------------------------------------------------------------------------
Balance at December 31, 1999.......... 70,599 $ 70,599 10,281 $2,822 $ (30,353) $ 43,068
Issuance of units..................... 11,894 11,894 -- -- 11,894
Net loss ............................. -- -- -- -- (11,241) (11,241)
Balance at March 31, 2000............. 82,493 $ 82,493 10,281 $2,822 $(41,594) $ 43,721
====== ======== ====== ====== ========= ========
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
4
MUZAK HOLDINGS LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
QUARTER ENDED QUARTER ENDED
MARCH 31, MARCH 31,
2000 1999
-------------------- --------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss........................................................................ $ (11,241) $ (816)
Adjustments to derive cash flow from continuing operating activities:
Deferred income tax expense..................................................... 15 --
Depreciation and amortization................................................... 13,954 3,197
Amortization of senior discount notes........................................... 1,371 206
Amortization of deferred financing fees......................................... 365 13
Deferred subscriber acquisition costs........................................... (3,076) (133)
Unearned installment income..................................................... (62) -
Net change in certain assets and liabilities, net of business acquisitions
Decrease (increase) in accounts receivable................................... 771 (364)
Decrease (increase) in inventory ............................................ 1,287 (207)
Increase (decrease) in accrued interest...................................... (1,488) 1,238
Increase (decrease) in accounts payable ..................................... 444 (116)
Increase (decrease) in accrued expenses...................................... (7,813) 1,697
Increase (decrease) in advance billings...................................... 734 (457)
Other, net................................................................... (103) 711
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES........................ (4,842) 4,969
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash....................................................... (33,236) (262,509)
Capital expenditures............................................................ (10,100) (2,705)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES...................................... (43,336) (265,214)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior subordinated notes............................. - 115,000
Proceeds from issuance of senior credit facility................................ - 135,000
Net borrowings (repayments) on revolver......................................... (308) 3,400
Proceeds from issuance of floating rate notes................................... 36,000 -
Proceeds from interest rate swap................................................ 4,364 -
Proceeds from issuance of membership units...................................... 10,636 60,000
Repayment of notes payable to related party..................................... - (41,683)
Repayments of capital lease obligations and other debt.......................... (671) (564)
Payment of fees associated with the financing................................... (748) (10,164)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITES................................... 49,273 260,989
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS....................................... 1,095 744
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 2,275 1,293
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ 3,370 $ 2,037
======== ========
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
5
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Muzak Holdings LLC, together with its subsidiaries, ("the Company"),
formerly known as ACN Holdings, LLC, was formed in September 1998 pursuant to
the laws of Delaware. Muzak LLC, a wholly owned subsidiary of the Company, owns
and operates franchisees. Muzak LLC began its operations on October 7, 1998 with
the acquisition of the independent franchisees in the Baltimore, Charlotte,
Hillsborough, Kansas City, St. Louis, Jacksonville, Phoenix, and Fresno areas
from Audio Communications Network, Inc. (the "Predecessor Company"). On March
18, 1999, Muzak Limited Partnership ("Old Muzak") merged with and into Audio
Communications Network, LLC ("ACN"). At the time of the merger, ACN changed its
name to Muzak LLC.
As of March 31, 2000, ABRY Partners, LLC. and its respective affiliates
collectively own approximately 67% of the beneficial interests in the Company's
voting interests.
The Company derives the majority of its revenues from the sale of
business music products. The core product is Audio Architecture and its two
complementary products are Audio Marketing and Video Imaging. These revenues are
generated by clients, who pay monthly subscription fees under noncancelable five
year contracts.
The Company also derives revenues from the sale and lease of audio
system-related products, principally sound systems and intercoms, to business
music clients and other clients. In addition, the Company sells electronic
equipment, such as proprietary tape playback equipment and other audio and video
equipment to franchisees to support the sale of business music services.
Installation, service and repair revenues consist principally of revenues from
the installation of sound systems and other equipment that is not expressly part
of a business music contract, such as paging, security and drive-through
systems. These revenues also include revenue from the installation, service and
repair of equipment installed under a business music contract.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
the Company and its subsidiaries; Muzak LLC, Muzak Capital Corporation, Muzak
Holdings Finance Corporation, Muzak Finance Corporation, Business Sound Inc.,
Electro Systems Corporation, BI Acquisition LLC, MLP Environmental Music, LLC,
Audio Environments, Inc, Background Music Broadcasters, Inc, Telephone Audio
Productions, Inc., Vortex Sound Communications Company, Inc., Music Incorporated
and Muzak Houston, Inc. All significant intercompany items have been eliminated
in consolidation.
Pursuant to the rules and regulations of the Securities and Exchange
Commission, certain financial information has been condensed and certain
footnote disclosures have been omitted. Such information and disclosures are
normally included in financial statements prepared in accordance with generally
accepted accounting principles.
The financial statements as of March 31, 2000 and March 31, 1999 and
for the three month periods then ended are unaudited; however, in the opinion of
management, such statements include all adjustments (consisting solely of normal
recurring adjustments except for the acquisitions described in Note 3) necessary
for a fair statement of the financial information included herein subject to
year end audit adjustments. Results of operations for interim periods are not
necessarily indicative of results for the full year.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Muzak Holdings LLC Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
6
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS
As discussed in Note 1, on March 18, 1999 Old Muzak merged with and
into ACN. Under the terms of the agreement, the Company paid total consideration
of $274.2 million, which is comprised of the following: $125.5 million cash
consideration, $114.9 million consideration in the tender offer and consent
solicitation for the 10% Senior Notes due 2003 of Old Muzak, $15.9 million for
debt repayment of Old Muzak outstanding obligations and $17.9 million of other
assumed obligations. In addition, at the time of the merger, the Company repaid
$41.7 million borrowed from ABRY Broadcast Partners by ACN in October 1998 in
connection with the acquisition of the Company's independent franchisees from
the Predecessor Company and converted $0.7 million into voting units of the
Company.
In 1999, prior to the merger, the Company made the following
acquisitions:
On January 15, 1999, the Company acquired all of the outstanding stock of
Business Sound, Inc. for approximately $4.1 million, which included 3,661
Class A units of the Company. Business Sound was the Company's independent
franchisee for the New Orleans, Louisiana and Mobile, Alabama areas.
On February 24, 1999, the Company acquired all of the outstanding stock of
Electro Systems for approximately $0.7 million, which included 650 Class A
units of the Company, and assumed certain non-recourse debt of $2.4 million.
Electro Systems was the Company's independent franchisee located in Panama
City, Florida.
The Company made twenty acquisitions between the merger on March 18, 1999
and March 31, 2000. The table below provides information regarding these
acquisitions (in millions, except for number of Company units).
Purchase Acquired Assets Acquired Acquired
Date Price (1) Or Stock Business Markets
- ------------------------------------------------------------------------------------------------------------------------------
March 18,1999 $18.1 (2) Net assets of Capstar Broadcasting Independent franchisee Georgia, Florida
Corporation's independent franchisee
April 1, 1999 $0.2 Net assets of Custom On Hold Services Audio Marketing Washington
Inc
May 1, 1999 $3.2 (3) Net assets of Capstar Broadcasting Independent franchisee Nebraska
Corporation's independent franchisee
June 1, 1999 $6.9 Net assets of Advertising on Hold, Inc Audio Marketing Florida, Georgia,North
Carolina
July 1, 1999 $0.8 Net assets of CustomTronics Sound Business Music California
July 1, 1999 $0.9 Net assets of Penobscot Broadcasting Independent Maine
Corporation franchisee
July 26, 1999 $1.3 Net assets of LaBov and Beyond, Inc Audio Marketing Indiana
August 1, 1999 $3.5 Net assets of US West Communications Audio Marketing National
Services, Inc's Please Hold Promotions
September 1, 1999 $4.7 Stock of Broadcast International, Inc Business Music National
October 1, 1999 $10.3 Net assets of Midwest Systems and Business Music Illinois, Indiana, Ohio,
Services, Inc West Virginia
November 1, 1999 $2.9 Net assets of A & D Music, Inc Independent franchisee Oregon
November 1, 1999 $7.9 (4) Stock of Audio Environment, Inc and Independent California
Background Music Broadcasters Inc franchisee
December 1, 1999 $13.2 (5) Net assets of MountainWest Audio, Inc Independent Utah, Idaho,Washington
franchisee
February 2, 2000 $0.4 Net assets of Quincy Broadcasting Company Independent franchisee Illinois
7
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
Purchase Acquired Assets Acquired Acquired
Date Price (1) Or Stock Business Markets
- ----------------------------------------------------------------------------------------------------------------------------
February 2, 2000 $0.9 Net assets of General Communications Audio Marketing Indiana, Georgia,
Corporation ("On Hold America") Florida, Ohio
February 2, 2000 $0.4 Net assets of Texas Sound Co. Ltd Business Music Texas
February 24, 2000 $3.7 Stock of Telephone Audio Productions, Audio Marketing National
Inc
March 24, 2000 $9.2 (6) Stock of Vortex Sound Communications Independent franchisee District of Columbia
Company, Inc
March 31, 2000 $1.6 Net assets of Dynamic Sound Independent franchisee Nevada, California
March 31, 2000 $8.3 Stock of Muzak Houston Inc Independent franchisee Texas
(1) The purchase price does not include transaction costs
(2) Total purchase price included 13,535 Class A units.
(3) Total purchase price included 2,385 Class A units.
(4) Total purchase price included 100 Class A units.
(5) The Company paid $3.1 million of the purchase price of Mountain West Audio,
Inc. as of December 31, 1999. In February 2000, the Company paid the
remaining purchase price, which included 456 Class A units.
(6) Total purchase price included 802 Class A units.
The results of operations of the acquired companies are included in the
Company's consolidated statement of operations for the periods in which they
were owned by the Company.
The acquisitions were accounted for under the purchase method of
accounting. Accordingly, the consideration was allocated to the net assets
acquired based on the fair market values at the date of acquisition as
determined through the use of an independent appraisal. The excess of purchase
price for each acquisition over the estimated fair value of the tangible and
identifiable intangible assets acquired approximated $7.0 million and $127.9
million for the quarter ended March 31, 2000 and the year ended December 31,
1999, respectively and is being amortized over a period of twenty years on a
straight-line basis.
The following presents the unaudited pro forma results assuming that
the acquisitions discussed above had occurred as of the beginning of fiscal 2000
and 1999. These pro forma results are not necessarily indicative of the results
that will occur in future periods (in thousands).
QUARTER ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(UNAUDITED)
Revenues............................. $ 45,648 $ 43,470
Income (Loss) from operations........ 167 (1,883)
Net loss............................. (11,453) (11,514)
8
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
USEFUL MARCH 31, DECEMBER 31,
LIFE 2000 1999
(YEARS) (UNAUDITED)
----------------------------------------------
Equipment provided to subscribers.......................... 4-6 $ 80,649 $ 72,598
Capitalized Installation Labor............................. 5 20,865 18,270
Other...................................................... 3-30 23,012 22,606
--------- ---------
124,526 113,474
Less accumulated depreciation............................. (24,978) (18,424)
--------- ---------
$ 99,548 $ 95,050
========= =========
Depreciation expense approximated $6.6 million and $1.5 million for the quarters
ended March 31, 2000 and March 31, 1999, respectively.
5. INTANGIBLE ASSETS
Intangible assets consists of the following (in thousands):
USEFUL MARCH 31, DECEMBER 31,
LIFE 2000 1999
(YEARS) (UNAUDITED)
--------------------------------------------
Goodwill................................................. 20 $ 150,079 $ 143,094
Income producing contracts............................... 8-14 148,154 136,184
License agreements....................................... 20 5,082 5,082
Trademarks............................................... 5 14,891 14,866
Non-compete agreements................................... 2-7 22,054 16,401
Other.................................................... 5-20 18,717 18,430
--------- ---------
358,977 334,057
Less accumulated amortization............................ (27,049) (19,693)
--------- ---------
$ 331,928 $ 314,364
========= =========
Amortization expense was $7.4 million and $1.7 million for the quarters ended
March 31, 2000 and March 31, 1999, respectively.
9
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT
Debt obligations consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2000 1999
(UNAUDITED)
------------------ ---------------------
Revolving loan- Senior Credit Facility........................ $ 24,692 $ 25,000
====== ======
Related Party Notes........................................... 30,000 30,000
====== ======
Long term debt:
Senior Credit Facility........................................ 165,000 165,000
Senior Notes.................................................. 115,000 115,000
Senior Discount Notes......................................... 45,585 44,214
Floating Rate Notes........................................... 36,000 -
Other......................................................... 2,704 3,114
-------- --------
Total debt obligations........................................ 364,289 327,328
Less current maturities....................................... (3,692) (4,197)
-------- --------
$ 360,597 $ 323,131
========= =========
SENIOR CREDIT FACILITY
In March 1999, Muzak LLC entered into a new senior credit facility
("Senior Credit Facility") consisting of: (i) a term loan facility in the amount
of $30.0 million payable in semi-annual installments until final maturity on
December 31, 2005 ("Term Loan A") ; (ii) a term loan facility in the amount of
$105.0 million payable in semi-annual installments until final maturity on
December 31, 2006 ("Term Loan B") (together with Term Loan A , the "Term
Loans"); and (iii) a revolving loan (the "Revolving Loan") in an aggregate
principal amount of up to $35.0 million terminating on December 31, 2005. In
July 1999, Muzak LLC amended the Senior Credit Facility which increased the
principal amount of the Term Loan B by $30.0 million to $135.0 million. In
October 1999, Muzak LLC amended the Senior Credit Facility to enable a related
party to make a subordinated loan to Muzak LLC in the aggregate principal
amount of $20.0 million and to permit Muzak LLC to issue additional senior
subordinated notes and Muzak LLC to issue preferred stock if certain covenants
are met by the Company.
The Senior Credit Facility, which is guaranteed by the Company and
certain of its domestic subsidiaries contains restrictive covenants including
maintenance of interest and leverage ratios and various other restrictive
covenants which are customary for such facilities. In addition, Muzak LLC and
its subsidiaries are generally prohibited from incurring additional
indebtedness, incurring liens, paying dividends or making other restricted
payments, consummating asset sales, entering into transactions with affiliates,
merging or consolidating with any other person or selling assigning,
transferring, leasing, conveying, or otherwise disposing of assets. These
conditions were satisfied as of March 31, 2000.
Indebtedness under the Term Loan A and the Revolving Loans bear
interest at a per annum rate equal to the Company's choice of (i) the Alternate
Base Rate (which is the highest of prime rate and the Federal Funds Rate plus
.5%) plus a margin ranging from 1.00% to 2.00% or (ii) the offered rates for
Eurodollar deposits ("LIBOR") of one, two, three, or six months, as selected by
the Company, plus a margin ranging from 2.0% to 3.0%. Margins, which are subject
to adjustment based on the changes in the Company's ratio of consolidated total
debt to EBITDA (i.e., earnings before interest, taxes, depreciation,
amortization and other non cash charges) were 2.0% in the case of Alternate Base
Rate and 3.0% in the case of LIBOR as of March 31, 2000. Indebtedness under the
Term Loan B bears interest at a per annum rate equal to the Company's choice of
(i) the Alternate Base Rate (as described above) plus a margin of 2.5% or (ii)
LIBOR of one, two, three, or six months, as selected by the Company plus a
margin of 3.5%. The weighted average rate of interest on the Senior Credit
Facility at March 31, 2000 was 9.64%.
10
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT (CONTINUED)
SENIOR NOTES
On March 18, 1999, Muzak LLC together with its wholly owned
subsidiary, Muzak Finance Corp., co-issued $115.0 million in principal amount of
9 7/8% Senior Subordinated Notes ("Senior Notes") which mature on March 15,
2009. Interest is payable semi-annually, in arrears, on March 15 and September
15 of each year. The Senior Notes are general unsecured obligations of Muzak LLC
and Muzak Finance Corp. and are subordinated in right of payment to all existing
and future Senior Indebtedness of Muzak LLC and Muzak Finance Corp. The Senior
Notes are guaranteed by the Company, MLP Environmental Music, LLC, Business
Sound, Inc., BI Acquisition LLC, Audio Environments, Inc., Background Music
Broadcasters, Inc., Telephone Audio Productions, Inc., Muzak Capital
Corporation, Muzak Houston, Inc., Music Incorporated, and Vortex Sound
Communications Company, Inc. The indenture governing the Senior Notes prohibits
Muzak LLC and its subsidiaries from making certain payments such as dividends
and distributions of their capital stock; repurchases or redemptions of their
capital stock, and investments (other than permitted investments) unless certain
conditions are met. Before March 15, 2002, the issuers may redeem up to 35% of
the aggregate principal amount of the Notes originally issued under the
indenture at a redemption price of 109.875% of the aggregate principal amount so
redeemed, plus accrued and unpaid interest to the redemption date, with the net
proceeds of one or more equity offerings if certain conditions are met. After
March 15, 2004, the issuers may redeem all or part of the Notes at a redemption
price equal to 104.938% of the principal which redemption price declines to 100%
of the principal amount in 2007.
SENIOR DISCOUNT NOTES
On March 18, 1999, the Company together with its wholly owned
subsidiary Muzak Holdings Finance Corp., co-issued $75.0 million in principal
amount at maturity, or $39.9 million in accreted value on the issue date, of 13%
Senior Discount Notes (the "Senior Discount Notes") due March 2010. Cash
interest on the Senior Discount Notes does not accrue and is not payable prior
to March 15, 2004. The Senior Discount Notes were issued at a substantial
discount from their principal amount at maturity. Until March 15, 2004, the
Senior Discount Notes will accrete in value such that the accreted value on
March 15, 2004 will equal the principal amount at maturity of the Senior
Discount Notes. From and after March 15, 2004, interest on the Senior Discount
Notes will accrue at a rate of 13% per annum. Interest will be payable
semi-annually in arrears on each March 15 and September 15, commencing September
15, 2004, to holders of record of the Senior Discount Notes at the close of
business on the immediately preceding March 1 and September 1.
FLOATING RATE NOTES
In January 2000, Muzak LLC entered into an indenture for up to $50.0
million Senior Subordinated Floating Rate Notes (the "Floating Rate Notes"). The
Floating Rate Notes will be available for drawdowns until July 31, 2000.
Commitments on all amounts undrawn under the Floating Rate Notes by July 31,
2000 will expire and will be ineligible for future drawdowns. The Floating Rate
Notes may be redeemed at 100% if redeemed before July 31, 2000 and at 101.50% if
redeemed August 1, 2000 through October 31, 2000. If Muzak LLC does not redeem
the Floating Rate Notes by November 1, 2000, the Floating Rate Notes will
automatically convert into fixed-rate permanent notes due March 2009. Proceeds
from the Floating Rate Notes are being used to fund acquisitions. As of March
31, 2000, the Company had drawn $36.0 million of the Floating Rate Notes.
Indebtedness under the Floating Rate Notes bears interest at a rate
equal to 3 month LIBOR plus a margin of 5.00% for the period from January 2000
through July 31, 2000, at a rate of 3 month LIBOR plus a margin of 7.5% for the
period from August 1, 2000 through October 31, 2000, and at a fixed rate based
on the greater of (i) 3 month LIBOR plus a margin of 7.5% and (ii) the yield on
Muzak LLC's 9.875% Senior Subordinated Notes due 2009 at time of conversion
plus a margin of 2.5% after October 31, 2000. Interest on the Floating Rate
Notes is subject to a maximum annual cash rate of 14% and a maximum total annual
interest rate of 16%, with any interest in excess of 14% payable in-kind in
additional amounts of the Floating Rate Notes.
11
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT (CONTINUED)
RELATED PARTY NOTES
From July 1, 1999 through November 24, 1999, Muzak LLC borrowed an
aggregate amount of $30.0 million, from MEM Holdings LLC in the form of Junior
Subordinated Unsecured Notes (the "ABRY Notes"). MEM Holdings is a company that
owns 67% of the voting interests in the Company. ABRY Broadcast Partners III and
ABRY Broadcast Partners II are the beneficial owners of MEM Holdings.
The ABRY Notes mature on June 30, 2007, at which time principal and
accrued interest are due. Interest accrues at 15% per annum; any accrued
interest not paid as of March 31, June 30, September 30 or December 31 will bear
interest at 15% per annum until such interest is paid or extinguished. The ABRY
Notes are junior and subordinate to payments for the Senior Credit Facility, and
the Senior Notes. At any time, all of the ABRY Notes, with the exception of a
$3.0 million note may be converted into Class A units of the Company. If the
ABRY Notes with the exception of a $3.0 million note, have not been repaid in
full as of May, 2001, the ABRY Notes will automatically be converted into Class
A units of the Company. Proceeds from the ABRY Notes were used to fund
operations and acquisitions.
In order to complete the acquisition of the Predecessor Company, Muzak
LLC issued Notes payable to a related party for $40.8 million in 1998. Muzak LLC
repaid $41.7 million, which included $0.9 million of interest, outstanding under
this note at the time of the merger and converted $0.7 million of interest into
Class A units of the Company during the quarter ended March 31, 1999.
OTHER DEBT
In connection with the purchase of Electro Systems on February 24,
1999, Muzak LLC assumed several promissory notes, totaling $2.4 million as of
the acquisition date. All of the notes, with the exception of one, bear interest
at 9.887% and mature in November 2016. Muzak LLC is required to make interest
only payments on a monthly basis through October 2006, and principal and
interest payments for the remainder of the term. The Note terms are the same for
all but one of the notes. This note bears interest at 8% with principal and
interest payments due monthly until maturity in October 2006.
INTEREST RATE PROTECTION PROGRAMS
During April 1999, Muzak LLC entered into a four year interest rate
swap agreement in which it effectively exchanged $100.0 million of floating rate
debt at three month LIBOR for 5.59% fixed rate debt. This agreement was modified
on January 28, 2000 resulting in an increase to 7.042% fixed rate debt and a
termination date of April 2002. The proceeds of $4.4 million from the
modification are being recorded as an adjustment to interest expense over the
remaining life of the swap agreement.
This agreement is designated as a hedge of interest rates, and the
differential to be paid or received on the swap is accrued as an adjustment to
interest expense as interest rates change. The Company is exposed to credit loss
in the event of nonperformance by the other party to the swap agreement.
However, the Company does not anticipate nonperformance by the counterparty.
During the quarter ended March 31, 2000, this agreement resulted in an increase
to interest expense of approximately $0.2 million.
12
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT (CONTINUED)
ANNUAL MATURIES OF DEBT
Annual maturities of debt obligations are as follows (in thousands):
2000...............................................$ 3,672
2001................................................ 5,181
2002................................................ 6,680
2003................................................ 7,761
2004................................................26,344
Thereafter............................................314,651
Total interest paid by the Company on all indebtedness was $10.9
million and $1.0 million for the quarters ended March 31, 2000 and March 31,
1999, respectively. Accrued interest payable was $4.6 million and $1.2 million
as of March 31, 2000 and March 31, 1999, respectively.
7. RELATED PARTY TRANSACTIONS
During October 1998, the Company entered into a Management Agreement
with ABRY Partners which provides that the Company will pay a management fee as
defined in the Management Agreement. There were no fees incurred under the
agreement during the quarters ended March 31, 2000 and March 31, 1999. Either
the Company or ABRY Partners, with the approval of the Board of Directors of the
Company, may terminate the Management Agreement by prior written notice to the
other.
During fiscal 1999, Muzak LLC borrowed $30.0 million from MEM
Holdings under junior subordinated notes. See Note 6 for a description of this
related party note.
8. MUZAK HOLDINGS FINANCE CORP.
Muzak Holdings Finance Corp. had no operating activities during the
quarters ended March 31, 2000 and March 31, 1999.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in various claims and lawsuits arising out of
the normal conduct of its business. Although the ultimate outcome of these legal
proceedings cannot be predicted with certainty, the management of the Company
believes that the resulting liability, if any, will not have a material effect
upon the Company's consolidated financial statements or liquidity.
OTHER COMMITMENTS
As of March 31, 2000, the Company's operations has approximately $1.8
million in outstanding capital expenditure commitments. The Company is the
lessee under various operating and capital leases for equipment, vehicles,
satellite capacity, and buildings for periods ranging from 2 years to 10 years.
13
MUZAK HOLDINGS LLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS (UNAUDITED)
On April 11, 2000 the Company acquired certain of the assets and
assumed certain obligations of Audio Plus, Inc, a Kentucky corporation, for
approximately $1.0 million. Audio Plus, Inc was the Company's independent
franchisee located in Fairfield, Ohio.
The following presents the unaudited pro forma results of the Company
for the quarter ended March 31, 2000, as if the acquisitions and financings,
including those discussed above in subsequent events, occurred on January 1,
2000. These unaudited pro forma results are not necessarily indicative of the
results that will occur in future periods (in thousands).
Revenues............................................... 45,743
Income from operations................................. 189
Net Loss............................................... (11,459)
14
MUZAK HOLDINGS LLC
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains statements which, to the extent they are not
historical fact, constitute forward-looking statements within the meaning of
Section 27A of the securities Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934 (the "Safe Harbor Acts"). All forward-looking statements
involve risks and uncertainties. The forward-looking statements in this Form
10-Q are intended to be subject to the safe harbor protection provided by the
Safe Harbor Acts.
Risks and uncertainties that could cause actual results to vary
materially from those anticipated in the forward-looking statements included in
this Form 10-Q include industry-based factors such as the level of competition
in the business music industry, changes in consumer preference, competitive
pricing, concentrations in and dependence on satellite delivery capabilities,
rapid technological changes, as well as factors more specific to the Company
such as the substantial leverage of the Company, limitations imposed by the
Company's debt facilities, and changes made in connection with the integration
of operations acquired by the Company.
GENERAL
The Company is the leading provider of business music programming in
the United States. Together with its independent franchisees, the Company serves
an installed base of approximately 300,000 business locations nationwide. The
Company and its independent franchisees also sell, install and maintain
electronic equipment related to the Company's business.
The Company, formerly known as ACN Holdings, LLC, was formed in
September 1998 pursuant to the laws of Delaware. Audio Communications Network
LLC ("ACN") began its operations on October 7, 1998 with the acquisition of the
independent franchisees in the Baltimore, Charlotte, Hillsborough, Kansas City,
St. Louis, Jacksonville, Phoenix, and Fresno areas from Audio Communications
Network, Inc. (the "Predecessor Company") for $66.8 million. On March 18, 1999,
Muzak Limited Partnership ("Old Muzak") merged with and into ACN. At the time of
the merger, ACN changed its name to Muzak LLC. Under the terms of the agreement,
the Company paid total consideration of $274.2 million, which consisted of the
following: $125.5 million cash consideration, $114.9 million consideration in
the tender offer and consent solicitation for the 10% Senior Notes due 2003 of
Old Muzak, $15.9 million for debt repayment of Old Muzak outstanding obligations
and $17.9 million of other assumed obligations. In addition, at the time of the
merger, the Company repaid $41.7 million borrowed from ABRY Broadcast Partners
by ACN in October 1998 in connection with the acquisition of the Company's
independent franchisees from the Predecessor Company and converted $0.7 million
into Class A units. Since the merger, the Company has acquired twenty businesses
for total consideration of $98.4 million, which included 17,287 Class A units of
the Company.
In 1999, prior to the merger, the Company made the following acquisitions:
On January 15, 1999, the Company acquired all of the outstanding stock of
Business Sound, Inc. for approximately $4.1 million, which included 3,661
Class A units of the Company. Business Sound was the Company's independent
franchisee for the New Orleans, Louisiana and Mobile, Alabama areas.
On February 24, 1999, the Company acquired all of the outstanding stock of
Electro Systems for approximately $0.7 million, which included 650 Class A
units of the Company, and assumed certain non-recourse debt of $2.4
million. Electro Systems was the Company's independent franchisee located
in Panama City, Florida.
I-1
MUZAK HOLDINGS LLC
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
The Company made twenty acquisitions between the merger on March 18, 1999
and March 31, 2000. The table below provides information regarding these
acquisitions (in millions, except for number of units).
Purchase Acquired Assets Acquired Acquired
Date Price (1) Or Stock Business Markets
- --------------------------------------------------------------------------------------------------------------------------------
March 18, 1999 $18.1 (2) Net assets of Capstar Broadcasting Independent franchisee Georgia, Florida
Corporation's independent franchisee
April 1, 1999 $0.2 Net assets of Custom On Hold Services Audio Marketing Washington
Inc
May 1, 1999 $3.2 (3) Net assets of Capstar Broadcasting Independent franchisee Nebraska
Corporation's independent franchisee
June 1, 1999 $6.9 Net assets of Advertising on Hold, Inc Audio Marketing Florida, Georgia,North
Carolina
July 1, 1999 $0.8 Net assets of CustomTronics Sound Business Music California
July 1, 1999 $0.9 Net assets of Penobscot Broadcasting Independent franchisee Maine
Corporation
July 26, 1999 $1.3 Net assets of LaBov and Beyond, Inc Audio Marketing Indiana
August 1, 1999 $3.5 Net assets of US West Communications Audio Marketing National
Services, Inc's Please Hold Promotions
September 1, 1999 $4.7 Stock of Broadcast International, Inc Business Music National
October 1, 1999 $10.3 Net assets of Midwest Systems and Business Music Illinois, Indiana,
Services, Inc Ohio,
West Virginia
November 1, 1999 $2.9 Net assets of A & D Music, Inc Independent franchisee Oregon
November 1, 1999 $7.9 (4) Stock of Audio Environment, Inc and Independent franchisee California
Background Music Broadcasters Inc
December 1, 1999 $13.2 (5) Net assets of MountainWest Audio, Inc Independent franchisee Utah, Idaho,Washington
February 2, 2000 $0.4 Net assets of Quincy Broadcasting Company Independent franchisee Illinois
February 2, 2000 $0.9 Net assets of General Communications Audio Marketing Indiana, Georgia,
Corporation ("On Hold America") Florida, Ohio
February 2, 2000 $0.4 Net assets of Texas Sound Co. Ltd Business Music Texas
February 24, 2000 $3.7 Stock of Telephone Audio Productions, Audio Marketing National
Inc
March 24, 2000 $9.2 (6) Stock of Vortex Sound Communications Independent franchisee District of Columbia
Company, Inc
March 31, 2000 $1.6 Net assets of Dynamic Sound Independent franchisee Nevada, California
March 31, 2000 $8.3 Stock of Muzak Houston, Inc Independent franchisee Texas
(1) The purchase price does not include transaction costs
(2) Total purchase price included 13,535 Class A units.
(3) Total purchase price included 2,385 Class A units
(4) Total purchase price included 100 Class A units of the Company.
(5) The Company paid $3.1 million of the purchase price of Mountain West Audio,
Inc. as of December 31, 1999. In February 2000, the Company paid the
remaining purchase price, which included 456 Class A units of the Company.
(6) Total purchase price included 802 Class A units.
I-2
MUZAK HOLDINGS LLC
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
RECENT DEVELOPMENTS
NEW PRESIDENT AND CHIEF OPERATING OFFICER
On April 23, 2000, Joseph Koff joined the Company as President and
Chief Operating Officer. Mr. Koff was formerly President and Chief Executive
Officer of Audio Communications Network, LLC. Prior to that, Mr. Koff served in
executive and managerial capacities at radio stations in Florida, North
Carolina, Ohio, and Maryland.
ADDITIONAL FINANCING
In January 2000, the Company entered into an indenture for up to $50.0
million Senior Subordinated Floating Rate Notes (the "Floating Rate Notes"). The
Floating Rate Notes are available to be drawn up to $50.0 million in increments
of no less than $2.5 million to fund acquisitions. The Floating Rate Notes will
be available for drawdowns until July 31, 2000. Commitments on all amounts
undrawn under the Floating Rate Notes by July 31, 2000 will expire and will be
ineligible for future draw downs. The Floating Rate Notes may be redeemed at
100% if redeemed before July 31, 2000 and at 101.50% if redeemed August 1, 2000
through October 31, 2000. If the Company does not redeem the Floating Rate Notes
by November 1, 2000, the Floating Rate Notes will automatically convert into
fixed-rate permanent notes due March 2009. As of March 31, 2000, $36.0 million
of the Floating Rate Notes were outstanding.
Also, in February 2000, the Company received equity contributions of
approximately $10.6 million from its members. The proceeds of the equity
contributions were used to make repayments on the revolving loan (as defined
below) and for general corporate purposes.
ACQUISITIONS
On April 11, 2000 the Company acquired certain of the assets and
assumed certain obligations of Audio Plus, Inc, a Kentucky corporation, for
approximately $1.0 million. Audio Plus, Inc was the Company's independent
franchisee located in Fairfield, Ohio.
REVENUES AND EXPENSES
The Company derives the majority of its revenues from the sale of
business music products. The core product is Audio Architecture and its two
complementary products are Audio Marketing and Video Architecture. These
revenues are generated by clients who pay monthly subscription fees.
The Company also derives revenues from the sale and lease of audio
system-related products, principally sound systems and intercoms, to business
music clients and other clients. In addition, the Company sells electronic
equipment, such as proprietary tape playback equipment and other audio and video
equipment to franchisees to support the sale of business music services.
Installation, service and repair revenues consist principally of revenues from
the installation of sound systems and other equipment that is not expressly part
of a business music contract, such as paging, security and drive-through
systems. These revenues also include revenue from the installation, service and
repair of equipment installed under a business music contract. Music contract
installation revenues are deferred and recognized over the term of the
respective contracts.
I-3
MUZAK HOLDINGS LLC
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
The cost of revenues for business services consists primarily of
broadcast delivery, programming and licensing associated with providing music
and other business programming to a client or a franchisee. The cost of revenues
for equipment represents the purchase cost plus handling, shipping and warranty
expenses. The cost of revenues for installation, service and repair consists
primarily of service and repair labor and labor for installation that is not
associated with new client locations. Installation costs associated with new
client locations are capitalized and charged to depreciation expense over the
estimated life of the clients' contract.
The Company's customers typically enter into a noncancelable five-year
contract that renews automatically for at least one five-year term unless
specifically terminated at the initial contract expiration date. The average
length of service per customer is approximately 12 years. The Company typically
makes an initial one-time installation investment per location, in exchange for
recurring monthly fees. For music clients under contract with the independent
franchisees, the Company receives a net monthly royalty fee in exchange for
music programming. The Company does not incur a capital outlay for a new client
location generated by an independent franchisee.
The business music industry remains highly fragmented, with numerous
independent operators. The Company plans to pursue acquisitions of competitors
and of its independent franchisees. Through acquisitions, the Company expects to
realize cost savings by eliminating duplicative programming, distribution, sales
and marketing, and technical and other general administrative expenses
The business music industry is influenced by the recording industry,
performing rights societies, government regulations, technological advancements,
satellite capabilities, and competition. The Company must license rights to
rerecord and distribute music and is reliant on third parties for satellite
capabilities.
Selling, general and administrative expenses include salaries,
benefits, commissions, travel, marketing materials, training and occupancy costs
associated with staffing and operating local and national sales offices. These
expenses also include personnel and other costs in connection with the Company's
headquarters functions. Sales commissions are capitalized and charged as
selling, general and administrative expense over the typical contract term of
five years. If a client contract is terminated early, the unamortized sales
commission is typically recovered from the salesperson.
RESULTS OF OPERATIONS
The Company did not compare the results for the quarter ended March 31, 2000 to
the prior year period as the prior period does not include a full quarter of
operations of the Company subsequent to the merger of Old Muzak and ACN, which
occurred on March 18, 1999. To provide a more meaningful analysis, the Company
compared the results for the quarter ended December 31, 1999 to the quarter
ended March 31, 2000.
I-4
MUZAK HOLDINGS LLC
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
SELECTED FINANCIAL DATA
(unaudited)
Three Months Three Months
Ended Ended
March 31, December 31,
2000 1999
--------------------- -------------------
Revenues:
Music and other business services............................. $ 32,259 $ 29,693
Equipment and related services................................ 11,436 12,399
------- -------
43,695 42,092
Cost of revenues:
Music and other business services............................. 6,773 5,951
Equipment and related services................................ 8,931 9,021
------- -------
15,704 14,972
Gross profit.............................................. 27,991 27,120
Selling, general and administrative expenses....................... 14,182 14,227
Depreciation and amortization expense.............................. 13,954 12,885
Income (loss) from operations............................ (145) 8
Other income (expense):
Interest expense, net......................................... (11,083) (10,254)
Other, net.................................................... 7 (113)
------- -------
Loss before income taxes........................................... (11,221) (10,359)
Income tax provision (benefit)..................................... 20 (439)
Net loss.................................................. $(11,241) $ (9,920)
========= ========
REVENUES. Total revenues for the first quarter of 2000 increased 3.8% to $43.7
million, up $1.6 million from the fourth quarter of 1999. $1.3 million of this
increase was due to an increase of broadcast music revenues, slightly offset by
a decrease in equipment and related services revenues. The remaining $0.3
million was due to acquisitions completed during the first quarter of 2000.
Music and other business services revenue increased by $2.6 million or 8.6% for
the quarter ended March 31, 2000 as compared to the quarter ended December 31,
1999. Equipment and related services revenues decreased by $1.0 million or 7.7%
for the quarter ended March 31, 2000 as compared to the quarter ended December
31, 1999.
GROSS PROFIT. For the first quarter of 2000, gross profit margin was 64.1%.
Gross profit increased $0.9 million or 3.2% for the quarter ended March 31, 2000
as compared to the quarter ended December 31, 1999. Gross profit contributed by
the 2000 acquisitions was $0.2 million during the quarter ended March 31, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the quarter ended March 31, 2000 remained flat at
$14.2 million as compared to the quarter ended December 31, 1999. These
expenses, as a percentage of revenues, were 32.5% and 33.8% for the first
quarter of 2000 and the fourth quarter of 1999, respectively.
I-5
MUZAK HOLDINGS LLC
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization increased
to $13.9 million in the first quarter of 2000, up $1.0 million from the fourth
quarter of 1999. This increase is due to the acquisition of competitors' and
independent franchisees business music contracts during the fourth quarter of
1999 and the first quarter of 2000.
INTEREST EXPENSE. Interest expense, net of interest income, increased to $11.1
million in the first quarter of 2000, up 8.1% from the fourth quarter of 1999.
The increase is due to the borrowing under the floating rate notes, as well as
an increase of interest rates.
INCOME TAX PROVISION (BENEFIT). Income tax provision increased $0.5 million to
$20 thousand in the first quarter of 2000, as compared to a benefit of $0.5
million in the fourth quarter of 1999. The increase is due to lower losses at
the Company's corporate subsidiaries during the first quarter of 2000. The
Company is a limited liability company and is treated as a partnership for
income tax purposes.
NET LOSS. The combined effect of the foregoing resulted in net loss of $11.2
million for the first quarter of 2000, compared to a net loss of $9.9 million
for the fourth quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents totaling $3.4 million and
$2.3 million at March 31, 2000 and December 31, 1999, respectively. The Company
had $10.1 million of borrowing availability (after giving effect to outstanding
letters of credit of $0.2 million) under its credit agreements as of March 31,
2000.
SOURCES AND USES OF FUNDS
The Company's principal sources of funds are cash generated from
continuing operations, borrowings under the Senior Credit Facility, Floating
Rate Notes and proceeds from equity contributions. In February 2000, the Company
received an equity contribution of approximately $10.6 million from its members.
The proceeds were used to pay down the revolving loan and for general corporate
purposes. Net cash used by continuing operating activities of the Company was
$4.8 million during the quarter ended March 31, 2000.
The Company expects that its principal uses of funds from operating
activities and borrowings will be to fund acquisitions, interest and principal
payments on its indebtedness, net working capital increases and capital
expenditures. The Company believes that its cash flows from operations and
borrowing availability will be sufficient to fund operations, excluding capital
expenditure requirements, through December 31, 2000. Due to continued growth in
its operating activities and the associated need to invest capital in connection
with each new client location to realize such growth, the Company believes that
its capital expenditures will require the Company to pursue additional debt or
equity financing. The Company's strategic plan is to pursue opportunities to
acquire music contract portfolios of competitors and to review acquisitions of
independent franchisees if they became available. The Company plans to pursue
additional debt financing to complete such acquisitions.
Proceeds from the Senior Credit Facility, the Senior Notes, and the
Senior Discount Notes were used to pay merger consideration consisting of $125.5
million in cash to the partners of Old Muzak, approximately $114.9 million
consideration in the tender offer and consent solicitation for the 10% Senior
Notes due 2003 of Old Muzak together with accrued interest, $15.9 million for
debt repayment of Old Muzak obligations, approximately $41.7 million of
borrowings by Audio Communications Network under ABRY Broadcast Partners III
subordinated note, merger consideration for Capstar Broadcasting Corporation,
and to pay fees and expenses in connection with the foregoing.
I-6
MUZAK HOLDINGS LLC
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
CAPITAL EXPENDITURES
The Company's business generally requires capital for the installation
of equipment for new business music clients. The Company currently anticipates
that its capital expenditures for fiscal 2000 will be in the range of $ 29.0
million to $32.0 million, a portion of which may be financed through leasing. As
of March 31, 2000, the Company had approximately $1.8 million in outstanding
capital expenditure commitments.
SENIOR CREDIT FACILITY
In March 1999, Muzak LLC entered into a new senior credit facility
("Senior Credit Facility") consisting of: (i) a term loan facility in the amount
of $30.0 million payable in semi-annual installments until final maturity on
December 31, 2005 ("Term Loan A"); (ii) a term loan facility in the amount of
$105.0 million payable in semi-annual installments until final maturity on
December 31, 2006 ("Term Loan B") (together with Term Loan A, the "Term Loans");
and (iii) a revolving loan (the "Revolving Loan") in an aggregate principal
amount of up to $35.0 million terminating on December 31, 2005. In July 1999,
the Senior Credit Facility was amended to increase the principal amount of Term
Loan B by $30.0 million to $135.0 million. In October 1999, the Senior
Credit Facility was amended to enable a related party to make a subordinated
loan to Muzak LLC in the aggregate principal amount of $20.0 million and to
permit Muzak LLC to issue additional senior subordinated notes and the Company
to issue preferred stock if certain covenants are met.
The Senior Credit Facility, which is guaranteed by the Company and
certain of its domestic subsidiaries, contains restrictive covenants including
maintenance of interest and leverage ratios and various other restrictive
covenants which are customary for such facilities. In addition, Muzak LLC and
its subsidiaries are generally prohibited from incurring additional
indebtedness, incurring liens, paying dividends or making other restricted
payments, consummating asset sales, entering into transactions with affiliates,
merging or consolidating with any other person or selling assigning,
transferring, leasing, conveying, or otherwise disposing of assets. These
conditions were satisfied as of December 31, 1999. Such limitations, together
with the Company's highly leveraged nature could limit the Company's corporate
and operating activities in the future, including the implementation of future
acquisitions.
FLOATING RATE NOTES
In January 2000, Muzak LLC entered into an indenture for up to $50.0
million Senior Subordinated Floating Rate Notes (the "Floating Rate Notes"). The
Floating Rate Notes will be available for drawdowns until July 31, 2000.
Commitments on all amounts undrawn under the Floating Rate Notes by July 31,
2000 will expire and will be ineligible for future drawdowns. The Floating Rate
Notes may be redeemed at 100% if redeemed before July 31, 2000 and at 101.50% if
redeemed August 1, 2000 through October 31, 2000. If the Floating Rate Notes are
not redeemed by November 1, 2000, the Floating Rate Notes will automatically
convert into fixed-rate permanent notes due March 2009.
I-7
MUZAK HOLDINGS LLC
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
SENIOR NOTES
On March 18, 1999, Muzak LLC together with its wholly owned
subsidiary, Muzak Finance Corp., co-issued $115.0 million in principal amount of
Senior Subordinated Notes ("Senior Notes") which mature on March 15, 2009.
Interest is payable semi-annually, in arrears, on March 15 and September 15 of
each year, commencing on September 15, 1999.
The Senior Notes are general unsecured obligations of Muzak LLC and
Muzak Finance Corp. and are subordinated in right of payment to all existing and
future Senior Indebtedness of Muzak LLC and Muzak Finance Corp. The Senior Notes
are guaranteed by the Company, Muzak LLC, MLP Environmental Music, LLC, Business
Sound, Inc., BI Acquisition LLC, Audio Environments, Inc., Background Music
Broadcasters, Inc., Muzak Capital Corporation, Muzak Houston Inc., Telephone
Audio Productions, Inc., Music Incorporated, and Vortex Sound Communications
Company, Inc. The indenture governing the Senior Notes generally prohibits Muzak
LLC and its subsidiaries from making certain payments such as dividends and
distributions of their capital stock; repurchases or redemptions of their
capital stock, and investments (other than permitted investments) unless certain
conditions are met.
Before March 15, 2002, the issuers may redeem up to 35% of the
aggregate principal amount of the Notes originally issued under the indenture at
a redemption price of 109.875% of the aggregate principal amount so redeemed,
plus accrued and unpaid interest to the redemption date, with the net proceeds
of one or more equity offerings if certain conditions are met. After March 15,
2004, the issuers may redeem all or part of the Senior Notes at a redemption
price equal to 104.938% of the principal amount, which redemption price declines
to 100% of the principal amount in 2007.
SENIOR DISCOUNT NOTES
On March 18, 1999, the Company together with its wholly owned
subsidiary Muzak Holdings Finance Corp., co-issued $75.0 million in principal
amount at maturity or $39.9 million in accreted value on the issue date, of 13%
Senior Discount Notes (the "Senior Discount Notes") due 2010. Cash interest on
the Senior Discount Notes does not accrue and is not payable prior to March 15,
2004. The Senior Discount Notes were issued at a substantial discount from their
principal amount at maturity. Until March 15, 2004, the Senior Discount Notes
will accrete in value such that the accreted value on March 15, 2004 will equal
the principal amount at maturity of the Senior Discount Notes. From and after
March 15, 2004, interest on the Senior Discount Notes will accrue at a rate of
13% per annum. Interest will be payable semi-annually in arrears on each March
15 and September 15, commencing September 15, 2004, to holders of record of the
Senior Discount Notes at the close of business on the immediately preceding
March 1 and September 1.
The Senior Discount Notes are general unsecured obligations of the
Company and Muzak Holdings Finance Corp and effectively subordinated in right of
payment to all existing and future Senior Indebtedness of Muzak LLC and Muzak
Finance Corp. Muzak Holdings Finance has no operations and substantially no
assets. Accordingly, the Company is dependent upon the distribution of the
earnings of its subsidiaries to service its debt obligations. The indenture
governing the Senior Discount Notes generally prohibits the Company and its
restricted subsidiaries from making certain payments such as dividends and
distributions of their capital stock, repurchases or redemptions of their
capital stock, and investments (other than permitted investments) unless certain
conditions are met by the Company and its restricted subsidiaries.
I-8
MUZAK HOLDINGS LLC
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Before March 15, 2002, the issuers may redeem up to 35% of the
aggregate principal amount of the Senior Discount Notes originally issued under
the indenture at a redemption price of 113% of the aggregate principal amount so
redeemed, plus accrued and unpaid interest to the redemption date, with the net
proceeds of one or more equity offerings if certain conditions are met. After
March 15, 2004, the issuers may redeem all or part of the Senior Discount Notes
at a redemption price equal to 106.5% of the principal amount which redemption
price declines to 100% of the principal amount in 2007.
RELATED PARTY DEBT
From July 1, 1999 through November 24, 1999, Muzak LLC borrowed an
aggregate amount of $30.0 million from MEM Holdings LLC in the form of Junior
Subordinated Unsecured Notes (the "ABRY Notes"). The ABRY Notes mature on June
30, 2007, at which time principal and accrued interest are due. Interest accrues
at 15% per annum; any accrued interest not paid as of March 31, June 30,
September 30 or December 31 will bear interest at 15% per annum until such
interest is paid or extinguished. The ABRY Notes are junior and subordinate to
payments for the Senior Credit Facility and the Senior Notes. Proceeds from the
ABRY Notes were used to fund operations and acquisitions.
INTEREST RATE EXPOSURE
Indebtedness under the Term Loan A and the revolving loans bears
interest at a per annum rate equal to the Company's choice of (i) the Alternate
Base Rate (which is the highest of prime rate and the Federal Funds Rate plus
.5%) plus a margin ranging from 1.00% to 2.00% or (ii) the offered rates for
Eurodollar deposits ("LIBOR") of one, two, three, or six months, as selected by
the Company, plus a margin ranging from 2.0% to 3.0%. Margins, which are subject
to adjustment based on the changes in the Company's ratio of consolidated total
debt to EBITDA (i.e., earnings before interest, taxes, interest, depreciation,
amortization and other non cash charges) were 2.0% in the case of Alternate Base
Rate and 3.0% in the case of LIBOR as of March 31, 2000. Indebtedness under the
Term Loan B bears interest at a per annum rate equal to the Company's choice of
(i) the Alternate Base Rate (as described above) plus a margin of 2.5% or (ii)
LIBOR of one, two, three, or six months, as selected by the Company plus a
margin of 3.5%. Commitment fees range from .375% to .625%.
Indebtedness under the Floating Rate Notes bears interest at a per
annum rate equal to (i) three month LIBOR plus a margin of 5.0% until July 31,
2000 (ii) at three month LIBOR plus a margin of 7.5% for the period beginning
August 1, 2000 through October 31, 2000 and (iii) for the period from November
1, 2000 through maturity, at a fixed rate based on the greater of (a) three
month LIBOR plus 7.5% and (b) the yield on the Company's Senior Notes plus 2.5%.
Interest on the Senior Notes accrues at a rate of 9.875% per annum.
Until March 15, 2004, the Senior Discount Notes will accrete in value such that
the accreted value on March 15, 2004 will equal the principal amount at maturity
of the Senior Discount Notes. From and after March 15, 2004, interest on the
Senior Discount Notes will accrue at a rate of 13% per annum.
Cash interest paid was $10.9 million and $1.0 million for the quarters
ended March 31, 2000 and March 31, 1999, respectively.
Due to the variable interest rates under the Senior Credit Facility,
the Company is sensitive to changes in interest rates. Accordingly, during April
1999, the Company entered into a four year interest rate swap agreement in which
the Company effectively exchanged $100.0 million of floating rate debt at three
month
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MUZAK HOLDINGS LLC
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
LIBOR for 5.59% fixed rate debt. The Company modified this agreement on January
28, 2000 resulting in an increase to 7.042% fixed rate debt and a termination
date of April 2002. Based on amounts outstanding at March 31, 2000, a .5%
increase in each of LIBOR and the Alternate Base Rate (6.04% and 9.00%
respectively, at March 31, 2000) would impact interest costs by approximately
$0.9 million annually on the Senior Credit Facility.
DEBT MATURITIES
The current maturities of long-term debt primarily consist of the
current portion of the Senior Credit Facility and other miscellaneous debt. The
maturities of long-term debt of the Company's operations during the remainder of
2000 and for 2001, 2002, 2003, and 2004 are $3.6 million, $5.2 million, $6.7
million, $7.8 million, $26.3 million, respectively. The Senior Notes mature in
March 2009. In addition, the Senior Credit Facility provides for mandatory
prepayments with net cash proceeds of certain asset sales, net cash proceeds of
permitted debt issuances, net cash proceeds from insurance recovery and
condemnation events, and beginning December 31, 2000 the Senior Credit Facility
requires annual excess cash repayments. The indentures governing the Senior
Notes and the Senior Discount Notes provide that in the event of certain asset
dispositions, the Company must apply net proceeds first to repay Senior
Indebtedness. To the extent the net proceeds have not been applied within 360
days from the asset disposition to an investment in capital expenditures or
other long term tangible assets used in the business, and to the extent the
remaining net proceeds exceed $10.0 million, the Company must make an offer to
purchase outstanding Senior Notes at 100% of their principal amount plus accrued
interest. To the extent there are excess funds after the purchase of the Senior
Notes, the Company must make an offer to purchase outstanding Senior Discount
Notes at 100% of the accreted value. The Company must also make an offer to
purchase outstanding Senior Notes and the Senior Discount Notes at 101% of their
principal amount plus accrued and unpaid interest if a Change in Control of the
Company occurs. Subject to compliance with the Senior Credit facility, the
Floating Rate Notes will be mandatory redeemable with the proceeds of any
securities issuances or incurrences of indebtedness at any time on or prior to
October 31, 2000. If the Company does not redeem the Floating Rate Notes by
November 1, 2000, the Floating Rate Notes will automatically convert into
fixed-rate permanent notes due March 15, 2009.
.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the period ended March 31, 2000, the Company did not experience any
material changes in market risk disclosure that affect the quantitative and
qualitative disclosures presented in the 10-K.
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MUZAK HOLDINGS LLC
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no material developments in legal proceedings involving
the Company since those reported in the Company's Report on Form 10-K for fiscal
year ended December 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27 Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter for which this Report on Form 10-Q is being filed,
the Company filed no reports on Form 8-K.
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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 HOLDINGS LLC
MUZAK HOLDINGS FINANCE CORP.
By: /s/ Robert M. Riley
---------------------------------
Date: May 15, 2000 Robert M. Riley
Controller
(Principal Financial
Officer and Chief
Accounting Officer)
By: /s/ William A. Boyd
---------------------------------
Date: May 15, 2000 William A. Boyd
President and Chief Executive Officer
(Principal Executive Officer)
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