-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VDakzGlO/seSij4Q/rifYeuZIgZSRXfFl1QB5ETRo9ET6XAnE37mFmORqv0oxwiO 2MkK0FQi7Xvqh8D8Qiyy+w== 0001021408-02-014167.txt : 20021114 0001021408-02-014167.hdr.sgml : 20021114 20021114160715 ACCESSION NUMBER: 0001021408-02-014167 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUZAK HOLDINGS FINANCE CORP CENTRAL INDEX KEY: 0001085319 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-78573-01 FILM NUMBER: 02825202 BUSINESS ADDRESS: STREET 1: 2901 THIRD AVENUE SUITE 400 CITY: SEATTLE STATE: WA ZIP: 98121 BUSINESS PHONE: 2066333000 MAIL ADDRESS: STREET 1: 2901 THIRD AVENUE SUITE 400 CITY: SEATTLE STATE: WA ZIP: 98121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUZAK HOLDINGS LLC CENTRAL INDEX KEY: 0001085320 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-78571-02 FILM NUMBER: 02825204 BUSINESS ADDRESS: STREET 1: 2901 THIRD AVENUE SUITE 400 CITY: SEATTLE STATE: WA ZIP: 98121 BUSINESS PHONE: 2066333000 MAIL ADDRESS: STREET 1: 2901 THIRD AVENUE SUITE 400 CITY: SEATTLE STATE: WA ZIP: 98121 10-Q 1 d10q.txt MUZAK HOLDINGS LLC 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, 2002. 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 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) 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 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. PART I- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. MUZAK HOLDINGS LLC CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)
September 30, December 31, 2002 2001 ------------- ------------ ASSETS Current assets: Cash .......................................................... $ 1,599 $ 2,583 Accounts receivable, net of allowances of $1,719 and $1,943 ... 27,113 24,313 Inventory ..................................................... 11,238 9,402 Prepaid expenses and other assets ............................. 2,091 1,441 ---------- ---------- Total current assets ...................................... 42,041 37,739 Property and equipment, net ...................................... 110,721 118,019 Intangible assets, net ........................................... 275,737 292,546 Deferred charges and other assets, net ........................... 51,728 50,020 ---------- ---------- Total assets .............................................. $ 480,227 $ 498,324 ========== ========== LIABILITIES AND MEMBERS' INTEREST Current liabilities: Current maturities of long term debt .......................... $ 7,153 $ 6,775 Current maturities of other liabilities ....................... 3,993 4,115 Accounts payable .............................................. 6,545 5,192 Accrued expenses .............................................. 19,545 21,278 Advance billings .............................................. 1,382 870 ---------- ---------- Total current liabilities ................................. 38,618 38,230 Long-term debt ................................................... 358,529 355,145 Related party notes .............................................. 10,000 -- Other liabilities ................................................ 9,884 12,895 Commitments and contingencies Manditorialy redeemable preferred units .......................... 104,683 92,266 Members' interest: Class A units ................................................. 121,261 133,141 Class B units ................................................. 406 1,263 Accumulated other comprehensive loss .......................... (197) (2,455) Accumulated deficit ........................................... (162,957) (132,161) ---------- ---------- Total members' interest ................................... (41,487) (212) ---------- ---------- Total liabilities and members' interest ................... $ 480,227 $ 498,324 ========== ==========
The Notes are an integral part of these consolidated financial statements. 2 MUZAK HOLDINGS LLC CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands)
Quarter Ended Nine Months Ended ------------------------------ ----------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- Revenues: Music and other business services ............... $ 41,177 $ 37,851 $ 121,123 $ 111,782 Equipment and related services .................. 14,989 12,675 40,075 39,448 --------- --------- --------- --------- 56,166 50,526 161,198 151,230 Cost of revenues: Music and other business services (excluding $11,196, $9,550, $32,932, and $27,406 of depreciation and amortization expense) ........ 7,780 7,396 26,428 21,956 Equipment and related services .................. 11,873 10,519 32,474 29,516 --------- --------- --------- --------- 19,653 17,915 58,902 51,472 --------- --------- --------- --------- 36,513 32,611 102,296 99,758 Selling, general and administrative expenses ......... 17,931 16,402 53,853 51,557 Depreciation and amortization expense ................ 17,567 19,287 52,825 56,078 --------- --------- --------- --------- Income (loss) from operations ............... 1,015 (3,078) (4,382) (7,877) Other income (expense): Interest expense ................................ (8,865) (9,236) (27,505) (29,728) Other, net ...................................... 76 (99) 192 (201) --------- --------- --------- --------- Loss before income taxes .................... (7,774) (12,413) (31,695) (37,806) Income tax provision (benefit) ....................... (308) 109 (899) (500) --------- --------- --------- --------- Net loss .................................... $ (7,466) $ (12,522) $ (30,796) $ (37,306) ========= ========= ========= =========
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 Nine Months Ended ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, 2002 2001 2002 2001 ------------- ------------- ------------- ------------- CASH FLOW FROM OPERATING ACTIVITIES Net loss ............................................................ $ (7,466) $(12,522) $(30,796) $(37,306) Adjustments to derive cash flow from continuing operating activities: Loss (gain) on disposal of fixed assets ............................. (17) 10 (30) 119 Deferred income tax benefit ......................................... (308) (142) (899) (751) Depreciation and amortization ....................................... 17,567 19,287 52,825 56,078 Amortization of senior discount notes ............................... 1,953 1,723 5,669 4,999 Amortization of deferred financing fees ............................. 575 473 1,625 1,417 Amortization of deferred subscriber acquisition costs ............... 3,260 2,478 9,182 6,830 Deferred subscriber acquisition costs ............................... (3,619) (4,027) (10,845) (11,920) Unearned installment income ......................................... (316) (216) (1,053) (548) Change in certain assets and liabilities, net of business acquisitions Decrease (increase) in accounts receivable ....................... (3,760) 610 (2,799) 10,222 Decrease (increase) in inventory ................................. (166) 806 (1,836) 1,026 Decrease in accrued interest ..................................... (2,807) (2,802) (5,698) (1,269) Decrease in accounts payable ..................................... (722) (353) (1,684) (4,679) Increase (decrease) in accrued expenses .......................... 1,434 162 4,544 (406) Increase (decrease) in advance billings .......................... 90 (292) 512 294 Other, net ....................................................... 494 (471) 51 633 -------- -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES ...................... 6,192 4,724 18,768 24,739 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions, net of cash ........................................... -- -- -- (979) Capital expenditures ................................................ (8,646) (8,327) (26,700) (30,427) Proceeds from sale of fixed assets .................................. 22 11 40 291 -------- -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES .......................... (8,624) (8,316) (26,660) (31,115) -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in book overdrafts .............................. 1,719 (3,093) 3,037 (5,320) Repayments of senior credit facility ................................ -- -- (3,347) (2,597) Repayments on revolver .............................................. -- -- (10,000) -- Borrowings on revolver .............................................. 3,000 7,500 11,500 16,000 Issuance of notes payable to a related party ........................ -- -- 10,000 -- Payment of interest rate protection agreement ....................... -- -- (372) -- Repayments of capital lease obligations and other debt .............. (662) (662) (2,035) (1,743) Payment of fees associated with the financing ....................... (343) -- (1,875) -- -------- -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITES ...................... 3,714 3,745 6,908 6,340 -------- -------- -------- -------- NET INCREASE (DECREASE) IN CASH ..................................... 1,282 153 (984) (36) CASH, BEGINNING OF PERIOD ........................................... 317 2,823 2,583 3,012 CASH, END OF PERIOD ................................................. $ 1,599 $ 2,976 $ 1,599 $ 2,976 ======== ======== ======== ======== Significant non-cash activities: Issuance of common stock in connection with conversion of sponsor notes ....................................................... -- -- -- 35,435 Issuance of common stock in connection with acquisitions ............ -- -- -- 143 Capital lease obligations ........................................... 662 963 1,953 1,432
The Notes are an integral part of these consolidated financial statements. 4 MUZAK HOLDINGS LLC CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST (Unaudited) (in thousands, except for units)
Class A Class B Accumulated ------- ------- Other Total Accumulated Comprehensive Members' Units Dollars Units Dollars Deficit Loss Interest ----- --------- ----- ------- ------- ---- -------- Balance, December 31, 2001 132,422 $ 133,141 10,526 $ 1,263 $(132,161) $ (2,455) $ (212) Comprehensive loss: Net loss ............................... (11,546) (11,546) Change in unrealized losses on derivative ............................. -- 1,182 1,182 --------- -------- --------- Total comprehensive loss ............... (11,546) 1,182 (10,364) Net Issuance (repurchase) of units ..... 470 Preferred return on preferred units .... -- (3,587) -- (285) -- -- (3,872) ------- --------- ------- --------- --------- -------- --------- Balance, March 31, 2002 132,422 $ 129,554 10,996 $ 978 $(143,707) $ (1,273) $ (14,448) ======= ========= ======= ========= ========= ======== ========= Comprehensive loss: Net loss ............................... (11,784) (11,784) Change in unrealized losses on derivative ............................. -- 1,179 1,179 --------- -------- --------- Total comprehensive loss ............... (11,784) 1,179 (10,605) Net Issuance (repurchase) of units ..... Preferred return on preferred units .... -- (3,857) -- (204) -- -- (4,061) ------- --------- ------- --------- --------- -------- --------- Balance, June 30, 2002 132,422 $ 125,697 10,996 $ 774 $(155,491) $ (94) $ (29,114) ======= ========= ======= ========= ========= ======== ========= Comprehensive loss: Net loss ............................... (7,466) (7,466) Change in unrealized losses on derivative ............................. -- (103) (103) --------- -------- --------- Total comprehensive loss ............... (7,466) (103) (7,569) Net Issuance (repurchase) of units ..... (297) Preferred return on preferred units .... -- (4,436) -- (368) -- -- (4,804) ------- --------- ------- --------- --------- -------- --------- Balance, September 30, 2002 132,422 $ 121,261 10,699 $ 406 $(162,957) $ (197) $ (41,487) ======= ========= ======= ========= ========= ======== =========
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"), a Delaware limited liability company, provides business music programming to clients through its integrated nationwide network of owned operations and franchises. As of September 30, 2002, ABRY Partners, LLC and its respective affiliates, collectively own approximately 64.2% of the beneficial interests in the Company's voting interests. 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. 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, 2001. The financial statements as of September 30, 2002 and 2001 and for the three and nine months 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 2002 presentation. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands):
Useful September 30, December 31, Life 2002 2001 (years) (Unaudited) ----------------------------------------- Equipment provided to subscribers .... 4-6 $ 135,004 $ 121,084 Capitalized installation labor ....... 5 57,740 48,802 Equipment ............................ 5-7 23,944 21,151 Other ................................ 3-30 17,766 16,248 --------- --------- 234,454 207,285 Less accumulated depreciation ....... (123,733) (89,266) --------- --------- $ 110,721 $ 118,019 ========= =========
6 MUZAK HOLDINGS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Included in equipment and other at September 30, 2002 and December 31, 2001 is $13.7 million and $11.6 million, respectively, of equipment under capital leases, gross of accumulated depreciation of $8.8 million and $6.6 million, respectively. Depreciation of property and equipment was $11.8 million and $34.8 million for the quarter and nine months ended September 30, 2002, respectively, and $10.5 million and $29.6 million for the quarter and nine months ended September 30, 2001, respectively. 4. INTANGIBLE ASSETS The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") on January 1, 2002. In connection with the adoption of SFAS No. 142, the Company reclassified other intangibles of $6.4 million related to trained workforce to goodwill and ceased amortization of goodwill. During the first quarter, the Company evaluated the useful lives of its existing intangible assets and concluded that, with the exception of goodwill, all of its intangible assets have definite lives and that the existing useful lives are reasonable. The Company completed its testing of goodwill in accordance with SFAS No. 142 during the quarter ended June 30, 2002. As the fair value of goodwill exceeds the carrying amount of goodwill the Company did not record an impairment charge. Unamortized intangible assets consist of the following (in thousands): September 30, 2002 December 31, 2001 Carrying Amount Carrying Amount (unaudited) --------------------------------------------- Goodwill ................... $140,805 $137,917 Trained workforce .......... -- 2,868 The following presents net loss exclusive of amortization of goodwill and trained workforce (in thousands):
(unaudited) For the Quarter Ended September 30, 2002 2001 ----------------------------------- Net Loss ...................................... $ (7,466) $ (12,522) Goodwill amortization ......................... -- 1,984 Trained workforce amortization ................ -- 319 --------- --------- Net Loss excluding amortization of goodwill ... $ (7,466) $ (10,219) ========= =========
(unaudited) For the Nine Months Ended September 30, 2002 2001 --------------------------------------- Net Loss ..................................... $ (30,796) $ (37,306) Goodwill amortization ........................ -- 5,948 Trained workforce amortization ............... -- 957 --------- --------- Net Loss excluding amortization of goodwill .. $ (30,796) $ (30,401) ========= =========
7 MUZAK HOLDINGS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Amortized intangible assets consist of the following (in thousands):
September 30, 2002 December 31, 2001 Useful (unaudited) ----------------------------------- ---------------------------------- Life Gross Carrying Accumulated Gross Carrying Accumulated (years) Amount Amortization Amount Amortization ------- ----------------------------------- ----------------------------------- Income producing contracts ....... 12 $153,955 $(43,410) $ 154,048 $ (33,786) License agreements ............... 20 5,082 (889) 5,082 (699) Deferred production costs ........ 10 5,593 (1,092) 4,437 (701) Trademarks ....................... 5 15,123 (10,486) 14,935 (8,219) Non-compete agreements ........... 3-5 19,983 (17,787) 23,869 (16,560) Other ............................ 20 10,683 (1,823) 10,778 (1,423) -------- -------- --------- --------- $210,419 $(75,487) $ 213,149 $ (61,388) ======== ======== ========= =========
Aggregate amortization expense was $5.7 million and $18.0 million for the quarter and nine months ended September 30, 2002, respectively, and $8.8 million and $26.3 million for the quarter and nine months ended September 30, 2001, respectively. The estimated future aggregate amortization expense is as follows (in thousands): Fiscal year ending ------------------ 2002 ................................. $23,229 2003 ................................. 18,379 2004 ................................. 15,079 2005 ................................. 14,240 2006 ................................. 14,189 5. DEFERRED CHARGES AND OTHER ASSETS, NET Deferred charges and other assets, net, consist of the following (in thousands): September 30, December 31, 2002 2001 (Unaudited) ----------- -------- Subscriber acquisition costs, net ........ $ 39,105 $ 37,442 Other .................................... 12,623 12,578 -------- -------- $ 51,728 $ 50,020 ======== ======== 8 MUZAK HOLDINGS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. DEBT Debt obligations consist of the following (in thousands): September 30, December 31, 2002 2001 (Unaudited) ----------- --------- Related Party Notes ......................... $ 10,000 $ -- ======== ========= Long term debt: Revolving Loan-Senior Credit Facility ..... $ 22,800 $ 21,300 Senior Credit Facility .................... 162,860 166,207 Senior Discount Notes ..................... 62,530 56,861 Senior Subordinated Notes ................. 115,000 115,000 Other ..................................... 2,492 2,552 -------- --------- Total debt obligations ...................... 365,682 361,920 Less current maturities ..................... (7,153) (6,775) -------- --------- $358,529 $ 355,145 ======== ========= Senior Credit Facility The Senior Credit Facility is guaranteed by the Company and certain 100% owned subsidiaries. The non-guarantor subsidiary is considered minor and the consolidated amounts in the Company's financial statements are representative of the combined guarantor's financial statements. The Amended Senior Credit Facility contains restrictive covenants including maintenance of interest, senior and total leverage, fixed charge ratios, and various other restrictive covenants which are customary for such facilities. In March 2002, the Company entered into the sixth amendment under the Senior Credit Facility, which increased its aggregate revolving loan commitment under the Senior Credit Facility by $20.0 million, for a total commitment of $55.0 million, and amended certain financial covenants and applicable margins. As amended in March 2002, 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 2.00% to 3.00% 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 3.00% to 4.00%. 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, other non cash charges, and certain other items as defined by the agreement) were 2.75% in the case of Alternate Base Rate and 3.75% in the case of LIBOR as of September 30, 2002. 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 3.5% or (ii) LIBOR of one, two, three, or six months, as selected by the Company plus a margin of 4.5%. The weighted average rate of interest on the Senior Credit Facility, including the effects of the interest rate swap, if any, was 6.1% and 9.3% at September 30, 2002 and 2001, respectively. 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 Subordinated 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 Subordinated Notes are general unsecured obligations of Muzak LLC and Muzak Finance and are subordinated in right of payment to all existing and future Senior Indebtedness of Muzak LLC and Muzak Finance. 9 MUZAK HOLDINGS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Senior Subordinated 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. The Company's non-guarantor subsidiary is minor and the consolidated amounts in the Company's financial statements are representative of the combined guarantors. The indenture governing the Senior Subordinated Notes prohibits the Company 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. 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. Related Party Notes In March 2002, MEM Holdings LLC contributed $10.0 million to the Company in the form of junior subordinated unsecured notes (the "sponsor notes"), the proceeds of which were used to repay outstanding revolving loan balances. MEM Holdings is a company that owns 64.2% of the voting interests in the Company. ABRY Broadcast Partners III and ABRY Broadcast Partners II are the beneficial owners of MEM Holdings. The sponsor notes accrue interest 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. Under certain default scenarios, the sponsor notes are junior and subordinate to payments for the Senior Credit Facility, the Senior Subordinated Notes, and the Senior Discount Notes. At any time, the sponsor notes may be converted into Class A-2 units of the Company at the direction of MEM Holdings. If the sponsor notes have not been repaid in full as of September 2003, the sponsor notes will automatically be converted into Class A-2 units of the Company. Other Debt The Company has $2.2 million of promissory notes which, with the exception of one, bear interest at 9.887% and mature in November 2016. The Company 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. Liquidity The Company's principal sources of funds will continue to be cash flows from operations and borrowings under the senior credit facility. As of September 30, 2002, the Company had outstanding debt of $185.7 million under its senior credit facility, with additional available borrowings of up to $32.0 million. Based upon current and anticipated levels of operations, the Company believes that its cash flows from operations, combined with availability under the senior credit facility, as amended, will be adequate to meet its liquidity needs through December 2004. The Company is continuing its efforts to improve working capital balances, while also implementing additional cost-saving initiatives, such as more efficiently utilizing its capital resources associated with new client locations. Overall, the Company's business plan anticipates continued growth in new client locations and operational improvements. The 10 MUZAK HOLDINGS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company's future performance is subject 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, its dependence on license agreements and other factors that are beyond its control. Annual Maturities Annual maturities of long-term debt obligations are as follows (in thousands): 2002 .................................... $ 3,368 2003 .................................... 7,855 2004 .................................... 27,742 2005 .................................... 65,733 2006 .................................... 81,700 Thereafter .............................. 189,284 Total interest paid by the Company on all indebtedness was $8.6 million and $25.2 million for the quarter and nine months ended September 30, 2002, respectively and $10.1 million and $23.3 million for the quarter and nine months ended September 30, 2001. The weighted average interest rate on all indebtedness was 8.7% and 10.0% as of September 30, 2002 and 2001, respectively. Interest Rate Protection Programs The Company had an interest rate swap agreement which terminated in April 2002. The effect of this agreement on the operating results of the Company was to increase interest expense by $1.6 million for the nine months ended September 30, 2002 and $0.8 million and $1.6 million for the quarter and nine months ended September 30, 2001, respectively. The Company entered into a three year interest rate cap on April 19, 2002, for which it paid a premium of $0.4 million. The interest rate cap protects the Company against LIBOR increases above 7.25% and is designated as a hedge of interest rates. Accordingly, the derivative will be recognized on the balance sheet at its fair value. The hedge is considered 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 will be recorded in other comprehensive loss. The Company will amortize the premium paid for the cap over the life of the agreement using the caplets approach and any amounts received under the cap will be recorded as a reduction to interest expense. The fair market value of the interest rate cap was $0.2 million as of September 30, 2002. The fair values of interest rate caps are obtained from dealer quotes which represents the estimated amount the Company would receive or pay to terminate agreements taking into consideration current interest rates and creditworthiness of the counterparties. 7. Manditorily Redeemable Preferred Units On March 8, 2002, the Company entered into the second amendment to the Securities Purchase Agreement which amended the consolidated capital expenditure covenant for 2001 and subsequent years and allowed for an increase to consolidated operating cash flow for amounts designated by the Company with respect to license fees up to a certain amount. In connection with this amendment, the Company incurred $0.3 million in fees. The Company was in violation of unit coverage and total leverage ratio under the Securities Purchase Agreement as of June 30, 2002. As a result of the default, the preferred units accrued at a preferential return of 17% per annum during the quarter ended September 30, 2002. The Company is in compliance as of September 30, 2002, and therefore, the preferred units are accruing at 15% per annum beginning on October 1, 2002. 11 MUZAK HOLDINGS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Related Party Transactions During the nine months ended September 30, 2002, the Company incurred fees of $0.2 million under the Management and Consulting Services Agreement with ABRY Partners. 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 the quarter ended March 31, 2002, the Company borrowed $10.0 million from MEM Holdings under junior subordinated notes. At any time, the sponsor notes may be converted into Class A-2 units of the Company at the direction of MEM Holdings. If the sponsor notes have not been repaid in full as of September 2003, the sponsor notes will automatically be converted into Class A-2 units of the Company. 9. MUZAK HOLDINGS FINANCE CORP. Muzak Holdings Finance Corp. had no operating activities during the nine months ended September 30, 2002 and 2001. 10. 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 September 30, 2002, 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. If the parties fail to progress in their negotiations toward a mutually acceptable rate by November 29, 2002, either party can pursue a rate court proceeding in federal court in New York to seek a court determined reasonable rate. In October 1998, the Digital Millennium Copyright Act was enacted. The Act provides for a statutory license from the copyright owners of master recordings to make and use ephemeral copies of such recordings. Ephemeral copies refer to temporary copies of master sound recordings made to enable or facilitate the digital transmission of such recordings. The Digital Millennium Copyright Act did not specify the rate and terms of the license. As a result, the United States Copyright Office convened a Copyright Arbitration Royalty Panel to recommend an ephemeral royalty rate. In February 2002, the Panel recommended an ephemeral royalty rate of ten percent (10%) of gross proceeds applicable to the use of ephemeral copies. That recommendation was subject to review by the Librarian of Congress, who could have modified or adopted such recommendation. 12 MUZAK HOLDINGS LLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In June 2002, the Librarian of Congress published his final decision to adopt the Copyright Arbitration Royalty Panel's recommendation of a ten percent (10%) ephemeral royalty rate, which covers the period from October 1998 through the present. As required by such determination, we remitted payment on October 20, 2002 for the above mentioned period. With respect to future revenue subject to such ephemeral royalty rate, we believe our exposure is minimal, as we believe our current satellite technologies do not require use of ephemeral copies. Nonetheless, there can be no assurances that the collective for the copyright owners will refrain from investigating or otherwise challenging the applicability of the statute to our satellite technologies. During the nine months ended September 30, 2002, the Company increased its estimated reserve for prior period licensing royalties and related expenses by $3.1 million to $4.0 million. This charge is recorded in cost of music and other business services revenues. Other Commitments As of September 30, 2002, the Company has approximately $28.4 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. 13 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, 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 general economic conditions. Recent Developments General Business Pan Am Sat announced the successful launch of the Galaxy IIIC satellite on June 15, 2002. Galaxy IIIC is now operating in the same orbital slot formerly occupied by Galaxy IIIR, and the transition to Galaxy IIIC has been a seamless one for the Company's clients. While the Company believes that Galaxy IIIC is operating within all performance and design specifications, the Company's risk management strategy continues to be to explore the availability of insurance to cover increased costs in the event of a Galaxy IIIC satellite failure. In October 1998, the Digital Millennium Copyright Act was enacted. The Act provides for a statutory license from the copyright owners of master recordings to make and use ephemeral copies of such recordings. Ephemeral copies refer to temporary copies of master sound recordings made to enable or facilitate the digital transmission of such recordings. The Digital Millennium Copyright Act did not specify the rate and terms of the license. As a result, the United States Copyright Office convened a Copyright Arbitration Royalty Panel to recommend an ephemeral royalty rate. In February 2002, the Panel recommended an ephemeral royalty rate of ten percent (10%) of gross proceeds applicable to the use of ephemeral copies. That recommendation was subject to review by the Librarian of Congress, who could have modified or adopted such recommendation. In June 2002, the Librarian of Congress published his final decision to adopt the Copyright Arbitration Royalty Panel's recommendation of a ten percent (10%) ephemeral royalty rate, which covers the period from October 1998 through the present. As required by such determination, we remitted payment on October 20, 2002 for the above mentioned period. With respect to future revenue subject to such ephemeral royalty rate, we believe our exposure is minimal, as we believe our current satellite technologies do not require use of ephemeral copies. Nonetheless, there can be no assurances that the collective for the copyright owners will refrain from investigating or otherwise challenging the applicability of the statute to our current satellite technologies. During the first quarter of 2002, the Company increased its aggregate revolver commitments under the Senior Credit Facility by $20.0 million, for a total commitment of $55.0 million. In addition, in March 2002 the existing equity holders, including ABRY Partners LLC, contributed $10.0 million in the form of junior subordinated unsecured notes to the Company. The Company paid $1.8 million in financing fees related to these transactions during the nine months ended September 30, 2002. The increased revolver commitment and 14 MUZAK HOLDINGS LLC Item 2. Management's Discussion and Analysis (Continued) the $10.0 million from the sponsors enhances the Company's financial flexibility and provides sufficient liquidity to fund its organic business plan for the foreseeable future. Accounting Developments The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") on January 1, 2002. SFAS No. 142 requires that goodwill be tested annually at the reporting unit level for impairment using a two-step process. The Company completed its testing of goodwill in accordance with SFAS No. 142 during the quarter ended June 30, 2002. As the fair value of goodwill exceeds the carrying amount of goodwill, the Company did not record an impairment charge. 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. Results of Operations Set forth below are discussions of the results of operations for Muzak Holdings LLC for the quarter and nine months ended September 30, 2002 compared to the quarter and nine months ended September 30, 2001. Revenues. Revenues were $56.2 million and $50.5 million for the quarters ended September 30, 2002 and 2001, respectively, an increase of 11.2%. Music and other business services revenue increased $3.3 million, or 8.8% and equipment and related services revenue increased $2.3 million, or 18.3% in 2002 as compared to the quarter ended September 30, 2001. Revenues for the nine months ended September 30, 2002 increased 6.6% to $161.2 million, up $10.0 million from the comparable 2001 period. Music and other business services revenue increased $9.3 million, or 8.4% and equipment and related services revenue increased $0.6 million, or 1.6% for the nine months ended September 30, 2002 as compared to 2001. The increase in music and other business services revenue is due to a growth in new client locations at consistent prices, offset by a 10.4% churn rate during the twelve months ended September 30, 2002. The 2001 churn rate was higher than historical levels due to more bankruptcies and business closures in our client base. However, our efforts on reducing our client churn rate have contributed to a reduction in our annualized churn rate during the nine months ended September 30, 2002 to 10.0% from 11.8% during the first nine months of 2001. During the twelve months ended September 30, 2002, we added, net of churn, approximately 8,200 Audio Architecture, 3,900 Voice, and 1,400 other locations. Due to an expected further reduction in new store location build outs among our national chains in 2002, particularly within the retail sector, the Company committed resources and renewed its focus on system sales such as sound systems, noise masking, drive-thru systems, and closed circuit television as a means to replace this expected reduction in equipment and labor revenues. The significant increase in equipment and related services revenue for the quarter ended September 30, 2002 as compared to the quarter ended September 30, 2001 is a direct result of this focus. We expect the full year 2002 equipment and related services revenue will slightly exceed the 2001 levels. Cost of Revenues. Cost of revenues was $19.7 million and $17.9 million for the quarters ended September 30, 2002 and 2001, respectively, an increase of 9.7%. Cost of revenues increased $7.4 million for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001. During the nine months ended September 30, 2002, the Company increased its reserves for estimated prior period licensing royalties and related expenses by $3.1 million. Excluding this increase in the reserve in 2002, costs of music and other business services revenue as a percentage of music and other business services revenue was 18.9% and 19.5% for the quarters ended September 30, 2002 and 2001 and 19.2% and 19.6% for the nine months ended 15 MUZAK HOLDINGS LLC Item 2. Management's Discussion and Analysis (Continued) September 30, 2002 and 2001, respectively. The improvement in costs of music and other business services revenue is primarily due to the leveraging of fixed costs over a larger client base and labor savings achieved from the use of the Company's Voice website, despite an increase in licensing royalties and satellite expenses. Costs of equipment and related services as a percentage of revenues was 79.2% and 83.0% for the quarters ended September 30, 2002 and 2001 and 81.0% and 74.8% for the nine months ended September 30, 2002 and 2001. The increase in the cost of equipment and related services revenues as a percentage of revenues for the nine months ended September 30, 2002 as compared to the 2001 period is due to the relatively fixed technician workforce and an increase in certain technician related costs, such as insurance, contractual union wage increases, and higher fuel and repair costs, despite lower equipment and related services revenue during the first half of 2002. The cost of equipment and related services revenues as a percentage of revenues in the third quarter of 2002 decreased as compared to the 2001 period due to lower equipment and related services revenues in the 2001 period as well as disruptions in the Company's technician work force's ability to install new client locations in the days following September 11, 2001. The improvement is also attributable to the Company's focus on efficient management of its labor technician costs. The Company fully implemented its scheduling software in June 2002, which is designed to better manage and utilize internal and external labor resources. The Company expects to continue to achieve savings from the efficient management of its labor resources which will be offset slightly by the increase in certain technician related costs such as contractual union wage increases and insurance. Selling, general and administrative expenses. Selling, general, and administrative expenses were $17.9 million and $16.4 million for the quarters ended September 30, 2002 and 2001, respectively and $53.9 million and $51.6 million for the nine months ended September 30, 2002 and 2001, respectively. This increase is partially due to a $0.8 million and $2.4 million increase in amortization of subscriber acquisition costs, a non-cash component of selling, general, and administrative expenses for the quarter and nine months ended September 30, 2002 as compared to the 2001 period. This increase is directly related to the increase in music and other business services revenue. Excluding the amortization of subscriber acquisition costs, selling, general, and administrative expenses as a percentage of revenues were 26.1% and 27.6% for the quarters ended September 30, 2002 and 2001, respectively and 27.4% and 29.1% for the nine months ended September 30, 2002 and 2001, respectively. This improvement is attributable to the Company's continued focus on controlling expenses, including travel, salaries and other employee related expenses, telephone, and other administrative expenses. The nine months ended September 30, 2002 and 2001 include $0.5 million and $0.7 million, respectively, of charges incurred in connection with exploring various financing alternatives. Depreciation and amortization expenses. Depreciation and amortization was $17.6 million and $19.3 million for the quarters ended September 30, 2002 and 2001, respectively, a decrease of 8.9%. Depreciation and amortization was $52.8 million and $56.1 million for the nine months ended September 30, 2002 and 2001, respectively, a decrease of 5.8%. The decrease is due to the adoption of SFAS No. 142 on January 1, 2002. In connection with the adoption, the Company ceased amortization of goodwill on January 1, 2002. During the first nine months of 2001, the Company recorded $6.9 million amortization expense related to goodwill and trained workforce. Depreciation was $34.8 million and $29.6 million in the nine months ended September 30, 2002 and 2001, respectively. This increase is due to the increase in property and equipment in conjunction with Muzak's growth in the number of client locations. Interest expense. Interest expense was $8.9 million and $9.2 million for the quarters ended September 30, 2002 and 2001, respectively, a decrease of $0.4 million, or 4.0%. Interest expense was $27.5 million and $29.7 million for the nine months ended September 30, 2002 and 2001, respectively, a decrease of 7.5%. This decrease is due to lower interest rates during the first nine months of 2002 as compared to the 2001 comparable period as well as to the termination of the interest rate swap. The effective interest rate for the nine months ended September 30, 2002 and 2001 was 8.7% and 10.0%, respectively. 16 MUZAK HOLDINGS LLC Item 2. Management's Discussion and Analysis (Continued) Income tax provision. Income tax benefit was $0.3 million for the quarter ended September 30, 2002 and the income tax provision for the quarter ended September 30, 2001 was $0.1 million. Income tax benefit was $0.9 million and $0.5 million for the nine months ended September 30, 2002 and 2001, respectively. Although Muzak is a limited liability company and is treated as a partnership for income tax purposes, the Company has several subsidiaries that are corporations. The income tax benefits relate to these corporate subsidiaries. Net Loss. The combined effect of the foregoing resulted in a net loss of $7.5 million and $30.8 million for the quarter and nine months ended September 30, 2002, respectively, compared to a net loss of $12.5 million and $37.3 million for the comparable 2001 period. The Company evaluates the operating performance of its business using several measures, one of them being adjusted EBITDA (defined as earnings before interest, income taxes (benefits), depreciation, amortization, non-cash charges and one-time expenses). Adjusted EBITDA is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, either operating income or net income as an indicator of operating performance or cash flow as a measure of liquidity, as determined in accordance with generally accepted accounting principles, known as GAAP. However, management believes that adjusted EBITDA is a meaningful measure of performance and that it is commonly used in similar industries to analyze and compare companies on the basis of operating performance, leverage and liquidity, however it is not necessarily comparable to similarly titled amounts of other companies.
Three Months Ended (unaudited) ---------------------------------------------- September 30, 2002 September 30, 2001 -------------------- -------------------- Net loss ............................ $ (7,466) $(12,522) Depreciation and amortization ....... 17,567 19,287 Interest expense, net ............... 8,856 9,225 Income tax provision (benefit) ...... (308) 109 Non Cash charges (income) ........... (67) 110 -------- -------- Adjusted EBITDA ..................... $ 18,582 $ 16,209 ======== ========
Nine Months Ended (unaudited) ---------------------------------------------- September 30, 2002 September 30, 2001 -------------------- -------------------- Net loss ............................ $(30,796) $(37,306) Depreciation and amortization ....... 52,825 56,078 Interest expense, net ............... 27,470 29,644 Income tax benefit .................. (899) (500) Non Cash charges (income) ........... (157) 285 One-time expenses (a) ............... 3,684 675 -------- -------- Adjusted EBITDA ..................... $ 52,127 $ 48,876 ======== ========
(a) One-time expenses were incurred in connection with exploring various financing alternatives and increasing reserves for prior period licensing royalties and related expenses. Adjusted EBITDA for the quarter ended September 30, 2002 increased $2.4 million, or 14.6% to $18.6 million from $16.2 million for the quarter ended September 30, 2001. Adjusted EBITDA for the nine months ended September 30, 2002 increased $3.3 million or 6.7% as compared to the 2001 period. 17 MUZAK HOLDINGS LLC Item 2. Management's Discussion and Analysis (Continued) Liquidity and Capital Resources Sources and Uses. Our principal sources of funds have been cash generated from operations, borrowings under the senior credit facility, and contributions from the sponsors. Our future need for liquidity will arise primarily from capital expenditures for investments in new client locations and from interest and principal payments on our indebtedness. During the nine months ended September 30, 2002, $18.8 million of cash was provided by our operating activities, $26.7 million of cash was used in investing activities, and $6.9 million of cash was provided by financing activities. Cash was primarily used during the first nine months of 2002 to make investments relating to new client locations and to make interest payments on the senior credit facility. We expect that our principal sources of funds will continue to be cash flows from operations and borrowings under the senior credit facility. As of September 30, 2002, we had outstanding debt of $185.7 million under our senior credit facility, with additional available borrowings of up to $32.0 million. Based upon current and anticipated levels of operations, we believe that our cash flows from operations, combined with availability under the senior credit facility, will be adequate to meet our liquidity needs through December 2004. We are continuing our efforts to improve working capital balances, while also implementing additional cost-saving initiatives, such as more efficiently utilizing our capital resources associated with new client locations. Overall, Muzak's business plan anticipates steady growth in new client locations, operational improvements, and increases in equipment and related services revenue. Muzak strives to fund both investments in new client locations and interest and principal payments primarily through cash generated from operations rather than through borrowings under the senior credit facility. Currently, Muzak is funding investments in new client locations through cash generated from operations but is borrowing under its senior credit facility for partial interest and principal payments. Our future performance is subject 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, our dependence on license agreements and other factors that are beyond our control. 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 nine months ended September 30, 2002, our total initial investment in new client locations was $33.1 million which was comprised of equipment and installation costs attributable to new client locations of $22.2 million and $10.9 million in sales commissions (included in operating activities in the consolidated statement of cash flows) relating to these new locations. The sales commissions are capitalized in deferred charges and other assets, net and are 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 revenue over the initial contract term of five years. We currently anticipate that our total initial investment in new client locations during 2002 will be approximately $47.0 million including $32.0 million of equipment and installation costs attributable to new client locations, and $15.0 million in sales commissions relating to new client locations. The Company is focused on reducing the initial investment associated with new client locations through the re-use of equipment and efficiencies gained from vendor consolidation and labor management. We also invest in property and equipment to be used at our headquarters and within our owned operations. Our investment for such property and equipment for the nine months ended September 30, 2002 was approximately $3.3 million, consisting of system upgrades, furniture and fixtures, computers, equipment to replenish the equipment exchange pool relating to our drive-thru systems client locations, and conversions from local broadcast technology to direct broadcast satellite transmission for existing client locations. We anticipate our investment in property and equipment to be used at headquarters, equipment for use in the exchange pool for servicing drive-thru systems client locations, and equipment for conversions will be approximately $4.8 million for 2002. 18 MUZAK HOLDINGS LLC Item 2. Management's Discussion and Analysis (Continued) Sensitivity to Interest Rate Changes. Due to the variable interest rates under the senior credit facility, we are sensitive to changes in interest rates. A 0.5% increase in each of LIBOR and the Alternate Base Rate (1.82% and 4.75% respectively, at September 30, 2002) would impact interest costs by approximately $0.9 million annually on the senior credit facility. The Company's interest rate swap terminated on April 19, 2002. We entered into an interest rate cap in April 2002 as our senior credit facility requires that we maintain an agreement for 50% of the outstanding balance of the senior credit facility to limit our interest rate exposure. The interest rate cap protects the Company against LIBOR increases above 7.25%. To the extent, LIBOR increased above 7.25%, the Company's exposure to increases would be limited to the unhedged portion of the senior credit facility. Certification Under the Sarbanes-Oxley Act. The certification by the Company's chief executive officer and the chief financial officer of this report on Form 10-Q, as required by Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), accompanies this report to the Securities and Exchange Commission as additional correspondence. Item 3. Quantitative and Qualitative Disclosures About Market Risk For the period ended September 30, 2002, the Company did not experience any material changes in market risk disclosure that affect the quantitative and qualitative disclosures presented in the 10-K. Item 4. Controls and Procedures Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure and control procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure and control procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these subsequent to the date of their evaluation. 19 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, 2001. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.1 Executive Employment Agreement dated as of November 5, 2002, among Muzak Holdings LLC, Muzak LLC, and Stephen P. Villa 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K The Company filed a Form 8-K on January 14, 2002 disclosing its violation of the maximum consolidated capital expenditures covenant of its Senior Credit Facility for the period ending December 31, 2001 as well as the expiration of its insurance covering increased costs in the event of a failure of PanAmSat Corporation's Galaxy IIIR satellite. The Company filed a Form 8-K on April 1, 2002 disclosing that it has obtained a waiver of the violation of the maximum consolidated capital expenditures covenant of its senior credit facility. In addition, the Company disclosed it has increased its revolving commitments of its senior credit facility by $20.0 million, for a total commitment of $55.0 million. 20 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/ William A. Boyd --------------------------------------- Date: November 14, 2002 William A. Boyd Chief Executive Officer (Principal Executive Officer) By: /s/ Stephen P. Villa --------------------------------------- Date: November 14, 2002 Stephen P. Villa Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer) 21 Muzak Holdings LLC Section 302 Certifications Certification of the Chief Financial Officer I, Stephen P. Villa,Chief Financial Officer of Muzak Holdings LLC certify that: 1. I have reviewed this quarterly report on Form 10-Q of Muzak Holdings LLC; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 14, 2002 Stephen P. Villa Chief Financial Officer 22 Muzak Holdings LLC Section 302 Certifications Certification of the Chief Executive Officer I, William A. Boyd,Chief Executive Officer of Muzak Holdings LLC certify that: 1. I have reviewed this quarterly report on Form 10-Q of Muzak Holdings LLC; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 14, 2002 William A. Boyd Chief Executive Officer 23 EX-10.1 3 dex101.txt EXECUTIVE EMPLOYMENT AGREEMENT EXECUTIVE EMPLOYMENT AGREEMENT THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is made as of November 5, 2002, by and among Muzak Holdings LLC, a Delaware limited liability company ("Holdings LLC"), Muzak LLC, a Delaware limited liability company and a wholly owned subsidiary of Holdings LLC (the "Company"), and Stephen P. Villa ("Executive"). In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment. The Company will employ Executive, and Executive accepts employment with the Company, upon the terms and conditions set forth in this Agreement, for the period beginning on October 3, 2001 and ending as provided in Section 6 (the "Employment Period"). 2. Position and Duties. During the Employment Period, Executive will (i) serve on the board of directors (or equivalent supervising body) of Holdings LLC (the "Board"), (ii) exclusively serve as the Chief Operating Officer, Chief Financial Officer, and Treasurer of Holdings LLC and the Company, and (iii) render such managerial, analytical, administrative, marketing, creative and other executive services to Holdings LLC, the Company and their respective Subsidiaries (such entities, the "Muzak Entities") as are from time to time necessary in connection with the management and affairs of the Muzak Entities subject to the authority of the Board and to the proviso set forth in the following sentence. Executive will devote his best efforts and substantially all of his business time and attention (except for permitted vacation periods and reasonable periods of illness or other incapacity) to the business and affairs of the Muzak Entities; provided that, during the Employment Period, Executive will not directly or indirectly own, manage, control, participate in, consult with, render services for, or in any other manner engage in the business of providing business music programming and ancillary communications products and services including broadcast data delivery, satellite delivered cable television channels, audio marketing and in-store advertising services to a diverse customer base that includes, among others, restaurants, retailers, supermarkets and business offices (together with all reasonably related activities, the "Business") other than (i) on behalf of the Muzak Entities or (ii) as a passive owner of less than 5% of the outstanding stock of a corporation of any class which is publicly traded, so long as Executive has no direct or indirect participation in the business of such corporation. Executive will report to the Board and the Chief Executive Officer of the Company. Executive will perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. 3. Compensation and Benefits. (a) Base Salary. During the Employment Period, Executive shall be entitled to receive $200,000 per annum as base compensation for services (as in effect from time to time, the "Base Salary"); provided that, effective on October 1, 2002 and each anniversary of such date, the Base Salary shall increase by 5% over the preceding year. The Base Salary will be payable in regular installments in accordance with the general payroll practices of the Company. (b) Bonus. In addition to the Base Salary, the Board in its sole discretion may award a bonus (as in effect from time to time, the "Bonus") in an amount up to 50% of the Base Salary as then in effect ("Maximum Bonus") to Executive following the end of each fiscal year during the Employment Period as the Board deems appropriate based upon, among other things, the Company's overall performance and satisfaction of the personal goals of Executive as established by the Board in advance of each fiscal year. The Bonus, if awarded, for a fiscal year shall be paid in a single payment within thirty (30) days after the audited financial statements for such fiscal year have been reviewed by the Board. For any fiscal year which Executive is not employed by the Company at the end of the fiscal year, Executive shall not be entitled to receive any Bonus. (c) Reimbursement of Expenses. During the Employment Period, the Company will reimburse Executive for all reasonable expenses incurred by him in the course of performing his duties under this Agreement and which are consistent with the Company's policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company's requirements with respect to reporting and documentation of such expenses. (d) Benefits. During the Employment Period, Executive shall be entitled to participate in any health insurance plan and other similar benefits which the Company makes available generally to other Company executives and further shall be entitled to a monthly automobile allowance of $300 or, in lieu thereof and at Company's discretion, the use of an automobile leased by the Company. (e) Incentive Units. In the event that the Employment Period has not terminated as of April 3, 2003, Holdings LLC shall grant to Executive 78 Class B-1 Units, 78 Class B-2 Units and 79 Class B-3 Units in Holdings LLC that will vest ratably over a four (4) year period commencing on April 3, 2003; on or about April 3, 2003, the Board of Directors of Holdings LLC will confirm such grant, and such grant will be subject to the terms and conditions of an Incentive Unit Agreement acceptable in form and substance to Holdings LLC. 4. Vacation Days. Executive shall be entitled to four (4) weeks of paid vacation during each year of the Employment Period, in addition to legal holidays; provided, however, that no such vacation time shall accrue or be earned to the extent that such accrual or earning would cause Executive's accrued or earned, but unused, vacation time to exceed four (4) weeks. Executive shall make best efforts to schedule vacations so as not to conflict with the conduct of the Muzak Entities' business, and Executive shall give to the Board adequate advance notice of his planned absences. 5. Board Membership. During the Employment Period, Executive shall serve as a member of the Board, but only if Executive is then serving as the Chief Operating Officer of Holdings LLC and the Company. 6. Termination. The Employment Period shall terminate under the following circumstances: (a) Death. Executive's death, in which case Executive's employment shall terminate on the date of death. 2 (b) Disability. If, as a result of Executive's illness, physical or mental disability or other incapacity, Executive is unable to perform his or her duties under this Agreement for any period of three (3) consecutive months, and within thirty (30) days after written notice of termination is given by the Company to Executive (which notice may be given before or after the end of such three-month period) he or she shall not have returned to the performance of his or her duties hereunder on a full-time basis, the Company may terminate Executive's employment hereunder as of the latest of (i) the expiration of such three-month period or (ii) the thirty-first (31st) day following the giving by the Company of the written notice of termination. (c) Consolidation, Merger or Comparable Transaction. In the event that Holdings LLC consolidates with or merges with and into any other entity, effects a share exchange, sells or causes the Company to sell all or substantially all of its and its subsidiaries' consolidated assets or enters into a comparable capital transaction pursuant to which Holdings LLC is not the continuing or surviving entity or a sale of a majority of the outstanding voting power of Holdings LLC's equity securities to a third party occurs such that the beneficial owners of Holdings LLC have substantially changed, Executive's employment may, by written notice of termination, be terminated by the Company simultaneous with the consummation of such consolidation, merger, share exchange, asset sale, stock sale or comparable transaction; provided, however, that if as a result of any such consolidation, merger, share exchange, asset sale, stock sale or comparable transaction, Holdings LLC's stockholders do not, directly or indirectly, receive cash and/or marketable securities having a value of at least fifty percent (50%) of the value of their membership interests of Holdings LLC held immediately prior to such transaction, then in any such event a termination of Executive's employment by the Company shall be deemed and treated as a termination of the Employment Period hereunder by the Company other than for Company's Good Reason under Section 6(d)(i) for purposes of this Agreement, including without limitation, for determining termination benefits under Section 7 hereof. (d) Voluntary Termination by the Company. The Company may terminate Executive's employment, upon written notice to Executive, (i) for "Company's Good Reason," which for purposes of this Agreement shall mean a material breach by Executive which has not been cured within ten (10) days after written notice to Executive of any material provision of this Agreement, violation in any material respect of a written directive of the Board, or violation of a material Company policy, or (ii) for any other reason or for no reason, in each case, subject to payment of the termination payments, if any, specified in Section 7 hereof. (e) Termination by Executive With Good Reason. Executive may terminate his or her employment hereunder at any time for Executive's Good Reason, with such termination to be effective as of the date stated in a written notice of termination delivered by Executive to the Company. For purposes of this Agreement, "Executive's Good Reason" shall mean a material breach by Holdings LLC or the Company of a material provision of this Agreement which has not been cured within ten (10) days after written notice of noncompliance has been given by Executive to the Company. 3 (f) Voluntary Termination by Executive Without Good Reason. Executive may terminate his or her employment hereunder for any reason other than Executive's Good Reason as defined above, or for no reason, upon thirty (30) days prior written notice to the Company (provided that, at the Company's election, such termination will become effective immediately or at such other time during such 30-day period as the Company may elect). (g) Retirement. The Company may require Executive to retire upon attaining age 65 if not violative of applicable law; such a decision shall not be treated as a voluntary termination by the Company for purposes of Section 6(d)(ii) above. In no event shall the termination of Executive's employment affect the rights and obligations of the parties set forth in this Agreement, except as expressly set forth herein. 7. Termination Payments. Executive (or his or her estate pursuant to Section 6(a) hereof) shall be entitled to receive the following payments upon termination of his or her employment hereunder: (a) In the event of the termination of Executive's employment pursuant to Section 6(a), 6(c) or 6(f) hereof, or by the Company pursuant to Section 6(d)(i) for Company's Good Reason or pursuant to Section 6(g) , the Company shall pay to Executive (or his or her estate, as the case may be) as soon as practicable following such termination any accrued and unpaid Base Salary through the date of termination as provided in Section 3 hereof. (b) In the event of the termination of Executive's employment pursuant to Section 6(b) hereof, the Company shall pay to Executive for a period of twelve (12) months after the date of termination the amount of the Base Salary through the end of such twelve (12) month period, less any amounts paid to Executive pursuant to disability insurance, if any, provided by the Muzak Entities. (c) In the event of termination pursuant to Section 6(d)(ii) of Executive's employment other than for Company's Good Reason, or pursuant to Section 6(e) for Executive's Good Reason, the Company shall continue to pay the Base Salary for twelve (12) months after the date of termination. (d) Without limiting the remedies available to the Company for breach by Executive of Section 9 or 10 hereof, in the event that Executive violates the provisions of Section 9 or 10 after the termination of his or her employment with the Company in a manner reasonably determined by the Company to be materially injurious to any Muzak-Related Company (as that term is defined in Section 9), any termination payments provided in this Section 7 remaining unpaid at the time such violation occurs shall be automatically forfeited. 8. Resignation as Officer or Director. Upon the termination of the Employment Period, Executive will resign each position (if any) that he then holds as an officer, director or manager of any of the Muzak Entities (including, without limitation, his membership on the Board). 4 9. Confidential Information. Executive acknowledges that the information, observations and data that (i) have been or may be obtained by him during his employment or other relationship or interaction with any of the Muzak Entities or any predecessor thereof (any of the Muzak Entities or any such predecessor being a "Muzak-Related Company," and collectively they are "Muzak-Related Companies"), prior to and/or after the date of this Agreement concerning the business or affairs of the Muzak-Related Companies, and (ii) is treated by the Muzak-Related Companies as confidential information (collectively, "Confidential Information") are and will be the property of the Muzak-Related Companies. Therefore, Executive agrees that he will not disclose to any unauthorized person or use for his own account any Confidential Information without the prior written consent of Holdings LLC (by the action of the Board), unless and to the extent that (x) the aforementioned matters become generally known to and available for use by the public other than as a result of Executive's acts or omissions to act, or (y) disclosure of the aforementioned matters is required under federal or state law or a duly issued subpoena. In the event any disclosure pursuant to clause (y) above is to be made, Executive will give the Company reasonable prior notice thereof and will permit the Muzak-Related Companies to resist or limit the scope of the disclosure to be made. Executive will deliver or cause to be delivered to Company at the termination of the Employment Period, or at any other time any of the Muzak Entities or the Board may request, all memoranda, notes, plans, records, reports, computer tapes and software and other documents and data (and copies thereof) containing or relating to Confidential Information or the business of any Muzak-Related Company, which he may then possess or have under his control. 10. Non-Compete, Non-Solicitation. (a) Non-Compete. Executive acknowledges that during his employment or other relationship or interaction with the Muzak-Related Companies, he has and will become familiar with trade secrets and other confidential information concerning the Muzak-Related Companies, and with investment opportunities relating to the Business, and that his services have been and will be of special, unique and extraordinary value to the foregoing entities. Therefore, Executive agrees that, during the Employment Period and thereafter, until the 2nd anniversary of the last day of the Employment Period (the Employment Period and the remainder of such period being the "Noncompete Period"), he will not directly or indirectly own, manage, control, participate in, consult with, render services for, or in any other manner engage in any business, or as an investor in or lender to any business (in each case including, without limitation, on his own behalf or on behalf of another entity) which constitutes or is competitive with all or part of the Business (as and where the same is conducted or proposed to be conducted by any of Muzak-Related Companies during the Employment Period). In addition, in as much as the Company regularly seeks to acquire additional Muzak franchises and/or Muzak franchisees, Executive agrees that, during the Employment Period and thereafter, until the 1st anniversary of the last day of the Employment Period, he will not directly or indirectly acquire or seek to acquire any Muzak franchise or the assets or ownership interest of any Muzak franchisee within the United States. Nothing in this Section 10 will prohibit Executive from being a passive owner of less than 5% of the outstanding stock of a corporation engaged in a competing business described above of any class which is publicly traded, so long as Executive has no direct or indirect participation in the business of such corporation. By initialing in the space provided below, Executive acknowledges that he has read carefully and had the opportunity to consult with legal counsel regarding the provisions of this Section 10(a). _____ [initial]. 5 (b) Non-Solicitation. During the Noncompete Period, Executive will not directly or indirectly (i) induce or attempt to induce any employee or full-time independent contractor of any Muzak-Related Company to leave the employ or contracting relationship with such entity, or in any way interfere with the relationship between any such entity and any employee or full-time independent contractor thereof, (ii) solicit for employment or as an independent contractor any person who was an employee or full-time independent contractor of any Muzak-Related Company, at any time during the Employment Period, or (iii) induce or attempt to induce any customer, supplier or other business relation of any Muzak-Related Company to cease doing business with such entity or in any way interfere with the relationship between any such customer, supplier or other business relation and such entity. By initialing in the space provided below, Executive acknowledges that he has read carefully and had the opportunity to consult with legal counsel regarding the provisions of this Section 10(b). _____ [initial]. 11. Enforcement. The parties hereto agree that if, at the time of enforcement of Section 9 or 10, a court holds that any restriction stated in any such Section is unreasonable under circumstances then existing, then the maximum period, scope or geographical area reasonable under such circumstances will be substituted for the stated period, scope or area. Because Executive's services are unique and because Executive has access to information of the type described in Sections 9 and 10, the parties hereto agree that money damages would be an inadequate remedy for any breach of Section 9 or 10. Therefore, in the event of a breach or threatened breach of Section 9 or 10, any Muzak-Related Company, may, in addition to other rights and remedies existing in their favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions of Section 9 or 10, without posting a bond or other security. The provisions of Sections 9, 10, and 11 are intended to be for the benefit of the Company, Holdings LLC, each of the other Muzak Entities, and their respective successors and assigns, each of which may enforce such provisions and each of which (other than Holdings LLC and the Company) is an express third-party beneficiary of such provisions and this Agreement generally. Sections 9, 10, and 11 will survive and continue in full force in accordance with their terms notwithstanding any termination of the Employment Period. By initialing in the space provided below, Executive acknowledges that he has read carefully and had the opportunity to consult with legal counsel regarding the provisions of this Section 11. _____ [initial]. 12. Representations. Executive represents and warrants to the Company and Holdings LLC that Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person. 13. Key-Man Life Insurance. Executive agrees to submit to any requested physical examination in connection with any of the Muzak Entities' purchase of a "key-man" insurance policy. Executive agrees to cooperate fully in connection with the underwriting, purchase and/or retention of any such key-man insurance policy. 6 14. Miscellaneous. (a) Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by reputable overnight courier service (charges prepaid), or mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications shall be sent to the address indicated below: Notices to Executive: Stephen P. Villa 10228 Chilvary Drive Charlotte, NC 28277 Notices to the Company: Muzak LLC 3318 Lakemont Boulevard Fort Mills, SC 29708 Attn: Chief Executive Officer with copies (which shall not constitute notice to any Muzak-Related Company) to: ABRY Partners, LLC 111 Huntington Avenue 30th Floor Boston, MA 02199 Attention: Peni Garber and Kirkland & Ellis Citigroup Center 153 East 53rd Street New York, New York 10022 Attention: John L. Kuehn, Esq. Lisa M. Anastos, Esq. or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. (b) Amendment and Waiver. No modification, amendment or waiver of any provision of this Agreement will be effective unless such modification, amendment or waiver is approved in writing by Holdings LLC, the Company, Executive and ABRY Broadcast Partners III, L.P. ("ABRY"), if ABRY then holds any equity securities of Holdings LLC. The failure of any party to enforce any of the provisions of this Agreement will in no way be 7 construed as a waiver of such provisions and will not affect the right of such party thereafter to enforce each and every provision of this Agreement in accordance with its terms. (c) Severability. Without limiting Section 11, whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect the validity, legality or enforceability of any other provision of this Agreement in such jurisdiction or affect the validity, legality or enforceability of any provision in any other jurisdiction, but this Agreement will be reformed, construed and enforced in that jurisdiction as if such invalid, illegal or unenforceable provision had never been contained in this Agreement. (d) Entire Agreement. Except as otherwise expressly set forth herein, this agreement and the other agreements referred to herein embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral (including that certain Employment Agreement dated September 27, 2000 by and between Executive and the Company), which may have related to the subject matter hereof in any way. (e) Successors and Assigns. This Agreement will bind and inure to the benefit of and be enforceable by Holdings LLC, the Company and Executive and their respective assigns; provided that Executive may not assign his rights under this Agreement without the prior written consent of each of Holdings LLC, the Company and ABRY, if ABRY then holds any equity securities of Holdings LLC. (f) Counterparts. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same Agreement. (g) Descriptive Headings; Interpretation. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a substantive part of this Agreement. (h) GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF SOUTH CAROLINA, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT PROVISION OR RULE (WHETHER OF THE STATE OF SOUTH CAROLINA OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF SOUTH CAROLINA TO BE APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF SOUTH CAROLINA WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT, EVEN IF UNDER THAT JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE 8 SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY. (i) WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF. (j) No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. * * * * * 9 IN WITNESS WHEREOF, the parties hereto have executed this Executive Employment Agreement as of the date first written above. /s/ Stephen P. Villa ---------------------------------------- STEPHEN P. VILLA MUZAK HOLDINGS LLC By: /s/ Peni Garber ----------------------------------- Name: Peni Garber Title: Vice President MUZAK LLC By: /s/ Peni Garber ----------------------------------- Name: Peni Garber Title: Vice President EX-99.1 4 dex991.txt CERTIFICATION - VILLA Exhibit 99.1 CERTIFICATION OF CHIEF OPERATING OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) I, Stephen P. Villa, Chief Operating Officer, of Muzak Holdings LLC, certify, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended September 30, 2002 of the Muzak Holdings LLC (the "Report"), that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Stephen P. Villa Stephen P. Villa Chief Operating Officer November 14, 2002 EX-99.2 5 dex992.txt CERTIFICATION - BOYD Exhibit 99.2 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) I, William A. Boyd, Chief Executive Officer, of Muzak Holdings LLC, certify, to the best of my knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended September 30, 2002 of the Muzak Holdings LLC (the "Report"), that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ William A. Boyd William A. Boyd Chief Executive Officer November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----