UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- - - - - - - - - - - - -
FORM 10-Q
- - - - - -
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999.
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 Applied for
(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 [ ] No [X]
Muzak Finance Corporation meets the conditions set forth in General Instruction
H(1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MUZAK LLC
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT UNITS ISSUED AND OUTSTANDING)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------- ----
(UNAUDITED)
ASSETS
C>
Current assets:
Cash and cash equivalents............................. $ 3,350 $ 1,293
Accounts receivable, net.............................. 34,746 1,764
Inventory............................................. 9,581 1,323
Prepaid expenses and other assets..................... 4,949 125
--------- --------
Total current assets............................. 52,626 4,505
Property and equipment, net................................ 85,321 17,499
Intangible assets, net..................................... 271,344 49,039
Deposits and other assets, net.............................. 28,204 1,884
--------- ---------
TOTAL ASSETS..................................... $ 437,495 $ 72,927
========= =========
LIABILITIES AND MEMBER'S INTEREST
Current liabilities:
Revolving credit facility............................. $ 16,500 $ --
Current portion of long-term debt..................... 2,429 42,217
Accounts payable and accrued expenses................. 25,902 3,964
Advance billings...................................... 6,945 --
-------- --------
Total current liabilities........................ 51,776 46,181
Senior credit facility..................................... 165,000 --
Senior subordinated notes.................................. 115,000 --
Other long-term debt....................................... 3,979 486
Other liabilities.......................................... 5,037 --
-------- --------
Total liabilities................................ 340,792 46,667
Member's interest
Common units.......................................... 110,380 27,407
Accumulated deficit................................... (13,677) (1,147)
------------ ----------
Total member's interest.......................... 96,703 26,260
------------ ----------
TOTAL LIABILITIES AND MEMBER'S INTEREST $ 437,495 $ 72,927
============ ==========
The accompanying notes are an integral part of these consolidated financial
statements
2
MUZAK LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30,
1999 1999
---- -----
Revenues:
Music and other business services............................... $28,328 $ 62,456
Equipment and related services.................................. 11,927 25,468
-------- -----------
40,255 87,924
Cost of revenues:
Music and other business services............................... 6,129 13,366
Equipment and related services.................................. 9,259 19,981
-------- -----------
15,388 33,347
-------- -----------
Gross profit............................................... 24,867 54,577
-------- -----------
Selling, general and administrative expenses......................... 13,438 28,268
Depreciation and amortization expense................................ 11,255 23,594
-------- -----------
Income from operations..................................... 174 2,715
Other income (expense):
Interest expense, net........................................... (7,480) (16,105)
Other, net...................................................... 154 133
------- -----------
Net loss before extraordinary gain on the extinguishment
of debt................................................... (7,152) (13,257)
Extraordinary gain on the extinguishment of debt..................... -- 727
--------- -----------
Net loss...................................................$ (7,152) $ (12,530)
========= =============
The accompanying notes are an integral part of these consolidated financial
statements
3
MUZAK LLC
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S INTEREST
(DOLLARS IN THOUSANDS, EXCEPT FOR UNITS)
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------
(UNAUDITED)
COMMON UNITS TOTAL
------------ ACCUMULATED MEMBER'S
OUTSTANDING ($) DEFICIT INTEREST
----------- --- -------------- ----------
Balance, December 31, 1998.................... 100 $ 27,407 $ (1,147) $ 26,260
Additional capital contributed................ -- 82,973 -- 82,973
Net loss...................................... -- -- (12,530) (12,530)
--- ---------- --------- --------
Balance, September 30, 1999................... 100 $110,380 $ (13,677) $ 96,703
=== ========== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements
4
MUZAK LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NINE MONTHS
ENDED
SEPTEMBER 30,
1999
-------------
CASH FLOW FROM OPERATING ACTIVITIES (UNAUDITED)
Net Loss................................................................... ($12,530)
Adjustments to derive cash flow from continuing operating activities:
Depreciation and amortization.............................................. 23,594
Amortization of deferred financing fees.................................... 614
Extraordinary gain on extinguishment of debt............................... (727)
Net change in certain assets and liabilities, net of business acquisitions.
Increase in accounts receivable........................................ (9,590)
Increase in inventory ................................................. (972)
Increase in accrued interest........................................... 4,403
Decrease in accounts payable and accrued expenses...................... (7,589)
Increase in advance billings........................................... 1,018
Increase in unearned installment income................................ 208
Other, net............................................................. (3,521)
-------
NET CASH USED IN OPERATING ACTIVITIES.................................. (5,092)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions, net of cash.................................................. (281,491)
Capital expenditures....................................................... (16,824)
--------
NET CASH USED IN INVESTING ACTIVITIES................................. (298,315)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior subordinated notes........................ 115,000
Proceeds from issuance of senior credit facility........................... 165,000
Proceeds from issuance of membership units to management................... 64,250
Repayment of bridge loan................................................... (41,683)
Issuance of notes payable to related party................................. 3,000
Net borrowings under Revolver.............................................. 16,500
Repayments of other debt................................................... (3,140)
Payment of fees associated with the financing.............................. (13,463)
-----
NET CASH PROVIDED BY FINANCING ACTIVITIES........................ 305,464
-------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................. 2,057
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD....................... 1,293
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $3,350
=======
The accompanying notes are an integral part of these consolidated
financial statements
5
MUZAK LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Muzak LLC (the "Company") was formerly known as Audio Communications
Network, LLC which was formed in September 1998, pursuant to the laws of
Delaware, as a wholly owned subsidiary of Muzak Holdings LLC (the "Parent"),
formerly known as ACN Holdings LLC. The Company began its operations on October
7, 1998, with the acquisition of certain assets and liabilities of Audio
Communications Network, Inc.
The Company provides business music services and products and markets and
sells video and audio marketing services through a network of domestic and
international franchises and owned operations. The franchises are charged a fee
based on their revenues, in exchange for broadcast music, marketing, technical
and administrative support. The Company and its franchises also sell, install
and maintain electronic equipment related to the Company's business.
The Company's music services are primarily sold for use in public areas,
such as retail and restaurant establishments as well as business offices and
manufacturing facilities. Services are distributed through direct broadcasting
satellite transmission, local broadcasting transmission and pre-recorded tapes
played on the customer's premises.
2. BASIS OF PRESENTATION
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.
These condensed financial statements should be read in conjunction with the
Company's audited financial statements as of December 31, 1998 and the notes
thereto as included in the Company's Registration Statement filed with the
Securities and Exchange Commission and declared effective September 13, 1999.
Results of operations for interim periods are not necessarily indicative of
results for the full year.
6
MUZAK LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The financial statements as of September 30, 1999 and for the three and
nine month periods then ended are unaudited; however, in the opinion of
management, such statements include all adjustments (consisting solely of normal
and recurring adjustments except for the acquisitions described in Note 4)
necessary to present fairly the financial information included herein subject
to year end audit adjustments.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of the Company include
the accounts of the Company and its wholly owned subsidiaries: Muzak Capital
Corporation, Muzak Finance Corp., Business Sound, Inc., Electro Systems
Corporation, BI Acquisition, LLC. and MLP Environmental Music, LLC. All
significant intercompany balances and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
Revenues from music services are recognized on a straight-line basis over
the term of the customer contract in the period services are provided. Revenues
from equipment sales and the installation of sold equipment for non-recurring
services are recognized upon delivery or installation. Contracts are typically
for a five-year non-cancelable period with automatic renewal options for an
additional five years. Fees received for services to franchises are recognized
as music revenues in the month that the services are provided.
DEFERRED FINANCING FEES
Deferred financing fees are stated at cost and amortized over the term of
the debt on the effective interest method are are included in deposits and other
assets, net in the consolidated balance sheets.
ADVANCE BILLINGS
The Company invoices certain customers in advance for contracted music and
other business services. Amounts invoiced in advance of the service period are
deferred when invoiced and recognized as revenue in the period earned.
7
MUZAK LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS
Prior period amounts have been reclassified to conform to the current
quarter's presentation.
4. ACQUISITIONS
On January 15, 1999, the Company acquired all of the outstanding stock of
Business Sound, Inc. for approximately $4.1 million, excluding transaction fees.
The acquisition was accounted for under the purchase method of accounting.
Accordingly, the consideration paid was allocated based on the estimated fair
market value of the net assets acquired. The excess of the consideration paid
over the estimated fair market value of the net assets acquired approximated
$0.9 million and is being amortized using the straight-line method over 20
years.
On February 24, 1999, the Company acquired all of the outstanding stock of
Electro Systems Corporation for approximately $3.0 million, excluding
transaction fees. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the consideration paid was allocated based on the
estimated fair market value of the net assets acquired. The excess of the
consideration paid over the estimated fair market value of the net assets
acquired approximated $0.7 million and is being amortized using the
straight-line method over 20 years.
On March 18, 1999, Muzak Limited Partnership ("Muzak L.P.") merged with and
into the Company. Under the terms of the Agreement, the Company paid
approximately $268.7 million in total consideration, which includes non-voting
units of the Parent and excludes transaction fees. The transaction was accounted
for under the purchase method of accounting. Accordingly, the consideration paid
was allocated based on the estimated fair market value of the net assets
acquired. The excess of the consideration paid over the estimated fair market
value of the net assets acquired approximated $100.4 million and is being
amortized using the straight-line method over 20 years.
On March 18, 1999, the Company acquired Capstar Broadcasting Corporation's
("Capstar") Muzak franchises, which served territories in Atlanta, Albany and
Macon, Georgia; Ft. Myers, Florida. Under the terms of the Agreement, the
Company paid approximately $18.1 million in total consideration comprised of
Class A units of the parent valued at $13.5 million and a cash payment of
approximately $4.6 million excluding transaction fees. The transaction was
accounted for under the purchase method of accounting. Accordingly, the
consideration paid was allocated based on the estimated fair market value of the
net assets acquired.
8
MUZAK LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In order to complete the acquisitions of Business Sound, Inc., Electro
Systems Corporation, Capstar and the merger with Muzak L.P., the Company
received $62.1 million in capital contributions from the Parent and $1.2 million
in capital contributions from management of the Company. In addition, the
Company became a co-issuer of $115.0 million, principle amount, of senior
subordinated notes, and borrowed $138.4 million under a senior credit facility.
The following transactions were accounted for under the purchase method of
accounting. Accordingly, the consideration paid was allocated based on the
estimated fair market value of the net assets acquired. The excess of the
consideration paid over the estimated fair market value of the net assets
acquired approximated $4.7 million and is being amortized using the
straight-line method over 20 years.
On March 24, 1999, the Company acquired the net assets of Custom On Hold
Services, Inc. for approximately $0.2 million, excluding transaction fees.
On May 3, 1999, the Company acquired Capstar's Muzak franchise territory
located in Omaha, Nebraska. Under the terms of the Agreement, the Company paid
$3.2 million in total consideration comprised of voting membership units of the
Parent and a cash payment of approximately $0.8 million, excluding transaction
fees.
On June 15, 1999, the Company acquired the net assets of Advertising On
Hold, Inc. for approximately $6.9 million.
On June 18, 1999, the Company acquired the net assets of CustomTronics
Sound for approximately $0.8 million.
On June 30, 1999, the Company acquired the net assets of Penobscot
Broadcasting Corporation for approximately $0.9 million.
On July 13, 1999 the Company acquired the net assets of LaBov and Beyond
for approximately $1.4 million.
On August 2, 1999, the Company acquired the net assets of Please Hold for
approximately $ 3.5 million.
On August 18, 1999, the Company acquired the stock of Broadcast
International, LLC for approximately $4.7 million.
9
MUZAK LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following presents the unaudited pro forma results of the Company for
the nine months ended September 30, 1999, as if the acquisition and financings
discussed above occurred on January 1, 1999. These unaudited pro forma results
are not necessarily indicative of the results that will occur in future interim
periods (in thousands).
Revenues................ $115,635
=========
Loss from operations.... (1,601)
=========
Net loss................ ($21,898)
=========
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
USEFUL
LIFE SEPTEMBER 30, DECEMBER 31,
(YEARS) 1999 1998
-------- ------------- -------------
(UNAUDITED)
Equipment provided to subscribers 4-6 $ 80,129 $ 16,186
Other................................. 3-35 17,025 2,113
-------------- ------------
97,154 18,299
Less accumulated depreciation......... (11,833) (800)
-------------- ------------
$ 85,321 $ 17,499
============== ============
Depreciation expense approximated $11.0 million and $5.7 million for the
nine months and quarter ended September 30, 1999, respectively.
10
MUZAK LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INTANGIBLE ASSETS
Intangible assets consists of the following (in thousands):
USEFUL
LIFE SEPTEMBER 30, DECEMBER 31,
(YEARS) 1999 1998
------- ------------ ------------
(UNAUDITED)
Goodwill.......................... 20 $119,823 $ 15,112
Income producing contracts........ 8-14 119,704 34,810
License agreements................ 20 5,082 --
Trademarks........................ 5 14,866 --
Non-compete agreements............ 2-7 7,946 --
Other............................. 5-20 17,373 --
------- --------
284,794 49,922
Less accumulated amortization..... (13,450) (883)
-------- --------
$271,344 $ 49,039
======== ========
Amortization expense was $12.6 million and $5.6 million for the nine months
ended and quarter ended September 30, 1999, respectively.
7. DEBT
In March 1999, the Company entered into a new senior credit facility
("Senior Credit Facility"), which provides for a $30.0 million term loan
facility ( "Term Loan A") which matures on December 31, 2005, a $105.0 term loan
facility ("Term Loan B") which matures on December 31, 2006, and for a $35.0
million Revolving Credit Facility. The Term Loans are required to be paid in
semi-annual installments on June 30 and December 31 of each year beginning on
June 30, 2000. The Revolving Loan must be repaid on or before December 31, 2005.
The obligations of the Company under the Senior Credit Facility are guaranteed
by each of the Company's future domestic subsidiaries. Interest accrues at the
Company's election at a rate based on either (a) the Base Rate (as described in
the Senior Credit Facilities Agreement) or b) Libor (as defined in the Senior
Credit Facilities Agreement) plus in either case, the applicable margin. The
applicable borrowing margin under Term Loans and Revolving Loans range from 1%
to 3.5%. Commitment fees range from .375% to .0625%.
On March 18, 1999, the Company together with its wholly owned subsidiary,
Muzak Finance Corp., co-issued $115.0 million in principal amount of Senior
Subordinated Notes ("Subordinated Notes").
11
MUZAK LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest on the Subordinated Notes accrues at a rate of 9.875% per annum.
Interest is payable semi-annually, in arrears, on March 15 and September 15
of each year. The Subordinated Notes mature on March 15, 2009.
In July 1999, the Company amended its Senior Credit Facility, which resulted in
an increase in the borrowings under Term Loan B by $30.0 million. In addition,
the Company may request lenders to commit to additional loans of up to $50.0
million under a second revolving facility prior to December 31, 2000 if the
Company meets certain covenants.
In July 1999, the Company executed a note agreement with a related party
for $3.0 million. Interest on this note accrues at a rate of 15% per annum, and
is payable, together with the principal on June 30, 2007.
Debt obligations consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
1999 1998
------- ----
(UNAUDITED)
Line of credit--revolving facility.. $ 16,500 $ --
Senior credit facility............. 165,000 --
Senior subordinated notes.......... 115,000 --
Other.............................. 6,408 42,703
---------- --------
Total debt obligations... 302,908 42,703
Less current portion............... (2,429) (42,217)
----------- --------
$ 300,479 $ 486
========== ========
Annual maturities of debt obligations are as follows (in thousands):
1999......... $ 18,929
2000......... 4,221
2001......... 5,250
2002......... 6,739
2003......... 7,350
Thereafter... 260,419
8. MUZAK FINANCE CORP.
Muzak Finance Corp had no operating activities during the nine months ended
September 30, 1999.
12
9. SUBSEQUENT EVENTS(unaudited)
In October 1999, the Company acquired all of the net assets of Midwest
Systems Inc. for approximately $10.3 million.
In October 1999, the Company amended its Senior Credit Facility, which
resulted in an increase in the amount a related party can loan the Company from
$10.8 million to $30.0 million. In addition, this amendment also provides for an
additional high yield bond offering or a preferred stock placement if certain
covenants are met by the Company.
In November 1999, the Company acquired certain net assets of A&D Systems
Inc. for approximately $2.9 million.
In November 1999, the Company entered into a letter of intent to acquire
certain net assets of an existing franchisee of the Company for approximately
$8.0 million of cost and equity consideration.
The following presents the unaudited pro forma results of the Company for the
nine months ended September 30,1999, as if the acquisitions and financings,
including those discussed above in subsequent events, occured on January 1,
1999. These unaudited pro forma results are not necessarily indicative of the
results that will occur in future periods (in thousands).
Revenues...................$123,214
========
Loss from operations....... ($699)
========
Net Loss...................($21,029)
========
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
registrant's Form S-4 filed with the Securities and Exchange Commission on
September 13, 1999.
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q or future filings by the
Company, as defined below, and the Parent, as defined below, with the
Securities and Exchange Commission, in the Company's and the Parent's press
releases or other public communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "believes,"
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company and the Parent wish to caution
readers not to place undo reliance on any such forward-looking statements, which
speak only as of the date made, and to advise readers that various factors,
including rapid technological change, competitive pricing, concentrations in and
dependence on satellite delivery capabilities, and development of new services
could affect the Company's and the Parent's financial performance and could
cause the Company's and the Parent's actual results for future periods to
differ materially from those anticipated or projected.
The Company and the Parent do not undertake and specifically disclaim any
obligation to update any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
(unaudited)
Managements's Discussion and Analysis includes a comparison of third quarter
1999 to second quarter 1999 as the Company's operations commenced in October,
1998.
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, SEPTEMBER 30,
1999 1999
---- -----
Revenues:
Music and other business services............................... 25,950 28,328
Equipment and related services.................................. 9,568 11,927
-------- -----------
35,518 40,255
Cost of revenues:
Music and other business services............................... 5,637 6,129
Equipment and related services.................................. 7,850 9,259
-------- -----------
13,487 15,388
-------- -----------
Gross Profit......................................................... 22,031 24,867
-------- -----------
Selling, general and administrative expenses......................... 11,883 13,438
Depreciation and amortization expense................................ 9,143 11,255
-------- -----------
Income from operations..................................... 1,005 174
Other income (expense):
Interest expense, net........................................... (6,513) (7,480)
Other, net...................................................... -- 154
Net loss before extraordinary gain on extinguishment of debt.... (5,508) (7,152)
Extraordinary gain on the extinguishment of debt..................... -- --
Net loss........................................................ (5,508) (7,152)
REVENUES. Total revenues increased 13.3% for the three month period ended
September 30, 1999, as compared to the three month period ended June 30, 1999.
This revenue increase was primarily due to strong organic growth combined with
the acquisition of competitors' business service accounts and one-time equipment
and related service revenues associated with non-acquisition growth.
Music and other business services revenue increased by $2.4 million or 9.2% for
the three month period ended September 30, 1999, as compared to the three month
period ended June 30, 1999. Equipment and related revenues increased by $2.4
million or 24.7% for the three month period ended September 30, 1999, as
compared to the three month period ended June 30, 1999.
GROSS PROFIT. Gross profit increased by $2.8 million or 12.9% for the three
month period ended September 30, 1999, as compared to the three month period
ended June 30, 1999. Gross profit margins for the three month period ended
September 30, 1999 and June 30, 1999, were 61.8% and 62.0%, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased as a percentage of revenues for the three
month period ended September 30, 1999, as compared to the three month period
ended June 30, 1999. These expenses, as a percentage of revenues, were 33.4% and
33.5% for the three month periods ended September 30, 1999, and June 30, 1999,
respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased
$2.1 million for the three month period ended September 30, 1999, as compared to
the three month period ended June 30, 1999. The increase for the three month
period is primarily due to increased amortization expense related to the
acquisitions.
OTHER INCOME(EXPENSE). Other income (expense), increased $0.8 million or 12.5%
for the three month period ended September 30, 1999 as compared to the three
month period ended June 30, 1999 due to the increase in borrowings of $30.0
million in July 1999.
NET LOSS. Net loss increased $1.6 million or 29.8% for the three month period
ended September 30, 1999 as compared to the three month period ended June 30,
1999 primarily due to the reasons cited above.
15
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased from $1.3 million as of December 31, 1998 to
$3.4 million as of September 30, 1999. The Company used cash of $5.1 million
during the nine months ended September 30, 1999 to fund operations and for
net working capital requirements. The Company has expended approximately $16.8
million in investing activities in the nine months ended September 30, 1999
primarily related to equipment provided to subscribers.
In March 1999, the Company entered into a new senior credit facility ("Senior
Credit Facility"), which provides for two term loans (the "Term Loans") for
$30.0 million and $105.0 million and revolving loans (the "Revolving Loan") for
up to $35.0 million. The Term Loans are required to be paid in semi-annual
installments on June 30 and December 31 of each year beginning on June 30, 2000.
The Revolving Loan must be repaid on or before December 31, 2005. The
obligations of the Company under the Senior Credit Facility are guaranteed by
each of the Company's future domestic subsidiaries. Interest accrues at the
Company's election at a rate based on either (a) the Base Rate (as described in
the Senior Credit Facilities Agreement) or (b) Libor (as defined in the Senior
Credit Facilities Agreement) plus in either case, the applicable margin. The
applicable borrowing margin under Term Loans and Revolving Loans range from 1%
to 3.5%. Commitment fees range from .375% to .0625%.
On March 18, 1999, the Company together with its wholly owned subsidiary, Muzak
Finance Corp., co-issued $115.0 million in principal amount of Senior
Subordinated Notes ("Subordinated Notes"). Interest on the Subordinated Notes
accrues at a rate of 9.875% per annum. Interest is payable semi-annually, in
arrears, on March 15 and September 15 of each year, commencing on September 15,
1999. The Subordinated Notes will mature on March 15, 2009.
In July 1999, the Company amended its Senior Credit Facility, which resulted in
an increase in the amount available for borrowings under this facility by $30.0
million. In addition, the Company may request lenders to commit to additional
loans of up to $50.0 million under a second revolving facility prior to December
31, 2000 if the Company meets certain covenants.
In July 1999, the Company executed a note agreement with a related party for
$3.0 million. Interest on this note accrues at a rate of 15% per annum, and is
payable, together with the principal on June 30, 2007.
In October 1999, the Company acquired all of the net assets of Midwest Systems
Inc. for approximately $10.3 million.
In October 1999, the Company amended its Senior Credit Facility, which resulted
in an increase in the amount the related party can loan the Company from
$10.8 million to $30.0 million. In addition, this amendment also provides for an
additional high yield bond offering or a preferred stock placement if certain
covenants are met by the company.
In November 1999, the Company acquired certain net assets of A&D Systems Inc.
for approximately $2.9 million.
In November 1999, the Company entered into a letter of intent to acquire certain
net assets of an existing franchisee of the Company for approximately $8.0
million of cost and equity consideration.
The Company believes that its cash flows from operations, borrowing availability
and cash on hand will be adequate to support currently planned business
operations, capital expenditures and debt service requirements at least through
December 2000. If the Company engages in one or more material acquisitions,
joint ventures or alliances or other major business initiatives requiring
significant cash commitments, or incurs unanticipated expenses, additional
financing could be required.
Year 2000 Conversion
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have date sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000.
The Company relies on computer technology in many facets of operations,
including satellite broadcast systems. If the Company's significant customers or
suppliers are not successful in making necessary modifications and conversions
on a timely basis, the year 2000 issue could have a material adverse effect on
the Company's operations.
The Company has replaced the primary computer system at headquarters, and
believes that it is now substantially year 2000 compliant. The Company has also
replaced hardware and software at owned operations and believes that these
systems are now year 2000 compliant. The new software is also available to its
franchisees. The Company is conducting ongoing reassessments, including testing
systems for year 2000 compliance, to confirm that all critical risks have been
identified and have been addressed.
Costs related to the year 2000 issue are funded through operating cash flows.
The Company estimates that its year its 2000 compliance programs will cost
approximately $1.0 million, of which substantially all has been expended as of
September 30, 1999.
While the Company believes all necessary work will be completed in a timely
fashion, the Company be certain that all systems will be compliant by the year
2000, or that the systems of other companies and government agencies on which we
rely will be compliant.
Since 1997, the Company has been communicating with outside vendors to determine
their state of readiness with regard to the year 2000 issue. Based on its
assessment to date, the Company has not received any indication from a third
party indicating that it expects to experience year 2000 non-compliance of a
nature which would have a material impact on the Company. We have received
letters assuring year 2000 compliance from our satellite providers, EchoStar and
PanAmSat. However, the risk remains that outside vendors or other third parties
may not have accurately determined their state of readiness, in which case the
Company's results of operations may be impacted. The Company continues to
monitor the year 2000 compliance of third parties with which we do business.
The Company believes the most likely worst-case scenarios that may occur with
respect to the year 2000 issues have to do with the possible failure of third
party systems over which the Company has no control, such as, but not limited
to, satellite, power and telephone services. The Company is currently in the
process of finalizing its year 2000 contingency plan.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is subject to various proceedings arising in the normal course of
business, none of which, individually or in the aggregate, is expected to have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
ITEM 2. CHANGES IN SECURITIES
None.
17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
(a) Exhibits
10.12 Second Amendment Consent and waiver dated October 26, 1999 to
the Credit and Guarantee Agreement dated as of March 18, 1999
with Muzak LLC as borrower.
27.1 Financial Data Schedule of Muzak LLC
27.2 Financial Data Schedule of Muzak Finance Corp.
18
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
By:/s/Brad D. Bodenman
---------------------------------
Date: November 15, 1999 Brad D. Bodenman
Chief Financial Officer
(Principal Financial
Officer and Chief
Accounting Officer of Muzak LLC
MUZAK FINANCE CORP.
By:/s/Brad D. Bodenman
---------------------------------
Date: November 15, 1999 Brad D. Bodenman
Chief Financial Officer
(Principal Financial
Officer and Chief
Accounting Officer of Muzak Finance Corp.)
EXHIBIT INDEX
Exhibit No. Description
- - ----------- -----------
10.12 Second Amendment Consent and waiver dated October 26, 1999 to
the Credit and Guarantee Agreement dated as of March 18, 1999
with Muzak LLC as borrower.
27.1 Financial Data Schedule of Muzak LLC
27.2 Financial Data Schedule of Muzak Finance Corp.
19