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, 2004
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 | |
| 333-78573-01 | ||
| 333-78571 | ||
| 333-78571-01 |
MUZAK HOLDINGS LLC
MUZAK HOLDINGS FINANCE CORP
MUZAK LLC
MUZAK FINANCE CORP
(Exact Name of Registrants as Specified in their charter)
| DELAWARE | 04-3433730 | |
| DELAWARE | 04-3433728 | |
| DELAWARE | 04-3433729 | |
| DELAWARE | 56-2187963 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
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 ¨
Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934) Yes ¨ No x
Muzak Holdings Finance Corp. and Muzak Finance Corp. meet the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and are therefore filing this form with the reduced disclosure format.
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MUZAK HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS
(In thousands)
| March 31, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash |
$ | 2,936 | $ | 2,284 | ||||
| Accounts receivable, net of allowances of $2,075 and $1,580 |
30,149 | 29,579 | ||||||
| Inventory |
14,738 | 15,016 | ||||||
| Prepaid expenses and other assets |
3,351 | 3,974 | ||||||
| Total current assets |
51,174 | 50,853 | ||||||
| Property and equipment, net |
106,963 | 108,591 | ||||||
| Goodwill |
140,805 | 140,805 | ||||||
| Intangible assets, net |
109,187 | 113,129 | ||||||
| Deferred subscriber acquisition costs |
45,941 | 46,208 | ||||||
| Deferred charges and other assets, net |
15,356 | 15,646 | ||||||
| Total assets |
$ | 469,426 | $ | 475,232 | ||||
| LIABILITIES AND MEMBERS’ INTEREST (DEFICIENCY) | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 5,817 | $ | 6,528 | ||||
| Accrued expenses |
22,321 | 21,311 | ||||||
| Current portion of other liabilities |
3,730 | 3,711 | ||||||
| Current maturities of long term debt |
95 | 94 | ||||||
| Advance billings |
2,543 | 1,084 | ||||||
| Total current liabilities |
34,506 | 32,728 | ||||||
| Long-term debt |
412,892 | 411,424 | ||||||
| Other liabilities |
9,210 | 9,461 | ||||||
| Mandatorily redeemable preferred units |
135,680 | 129,691 | ||||||
| Commitments and contingencies |
||||||||
| Members’ Interest (deficiency): |
||||||||
| Class A units |
90,699 | 96,688 | ||||||
| Class B units |
— | — | ||||||
| Accumulated deficit |
(213,561 | ) | (204,760 | ) | ||||
| Total members’ interest (deficiency) |
(122,862 | ) | (108,072 | ) | ||||
| Total liabilities and members’ interest (deficiency) |
$ | 469,426 | $ | 475,232 | ||||
The Notes are an integral part of these consolidated financial statements.
2
MUZAK HOLDINGS LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
| Quarter Ended March 31, 2004 |
Quarter Ended March 31, 2003 |
|||||||
| Revenues: |
||||||||
| Music and other business services |
$ | 45,268 | $ | 42,642 | ||||
| Equipment and related services |
14,805 | 14,048 | ||||||
| 60,073 | 56,690 | |||||||
| Cost of revenues: |
||||||||
| Music and other business services (excluding $11,351 and $12,015 of depreciation and amortization expense). |
8,449 | 7,784 | ||||||
| Equipment and related services |
12,605 | 11,289 | ||||||
| 21,054 | 19,073 | |||||||
| 39,019 | 37,617 | |||||||
| Selling, general and administrative expenses |
21,100 | 19,951 | ||||||
| Depreciation and amortization expense |
16,140 | 17,534 | ||||||
| Income from operations |
1,779 | 132 | ||||||
| Other income (expense): |
||||||||
| Interest expense |
(10,606 | ) | (8,612 | ) | ||||
| Other, net |
3 | 36 | ||||||
| Loss before income taxes |
(8,824 | ) | (8,444 | ) | ||||
| Income tax benefit |
(23 | ) | (198 | ) | ||||
| Net loss |
$ | (8,801 | ) | $ | (8,246 | ) | ||
The Notes are an integral part of these consolidated financial statements.
3
MUZAK HOLDINGS LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Quarter Ended March 31, 2004 |
Quarter March 31, |
|||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss |
$ | (8,801 | ) | $ | (8,246 | ) | ||
| Adjustments to derive cash flow from continuing operating activities: |
||||||||
| Gain on disposal of fixed assets |
(27 | ) | (6 | ) | ||||
| Deferred income tax benefit |
(64 | ) | (252 | ) | ||||
| Depreciation and amortization |
16,140 | 17,534 | ||||||
| Amortization of senior discount and senior notes |
1,493 | 1,952 | ||||||
| Amortization of deferred financing fees |
635 | 616 | ||||||
| Amortization of deferred subscriber acquisition costs |
4,546 | 3,617 | ||||||
| Deferred subscriber acquisition costs |
(4,478 | ) | (4,517 | ) | ||||
| Change in unearned installment income |
(42 | ) | 8 | |||||
| Change in certain assets and liabilities |
||||||||
| Decrease (increase) in accounts receivable |
1,041 | (116 | ) | |||||
| Increase in inventory |
(644 | ) | (873 | ) | ||||
| Decrease in accounts payable |
(1,499 | ) | (325 | ) | ||||
| Increase (decrease) in accrued expenses |
1,768 | (948 | ) | |||||
| Increase in advance billings |
1,459 | 953 | ||||||
| Other, net |
237 | (233 | ) | |||||
| Net cash provided by operating activities |
11,764 | 9,164 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Capital expenditures for property and equipment |
(9,879 | ) | (9,420 | ) | ||||
| Capital expenditures for intangibles |
(452 | ) | (297 | ) | ||||
| Proceeds from sale of fixed assets |
28 | 7 | ||||||
| Net cash used in investing activities |
(10,303 | ) | (9,710 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Decrease in book overdrafts |
(74 | ) | (367 | ) | ||||
| Repayments of capital lease obligations and other debt |
(675 | ) | (606 | ) | ||||
| Payment of financing fees |
(60 | ) | — | |||||
| Net cash used in financing activities |
(809 | ) | (973 | ) | ||||
| NET INCREASE (DECREASE) IN CASH | 652 | (1,519 | ) | |||||
| CASH, BEGINNING OF PERIOD | 2,284 | 1,781 | ||||||
| CASH, END OF PERIOD | $ | 2,936 | $ | 262 | ||||
| Significant non-cash activities: |
||||||||
| Capital lease obligations |
$ | 511 | $ | 51 | ||||
The Notes are an integral part of these consolidated financial statements.
4
MUZAK HOLDINGS LLC
CONSOLIDATED STATEMENTS OF CHANGES IN
MEMBERS’ INTEREST (DEFICIENCY)
(Unaudited)
(In thousands, except for units)
| Class A |
Class B |
Accumulated Deficit |
Total Members’ Interest |
|||||||||||||||||
| Units |
Dollars |
Units |
Dollars |
|||||||||||||||||
| Balance, December 31, 2003 | 132,422 | $ | 96,688 | 14,537 | $ | — | $ | (204,760 | ) | $ | (108,072 | ) | ||||||||
| Net loss |
(8,801 | ) | (8,801 | ) | ||||||||||||||||
| Forfeiture of Class B units |
(281 | ) | — | — | ||||||||||||||||
| Preferred return on preferred units |
(5,989 | ) | (5,989 | ) | ||||||||||||||||
| Balance, March 31, 2004 | 132,422 | $ | 90,699 | 14,256 | $ | — | $ | (213,561 | ) | $ | (122,862 | ) | ||||||||
The Notes are an integral part of these consolidated financial statements.
5
MUZAK HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Muzak Holdings LLC (and its subsidiaries (the “Company”)), previously known as ACN Holdings, LLC, was formed in September 1998 pursuant to the laws of the state of Delaware. The Company, through its subsidiaries, provides business music programming to clients through its integrated nationwide network of owned operations and franchises. All of the operating activities are conducted through the Company’s subsidiaries.
As of March 31, 2004, ABRY Partners, LLC and its respective affiliates, collectively own 64.2% of the beneficial interests in the Company’s voting interests.
2. Basis of Presentation
The 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.
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 Holdings LLC Annual Report on Form 10-K for the fiscal year ended December 31, 2003 which can be found on the Company’s website, www.muzak.com.
The financial statements as of March 31, 2004 and March 31, 2003 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.
3. Property and Equipment
Property and equipment consists of the following (in thousands):
| Useful Life (years) |
March 31, (Unaudited) |
December 31, 2003 |
||||||||
| Equipment provided to subscribers |
5 | $ | 166,004 | $ | 161,275 | |||||
| Capitalized installation labor |
5 | 80,706 | 76,900 | |||||||
| Equipment |
5-7 | 30,774 | 29,875 | |||||||
| Other |
3-30 | 20,744 | 20,478 | |||||||
| 298,228 | 288,528 | |||||||||
| Less accumulated depreciation |
(191,265 | ) | (179,937 | ) | ||||||
| $ | 106,963 | $ | 108,591 | |||||||
Included in equipment and other at March 31, 2004 and December 31, 2003 is $15.5 million and $15.0 million, respectively of equipment under capital leases, gross of accumulated depreciation of $10.9 million and $10.3 million, respectively. Depreciation of property and equipment was $11.7 million and $12.5 million for the quarters ended March 31, 2004 and 2003, respectively.
6
MUZAK HOLDINGS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
4. Intangible Assets
Unamortized intangible assets consist of the following (in thousands):
| March 31, 2004 Carrying Amount |
December 31, 2003 Carrying Amount | |||||
| (unaudited) | ||||||
| Goodwill |
$ | 140,805 | $ | 140,805 | ||
Amortized intangible assets consist of the following (in thousands):
| &n |