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, 2001.
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _________ to
__________.
Commission file number: 333-78571
333-78571-01
MUZAK LLC
MUZAK FINANCE CORP.
(Exact Name of Registrants as Specified in their charter)
DELAWARE 04-3433729
DELAWARE 56-2187963
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3318 LAKEMONT BLVD
FORT MILL, SC 29708
(803) 396-3000
(Address, Including Zip Code and Telephone Number including Area Code of
Registrants' Principal Executive Offices)
Indicate by check mark whether the registrants have filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Muzak Finance Corp meets the conditions set forth in General Instruction H(1)
(a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
Muzak Finance Corp had 100 shares of outstanding common stock as of May 12,
2001.
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MUZAK LLC
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2001 2000
(unaudited)
----------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 2,940 $ 3,012
Accounts receivable, net of allowances of $4,133 and $4,066.................. 29,912 38,847
Inventory.................................................................... 12,081 11,082
Prepaid expenses and other assets............................................ 2,183 2,548
---------- ---------
Total current assets..................................................... 47,116 55,489
Property and equipment, net....................................................... 116,285 114,571
Intangible assets, net............................................................ 316,431 324,544
Deferred charges and other assets, net............................................ 44,496 42,759
--------- ---------
Total assets............................................................. $ 524,328 $ 537,363
========= =========
LIABILITIES AND MEMBER'S INTEREST
Current liabilities:
Revolving credit facility.................................................... $12,500 $ 4,000
Current maturities of long term debt......................................... 5,281 5,281
Current maturities of other liabilities...................................... 3,795 3,776
Accounts payable............................................................. 6,439 14,498
Accrued expenses............................................................. 17,202 19,541
Advance billings............................................................. 3,088 2,096
--------- --------
Total current liabilities................................................ 48,305 49,192
Long-term debt.................................................................... 283,731 283,751
Related party notes............................................................... 27,000 27,000
Other liabilities................................................................. 20,519 17,993
Commitments and contingencies (Note 8)
Member's interest:
Common units (100 issued and
outstanding)............................................................... 226,676 226,666
Accumulated other comprehensive loss....................................... (2,826) --
Accumulated deficit........................................................ (79,077) (67,239)
-------- --------
Total member's interest.................................................. 144,773 159,427
-------- ---------
Total liabilities and member's interest.................................. $524,328 $537,363
======== ========
The Notes are an integral part of these consolidated financial statements.
2
MUZAK LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)
Quarter Quarter
Ended Ended
March 31, March 31,
2001 2000
------------------- ------------------
Revenues:
Music and other business services.......................................... $ 36,818 $ 32,259
Equipment and related services............................................. 13,150 11,436
--------- ---------
49,968 43,695
Cost of revenues:
Music and other business services (excluding $8,588 and $6,589 of
depreciation and amortization expense)................................... 7,666 6,773
Equipment and related services............................................. 8,981 8,931
--------- ---------
16,647 15,704
---------- ---------
33,321 27,991
Selling, general and administrative expenses.................................... 18,027 14,182
Depreciation and amortization expense........................................... 18,282 13,954
--------- ---------
Loss from operations................................................... (2,988) (145)
Other income (expense):
Interest expense, net...................................................... (9,251) (9,630)
Other, net................................................................. (36) 7
---------- ----------
Loss before income taxes............................................... (12,275) (9,768)
Income tax provision (benefit).................................................. (437) 20
---------- ----------
Net loss............................................................... $(11,838) $ (9,788)
========= =========
The Notes are an integral part of these consolidated financial statements.
3
MUZAK LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Quarter Ended Quarter Ended
March 31, March 31,
2001 2000
-------------------- --------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss.......................................................................... $ (11,838) $ (9,788)
Adjustments to derive cash flow from continuing operating activities:
Gain on disposal of fixed assets.................................................. (5) --
Deferred income tax (benefit) provision........................................... (437) 15
Depreciation and amortization..................................................... 18,282 13,954
Amortization of deferred financing fees........................................... 390 365
Amortization of deferred subscriber acquisition costs............................. 2,073 1,121
Deferred subscriber acquisition costs............................................. (3,937) (4,197)
Unearned installment income....................................................... (94) (62)
Change in certain assets and liabilities, net of business acquisitions
Decrease (increase) in accounts receivable..................................... 7,759 (467)
Decrease (increase) in inventory .............................................. (999) 1,287
Decrease in accrued interest................................................... (2,458) (2,648)
Increase (decrease) in accounts payable ....................................... (4,775) 4,424
Decrease in accrued expenses................................................... (147) (7,813)
Increase in advance billings.................................................. 992 1,972
Other, net..................................................................... 692 975
---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.......................... 5,498 (862)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash......................................................... -- (33,438)
Capital expenditures.............................................................. (10,217) (9,898)
Proceeds from sale of fixed assets................................................ 9 --
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES........................................ (10,208) (43,336)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in book overdrafts....................................................... (3,284) (3,980)
Net borrowing (repayments) on revolver............................................ 8,500 (308)
Proceeds from issuance of floating rate notes..................................... -- 36,000
Proceeds from interest rate swap.................................................. -- 4,364
Proceeds from contributions by Parent ............................................ -- 10,636
Repayments of capital lease obligations and other debt............................ (578) (671)
Payment of fees associated with the financing..................................... -- (748)
--------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITES..................................... 4,638 45,293
--------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. (72) 1,095
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................... 3,012 2,275
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................................... $ 2,940 $ 3,370
======== ========
The Notes are an integral part of these consolidated financial statements.
4
MUZAK LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S INTEREST
(Unaudited)
(in thousands, except for units)
Accumulated
Current Year Other Total
Comprehensive Common Units Accumulated Comprehensive Member's
Loss Units Dollars Deficit Loss Interest
---------------- ---------- ----------- ------------ --------------- -----------
Balance at December 31, 2000........ 100 $226,666 $(67,239) -- $159,427
Comprehensive loss:
Net loss............................ (11,838) -- -- (11,838) -- (11,838)
Change in unrealized losses on
derivative........................ (2,826) -- -- -- (2,826) (2,826)
-------
(14,664)
Additional capital contributed...... -- 10 -- -- 10
---------- ----------- ------------ --------------- -----------
Balance at March 31, 2001........... 100 $226,676 $(79,077) $(2,826) $144,773
======== ========= ======== ========
The Notes are an integral part of these consolidated financial statements.
5
MUZAK LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Muzak LLC ("the Company"), a Delaware limited liability company, was
formed on August 28, 1998. The Company is a wholly owned subsidiary of Muzak
Holdings LLC (the "Parent"). As of March 31, 2001, ABRY Partners, LLC and its
respective affiliates collectively own approximately 62% of the voting interests
in the Parent. All of the operating activities are conducted through the Company
and its subsidiaries. The Company provides business music programming to clients
through its integrated nationwide network of owned operations and franchises.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
the Company and its subsidiaries: Muzak Capital Corporation, Muzak Finance
Corporation, Business Sound Inc., Electro Systems Corporation, BI Acquisition
LLC, MLP Environmental Music LLC, Audio Environments Inc., Background Music
Broadcasters Inc., Telephone Audio Productions Inc., Vortex Sound Communications
Company Inc., Music Incorporated, and Muzak Houston, Inc. All significant
intercompany items have been eliminated in consolidation.
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X, and accordingly, 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 in the United States.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Muzak LLC Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.
The financial statements as of March 31, 2001 and March 31, 2000 and
for the quarters then ended are unaudited; however, in the opinion of
management, such statements include all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair statement of the financial
information included herein in accordance with generally accepted accounting
principles in the United States. The preparation of consolidated financial
statements in conformity with generally accepted accounting principles in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates. Results of operations for interim periods are
not necessarily indicative of results for the full year.
Certain prior year items have been reclassified to conform with the
2001 presentation. Accounts receivable and advance billings have been reduced by
the amounts invoiced, but not received, in advance of the service period. Book
overdrafts have been reclassified as a financing activity on the statement of
cash flows.
6
MUZAK LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
Useful March 31, December 31,
Life 2001 2000
(years) (Unaudited)
---------- ----------------- -----------------
Equipment provided to subscribers.......................... 4-6 $ 104,884 $ 99,305
Capitalized installation labor............................. 5 37,697 33,341
Equipment.................................................. 5-7 17,050 16,945
Other...................................................... 3-30 14,775 13,832
----------- -----------
174,406 163,423
Less accumulated depreciation............................. (58,121) (48,852)
----------- -----------
$ 116,285 $ 114,571
=========== ===========
Depreciation expense approximated $9.3 million and $6.6 million for the
quarters ended March 31, 2001 and March 31, 2000, respectively.
4. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
Useful March 31, December 31,
Life 2001 2000
(years) (Unaudited)
---------- ------------------- -------------------
Goodwill................................................. 20 $ 158,420 $ 158,172
Income producing contracts............................... 8-14 153,701 153,485
License agreements....................................... 20 5,082 5,082
Deferred production costs................................ 10 3,534 3,166
Trademarks............................................... 5 15,013 14,979
Non-compete agreements................................... 2-7 24,604 24,604
Other.................................................... 5-20 17,024 17,024
----- --------- --------
377,378 376,512
Less accumulated amortization............................ (60,947) (51,968)
--------- ---------
$ 316,431 $ 324,544
========= =========
Amortization expense was $9.0 million and $7.4 million for the quarters
ended March 31, 2001 and March 31, 2000, respectively.
5. DEFERRED CHARGES AND OTHER ASSETS, NET
Deferred charges and other assets, net, consist of the following (in
thousands):
March 31, December 31,
2001 2000
(Unaudited)
------------------ ---------------------
Subscriber acquisition costs.................................. $ 32,418 $ 30,554
Other......................................................... 12,078 12,205
-------- --------
$ 44,496 $ 42,759
======== ========
7
MUZAK LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. DEBT
Debt obligations consist of the following (in thousands):
March 31, December 31,
2001 2000
(Unaudited)
------------------ ---------------------
Revolving loan - Senior Credit Facility........................ $ 12,500 $ 4,000
====== =====
Related Party Notes (See Note 10)............................. 27,000 27,000
====== ======
Long term debt:
Senior Credit Facility...................................... 171,400 171,400
Senior Subordinated Notes................................... 115,000 115,000
Other....................................................... 2,612 2,632
---------- ---------
Total debt obligations........................................ 289,012 289,032
Less current maturities....................................... (5,281) (5,281)
--------- ---------
$283,731 $ 283,751
======== =========
Senior Credit Facility
The Senior Credit Facility is guaranteed by the Company and certain
100% owned subsidiaries. The non-guarantor subsidiary is minor and the
consolidated amounts in the Company's financial statements are representative of
the combined guarantors. The Senior Credit Facility contains restrictive
covenants including maintenance of interest, senior and total leverage and fixed
charge ratios and various other restrictive covenants which are customary for
such facilities. In addition, the Company is generally prohibited from incurring
additional indebtedness, incurring liens, paying dividends or making other
restricted payments, consummating asset sales, entering into transactions with
affiliates, merging or consolidating with any other person or selling assigning,
transferring, leasing, conveying, or otherwise disposing of assets. On May 15,
2001 the Company entered into the fifth amendment in which among other things
the parties amended the interest coverage ratios for the quarter ended March 31,
2001 and with respect to future periods.
The Senior Credit Facility consists of two term loan facilities (Term
Loan A and Term Loan B) and a revolving loan. Amounts outstanding on the Term
Loan A and Term Loan B loans were $27.8 million and $143.6 million,
respectively, as of March 31, 2001. Indebtedness under the Term Loan A and the
Revolving Loan 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 1.50% to 2.50%; 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 2.50% to 3.50%.
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 1.5% in the
case of Alternate Base Rate and 2.5% in the case of LIBOR as of March 31, 2001.
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 3.0%; or (ii) LIBOR of one, two, three, or six months, as selected by
the Company plus a margin of 4.0%. The weighted average rate of interest on the
Senior Credit Facility at March 31, 2001 was 8.8%.
8
MUZAK LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Debt (Continued)
Senior Subordinated Notes
On March 18, 1999, Muzak LLC together with its wholly owned subsidiary,
Muzak Finance Corp., co-issued $115.0 million in principal amount of 9 7/8%
Senior Subordinated Notes ("Senior Notes") which mature on March 15, 2009.
Interest is payable semi-annually, in arrears, on March 15 and September 15 of
each year. The Senior Notes are general unsecured obligations of Muzak LLC and
Muzak Finance Corp. and are subordinated in right of payment to all existing and
future Senior Indebtedness of Muzak LLC and Muzak Finance Corp. The Senior Notes
are guaranteed by the Company, MLP Environmental Music LLC, Business Sound Inc.,
BI Acquisition LLC, Audio Environments Inc., Background Music Broadcasters Inc.,
Muzak Capital Corporation, Telephone Audio Productions Inc., Muzak Houston Inc.,
Vortex Sound Communications Company Inc., and Music Incorporated. Muzak LLC's
non-guarantor subsidiary is minor and the consolidated amounts in the Company's
financial statements are representative of the combined guarantors financial
statements. The indenture governing the Senior Notes prohibits Muzak LLC from
making certain payments such as dividend and distributions of their capital
stock, repurchases or redemptions of their capital stock, and investments (other
than permitted investments) unless certain conditions are met by Muzak LLC.
Before March 15, 2002, the issuers may redeem up to 35% of the aggregate
principal amount of the Senior Notes originally issued under the indenture at a
redemption price of 109.875% of the aggregate principal amount so redeemed, plus
accrued and unpaid interest to the redemption date, with the net proceeds of one
or more equity offerings if certain conditions are met. After March 15, 2004,
the issuers may redeem all or part of the Senior Notes at a redemption price
equal to 104.938% of the principal which redemption price declines to 100% of
the principal amount in 2007.
Annual Maturities of Debt
Annual maturities of debt obligations are as follows (in thousands):
2001...............................................$ 5,261
2002................................................ 6,780
2003................................................ 7,861
2004................................................27,844
2005................................................55,601
Thereafter............................................225,165
Total interest paid by the Company on all indebtedness was $10.2
million and $10.9 million for the quarters ended March 31, 2001 and March 31,
2000, respectively. Accrued interest payable was $2.8 million and $4.6 million
as of March 31, 2001 and March 31, 2000, respectively.
Interest Rate Swap Agreements
At March 31, 2001, the Company had in effect one interest rate swap
agreement required by its Senior Credit Facility, with a notional amount of
$100.0 million. Muzak's interest rate swap agreement requires Muzak to pay a
fixed rate and receive a floating rate, thereby creating fixed rate debt. The
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.
The fair value of the interest rate swap agreement representing the cash the
Company would pay to settle the agreement, was approximately $1.6 million and
$2.8 million at December 31, 2000 and March 31, 2001, respectively. There were
no amounts of hedge ineffectiveness related to the Company's interest rate swap
and no gains or losses were excluded from the assessment of hedge effectiveness.
During the quarter ended March 31, 2001, the interest rate swap agreement
resulted in an increase to interest expense of approximately $0.3 million.
9
MUZAK LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. MUZAK FINANCE CORP.
Muzak Finance Corp. had no operating activities during the quarters
ended March 31, 2001 and March 31, 2000.
8. 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.
The industry wide agreement between business music providers and
Broadcast Music Inc. ("BMI") expired in December 1993. Since this time the
Company has been operating under an interim agreement pursuant to which the
Company has continued to pay royalties at the 1993 rates. Business music
providers and BMI have been negotiating the terms of a new agreement. The
Company is involved in a rate court proceeding, initiated by BMI in Federal
Court in New York. At issue are the music license fees payable by the Company
and its owned operations as well as licensed independent franchisees to BMI. The
period from which such "reasonable" license fees are payable covers the period
January 1, 1994 to December 31, 2000, and likely several years thereafter. BMI
contends that those fee levels understate reasonable fee levels by as much as
100%. The Company vigorously contests BMI's assessment. The eventual court
ruling setting final fees for the period covered will require retroactive
adjustment, upward or downward, likely back to January 1, 1994, and possibly
will also entail payment of pre-judgment interest. Discovery in the proceeding
has commenced and is not yet completed. A trial date has not been set.
The industry wide agreement between business music providers and
American Society of Composers, Authors and Publishers ("ASCAP") expired in May
1999. Negotiations between ASCAP and the Company began in June 1999, and the
Company has continued to pay ASCAP royalties at the 1999 rates.
Other Commitments
As of March 31, 2001, the Company has approximately $33.1 million in
outstanding capital expenditure commitments over a five year period. 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
15 years. On January 1, 2001, the Company entered into a long term commitment to
lease additional transponder space from Microspace.
9. RECENTLY ADOPTED ACCOUNTING STANDARDS
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS No. 133"). Subsequently, SFAS No.
133 was amended by the issuance of Statement of Accounting Standards No. 137 and
Statement of Accounting Standards No. 138. These amendments modify the
provisions and effective date of SFAS No. 133. SFAS No. 133, as amended, is
effective for fiscal quarters beginning after January 1, 2001. The Company
adopted SFAS No. 133 on January 1, 2001.
The Company uses a derivative financial instrument for purposes other
than trading, such as hedging for long-term debt and does so to reduce its
exposure to fluctuations in interest rates, as dictated by its Senior Credit
Facility. The Company's derivative is recognized on the balance sheet at its
fair value. The hedge is 100% effective for exposures to interest rate
fluctuations. As a result of the 100% effectiveness of the hedge, changes in the
fair value of the derivative are recorded each period in other comprehensive
income.
10
MUZAK LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Recently Adopted Accounting Standards (continued)
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", ("SFAS No. 130") requires the display of comprehensive
income or loss and its components as part of the Company's full set of financial
statements. Comprehensive income or loss is comprised of net income or loss and
other comprehensive income or loss. Other comprehensive income or loss includes
certain changes in equity that are excluded from net income, such as translation
adjustments and unrealized holding gains and losses on available-for-sale
marketable securities and certain derivative instruments, net of tax.
Prior to January 1, 2001, the Company did not have any transactions
that qualified as comprehensive income or loss. Upon adoption of SFAS No. 133,
on January 1, 2001, the Company recorded other comprehensive loss to recognize
at fair value a derivative that is designated as a cash flow hedging instrument,
which is comprised of unrealized losses related to the Company's interest rate
swap of $1.6 million. This unrealized loss increased by $1.2 million during the
first quarter of 2001 and as of March 31, 2001, the cumulative unrealized losses
on the Company's interest rate swap was $2.8 million.
10. SUBSEQUENT EVENTS
On May 9, 2001, $20.0 million of the Related Party Notes borrowed from
MEM Holdings LLC as well as $4.9 million of accrued interest, converted into
Class A units of the Parent. MEM Holdings owns 62% of the voting interests in
the Parent as of March 31, 2001. ABRY Broadcast Partners III and ABRY Broadcast
Partners II are the beneficial owners of MEM Holdings.
11
MUZAK LLC
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains statements which, to the extent they are not
historical fact, constitute forward-looking statements within the meaning of
Section 27A of the securities Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934 (the "Safe Harbor Acts"). All forward-looking statements
involve risks and uncertainties. The forward-looking statements in this Form
10-Q are intended to be subject to the safe harbor protection provided by the
Safe Harbor Acts.
Risks and uncertainties that could cause actual results to vary
materially from those anticipated in the forward-looking statements included in
this Form 10-Q include, but are not limited to, industry-based factors such as
the level of competition in the business music industry, competitive pricing,
concentrations in and dependence on satellite delivery capabilities, rapid
technological changes, the impact of legislation and regulation, as well as
factors more specific to the Company such as the substantial leverage and debt
service requirements, limitations imposed by the Company's debt facilities, the
Company's history of net losses, and the Company's ability to identify, complete
and integrate acquisitions, the Company's future capital requirements, the
Company's dependence on license agreements, and risks associated with economic
conditions generally.
General
Muzak is the leading provider of business music programming in the
United States based on market share. We believe that, together with our
franchisees, we have a market share of approximately 60% of the estimated number
of U.S. business locations currently subscribing to business music programming.
Together with our franchisees, we have nationwide coverage and serve an
installed base of approximately 325,000 client locations.
Recent Developments
As announced on March 23, 2001, due to market conditions, the Company
decided not to pursue the issuance of Senior Subordinated Notes. In connection
with the postponement of the Senior Subordinated Notes, the Company recorded a
one-time charge of $0.7 million. The Company will continue to explore
alternative financing opportunities.
Results of Operations
Set forth below are discussions of the results of operations for Muzak
LLC for the quarter ended March 31, 2001 compared to the quarter ended March 31,
2000.
Revenues. Revenues were $50.0 million and $43.7 million for the quarters ended
March 31, 2001 and 2000, respectively, an increase of 14.4%. The growth was
attributable to Muzak's significant increase in both Audio Marketing and Audio
Architecture clients resulting from both acquisitions and internal growth, as
well as the expansion of Muzak's drive-thru systems business. During the twelve
months ended March 31, 2001, through our sales and marketing efforts, we added,
net of churn, 25,000 Audio Architecture clients, 6,500 Audio Marketing, and
4,500 drive-thru client locations.
Cost of Revenues. Cost of revenues was $16.7 million and $15.7 million for the
quarters ended March 31, 2001 and 2000, respectively, an increase of 6.0%. Cost
of revenues as a percentage of revenues was 33.3% and 35.9% for the quarters
ended March 31, 2001 and 2000, respectively. This improvement was primarily due
to the leveraging of fixed costs over a larger client base resulting from
acquisitions and internal growth and headcount reductions taken in the second
half of 2000.
12
MUZAK LLC
Item 2 Management's Discussion and Analysis (Continued)
Selling, general and administrative expenses. Selling, general, and
administrative expenses were $18.0 million and $14.2 million for the quarters
ended March 31, 2001 and 2000, respectively, an increase of 27.1%. This increase
is attributable to the one-time expenses of $0.7 million recorded in the first
quarter of 2001 related to the postponement of the senior subordinated notes
offering, as well as expenses associated with growth in revenues and the
increase in our owned operations resulting from acquisitions. Amortization of
sales commissions, a non-cash component of selling, general, and administrative
expenses, was $2.1 million and $1.1 million for the quarters ended March 31,
2001 and 2000, respectively. Excluding the amortization of sales commissions,
the one time expenses recorded in the quarter ended March 31, 2001, and
excluding EchoStar revenues recorded in the first quarter of 2000, selling,
general, and administrative expenses as a percentage of revenues were 30.6% for
the quarters ended March 31, 2001 and 2000.
Depreciation and amortization expenses. Depreciation and amortization was $18.3
million and $14.0 million for the quarters ended March 31, 2001 and 2000,
respectively, an increase of 31.0%. This increase is due to the growth in
intangibles related to the acquisitions consummated in 2000, along with the
increase in property and equipment in conjunction with Muzak's significant
growth in the number of client locations resulting from acquisitions and
internal growth.
Interest expense. Interest expense, net of interest income, was $9.3 and $9.6
million for the quarters ended March 31, 2001 and 2000, respectively, a decrease
of 3.9%. The decrease in interest expense is due to lower borrowing levels as
well as a decrease in interest rates in the quarter ended March 31, 2001.
Income tax provision. The income tax provision (benefit) was ($0.4) million and
$20 thousand for the quarters ended March 31, 2001 and 2000, respectively. Muzak
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 a net loss of $11.8
million for the quarter ended March 31, 2001, compared to a net loss of $9.8
million for the comparable 2000 period.
Liquidity and Capital Resources
During the first quarter of 2001, our principal sources of funds have
been borrowings under the revolving credit facility and cash generated from
operations. Cash provided from operations, before investments in new subscriber
locations, was $9.5 million in the first quarter of 2001, an increase of $6.2
million over the comparable period of 2000. Cash was used in the first quarter
of 2001 to make interest payments, make investments in new client locations and
for general corporate purposes. In connection with the Company's execution of
the fifth amendment on May 15, 2001, applicable margins were amended to reflect
an across the board increase of .5%. These new margin ranges are reflected in
Note 6 to the Consolidated Financial Statements.
We expect that our principal uses of funds from operating activities
and borrowings will be the funding of growth in new client locations, interest
and principal payments on indebtedness and net working capital increases. As
announced on March 23, 2001, due to market conditions, the Company decided not
to pursue the issuance of Senior Subordinated Notes, the proceeds of which were
expected to be used to repay the revolving loan in full, to repay a portion of
the term loans, to repay the Related Party Notes, to consummate several
acquisitions, and to fund internal growth. The Company will continue to explore
various financing alternatives, which would provide necessary liquidity for
acquisitions. However, the Company believes that the cash flows from operations
and current borrowing availability will be sufficient to fund operations and
investments associated with new client locations through March 31, 2002.
Capital Investments. The majority of our capital expenditures are comprised of
the initial one-time investment for the installation of equipment for new client
locations. During the quarter ended March 31, 2001, the total initial investment
in new client locations was $13.9 million, which was comprised of equipment and
installation costs attributable to new client locations of $9.9 million and $4.0
million in sales commissions relating to these new locations. The sales
commissions are capitalized in deferred charges and other assets, net and are
13
MUZAK LLC
Item 2 Management's Discussion and Analysis (Continued)
amortized as a component of selling, general, and administrative expenses over
the initial contract term of five years. We also receive installation revenue
relating to new locations. This revenue is deferred and amortized as a component
of equipment and related services over the initial contract term of five years.
We currently anticipate that our total initial investment in new client
locations for the remainder of fiscal 2001 will be approximately $49.0 million,
including $34.4 million of equipment and installation costs attributable to new
client locations, and $14.6 million in sales commissions relating to new client
locations.
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 our operations as of March 31, 2001 during
the remainder of 2001 and 2002, 2003, 2004, 2005, and thereafter are $5.3
million, $6.8 million, $7.9 million, $27.8 million, $55.6 million, and $225.2
million, respectively. Included within the $225.2 million of debt maturing after
2005 is $27.0 million of Related Party Notes, of which $20.0 million converted
into Class A units of the Parent on May 9, 2001 and the remaining $7.0 million
is expected to convert on May 24, 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For the period ended March 31, 2001, the Company did not experience any
material changes in market risk disclosure that affect the quantitative and
qualitative disclosures presented in the 10-K.
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, 2000.
ITEM 3. Defaults upon Senior Securities
On May 15, 2001 the Company entered into the fifth amendment which
among other things (i) the parties amended the interest coverage ratios
applicable on March 31, 2001 and with respect to future periods, and (ii) the
applicable margins were amended to reflect an across the board increase of .5%.
These new margins are outlined in Note 6 to the Consolidated Financial
Statements.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
- ------ -----------
10.1 Waiver dated February 26, 2001, to the Credit and Guaranty Agreement
dated as of March 18, 1999 with Muzak LLC as borrower.
(b) Reports on Form 8-K
The Company filed Form 8-K on March 23, 2001, to announce the
postponement of its issuance of Senior Subordinated Notes.
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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 LLC
MUZAK FINANCE CORP.
By: /s/ William A. Boyd
---------------------------------
Date: May 15, 2001 William A. Boyd
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Stephen P. Villa
---------------------------------
Date: May 15, 2001 Stephen P. Villa
Chief Financial Officer
(Principal Financial
Officer and Chief
Accounting Officer)
15