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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 2000

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

Commission File Number: 333-78573
33-78573-01

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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.)
Incorporation or Organization)

3318 LAKEMONT BLVD.
FORT MILL, SC 29708
(803) 396-3000
(Address, Including Zip Code and
Telephone Number including Area Code
of Registrants' Principal Executive Offices)

Securities registered pursuant to Section 12(g) of the Act: None

Securities registered pursuant to Section 12(b) of the Act:

None

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Indicate by check mark whether the registrants have filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]

Muzak Holdings Finance Corp. meets the conditions set forth in General
Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this form
with the reduced disclosure format.

DOCUMENTS INCORPORATED BY REFERENCE

None

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MUZAK HOLDINGS LLC
MUZAK HOLDINGS FINANCE CORP

FORM 10-K INDEX

Page
----

PART I
Item 1. Business............................................................................... 3
Item 2. Properties............................................................................. 9
Item 3. Legal Proceedings...................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders.................................... 9

PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 10
Item 6. Selected Financial Data................................................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 17
Item 8. Financial Statements and Supplementary Data............................................ 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 17

PART III
Item 10. Directors and Executive Officers of the Registrants.................................... 18
Item 11. Executive Compensation................................................................. 20
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 22
Item 13. Certain Relationships and Related Transactions......................................... 23

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 26

Safe Harbor Statement

This Form 10-K contains statements which, to the extent they are not
historical fact (such as when we describe what we "believe," "expect" or
"anticipate" will occur), 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-K 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-K 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, restrictions imposed by the Company's debt facilities,
the Company's history of net losses, the Company's ability to identify,
complete and integrate acquisitions, the Company's future capital requirements,
the Company's dependence on license agreements, and risks associated with
economic conditions generally.

PART I

ITEM 1. BUSINESS

Muzak LLC ("Muzak") is the leading provider of business music programming in
the United States based on market share. Muzak is a wholly owned subsidiary of
Muzak Holdings LLC, previously known as ACN Holdings, LLC. We refer to Muzak
Holdings and its subsidiaries collectively as the "Company". We believe that,
together with our franchisees, we have a market share of approximately 60% of
the estimated number of U.S. business locations currently subscribing to
business music programming. Together with our franchisees, we have nationwide
coverage and serve an installed base of approximately 320,000 client locations.

Our two core products are Audio Architecture SM and Audio Marketing SM. We
provide our products to numerous types of businesses including specialty
retailers, restaurants, department stores, supermarkets, drug stores, financial
institutions, hotels, health and fitness centers, business offices,
manufacturing facilities and medical centers, among others. Our clients
typically enter into a non-cancelable five-year contract that renews
automatically for at least one additional five-year term unless specifically
terminated at the initial contract expiration date. Our average length of
service per Audio Architecture client is approximately 12 years. We believe
that our clients use our products because they recognize them as a key element
in establishing their desired business environment, in promoting their
corporate identities and in strengthening their brand images at a low monthly
cost.

We provide our products and services domestically through our integrated,
nationwide network of owned operations and franchisees. We believe our
nationwide network is the largest in the industry and provides us with a key
competitive advantage in effectively marketing and servicing clients ranging
from local accounts with single or multiple locations to national accounts with
significant geographic presences. In 2000, 96% of our revenues were generated
by our owned operations and the remaining 4% were generated from fees from our
franchisees and other sources.

ABRY Partners, LLC formed Audio Communications Network LLC in October 1998
to acquire 8 Muzak franchises from Audio Communication Network, Inc., which we
refer to as Old Audio Communications Network. In March 1999, Muzak Limited
Partnership, the franchisor (which we refer to as Old Muzak), was merged into
Audio Communications Network LLC, in a transaction with total consideration
(including debt repayment) of $274.2 million. In connection with the merger,
Audio Communications Network LLC changed its name to Muzak LLC.

Since the merger in March 1999, we have acquired 11 in-market competitors,
including 4 business music providers and 7 music and marketing on-hold and/or
in-store messaging providers, and 10 franchises, for an aggregate cash purchase
price of $86.6 million. We seek attractive opportunities to acquire music
contract portfolios and complementary music and marketing on-hold and in-store
messaging businesses and will review the acquisitions of our own franchises if
they become available.

Acquisitions

In 1999, prior to the merger, the Company made the following acquisitions:

. On January 15, 1999, the Company acquired all of the outstanding stock of
Business Sound, Inc. for approximately $4.1 million. Business Sound was
the Company's independent franchisee for the New Orleans, Louisiana and
Mobile, Alabama areas.

. On February 24, 1999, the Company acquired all of the outstanding stock
of Electro Systems for approximately $0.7 million, and assumed certain
non-recourse debt. Electro Systems was the Company's independent
franchisee located in Panama City, Florida.

The Company made twenty-one acquisitions between the merger and December 31,
2000. The table below provides information regarding these acquisitions (in
millions, except for number of units).

Acquired
Purchase Assets Acquired Acquired
Date Price(1) or Stock Business Markets
---- -------- -------- -------- --------

April 1, 1999 $ 0.2 Net assets of Audio Marketing Washington
Custom On Hold
Services Inc.
June 1, 1999 $ 6.9 Net assets of Audio Marketing Florida,
Advertising on Georgia,
Hold, Inc. North Carolina
June 1, 1999 $ 0.8 Net assets of Business Music California
CustomTronics
Sound
July 1, 1999 $ 0.9 Net assets of Independent Maine
Penobscot franchisee
Broadcasting
Corporation
August 1, 1999 $ 1.3 Net assets of Audio Marketing Indiana
LaBov and
Beyond, Inc.
August 1, 1999 $ 3.5 Net assets of Audio Marketing National
US West
Communications
Services,
Inc.'s Please
Hold
Promotions
September 1, 1999 $ 4.7 Stock of Business Music National
Broadcast
International,
Inc.
October 1, 1999 $10.3 Net assets of Business Music Illinois,
Midwest Indiana,
Systems and Ohio,
Services, Inc. West Virginia
November 1, 1999 $ 2.9 Net assets of Independent Oregon
A & D Music, franchisee
Inc.
November 1, 1999 $ 7.9(2) Stock of Audio Independent California
Environment, franchisee
Inc. and
Background
Music
Broadcasters
Inc.
December 1, 1999 $13.2(3) Net assets of Independent Utah,
Mountain West franchisee Idaho,
Audio, Inc. Washington
February 2, 2000 $ 0.4 Net assets of Independent franchisee Illinois
Quincy
Broadcasting
Company
February 2, 2000 $ 0.9 Net assets of Audio Marketing Indiana,
General Georgia,
Communications Florida,
Corporation Ohio
("On Hold
America")
February 2, 2000 $ 0.4 Net assets of Business Music Texas
Texas Sound
Co. Ltd.
February 24, 2000 $ 3.7 Stock of Audio Marketing National
Telephone
Audio
Productions,
Inc.
March 24, 2000 $ 9.2(4) Stock of Independent District of Columbia
Vortex Sound franchisee
Communications
Company, Inc.
March 31, 2000 $ 1.6 Net assets of Independent Nevada,
Dynamic Sound franchisee California
March 31, 2000 $ 8.3 Stock of Muzak Independent Texas
Houston, Inc. franchisee

Purchase Acquired Assets Acquired Acquired
Date Price(1) or Stock Business Markets
---- -------- --------------- -------- --------

April 11, 2000 $1.0 Net assets of Audio Plus, Independent Ohio
Inc. franchisee
October 19, 2000 $9.4 Net assets of Ohio Sound & Independent Ohio
Music LLC franchisee
October 19, 2000 $0.6 Net assets of On Hold Audio Marketing Nevada
Communications, Inc.

- --------
(1) The purchase price does not include transaction costs for the purposes of
this table. However, these costs have been included in the purchase price
as reflected in the financial statements.
(2) Total purchase price includes 100 Class A units.
(3) The Company paid $3.1 million of the purchase price of Mountain West Audio
as of December 31, 1999. In February 2000, the Company paid the remaining
purchase price, which included 456 Class A units.
(4) Total purchase price includes 802 Class A units.

Financing Developments

In January 2000, the Company entered into an indenture for up to $50.0
million Senior Subordinated Floating Rate Notes (the "Floating Rate Notes").
The Floating Rate Notes were available for drawdowns until July 31, 2000 and
proceeds from the issuance of Floating Rate Notes were used to fund
acquisitions. The Floating Rate Notes were redeemed at 101.5% on October 19,
2000.

On October 18, 2000, the Company completed a private placement of Series A
preferred membership units ("preferred units") and Class A common units for a
total of $85.0 million. The Company used the proceeds as follows: (i) to repay
the Revolving Loan in full; (ii) to repay the Floating Rate Notes; (iii) to
repay $3.0 million of the 15% junior subordinated unsecured notes (the "sponsor
notes"); and (iv) to consummate two acquisitions.

On December 29, 2000, the Company increased its borrowings under the Term
Loan B of the Senior Credit Facility by $10.0 million, for a total amount
borrowed under Term Loan B of $145.0 million. The proceeds were used for
repayments on the Senior Credit Facility as well as for general corporate
purposes.

The Company is pursuing additional financing, the proceeds of which are
expected to be used as follows: (i) to repay the revolving loan in full; (ii)
to repay approximately $45.0 million of the term loans; (iii) to repay the
sponsor notes; (iv) to consummate several acquisitions; and (vi) to fund
internal growth. There can be no assurances the Company will obtain such
financing, or of the terms thereof.

Products

The Company's core products are Audio Architecture and Audio Marketing. The
Company believes that its clients use its products because they recognize them
as a key element in establishing their desired business environment, in
promoting their corporate identities and in strengthening their brand images.

Audio Architecture is business music programming designed to enhance a
client's brand image. Our in-house staff of audio architects analyzes a variety
of music to develop and maintain 60 core music programs in 10 genres. Programs
include current top-of-the-charts hits to jazz, classic rock, urban, country,
Latin, classical music and others. Our audio architects change our music
programs on a daily basis, incorporating newly released original artists' music
recordings and drawing from our extensive music library. In designing our music
programs, our audio architects use proprietary computer software that allows
them to efficiently access the extensive library, avoid repeated songs and
manage tempo and music variety to provide clients with high quality, seamlessly
arranged programs. In addition, we offer individual music programs to clients
who seek further customization beyond that offered by our core music programs.
As of December 31, 2000, our owned operations provided our Audio Architecture
product to approximately 167,000 client locations.

Audio Marketing is telephone music and marketing on-hold as well as in-store
messaging. Our Audio Marketing staff creates customized music and messages that
allow clients' telephone systems to deliver targeted music and messaging during
their customers' time on hold. In addition, they also provide customized in-
store messages that allow our clients to deliver targeted music and messaging
to support their in-store point of sale merchandising. Our fully integrated
sound studios and editing and tape duplication facilities provide flexibility
in responding to clients' needs. Our telephone and satellite delivery
technologies allow us to expeditiously change our clients' music and messages.

In connection with the sale of our Audio Architecture and Audio Marketing
products, we sell and lease various system-related products, principally sound
systems. As part of a typical music programming contract, we provide music
receiving or playback equipment to our client. Our business music clients
generally purchase or lease audio equipment from us that supplements the music
receiving or playback equipment.

We also sell, install and maintain non-music related equipment, such as
intercom and paging systems. We provide these services for our business music
and other clients. Maintenance of program-receiving equipment that we provide
to business music clients is typically included as part of the overall music
service. Installation and maintenance of audio or other equipment not directly
related to reception of our business music service is provided on a contractual
or time-and-materials basis. All of the equipment is manufactured by third
parties, although some items bear the Muzak(R) brand name.

We have recently expanded our drive-thru systems service. This service
provides for the maintenance and repair of intercom systems, headsets and radio
transmitters commonly used in drive-thru systems found at our quick service
restaurant clients. We receive recurring monthly revenues for each client
location typically under a five-year contract. We respond to our clients'
repair calls which typically involve the repair of headsets. In most cases, we
are able to exchange the damaged headset for an operable headset which we send
to our clients through overnight delivery. Our staff repairs the damaged item
which then becomes available for future distribution to another client. As of
December 2000, we had approximately 7,100 drive-thru client locations.

The Company's net sales of Audio Architecture, Audio Marketing and drive-
thru systems service were $100.8 million, $18.3 million, and $4.4 million,
respectively in 2000.

Nationwide Franchise Network

We have a nationwide franchise network that divides the country into 168
affiliate territories, of which 56 are served by our owned operations and the
remaining 112 are served by our independent franchisees.

Franchise Agreement Terms

Our business relationships with our franchisees are governed by license
agreements that have renewable ten-year terms. Under these agreements, the
franchisee is granted an exclusive license to offer and sell our Audio
Architecture and Audio Marketing products, as well as other products such as
Dayparting and Weekparting. The franchisee is also permitted to use our
registered marks within a defined territory which allows us to promote a
uniform Muzak brand image nationally. The agreements also contain terms
relating to distribution of services via our direct broadcast satellite
distribution system and reciprocal exclusivity provisions which preclude
franchisees from selling products which compete with our Audio Architecture and
Audio Marketing products.

Pursuant to the agreements, each franchisee pays us a monthly fee based on
the number of businesses within its territory and a monthly royalty equal to
approximately 10% of its billings for music services. Typically, this combined
fee and royalty payment represents approximately $5 per month per client
location. However, this monthly royalty is subject to adjustments, as we charge
the franchisee additional amounts for on-premise tape services and other
services. The agreements also provide franchisees with incentives to increase
sales and guidelines regarding coordination of sales, installation and service
to national client locations.

Distribution Systems

We transmit our offerings through various mediums including direct broadcast
satellite transmission, local broadcast transmission, audio and videotapes and
compact discs. During 2000, the Company served its music client locations
through the following means: approximately 78% through direct broadcast
satellite
transmission, approximately 14% through local broadcast technology, and
approximately 8% through on-premises tapes or compact discs.

Our transmissions via direct broadcast satellite to clients are primarily
from transponders leased from Microspace and EchoStar Satellite Corporation
("EchoStar"). Microspace provides us with facilities for uplink transmission of
medium-powered direct broadcast satellite signals to the transponders.
Microspace, in turn, leases its transponder capacity on satellites operated by
third parties. The term of our principal transponder lease with Microspace is
projected to end in 2005.

As part of our arrangements with EchoStar, we furnish 60 music channels to
commercial subscribers and 52 of the 60 music channels to residential
subscribers over EchoStar's satellite system. Pursuant to the agreements with
EchoStar, EchoStar pays us a programming fee for each of its residential
subscribers and pays us and our franchisees a commission for sales made by
EchoStar or its agents to commercial subscribers in the respective territories.
We pay EchoStar a fee for uplink transmission of music channels to our clients
and we rent space at EchoStar's Cheyenne, Wyoming uplink facility. We also pay
EchoStar a royalty and combined access fees on music programs sold by the
Company which are distributed by EchoStar to commercial subscribers. The term
of each of our agreements with EchoStar is projected to end in 2010.

EchoStar has agreed that it will not provide transponder space to, enter
into or maintain distributor agreements or relationships with, or enter into
any agreements for the programming or delivery of any audio services via direct
broadcast satellite frequencies with, a specified group of our competitors. We
have agreed that we will not secure transponder space for, enter into or
maintain distributor agreements or relationships with, or enter into any
agreement for the programming or delivery of any of our services with any
competitor of Echostar via direct broadcast satellite frequencies or with
specified competitors of Echostar via specified frequencies.

Competition

We compete with many local, regional, national and international providers
of business music and business services. National competitors include AEI Music
Network, Inc., DMX MUSIC and Music Choice. Local and regional competitors are
typically smaller entities that target businesses with few locations. We
compete on the basis of service, the quality and variety of our music programs,
versatility and flexibility, the availability of our non-music services and, to
a lesser extent, price. Even though we are seldom the lowest-priced provider of
business music in any territory, we believe that we can compete effectively on
all these bases due to the widespread recognition of the Muzak(R) name, our
nationwide network, the quality and variety of our music programming, the
talent of our audio architects and our multiple delivery systems.

Some of our competitors may have substantially greater financial, technical,
personnel and other resources than we do. On September 25, 2000, Liberty
Digital Inc., the parent company of DMX MUSIC, announced that AEI Music Network
and DMX MUSIC plan to merge, and that the closing of the merger is subject to
receiving necessary consents and government approvals and satisfying other
closing conditions. If this merger is consummated, the Company could be faced
with a larger competitor than any previously faced.

There are numerous methods by which our existing and future competitors can
deliver programming, including various forms of direct broadcast satellite
services, wireless cable, fiber optic cable, digital compression over existing
telephone lines, advanced television broadcast channels, Digital Audio Radio
Service and the Internet. We cannot assure you that we will be able to:

. compete successfully with our existing or potential new competitors,

. maintain or increase our current market share,

. use, or compete effectively with competitors that adopt, new delivery
methods and technologies, or

. keep pace with discoveries or improvements in the communications, media and
entertainment industries such that our existing technologies or delivery
systems that we currently rely upon will not become obsolete.

Sales and Marketing

We employ a direct sales process in marketing products, which is focused on
securing new client contracts and renewing existing contracts. Client
agreements typically have a non-cancelable term of five years and renew
automatically for at least one additional five-year term unless specifically
terminated at the initial contract expiration date. Repeat clients comprise the
core of the account base. We have local and national sales forces. Local
account executives typically focus on clients that have fewer than 50
locations, which may include individual franchisees of national chains.

Music Licenses

We license rights to re-record and distribute music from a variety of
sources and pays royalties to songwriters and publishers through contracts
negotiated with performing rights societies such as the American Society of
Composers, Authors and Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI"), and
the Society of European Stage Authors and Composers ("SESAC").

The industry-wide agreement between business music providers and BMI expired
in December 1993. Since this time we have been operating under an interim
agreement pursuant to which we have continued to pay royalties at the 1993
rates. Business music providers and BMI have been negotiating the terms of a
new agreement. We are involved in a rate court proceeding, initiated by BMI in
Federal Court in New York. At issue are the music license fees payable by us
and our owned operations as well as licensed independent franchisees to BMI.
The period from which such "reasonable" license fees are payable covers the
period January 1, 1994 to December 31, 2000, and likely several years
thereafter. BMI contends that those fee levels understate reasonable fee levels
by as much as 100%. We are vigorously contesting BMI's assessment. We believe
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. As of February 25,
2000, a trial date had not been set.

The industry-wide agreement between business music providers and ASCAP
expired in May 1999. We began negotiations with ASCAP in June 1999, and we have
continued to pay ASCAP royalties at the 1999 rates. We cannot predict what the
terms of the new BMI or ASCAP agreements with business music providers will be
or when agreements will be reached, although BMI has indicated that it is
seeking royalty rate increases and a retroactive royalty rate increase.

In 2000, we paid approximately $8.6 million in royalties to ASCAP, BMI and
SESAC. Increases in the fees we must pay under these agreements could adversely
affect our operating margin, and, therefore, our results of operations.

Government Regulation

We are subject to governmental regulation by the United States and the
governments of other countries in which we provide services. We provide music
services in a few areas in the United States through 928 to 960 megahertz
frequencies licensed by the Federal Communications Commission ("FCC").
Additionally, the FCC licenses the frequencies used by satellites on which we
transmit direct broadcast satellite services in the United States. If the FCC
or any other person revokes or refuses to extend any of these licenses, we
would be required to seek alternative transmission facilities. Laws,
regulations and policy, or changes therein, in other countries could also
adversely affect our existing services or restrict the growth of its business
in these countries.

Employees

As of December 31, 2000, we had 1,349 full-time and 46 part-time employees.
Approximately 140 of our technical and service personnel are covered by
thirteen union contracts, twelve of which are with the International
Brotherhood of Electrical Workers and one with Communication Workers of
America. Eight of the contracts expire on dates ranging from August 31, 2001 to
February 28, 2003. Five of the contracts, covering 62 employees, expired in
2000. Negotiations on these expired arrangements are progressing and are in
various stages of completion, with the parties currently having reached
agreements-in-principal to the material terms of two contracts covering 17
employees. Management believes that Muzak's relations with its employees and
with the unions that represent them are generally good.

ITEM 2. PROPERTIES

The Company relocated its headquarters to a leased facility in Fort Mill,
South Carolina on October 31, 2000 and it consists of approximately 100,000
square feet which accommodates our executive offices, operations, national
sales, marketing, technical, finance and administrative staffs. We also have
approximately 66 local sales offices in various locations, and leases space at
two satellite uplink facilities in Raleigh, North Carolina and Cheyenne,
Wyoming and warehouses in various locations. Approximately 95% of the total
square footage of these facilities is leased and the remainder is owned.

The Company considers all of its properties, both owned and leased, suitable
for its existing needs.

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to various proceedings in the ordinary course of its
business. Management believes that such proceedings are routine in nature and
incidental to the conduct of its business, and that none of such proceedings,
if determined adversely to the Company, would have a material adverse effect on
the consolidated financial condition or results of operations of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Muzak is a wholly owned subsidiary of the Company. The Company does not have
an established public trading market for its equity securities. The equity
securities of the Company are held by MEM Holdings LLC, AMFM Systems Inc., New
York Life Capital Partners, Northwestern Mutual Life Insurance Company, and
BancAmerica Capital Investors I, L.P., and by current or former management.
ABRY Broadcast Partners III and ABRY Broadcast Partners II are the beneficial
owners of MEM Holdings.

The Company's bank agreement, the indentures with respect to the Senior
Subordinated Notes of the Company, the indenture with respect to the Company's
Senior Discount Notes, and the Securities Purchase Agreement between the
Company and BancAmerica Capital Investors I, L.P, and various Investors,
restrict the ability of the Company and Muzak to make dividends and
distributions in respect of their equity.

During 2000, the Company issued its membership units in the following
transactions:

. In February, the Company issued:

. 456.000 Class A Units to the principal shareholder of MountainWest
Audio Inc. in connection with this acquisition;

. 6,938.201 Class A Units to MEM Holdings LLC, 2,303.816 Class A Units to
AMFM Systems Inc., 422.422 Class A Units to Music Holdings Corp,
405.111 Class A Units to CMS Co-Investment Subpartnership, 29 Class A
Units to CMS Diversified Partners LP, and 92.298 Class A Units to
Management, the proceeds of which were used for general corporate
purposes.

. In March, the Company issued 802.000 Class A Units to the principal
shareholder of Vortex Sound Communications Company in connection with
this acquisition on March 24, 2000.

. In June, the Company issued 1,285.264 Class A-1 Units to MEM Holdings
LLC, 419.066 Class A-1 Units to AMFM Systems Inc., 73.699 Class A-1 Units
to CMS Co-Investment Subpartnership, 5.266 Class A-1 Units to CMS
Diversified Partners LP, and 2.420 Class A-1 Units to management, the
proceeds of which were used for repayments on the Senior Credit Facility
and for general corporate purposes.

. In July, the Company issued 2,570.527 Class A-1 Units to MEM Holdings
LLC, 838.131 Class A-1 Units to AMFM Systems Inc., 147.399 Class A-1
Units to CMS Co-Investment Subpartnership, 10.531 Class A-1 Units to CMS
Diversified Partners LP, and 4.840 Class A-1 Units to management, the
proceeds of which were used for general corporate purposes.

. In September, the Company issued 1,285.714 Class A-1 Units to MEM
Holdings LLC, 428.571 Class A-1 Units to AMFM Systems Inc., 1,250 Class
A-1 Units to New York Life Capital Partners L.P, and 607.143 Class A-1
Units to Northwestern Mutual Life Insurance Company, the proceeds of
which were used for general corporate purposes.

. In October, the Company issued 2,582.904 Class A Units to Banc of America
Capital Investors I, LP, 1,937.178 Class A Units to New York Life Capital
Partners L.P, and 968.589 Class A Units to Northwestern Mutual Life
Insurance Company in connection with the private placement of preferred
membership units.

. During 2000, the Company issued 1,076.5 Class B-1 Units, 1,066 Class B-2
Units, and 1,063 Class B-3 Units to members of management.

All of such issuances were deemed exempt from registration under the
Securities Act by virtue of Section 4 (2) thereof, as transactions not
involving a public offering.

ITEM 6. SELECTED FINANCIAL DATA

Set forth below is Selected Financial Data for the Company for the years
ended December 31, 2000 and 1999 and for the period from October 7, 1998 to
December 31, 1998 and for Audio Communications Network, Inc. (the "Predecessor
Company") for the period from January 1, 1998 to October 6, 1998. As discussed
above in "Item 1. Business", on October 7, 1998 ACN acquired Audio
Communications Inc. ACN had no operations until it acquired Audio
Communications Inc. in October 1998. In connection with the merger with Old
Muzak on March 18, 1999, ACN changed its name to Muzak LLC.

Predecessor Company
-------------------
Period From Period From
Year Ended Year Ended October 7, 1998 January 1, 1998
December 31, December 31, to December 31, to October 6,
2000 1999 1998 1998
------------ ------------ --------------- -------------------

Statement Of Operations
Data:
Net Sales............... $192,148 $130,016 $ 5,914 $18,917
Income (Loss) from
Operations............. (3,550) 2,723 (119) (906)
Interest expense, net... 46,073 29,394 888 2,520
Net Loss................ (50,611) (26,212) (1,002) (3,428)
Balance Sheet Data (At
Period End):
Total assets............ $540,075 $488,243 $ 72,927 $43,854
Intangible assets, net.. 324,544 314,364 49,039 24,152
Working Capital
(deficit).............. 6,297 (35,253) (41,676) (1,726)
Long-term debt,
including current
portion................ 370,171 382,328 42,677 34,589
Other Data:
Capital expenditures for
property and
equipment.............. $ 42,547 $ 28,708 $ 1,308 $ 3,538
Cash flows provided by
(used in) operations... (4,547) (14,394) 1,167 1,593
EBITDA(1)............... 57,505 39,222 1,569 3,472

- --------
(1) EBITDA. Represents net income before interest, income taxes, depreciation
and amortization. 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 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.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

General

ABRY Partners formed Audio Communications Network LLC in October 1998 to
acquire 8 Muzak franchises from Audio Communication Network, Inc., which we
refer to as Old Audio Communications Network. In March 1999, Muzak Limited
Partnership, the franchisor (which we refer to as Old Muzak), was merged into
Audio Communications Network LLC, in a transaction with total consideration
(including debt repayment) of $274.2 million. In connection with the merger,
Audio Communications Network LLC changed its name to Muzak LLC.

Business Overview

Muzak is the leading provider of business music programming in the United
States based on market share. We believe that, together with our franchisees,
we have a market share of approximately 60% of the estimated number of U.S.
business locations currently subscribing to business music programming.
Together with our franchisees, we have nationwide coverage and serve an
installed base of approximately 320,000 client locations.

Our two core products are Audio Architecture and Audio Marketing. We believe
that our clients use our products because they recognize them as a key element
in establishing their desired business environment, in promoting their
corporate identities and in strengthening their brand images.

We provide our products to numerous types of businesses including specialty
retailers, restaurants, department stores, supermarkets, drug stores, financial
institutions, hotels, health and fitness centers, business offices,
manufacturing facilities and medical centers, among others. Our top ten clients
include McDonald's, The Gap, Eckerd, Kinko's and Burger King. Our clients
typically enter into a non-cancelable five-year contract that renews
automatically for at least one additional five-year term unless specifically
terminated at the initial contract expiration date. Our average length of
service per Audio Architecture client is approximately 12 years.

For a typical Audio Architecture client generated by our owned operations,
we make an initial one-time investment of approximately $1,190 (including
equipment, installation labor, sales commissions and net of installation fees)
and currently generate approximately $45 of contribution (gross revenues less
direct variable costs) per month per client location. This allows us to recover
our investment within 26 months and generate a 56% annual return on investment
per Audio Architecture client location, based on an average client relationship
of 12 years.

For a typical Audio Marketing client generated by our owned operations, we
make an initial one-time investment of approximately $611 (including equipment,
installation labor, sales commissions and net of installation fees) and
currently generate approximately $45 of contribution (gross revenues less
direct variable costs) per month per client location. This allows us to recover
our investment within 14 months and generate a 132% annual return on investment
per Audio Marketing client location based on a typical five-year contract term.

For clients generated by our franchisees, we receive a net monthly fee of
approximately $5 for each Audio Architecture client location and a fee for each
program that we produce for an Audio Marketing client. The initial one-time
investment for a new Audio Architecture or Audio Marketing client location
generated by a franchisee is borne exclusively by the franchisee.

Revenues, Cost of Revenues, Expenses and New Client Investments

Revenues from the sale of music and other business services represented
71.9% of our total revenue in 2000, while equipment and other services revenue
represented the remaining 28.1% of our total revenue in 2000. Sales of our
Audio Architecture and Audio Marketing products by our owned operations
represented 52.5% and 9.5% of total revenue, respectively.

Revenues

Our music and other business services revenue is generated from:

. the sale of our core products, Audio Architecture and Audio Marketing, by
our owned operations to clients who pay monthly subscription fees;

. fees received from franchisees related to Audio Architecture, Audio
Marketing and the servicing of drive-thru systems; and

. service contract revenues for maintenance and repair of drive-thru systems
used by our quick-service restaurant clients.

We derive equipment and related services revenues from the sale of audio
system-related products, principally sound systems and intercoms, to business
music clients and other clients. Equipment and related services revenues also
include revenue from the installation, service and repair of equipment
installed under a client contract. Installation, service and repair revenues
consist principally of revenues from the installation of sound systems and
other equipment that is not expressly part of a client contract. Installation
revenues from sales of music and other business services are deferred and
recognized over the term of the respective contracts.

Costs of Revenues

The cost of revenues for music and other business services consists
primarily of broadcast delivery, programming and licensing associated with
providing music and other business programming to a client or a franchisee. The
cost of revenues for equipment represents the purchase cost plus handling,
shipping and warranty expenses. The cost of revenues for related services,
which includes installation, service and repair, consists primarily of service
and repair labor and labor for installation that is not associated with new
client locations. The costs for installation that are associated with new
client locations are capitalized as part of property and equipment and are
depreciated over the initial contract term of five years.

Expenses

Selling, general and administrative expenses include salaries, benefits,
commissions, travel, marketing materials, training and occupancy costs
associated with staffing and operating local sales offices. These expenses also
include personnel and other costs in connection with our headquarters
functions. Sales commissions are recorded within deferred charges and other
assets, net and are amortized as a component of selling, general and
administrative expense over the initial contract term of five years. If a
client's contract is terminated early, the unamortized sales commission is
typically recovered from the salesperson.

New Client Investment

The majority of our investments are comprised of our initial outlay for each
new client location. We incur these costs only after receiving a signed
contract from a client. Our typical initial one-time client installation
investment per client location (including equipment, installation labor, sales
commissions and net of installation fees) is approximately $1,190 and $611 per
Audio Architecture and Audio Marketing client location, respectively. The cost
of equipment installed at the client's premises is recorded within property and
equipment and amortized over five years. In the event of a contract
termination, we can typically recover and reuse the installed equipment. Sales
commissions incurred in connection with acquiring new client locations are
recorded within deferred charges and other assets, net and amortized as a
component of selling, general and administrative expense over the initial
contract term of five years. If a client's contract terminates early, the
unamortized sales commission is typically recovered from the salesperson.

Results of Operations

Set forth below are discussions of the results of operations for Muzak
Holdings LLC and Audio Communications Network, Inc. for the periods indicated.

Muzak Holdings LLC--Year Ended December 31, 2000 Compared to Year Ended
December 31, 1999

During the period from January 1, 1999 to March 17, 1999, we were a
franchisee, with operations in 11 territories. Following the merger in March
1999, we were the franchisor, and our operations were significantly larger, as
we generated revenues from owned operations in 45 territories and also received
fees from independent franchisees in the remaining 123 territories. The
following comparisons are impacted by the fact that 1999 results include less
than ten months of results as franchisor and by the acquisitions we completed
throughout 1999 and 2000.

Revenues. Revenues were $192.1 million and $130.0 million for the years
ended December 31, 2000 and 1999, respectively, an increase of 47.8%. The
growth was attributable to Muzak's significant increase in both Audio Marketing
and Audio Architecture clients resulting from the merger, acquisitions and
internal growth, as well as the expansion of Muzak's drive-thru systems
business. During 2000, through our sales and marketing efforts, we added, net
of churn, 23,631 Audio Architecture, 7,777 Audio Marketing and 4,100 drive-thru
client locations. During this same period, we added 11,685 Audio Architecture
and 1,418 Audio Marketing client locations through acquisitions, net of churn.

Cost of Revenues. Cost of revenues was $68.8 million and $48.3 million for
the years ended December 31, 2000 and 1999, respectively, an increase of 42.4%.
Cost of revenues as a percentage of revenues was 35.8% and 37.1% for the years
ended December 31, 2000 and 1999, respectively. This improvement was primarily
due to the leveraging of fixed costs over a larger client base resulting from
the merger, acquisitions and internal growth and headcount reductions taken in
the second half of 2000, offset by the $1.6 million charge recorded during 2000
in connection with the renegotiated EchoStar Agreement.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $63.8 million and $42.5 million for the years
ended December 31, 2000 and 1999, respectively, an increase of 50.1%. This
increase is attributable to the growth in revenues as well as the increased
administrative expenses we have as franchisor, and due to the increased number
of owned operations resulting from the merger and acquisitions. Amortization of
sales commissions, a non-cash component of selling, general and administrative
expenses, was $5.8 million and $2.5 million for the years ended December 31,
2000 and 1999, respectively. Excluding the amortization of sales commissions,
selling, general and administrative expenses as a percentage of revenues were
30.2% and 30.8% for the fiscal years ended December 31, 2000 and 1999,
respectively. This margin improvement is attributable to headcount reductions
taken in the second half of 2000 as well as vendor consolidation and contract
renegotiation to reduce telecommunications, shipping, printing and other costs.

Depreciation and Amortization Expense. Depreciation and amortization was
$63.1 million and $36.5 million for the years ended December 31, 2000 and 1999,
respectively, an increase of 72.9%. This increase is due to the growth in
intangibles related to the acquisitions consummated in 1999 and 2000, along
with the increase in property and equipment in conjunction with Muzak's
significant growth in the number of client locations resulting from the merger,
acquisitions and internal growth.

Interest Expense. Interest expense, net of interest income, was $46.1
million and $29.4 million for the years ended December 31, 2000 and 1999,
respectively, an increase of 56.7%. The increase in interest expense during
2000 is due to the Company's overall higher borrowing levels as well as an
increase in interest rates throughout 2000.

Income Tax Benefit. The income tax benefit was $1.1 million and $0.4 million
for the years ended December 31, 2000 and 1999, respectively, an increase of
175% and related to the Company's corporate subsidiaries. The Company is a
limited liability company and is treated as a partnership for income tax
purposes.

Extraordinary loss. Muzak recognized an extraordinary loss of $1.4 million
relating to the early redemption of the senior subordinated floating rate notes
in October 2000.

Net loss. The combined effect of the foregoing resulted in a net loss of
$50.6 million for the year ended December 31, 2000, compared to a net loss of
$26.2 million for the comparable 1999 period.

Muzak Holdings LLC--Year Ended December 31, 1999

We did not compare the results for the year ended December 31, 1999 to the
prior period as the prior period does not include a full year of operations and
we made numerous material acquisitions during 1999. As a result, the comparison
of 1999 to the period October 7, 1998 to December 31, 1998 is not meaningful.

Revenues. Revenues totaled $130.0 million for the year ended December 31,
1999, comprised of $92.1 million business music revenues and $37.9 million
equipment and related services. Business music revenues and equipment and
related revenues from the acquisitions subsequent to the merger were $5.0
million and $1.0 million, respectively.

Cost of Revenues. Cost of revenues was $48.3 million for the year ended
December 31, 1999. Cost of revenues as a percentage of revenues was 37.1% for
the year ended December 31, 1999.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $42.5 million, comprised of $16.5 million of sales
and marketing expenses and $26.0 million of general and administrative
expenses. Duplicative facilities and expenses related to integrating the
businesses of Muzak and Old Muzak resulted in an increase in selling, general
and administrative expenses during 1999. As a percentage of total revenues,
selling, general and administrative expenses were 32.7% for the year ended
December 31, 1999.

Depreciation and Amortization Expense. Depreciation and amortization was
$36.5 million for the year ended December 31, 1999. Amortization expense
generally increased in the quarters throughout 1999 due to the intangibles
related to acquisitions during 1999.

Interest Expense. Interest expense, net of interest income, was $29.4
million for the year ended December 31, 1999. Interest expense was comprised
primarily of expenses related to the 9 7/8% senior subordinated notes and to
the senior credit facility.

Income Tax Benefit. Income tax benefit was $0.4 million for the year ended
December 31, 1999 and related to the Company corporate subsidiaries. The
Company is a limited liability company and is treated as a partnership for
income tax purposes.

Muzak Holdings LLC--Period From October 7, 1998 to December 31, 1998

Revenues totaled $5.9 million for the period ended December 31, 1998,
comprised primarily of business music revenues. For the same period, cost of
revenues totaled $2.6 million. Total selling, general and administrative
expenses for the period totaled $1.8 million, comprised principally of salary,
benefits and overhead expenses.

Audio Communications Network, Inc.--Period From January 1, 1998 to October 6,
1998

Revenues totaled $18.9 million for the period ended October 6, 1998,
comprised primarily of business music revenues. For the same period, cost of
revenues totaled $8.2 million. Total selling, general and administrative
expenses for the period totaled $7.2 million, comprised primarily of salary,
benefits and overhead expenses.

Liquidity and Capital Resources

Our principal sources of funds have been borrowings under the senior credit
facility and other indebtedness, cash generated from operations and proceeds
from equity contributions. During the year ended December 31, 2000, $4.5
million of cash was used in our operating activities, $89.0 million of cash was
used in investing activities, and $94.3 million of cash was provided by
financing activities. Cash was used during 2000 to pay down the senior credit
facility, redeem the senior subordinated floating rate notes, repay $3.0
million of the sponsor notes, make acquisitions, make investments relating to
new client locations and for general corporate purposes.

We expect that our principal uses of funds from operating activities and
borrowings will be the funding of growth in new client locations, interest and
principal payments on our indebtedness, net working capital

increases and acquisitions. We believe that our cash flows from operations and
our current borrowing availability will be sufficient to fund operations and
investments associated with new client locations, but excluding acquisitions,
through December 31, 2001. In addition, we believe that the cash flows from
operations and current borrowing availability will be sufficient to fund
operations, excluding acquisitions and investments associated with new client
locations, for the foreseeable future.

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 year ended December 31, 2000, our total initial
investment in new client locations was $56.4 million which was comprised of
equipment and installation costs attributable to new client locations of $38.0
million and $18.4 million in sales commissions 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 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
2000 was approximately $4.5 million, including approximately $3.5 million that
we incurred in connection with the build-out of our new headquarters facility
in Fort Mill, South Carolina.

We currently anticipate that for fiscal 2001 our total initial investment in
new client locations will be approximately $68.0 million including $43.0
million of equipment and installation costs attributable to new client
locations, and $25.0 million in sales commissions relating to new client
locations.

Debt Maturities. The current maturities of long-term debt primarily consist
of the current portion of the senior credit facility and other miscellaneous
debt. The maturities of long-term debt of our operations during 2001, 2002,
2003, 2004, and 2005 are $5.2 million, $6.8 million, $7.9 million, $27.8
million and $43.1 million, respectively. In addition, the senior credit
facility provides for mandatory prepayments with net cash proceeds of certain
asset sales, net cash proceeds of permitted debt issuances, net cash proceeds
from insurance recovery and condemnation events, and beginning December 31,
2000 the senior credit facility requires annual excess cash repayments. The 9
7/8% senior subordinated notes mature in March 2009. The indentures governing
the 9 7/8% senior subordinated notes and the senior discount notes provide that
in the event of certain asset dispositions, Muzak and the Company must apply
net proceeds first to repay senior indebtedness. To the extent the net proceeds
have not been applied within 360 days from the asset disposition to an
investment in capital expenditures or other long term tangible assets used in
the business, and to the extent the remaining net proceeds exceed $10.0
million, we must make an offer to purchase outstanding 9 7/8% senior
subordinated notes at 100% of their principal amount plus accrued interest. To
the extent there are excess funds after the purchase of the 9 7/8% senior
subordinated notes, Muzak must make an offer to purchase outstanding senior
discount notes at 100% of the accreted value. Muzak and the Company must also
make an offer to purchase outstanding 9 7/8% senior subordinated notes and the
senior discount notes at 101% of their principal amount plus accrued and unpaid
interest if a change in control of Muzak occurs.

Sensitivity to Interest Rate Changes. Due to the variable interest rates
under the senior credit facility, we are sensitive to changes in interest
rates. Accordingly, in April 1999, we entered into a four year interest rate
swap agreement in which we effectively exchanged $100.0 million of floating
rate debt at three month LIBOR for 5.59% fixed rate debt. We terminated this
agreement on January 28, 2000 and in exchange received approximately $4.4
million. On January 28, 2000, we entered into a new interest rate swap
agreement in which we effectively exchanged $100.0 million of floating rate
debt at three month LIBOR for 7.04% fixed rate debt. The interest rate swap
agreement terminates on April 19, 2002. A 0.5% increase in each of LIBOR and
the Alternate Base Rate (6.58% and 9.00% respectively, at December 31, 2000)
would impact interest costs by approximately $0.4 million annually on the
senior credit facility.

Seasonality

Muzak experiences slight seasonality in its equipment and related services
revenues and costs of revenues resulting primarily from a significant retail
client base which constructs and opens new retail stores in time for the
fourth quarter holiday season. Accordingly, Muzak experiences higher equipment
and related services revenues and costs of goods in the third and fourth
quarters, as opposed to the first half of the year, as a result of the
installation and servicing of these new retail locations.

Inflation and Changing Prices

We do not believe that inflation and other changing prices have had a
significant impact on our operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Exposure

Our exposure to market risk for changes in interest rates relates primarily
to our long-term debt obligations. The interest rate exposure for our variable
rate debt obligations is currently indexed to LIBOR of one, two, or three
months as selected by us, or the Alternate Base Rate. We use interest rate
swap agreements to modify its exposure to interest rate movements and to
reduce borrowing rates.

The table below provides information about our debt obligations and
interest rate protection agreement. For debt obligations, the table presents
principal cash flows and related weighted average interest rates by expected
maturity dates. For interest rate protection agreements, the table presents
notional amounts and weighted average interest rates by expected (contractual)
maturity dates. Weighted average variable interest rates are based on implied
LIBOR in the yield curve at the reporting date. The principal cash flows are
in thousands.

Fair
Expected Maturity Date Value
-------------------------------------------- December 31,
2001 2002 2003 2004 2005 Thereafter Total 2000
-------- -------- ------ ------- ------- ---------- -------- ------------

DEBT:
Fixed rate ($US)........ $ 82 $ 80 $ 411 $ 94 $ 101 $194,003 $194,771 $172,648
Average interest rate... 11.38% 11.38% 11.38% 11.38% 11.38% 11.38%
Variable rate ($US)..... $ 5,200 $ 6,700 $7,450 $27,750 $47,000 $ 81,300 $175,400 $175,400
Average interest rate... 8.43% 8.81% 9.17% 9.40% 9.60% 9.81%
INTEREST RATE DERIVATIVES:
Variable to fixed swap
($US).................. $100,000 $100,000 $ (1,653)
Average pay rate........ 7.042% 7.042%
Average receive rate.... 5.06% 5.45%

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the Consolidated Financial Statements of Muzak Holdings LLC included
herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Muzak is a wholly owned subsidiary of the Company. The Company is a limited
liability company whose affairs are governed by a Board of Directors. The
following table sets forth information about the directors of the Company and
the executive officers of Muzak and the Company as of December 31, 2000. Each
of the persons identified as a Director below is currently a director of the
Company. The election of directors is subject to the terms of the Members
Agreement and Securityholders Agreement and are described below under "Item
13. Certain Relationships and Related Transactions."

Name Age Position and Offices
---- --- --------------------

William A. Boyd................ 59 Director; Chief Executive Officer of
Muzak and the Company

Joseph A. Koff................. 49 Director; President and Chief Operating
Officer of Muzak and the Company

Stephen P. Villa............... 37 Chief Financial Officer and Treasurer
of Muzak and the Company

Steven M. Tracy................ 50 Senior Vice President, Owned Operations
of Muzak

David M. Moore................. 37 Senior Vice President, Technical
Operations of Muzak

Michael F. Zendan II........... 37 General Counsel, Vice President and
Assistant Secretary of Muzak and the
Company

Peni A. Garber................. 37 Director; Vice President and Secretary
of Muzak and the Company

David W. Unger................. 43 Director

Royce G. Yudkoff............... 44 Director; Vice President of Muzak and
the Company

Andrew Banks................... 45 Director

Juliana F. Hill................ 31 Director

Randall T. Mays................ 35 Director

The following sets forth biographical information with respect to the
directors and executive officers listed above.

William A. Boyd has been the Chief Executive Officer of Muzak since March
1999 and was the Chief Executive Officer of Old Muzak from 1997 to March 1999,
Chairman of the Board of Music Holdings Corp., the general partner of the
managing general partner of Old Muzak, from 1997 to March 1999 and was a
director of Music Holdings Corp. from 1996 to March 1999. From 1995 to 1996,
Mr. Boyd was a private investor. From 1982 to 1995, Mr. Boyd was owner and
president of SunCom Communications, a large franchise of Old Muzak. Mr. Boyd
was President of the franchise organization from 1994 to 1995 and from 1986 to
1987. Mr. Boyd was also President of Old Muzak's Owned Affiliate division in
1987. Prior to owning a franchise, Mr. Boyd held various positions with Old
Muzak.

Joseph A. Koff has been Muzak's President and Chief Operating Officer since
April 2000. From March 1999 to April 2000, he was a private investor. From 1998
to March 1999, Mr. Koff served as the Chief Executive Officer of Audio
Communications Network. Mr. Koff served as General Manager of two television
stations owned by Sullivan Broadcasting, Inc. in Greensboro, Winston-Salem/High
Point, North Carolina, a portfolio company of ABRY, from 1996 to 1998. From
1989 to 1996, Mr. Koff was General Manager of ABRY television stations in
Baltimore and Cincinnati. Mr. Koff has also been associated with Malrite
Communications Group, Inc. in West Palm Beach, Tampa-St. Petersburg and
Phoenix.

Stephen P. Villa has been Muzak's Chief Financial Officer since September
2000. He served as the Chief Financial Officer and Treasurer of Frisby
Technologies, Inc., from April 1998 to September 2000. From January 1997 to
March 1998, Mr. Villa was the controller of Harman Consumer Group, an operating
company

of Harman International, Inc., which sells consumer electronic products. From
September 1986 through January 1997, Mr. Villa held numerous positions with
Price Waterhouse LLP in their New York and Paris offices. Mr. Villa's last
position with Price Waterhouse LLP was audit senior manager.

Steven M. Tracy has served as Senior Vice President, Owned Operations of
Muzak since March 1999 and was the Senior Vice President, Owned Operations of
Old Muzak from 1998 to March 1999. From 1997 to 1998, Mr. Tracy was Old Muzak's
Vice President, Owned Operations, Western Region. Prior to 1997, Mr. Tracy
served as a Regional Director from 1994 to 1997, General Manager from 1988 to
1994 and Vice President/General Manager for Old Muzak from 1986 to 1988.

David M. Moore has served as Senior Vice President of Technical Operations
of Muzak since May 2000. Mr. Moore served as the Vice President of the Network
Operations Center from March 1999 to May 2000. Mr. Moore served as an Account
Executive at Foundation Telecom, Inc. from 1996 to 1997. From 1990 to 1996 and
June 1998 to March 1999, Mr. Moore held various positions at Old Muzak. Prior
to joining Old Muzak, Mr. Moore served as General Manager of Atlantic Coast
Communications from 1986 to 1990.

Michael F. Zendan II has been Muzak's Vice President and General Counsel
since October 1999. From 1996 to October 1999, Mr. Zendan was Assistant General
Counsel (Aerospace) and Assistant Secretary for Coltec Industries Inc, and was
Assistant General Counsel (Industrial) for Coltec Industries Inc from 1994-
1996, and served as Attorney and Senior Attorney for Coltec Industries Inc from
1992-1994. From 1988-1992, he served as an Associate at Pepe & Hazard.

Peni A. Garber has served as Director, Vice President and Secretary since
March 1999. She is a partner and Secretary of ABRY Partners. She joined ABRY
Partners in 1990 from Price Waterhouse, where she served as Senior Accountant
in the Audit Division from 1985 to 1990. Ms. Garber is presently a director or
the equivalent of CommerceConnect Media Holdings, Inc., Nexstar Broadcasting
Group LLC, Network Music Holdings LLC, and Quorum Broadcast Holdings Inc.

David W. Unger has served as a Director since March 1999 and as Managing
Partner of Avalon Equity Partners since its inception in December 1999. Mr.
Unger previously served as Vice President of Muzak from March 1999 to August
1999 and was Executive Vice President of Audio Communications Network from May
1997 to March 1999. Prior to May 1997, he was chairman of SunCom
Communications, LLC, a franchise of Muzak. Since 1995, Mr. Unger has invested
in, operated and sold communications businesses. Prior to 1995, Mr. Unger
worked for Communications Equity Associated, Teleprompter Corp., TKR Cable Co.
and as an investment banker.

Royce G. Yudkoff has served as Director and Vice President since March 1999
and as the sole director of Muzak since March 1999. He is the President and
Managing Partner of ABRY Partners. Prior to joining ABRY Partners, Mr. Yudkoff
was affiliated with Bain & Company. At Bain, where he was a partner from 1985
through 1988, he shared significant responsibility for the firm's media
practice. Mr. Yudkoff is presently a director or the equivalent of various
companies including Quorum Broadcast Holdings Inc., Nexstar Broadcasting Group
LLC and Metrocall, Inc.

Andrew Banks has served as a Director since March 1999. He is Chairman of
ABRY Holdings, LLC. Previously, Mr. Banks was affiliated with Bain & Company.
At Bain, where he was a partner from 1986 until 1988, he shared significant
responsibility for the firm's media practice.

Juliana F. Hill has served as a Director since September 2000. She is the
Vice President of Finance and Strategic Development of Clear Channel
Communications Inc. Prior to joining Clear Channel Communications Inc. in March
1999, she was an associate at US West Communications. From September 1996 to
June 1998, she was a student at J.L. Kellogg Graduate School of Management,
Northwestern University. Prior to September 1996, she was an audit manager of
Ernst & Young LLP.

Randall T. Mays has served as a Director since September 2000. He is an
Executive Vice President, the Chief Financial Officer and a Director of Clear
Channel Communications Inc. Prior to serving in this capacity, he served as the
Treasurer of Clear Channel Communications from January 1993 to February 1997.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation of
Muzak's Chief Executive Officer and Muzak's four most highly compensated
executive officers, at December 31, 2000, for services in all capacities to
Muzak.

Summary Compensation Table

Long Term
Annual Compensation Compensation
------------------------------------- ------------
Restricted All Other
Name and Principal Other Annual Stock Compensation
Position Year Salary ($) Bonus ($) Compensation ($) Awards ($) ($)(1)
------------------ ---- ---------- --------- ---------------- ------------ ------------

William A. Boyd (2)..... 2000 300,034 -- 42,000 -- 2,700
Chief Executive Officer 1999 237,527 358,000 35,000 27,417 2,625
Joseph A. Koff (3)...... 2000 179,967 -- 25,725 44,025 2,800
President and Chief
Operating 1999 62,026 37,500 -- -- 1,000,000(4)
Officer 1998 116,287 -- -- -- --
Steven M. Tracy (5).... 2000 160,000 45,000 6,000 -- 6,300
Senior Vice President, 1999 118,750 -- 5,000 6,256 4,156
Owned
Operations
David M. Moore (6)...... 2000 115,000 35,000 -- -- 5,400
Senior Vice President, 1999 89,118 35,000 -- 2,496 2,077
Technical
Operations
Michael F. Zendan II
(7)....................
Vice President and 2000 115,000 15,000 -- 3,400 4,680
General Counsel 1999 23,958 -- -- -- --

- --------
(1) Consists of contributions by Muzak to a defined contribution 401(k) plan.
(2) Bonus amount includes $358,000 of retention bonus in connection with the
merger. Other Annual Compensation consists of a housing allowance of
$36,000 and $30,000 and a car allowance of $6,000 and $5,000 in 2000 and
1999, respectively. Aggregate restricted stock holdings were 1,924 shares,
with a value on December 31, 2000 of $1,924. One fifth of the restricted
stock award vested on March 18, 2000. The remainder is to vest in four
additional installments of 384.80 shares each on March 18, 2001, March 18,
2002, March 18, 2003 and March 18, 2004.
(3) Mr. Koff was President of ACN from August 28, 1998 through March 18, 1999,
the date of the merger. He separated employment from Muzak on March 31,
1999 and he was re-hired by Muzak on April 23, 2000. Other annual
compensation for 2000 consists of a housing allowance of $20,816 and a car
allowance of $4,909. Aggregated restricted stock holdings were 1,761 (of
which 352.2 units were held in trusts for the benefit of Mr. Koff's
children) with a value on December 31, 2000 of $1,761. One fifth of the
restricted stock award will vest on April 24, 2001. The remainder is to
vest in four additional installments of 352.2 shares each on April 24,
2002, April 24, 2003, April 24, 2004 and April 24, 2005.
(4) Consists of a payment to Mr. Koff in April of 1999 in connection with a
non-competition agreement.
(5) Other Annual Compensation consists of a car allowance of $6,000 and $5,000
in 2000 and 1999, respectively. Aggregated restricted stock holdings were
439 shares, with a value on December 31, 2000 of $439. One fifth of the
restricted stock award vested on March 18, 2000. The remainder is to vest
in four additional installments of 87.80 shares each on March 18, 2001,
March 18, 2002, March 18, 2003 and March 18, 2004.
(6) Aggregated restricted stock holdings were 175 shares, with a value on
December 31, 2000 of $175. One fifth of the restricted stock award vested
on March 18, 2000. The remainder is to vest in four additional
installments of 35.00 shares each on March 18, 2001, March 18, 2002, March
18, 2003 and March 18, 2004.
(7) Joined Muzak on October 18, 1999. Aggregated restricted stock holdings were
136 shares, with a value on December 31, 2000 of $136. One fifth of the
restricted stock award will vest on June 21, 2001. The remainder is to vest
in four additional installments of 27.2 shares on June 21, 2002, June 21,
2003, June 21, 2004 and June 21, 2005.

Voting and Terms of Office

Pursuant to the Amended and Restated Limited Liability Company Agreement of
the Company, each director of the Company is designated as either a "Class A
Director" or a "Class B Director." Each Class A Director is entitled to three
votes and each Class B Director is entitled to one vote. Any decisions to be
made by the Board of Directors requires the approval of a majority of the votes
of the Board of Directors. The authorized number of each class of directors is
three Class A Directors, Messrs. Banks and Yudkoff and Ms. Garber, and five
Class B Directors, Messrs. Boyd, Koff, Unger and Mays and Ms. Hill. The number
of directors may be increased or decreased by the Board of Directors. Directors
hold office until their respective successors are elected and qualified or
until their earlier death, resignation or removal.

Management Employment Agreements

William A. Boyd. Pursuant to the employment agreement dated as of March 18,
1999 by and among Mr. Boyd, the Company and Muzak, Muzak agreed to employ Mr.
Boyd as President and Chief Executive Officer until his resignation, death,
disability or termination of employment. Under the employment agreement,
Mr. Boyd is:

. required to devote substantially all of his business time to Muzak;

. entitled to a minimum base salary of $300,000, with annual increase by
the consumer price index of the preceding year;

. eligible for a bonus, as determined by the Board of Directors of the
Company, up to $0.15 million with annual increases by the consumer price
index of the preceding year;

. prohibited from competing with Muzak during the term of his employment
period and for a period of twelve months thereafter; and

. prohibited from disclosing any confidential information gained during
his employment period.

If Muzak terminates Mr. Boyd's employment without "cause," Mr. Boyd will be
entitled to receive his base salary for a period of one year thereafter.

Joseph A. Koff. Pursuant to the employment agreement dated as of April 24,
2000, by and among Mr. Koff, the Company and Muzak, Muzak agreed to employ Mr.
Koff as President and Chief Operating Officer until his resignation, death,
disability or termination of employment. Under the employment agreement,
Mr. Koff is:

. required to devote substantially all of his business time to Muzak;

. entitled to a minimum base salary of $250,000, with annual increases of
5%;

. eligible for a bonus, as determined by the Board of Directors of the
Company, up to $0.1 million with annual increases of 5%;

. prohibited from competing with Muzak during the term of his employment
period and for a period of twenty four months thereafter; and

. prohibited from disclosing any confidential information gained during
his employment period.

If Muzak terminates Mr. Koff's employment without "cause", Mr. Koff will be
entitled to receive his base salary for a period of one year thereafter.

Other Executive Officers. Each of Messrs. Tracy, Zendan, Moore, Villa is a
party to an employment agreement with Muzak, the terms of which are the same in
all material respects. Each agreement may be terminated at any time by either
party. Under the agreements, the executive is:

. entitled to compensation in accordance with Muzak's employee
compensation plan, which may be amended by Muzak at any time;

. prohibited from competing with Muzak during the term of employment and
for 18 months thereafter; and

. prohibited from disclosing any confidential information gained during
the executive's employment period.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial
ownership of the Class A and Class A-1 units of the Company, which are the only
outstanding membership interests in the Company with voting rights, as of
February 26, 2001, by:

. holders having beneficial ownership of more than 5% of the voting equity
interest of the Company;

. each director of the Company;

. each of Muzak's executive officers shown in the summary compensation
table; and

. all directors and executive officers as a group.

Beneficial
Ownership(a)
-----------------
Beneficial Owner Number Percentage
- ---------------- ------ ----------

MEM Holdings , LLC(b)........................................ 60,027 62.4%
18 Newbury Street
Boston, MA 02116
AMFM Systems Inc.(c)......................................... 19,910 20.7%
200 East Basse Road
San Antonio, Texas 78209
William A. Boyd.............................................. 1,323 1.5%
Joseph A. Koff............................................... 609 *
Stephen P. Villa............................................. -- *
Steven M. Tracy.............................................. 143 *
Michael F. Zendan II......................................... -- *
David M. Moore............................................... -- *
Andrew Banks................................................. -- *
Peni A. Garber............................................... -- *
Juliana F. Hill.............................................. -- *
Randall T. Mays.............................................. -- *
David W. Unger............................................... 1,255 1.4%
Royce G. Yudkoff(d).......................................... 60,027 62.4%
All directors of the Company and executive officers of Muzak
as a group
(12 persons)................................................ 63,357 65.4%

- --------
* Less than 1%
(a) "Beneficial ownership" generally means any person who, directly or
indirectly, has or shares voting or investment power with respect to a
security or has the right to acquire such power within 60 days. Unless
otherwise indicated, the Company believes that each holder has sole voting
and investment power with regard to the equity interests listed as
beneficially owned.
(b) MEM Holdings, LLC is controlled by ABRY Broadcast Partners II, L.P. and
ABRY Broadcast Partners III, L.P., both of which are affiliates of ABRY
Partners.
(c) AMFM Systems Inc. is owned by Clear Channel Communications, Inc.
(d) Mr. Yudkoff is the sole owner of the equity interests of ABRY Holdings
III, Inc., the general partner of ABRY Equity Investors, L.P., the general
partner of ABRY Broadcast Partners III. Mr. Yudkoff is also the sole owner
of ABRY Holdings, Inc., the general partner of ABRY Capital, L.P., which
is the general partner of ABRY Broadcast Partners II. As a result, Mr.
Yudkoff may be deemed to beneficially own the shares owned by ABRY
Broadcast Partners III, and ABRY Broadcast Partners II, which are the
beneficial owners of MEM Holdings. The address of Mr. Yudkoff is the
address of MEM Holdings.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Investor Securities Purchase Agreement

David W. Unger, ABRY Broadcast Partners III and the Company are parties to
an Investor Securities Purchase Agreement dated as of October 6, 1998, pursuant
to which the Company sold to investors, and investors purchased from the
Company, class A units of the Company. The investors are entitled to
indemnification in some circumstances to the extent the Company is determined
to have breached representations, warranties or agreements contained in the
Investor Securities Purchase Agreement.

The Management Securities Repurchase Agreement between Mr. Unger and the
Company was terminated in August 1999.

Subscription Agreements

From June to September 2000, the Company sold a total of $25.0 million of
its class A-1 units to certain investors (including approximately $14.4 million
of class A-1 units to MEM Holdings LLC and approximately $4.7 million of class
A-1 units to AMFM Systems) pursuant to Subscription Agreements at a price per
unit of $2,800.

Members Agreement

The Company, MEM Holdings, Mr. Unger, Mr. Koff, Mr. Boyd, Music Holdings
Corp., CMS Co-Investment Subpartnership, CMS Diversified Partners, L.P. and
Stephen Jones are parties to a Second Amended and Restated Members Agreement
dated as of October 18, 2000. Pursuant to the Members Agreement, MEM Holdings,
Mr. Unger, Mr. Koff, Mr. Boyd, Music Holdings Corp., CMS Co-Investment
Subpartnership, CMS Diversified Partners, L.P. and Stephen Jones have agreed to
vote their equity interests in the Company to elect Mr. Unger and Mr. Boyd to
the Board of Directors of the Company. The Members Agreement also contains:

. "co-sale" rights exercisable in the event of specified sales by MEM
Holdings or its permitted transferees;

. "drag along" sale rights exercisable by the Board of Directors of the
Company and holders of a majority of the then outstanding class A units
and class A-1 units, in the event of an Approved Company Sale, as
defined in the Members Agreement;

. preemptive rights;

. restrictions on transfers of membership interests by Mr. Unger, Mr.
Koff, Mr. Boyd, Music Holdings Corp., CMS Co-Investment Subpartnership,
CMS Diversified Partners, L.P. and Stephen Jones and its permitted
transferees; and

. rights to first refusal exercisable by MEM Holdings, Mr, Unger, Mr.
Koff, Mr. Boyd and Muzak on any transfer by Music Holdings Corp.

The voting restrictions will terminate with respect to Mr. Unger upon the
first to occur of an Approved Company Sale and a specified liquidity event with
respect to Mr. Unger's class A units, and with respect to Mr. Boyd upon the
earlier of an Approved Company Sale and the date on which he ceases to serve as
the President and CEO of the Company or Muzak. The co-sale, drag along,
transfer restrictions and rights of first refusal will terminate upon
consummation of the first to occur of a Qualified Public Offering, as defined
in the Members Agreement, or an Approved Company Sale.

CMS Co-Investment

MEM Holdings, CMS Co-Investment Subpartnership and CMS Diversified Partners,
L.P. are parties to a Purchase and Sale Agreement dated as of May 26, 1999.
Pursuant to the Purchase and Sale Agreement, MEM

Holdings sold 2,800 Class A Units of the Company to CMS Co-Investment
Subpartnership and 200 Class A Units of the Company to CMS Diversified
Partners, L.P. for $1,000 per unit, in cash. The Sale and Purchase Agreement
also provides that CMS Co-Investment Subpartnership and CMS Diversified
Partners, L.P. grant MEM Holdings an irrevocable proxy for as long as MEM
Holdings own any equity securities in the Company.

Securityholders Agreement

The Company, MEM Holdings, AMFM Systems and other investors are parties to
an Amended and Restated Securityholders Agreement dated as of October 18, 2000.
Pursuant to the Securityholders Agreement, the parties have agreed to vote
their equity interests in the Company to establish the composition of the Board
of Directors of the Company and to provide observer rights for specified
investors to attend meetings of the Board of Directors. The Securityholders
Agreement also contains:

. "co-sale" rights exercisable in the event of specified sales by MEM
Holdings or AMFM Systems;

. "drag along" rights exercisable by the Board of Directors of the Company
and holders of a majority of the then outstanding class A units and
class A-1 units, in the event of an Approved Company Sale, as defined in
the Securityholders Agreement;

. preemptive rights;

. restrictions on transfers of membership interests by MEM Holdings, AMFM
Systems and other investors party to the Securityholders Agreement and
its permitted transferees; and

. rights of first offer exercisable by AMFM Systems on any transfer by MEM
Holdings, and vice versa, and rights of first offer exercisable by MEM
Holdings and AMFM Systems on any transfer by the other parties to the
Securityholders Agreement.

The voting restrictions will terminate upon an Approved Company Sale. The
co-sale rights will terminate upon the consummation of the first to occur of an
initial Public Offering by the Company, as defined in the Securityholders
Agreement, or an Approved Company Sale. The drag along rights, preemptive
rights and the rights of first offer will terminate on the consummation of the
first to occur of a Qualified Public Offering, as defined in the
Securityholders Agreement, or an Approved Company Sale.

Registration Agreement

The Company, MEM Holdings, Mr. Koff, Mr. Boyd, Mr. Unger, Music Holdings
Corp., AMFM Systems, Inc, and other investors are parties to a Second Amended
and Restated Registration Agreement dated as of October 18, 2000. Pursuant to
this Registration Agreement, the holders of majority of the ABRY Registrable
Securities, as defined in the Registration Agreement, may request a demand
registration under the Securities Act of all or any portion of the ABRY
Registrable Securities:

. on Form S-1 or any similar long-form registration,

. on Form S-2 or S-3 or any similar short-form registration, if available,
and

. on any applicable form pursuant to Rule 415 under the Securities Act.

In accordance with the Registration Agreement, the holders of a majority of
AMFM Registrable Securities, as defined in the Registration Agreement, may
request a demand registration under the Securities Act of all or any portion of
the AMFM Registrable Securities on Form S-1 or any similar long-form
registration and on Form S-2 or S-3 or any similar short-form registration. In
addition, the holders of at least 60% of the Preferred Registrable Securities,
as defined in the Registration Agreement, may request a demand registration
under the Securities Act of all or any portion of the Preferred Registrable
Securities on Form S-1, but the registration will be effected as a short-form
registration, if available. All holders of Registrable Securities, as defined
in the Registration Agreement, will have "piggyback" registration rights, which
entitle them to include their

registrable equity securities in registrations of securities by the Company,
subject to the satisfaction of specified conditions.

The Company is responsible for all expenses incident to its performance
under the Registration Agreement, including without limitation all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, fees of counsel for the Company and the holders of
registrable securities and all independent certified public accountants and
underwriters.

ABRY Partners Management and Consulting Services Agreement

Pursuant to an Amended and Restated Management and Consulting Services
Agreement between ABRY Partners and Muzak dated March 18, 1999, ABRY Partners
is entitled to a management fee when, and if, it provides advisory and
management consulting services to the Company and based on the amount invested
by ABRY Partners and its affiliates in the Company. The Company anticipates
that any such management fee, if incurred, would be $0.3 million per annum
payable quarterly in arrears plus reimbursable expenses, adjusted as follows.
The Management Agreement provides that beginning in 1999, any applicable
management fee should be multiplied by 1.05 raised to the power obtained by
subtracting 1998 from the number of the calendar year. During 2000, the Company
incurred $0.3 million in fees under this agreement. Either ABRY Partners or the
Company, with the approval of the Board of Directors of the Company, may
terminate the Management Agreement by prior written notice to the other.

Related Party Debt

From July 1, 1999 through November 24, 1999, Muzak borrowed an aggregate
amount of $30.0 million from MEM Holdings in the form of junior subordinated
unsecured notes (the "Sponsor Notes"). MEM Holdings is a holding company that
owns 62.4% of the voting membership interests in the Company. ABRY Broadcast
Partners III, L.P. and ABRY Broadcast Partners II, L.P. are the beneficial
owners of MEM Holdings.

The Sponsor Notes mature on June 30, 2007, at which time principal and
accrued interest are due. Interest accrues at 15% per annum; any accrued
interest not paid as of March 31, June 30, September 30 or December 31 with
bear interest at 15% per annum until such interest is paid or extinguished. The
Sponsor Notes are junior and subordinate to payments for the Senior Credit
Facility and the Senior Notes. At any time, the Sponsor Notes may be converted
into class A units of the Company. If the Sponsor Notes, have not been repaid
in full as of May 2001, the Sponsor Notes will automatically be converted into
class A units of the Company. In October 2000, the Company repaid a $3.0
million Sponsor Note with the proceeds from the private placement of preferred
membership units.

Family Relationships

William Boyd, Muzak's Chief Executive Officer, is the father of Robert Boyd,
Muzak's Vice President and General Manager of Audio Marketing. Robert Boyd
earned over $60,000 during 2000.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements:

Page
Number
------

MUZAK HOLDINGS, LLC
Report of Independent Accountants....................................... F-1
Consolidated Balance Sheets at December 31, 2000 and 1999............... F-3
Consolidated Statements of Operations for the years ended December 31,
2000 and 1999 and the period from October 7, 1998 to December 31, 1998
....................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31,
2000 and 1999 and the period from October 7, 1998 to December 31,
1998................................................................... F-5
Consolidated Statement of Changes in Members' Interests for the fiscal
years ended December 31, 2000 and 1999 and the period from October 7,
1998 to December 31, 1998 ............................................. F-6
Notes to Consolidated Financial Statements.............................. F-7
AUDIO COMMUNICATIONS NETWORK, INC. (THE "PREDECESSOR COMPANY")
Report of Independent Accountants....................................... F-2
Consolidated Statement of Operations for the period from January 1, 1998
to October 6, 1998..................................................... F-4
Consolidated Statement of Cash Flows for the period from January 1, 1998
to October 6, 1998..................................................... F-5
Consolidated Statement of Stockholders' Equity for the period from
January 1, 1998 to October 6, 1998..................................... F-6
Notes to Consolidated Financial Statements.............................. F-7

(2) Financial Schedules:

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are omitted because they
are not required, are inapplicable, or the information is included in the
Consolidated Financial Statements or the Notes thereto.

(a)(3) Exhibits:

Exhibit
Number Description
------- -----------

2.1 Agreement and Plan of Merger, dated as of January 29, 1999 among ACN
Holdings, LLC, Audio Communication Network, LLC, Muzak Limited
Partnership, MLP Acquisition L.P. and Muzak Holdings Corp. (1)

2.2 First Amendment to the Agreement and Plan of Merger dated as of March
17, 1999 by and among Muzak Holdings LLC (f/k/a ACN Holdings, LLC),
Audio Communications Network, LLC, Muzak Limited Partnership, MLP
Acquisition, L.P. and Muzak Holdings Corp. (1)

2.3 Contribution Agreement between Capstar Broadcasting Corporation and
ACN Holdings, LLC dated as of February 19, 1999. (2)

2.4 First Amendment dated as of March 18, 1999, to the Contribution
Agreement dated as of February 19, 1999, between Capstar Broadcasting
Corporation and Muzak Holdings, LLC (f/k/a ACN Holdings, LLC). (2)

3.1 Certificate of Formation of ACN Operating, LLC. (1)

3.2 Certificate of Amendment of the Certificate of Formation of ACN
Operating, LLC. (1)

3.3 Certificate of Merger merging Muzak Limited Partnership into Audio
Communications Network, LLC. (1)

3.4 Certificate of Incorporation of Muzak Finance Corp. (1)

3.5 Certificate of Incorporation of Muzak, Inc. (1)

3.6 First Amendment to Certificate of Incorporation of Muzak, Inc. (1)

3.7 Certificate of Formation of MLP Environmental Music, LLC. (1)

3.8 Articles of Incorporation of Music Acquisition, Inc. (1)

3.9 Certificate of Amendment by Shareholders of Music Acquisition, Inc. to
the Articles of Incorporation of Music Acquisition, Inc. (1)

3.10 Certificate of Amendment by Shareholders to the Articles of
Incorporation of Ohio Sound and Music, Inc. (1)

3.11 Certificate of Formation of ACN Holdings, LLC. (1)

3.12 Certificate of Amendment to the Certificate of Formation of ACN
Holdings, LLC. (1)

3.13 Amended and Restated Limited Liability Company Agreement of Muzak LLC,
dated as of March 18, 1999. (1)

3.14 By-laws of Muzak Finance Corp. (1)

3.15 By-laws of Muzak, Inc. (1)

3.16 Amended and Restated Limited Liability Agreement of MLP Environmental
Music, LLC, dated as of March 18, 1999. (1)

3.17 Code of Regulations of Business Sound, Inc. (1)

3.18 Third Amended and Restated Limited Liability Company Agreement of
Muzak Holdings LLC dated as of October 18, 2000. (6)

3.20 Certificate of Formation of BI Acquisition, LLC. (1)

3.21 Limited Liability Agreement of BI Acquisition, LLC dated as of August
18, 1999. (1)

Exhibit
Number Description
------- -----------

3.22 Certificate of Incorporation of ACN Holdings, Inc. (2)

3.23 Certificate of Amendment of Certificate of Incorporation of ACN
Holdings, Inc. (2)

3.24 By-laws of ACN Holdings, Inc. (2)

4.1 Indenture, dated as of March 18, 1999 by and among Muzak LLC and Muzak
Finance Corp., as Issuers, Muzak Capital Corporation, MLP
Environmental Music, LLC, Business Sound, Inc. and ACN Holdings LLC,
as Guarantors and State Street Bank and Trust Company, as Trustee. (1)

4.2 Form of 9 7/8% Senior Subordinated Notes due 2009 (included in Exhibit
4.1 above as Exhibit A). (1)

4.3 Registration Rights Agreement, dated as of March 18, 1999 by and among
Muzak LLC and Muzak Finance Corp., the Guarantors named therein and
CIBC Oppenheimer Corp. and Goldman, Sachs & Co., as Initial
Purchasers. (1)

4.4 Purchase Agreement, dated March 12, 1999 by and among Audio
Communications Network, LLC and Muzak Finance Corp., the Guarantors
named therein and CIBC Oppenheimer Corp. and Goldman, Sachs & Co., as
Initial Purchasers. (1)

4.5 Supplemental Indenture, dated as of August 30, 1999 by and among Muzak
LLC, Muzak Finance Corp., Muzak Capital Corporation, MLP Environmental
Music, LLC, Business Sound, Inc., Muzak Holdings LLC and BI
Acquisition, LLC, as Guarantors and State Street Bank and Trust
Company, as Trustee. (1)

4.6 Indenture, dated as of February 2, 2000 by and among Muzak LLC and
Muzak Finance Corp., as Issuers and State Street Bank and Trust
Company, as Trustee. (4)

4.7 Purchase Agreement, dated February 2, 2000 by and among Muzak LLC and
Muzak Finance Corp., the Guarantors named therein and CIBC Inc. (4)

4.8 Registration Rights Agreement, dated as of February 2, 2000 by and
among Muzak LLC and Muzak Finance Corp., the Guarantors named therein
and CIBC Inc. (4)

4.9 Indenture, dated as of March 18, 1999 by and among Muzak Holdings LLC
and Muzak Holdings Finance Corp., as Issuers and State Street Bank and
Trust Company, as Trustee. (2)

4.10 Form of Series A 13% Senior Discount Notes due 2010 (included in
Exhibit 4.1 above as Exhibit A). (2)

4.11 Registration Rights Agreement, dated as of March 18, 1999, Muzak
Holdings, LLC and Muzak Holdings Finance Corp., and Issuers and CIBC
Oppenheimer Corp. and Goldman, Sachs & Co. as Initial Purchasers. (2)

4.12 Purchase Agreement, dated as of March 12, 1999, by and among ACN
Holdings, LLC and Muzak Holdings Finance Corp., as Issuers and CIBC
Oppenheimer Corp. and Goldman, Sachs & Co. as Initial Purchasers. (2)

4.13 Muzak LLC 15% Junior Unsecured Promissory Note due 2007. (1)

4.14 Muzak LLC 15% Junior Unsecured Promissory Note due 2007. (4)

4.15 Muzak LLC 15% Junior Unsecured Promissory Note due 2007. (4)

4.20 Supplemental Indenture, dated as of February 24, 2000 by and among
Telephone Audio Productions, Inc., Muzak LLC, and subsidiaries, as
Guarantors and State Street Bank and Trust Company, as Trustee (Senior
Subordinated Notes). (5)

4.21 Supplemental Indenture, dated as of February 24, 2000 by and among
Telephone Audio Productions, Inc., Muzak LLC, and subsidiaries, as
Guarantors and State Street Bank and Trust Company, as Trustee
(Floating Rate Notes). (5)

4.22 Supplemental Indenture, dated as of March 24, 2000 by and among Vortex
Sound Communications Company, Inc., Muzak LLC, and subsidiaries, as
Guarantors and State Street Bank and Trust Company, as Trustee (Senior
Subordinated Notes). (5)

Exhibit
Number Description
------- -----------

4.23 Supplemental Indenture, dated as of March 24, 2000 by and among Vortex
Sound Communications Company, Inc., Muzak LLC, and subsidiaries, as
Guarantors and State Street Bank and Trust Company, as Trustee
(Floating Rate Notes). (5)

4.24 Supplemental Indenture, dated as of March 31, 2000 by and among Music
Incorporated, Muzak LLC, and subsidiaries, as Guarantors and State
Street Bank and Trust Company, as Trustee (Senior Subordinated Notes).
(5)

4.25 Supplemental Indenture, dated as of March 31, 2000 by and among Music
Incorporated, Muzak LLC, and subsidiaries, as Guarantors and State
Street Bank and Trust Company, as Trustee (Floating Rate Notes). (5)

4.26 Supplemental Indenture, dated as of March 31, 2000 by and among Muzak
Houston, Inc., Muzak LLC, and subsidiaries, as Guarantors and State
Street Bank and Trust Company, as Trustee (Senior Subordinated Notes).
(5)

4.27 Supplemental Indenture, dated as of March 31, 2000 by and among Muzak
Houston, Inc., Muzak LLC, and subsidiaries, as Guarantors and State
Street Bank and Trust Company, as Trustee (Floating Rate Notes). (5)

10.1 Credit and Guaranty Agreement, dated as of March 18, 1999 among Audio
Communications Network, LLC, as Borrower, Muzak Holdings LLC and
certain subsidiaries of Audio Communications Network, LLC, as
Guarantors, various lenders, Goldman Sachs Credit Partners L.P., as
Syndication Agent, Canadian Imperial Bank of Commerce, as
Administrative Agent and Goldman Sachs Credit Partners L.P. and CIBC
Oppenheimer Corp. as Co-Lead Arrangers. (1)

10.2 Pledge and Security Agreement, dated as of March 18, 1999, among Audio
Communications Network, LLC, Muzak Holdings LLC, and certain present
and future domestic subsidiaries of Audio Communications Network, LLC,
as Guarantors, and Canadian Imperial Bank of Commerce, as agent for
the benefit of Lenders and Lender Counterparties and Indemnities. (1)

10.4* Amended and Restated Members Agreement, dated as of March 18, 1999, by
and among Muzak Holdings LLC (f/k/a ACN Holdings, LLC), MEM Holdings
LLC, David Unger, Joseph Koff, William Boyd and Music Holdings Corp.
(1)

10.5* Management and Consulting Services Agreement dated as of October 6,
1998 by and between ABRY Partners, Inc. and ACN Operating, LLC. (1)

10.6* Form of Employment Agreement by and between Muzak LLC and each of the
executive officers of Muzak other than William A. Boyd and David
Unger. (1)

10.7* Executive Employment Agreement, dated as of March 18, 1999, among
Muzak Holdings LLC, Muzak LLC, and William A. Boyd. (1)

10.8* Executive Employment Agreement, dated as of April 24, 2000, among
Muzak Holdings LLC, Muzak LLC, and Joseph Koff. (9)

10.9* Executive Employment Agreement dated as of October 6, 1998, by and
among ACN Operating, LLC, Audio Communications Network, LLC and David
Unger. (1)

10.10* First Amendment to the Executive Employment Agreement dated as of
March 18, 1999 to the certain Executive Employment Agreement dated as
of October 6, 1998, by and between Audio Communications Network, LLC
f/k/a ACN Operating, LLC and David Unger. (1)

10.11 Securities Repurchase Agreement dated as of October 6, 1998 by and
among ACN Holdings, LLC, David Unger and ABRY Broadcast Partners III,
L.P. (2)

Exhibit
Number Description
------- -----------

10.12 Second Amended and Restated Registration Rights Agreement, dated as of
October 18, 2000, by and among Muzak Holdings LLC and the parties
named therein. (7)

10.13 Amended and Restated Securityholders Agreement dated as of October 18,
2000 by and among Muzak Holdings LLC and the various parties named
therein. (7)

10.14 Securities Purchase Agreement between Muzak Holdings LLC as Issuer and
BancAmerica Capital Investors I, L.P. and various investors as
purchasers dated as of October 18, 2000. (7)

10.15 First Amendment, Consent and Waiver, dated as of July 1, 1999 to the
Credit and Guaranty Agreement, dated as of March 18, 1999 among Muzak
LLC, as Borrower, Muzak Holdings LLC and certain Subsidiaries of Muzak
LLC, as Guarantors, various Lenders, Goldman Sachs Credit Partners
L.P., as Syndication Agent, Canadian Imperial Bank of Commerce, as
Administrative Agent and Goldman Sachs Credit Partners L.P. and CIBC
Oppenheimer Corp. as Co-Lead Arrangers. (1)

10.16 Second Amendment Consent and Waiver dated October 26, 1999 to the
Credit and Guaranty Agreement dated as of March 18, 1999 with Muzak
LLC as borrower. (3)

10.17 Third Amendment Consent and Waiver dated January 14, 2000 to the
Credit and Guaranty Agreement dated as of March 18, 1999 with Muzak
LLC as Borrower. (4)

10.18 Fourth Amendment and Waiver dated August 2, 2000 to the Credit and
Guaranty Agreement dated as of March 18, 1999 with Muzak LLC as
Borrower (6)

10.19 Investor Securities Purchase Agreement dated as of October 6, 1998 by
and among ACN Holdings, LLC and the investors named therein. (2)

10.20 Form of Incentive Unit Agreement by and among Muzak Holdings LLC, each
of the Name Executives and ABRY Broadcast Partners III, L.P. (2)

- --------
* Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to Muzak LLC's Registration Statement on Form S-
4, File No. 333-78571.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-4, File No. 333-78573.
(3) Incorporated by reference to Muzak LLC's Report on Form 10-Q for the fiscal
quarter ended September 30, 1999.
(4) Incorporated by reference to Muzak LLC's Report on Form 10-K/A for the year
ended December 31, 1999.
(5) Incorporated by reference to Muzak LLC's Report on Form 10-Q for the fiscal
quarter ended March 31, 2000.
(6) Incorporated by reference to Muzak LLC's Report on Form 10-Q for the fiscal
quarter ended June 30, 2000.
(7) Incorporated by reference to the Company's Report on Form 10-Q for the
fiscal quarter ended September 30, 2000.
(8) Incorporated by reference to Muzak LLC's Report on Form 10-Q for the fiscal
quarter ended September 30, 2000.
(9) Incorporated by reference to Muzak LLC's Report on Form 10-K for the fiscal
year ended December 31, 2000.

(b) Reports on Form 8-K.

(c) During the last quarter of the fiscal year for which this report on Form
10-K was filed, the Company filed no reports on Form 8-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized, on the 27th day of
February 2001.

Muzak Holdings Finance Corp.
Muzak Holdings llc

/s/ William A. Boyd
By: _________________________________
William A. Boyd
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the 27th day of February 2001.

Signature Title
--------- -----

/s/ William A. Boyd Chief Executive Officer
___________________________________________ (Principal Executive Officer)
William A. Boyd

/s/ Stephen P. Villa Chief Financial Officer
___________________________________________ (Principal Financial Officer and
Stephen P. Villa Principal Accounting Officer)

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
of Muzak Holdings LLC:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 26 related to Muzak Holdings LLC present
fairly, in all material respects, the financial position of Muzak Holdings LLC
and its subsidiaries (the "Company"), formally known as ACN Holdings, LLC, at
December 31, 2000 and 1999 and the results of their operations and their cash
flows for the years ended December 31, 2000 and 1999 and for the period from
October 7, 1998 to December 31, 1998, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

/s/ PricewaterhouseCoopers LLP

Charlotte, North Carolina
February 15, 2001 except as to the last sentence of the fourth paragraph in
Note 6, for which the date is February 26, 2001

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
Muzak Holdings LLC

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 26 related to Audio Communications
Network, Inc. ("ACN" or "Predecessor Company") present fairly, in all material
respects, the results of their operations and their cash flows for the period
from January 1, 1998 to October 6, 1998 in conformity with generally accepted
accounting principles in the United States of America. These financial
statements are the responsibility of ACN's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

/s/ PricewaterhouseCoopers LLP

Charlotte, North Carolina
February 19, 1999

F-2

ITEM 1. FINANCIAL STATEMENTS

MUZAK HOLDINGS LLC

CONSOLIDATED BALANCE SHEETS
(In thousands)

December 31, 2000 December 31, 1999
----------------- -----------------

ASSETS
------

Current Assets:
Cash and cash equivalents................ $ 3,012 $ 2,275
Accounts receivable, net of allowances of
$4,066 and $3,683....................... 38,847 30,131
Inventories.............................. 11,082 12,283
Prepaid expenses and other assets........ 2,548 2,304
-------- --------
Total current assets................... 55,489 46,993
Property and equipment, net................ 114,571 95,050
Intangible assets, net..................... 324,544 314,364
Deferred charges and other assets, net..... 45,471 31,836
-------- --------
Total assets........................... $540,075 $488,243
======== ========

LIABILITIES AND MEMBERS' INTEREST
---------------------------------

Current Liabilities:
Revolving credit facility................ $ 4,000 $ 25,000
Current maturities of long term debt..... 5,281 4,197
Current maturities of other liabilities.. 3,776 1,394
Accounts payable......................... 14,498 15,123
Accrued expenses......................... 19,541 34,433
Advance billings......................... 2,096 2,099
-------- --------
Total current liabilities.............. 49,192 82,246
Long-term debt............................. 333,890 323,131
Related party notes........................ 27,000 30,000
Other liabilities.......................... 17,993 9,798
Commitments and Contingencies (Note 14)
Mandatorily redeemable preferred units..... 79,762 --
Members' Interest:
Class A units............................ 110,680 70,599
Class B units............................ 2,522 2,822
Accumulated deficit...................... (80,964) (30,353)
-------- --------
Total members' interest................ 32,238 43,068
-------- --------
Total liabilities and members'
interest.............................. $540,075 $488,243
======== ========

The Notes are an integral part of these consolidated financial statements.

F-3

MUZAK HOLDINGS LLC

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)

Predecessor
Company
-----------
Period from
Period From January 1,
October 7, 1998
Year Ended Year Ended 1998 Through Through
December 31, December 31, December 31, October 6,
2000 1999 1998 1998
------------ ------------ ------------ -----------

Revenues:
Music and other business
services................. $138,167 $ 92,149 $ 3,909 $12,315
Equipment and related
services................. 53,981 37,867 2,005 6,602
-------- -------- ------- -------
192,148 130,016 5,914 18,917
-------- -------- ------- -------
Cost of revenues:
Music and other business
services (excluding
$30,344, $20,243, $775,
and $1,789 of
depreciation and
amortization expense).... 29,756 19,317 833 2,670
Equipment and related
services................. 39,019 29,002 1,723 5,536
-------- -------- ------- -------
68,775 48,319 2,556 8,206
-------- -------- ------- -------
123,373 81,697 3,358 10,711
-------- -------- ------- -------
Selling, general and
administrative expenses.... 63,798 42,495 1,794 7,245
Depreciation and
amortization expense....... 63,125 36,479 1,683 4,372
-------- -------- ------- -------
Income (loss) from
operations................. (3,550) 2,723 (119) (906)
Other income (expense):
Interest expense, net..... (46,073) (29,394) (888) (2,520)
Other, net................ (652) 20 5 6
-------- -------- ------- -------
Loss before income taxes and
extraordinary item......... (50,275) (26,651) (1,002) (3,420)
Income tax provision
(benefit).................. (1,082) (439) -- 8
-------- -------- ------- -------
Loss from operations before
extraordinary item......... (49,193) (26,212) (1,002) (3,428)
Extraordinary Loss.......... (1,418) -- -- --
-------- -------- ------- -------
Net loss.................... $(50,611) $(26,212) $(1,002) $(3,428)
======== ======== ======= =======

The Notes are an integral part of these consolidated financial statements.

F-4

MUZAK HOLDINGS LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

Predecessor Company
Period From -------------------
October 7, 1998 Period From
Year Ended Year Ended Through January 1, 1998
December 31, December 31, December 31, Through October 6,
2000 1999 1998 1998
------------ ------------ --------------- -------------------

CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss.............. $(50,611) $ (26,212) $ (1,002) $(3,428)
Adjustments to derive
cash flow from
operating activities:
Extraordinary loss.... 1,418 -- -- --
Loss on disposal of
fixed assets......... 554 74 -- --
Deferred income tax
benefit.............. (1,136) (458) -- --
Depreciation and
amortization......... 63,125 36,479 1,683 4,372
Amortization of senior
discount notes....... 5,925 4,218 -- --
Amortization of
deferred financing
fees................. 1,795 1,226 20 58
Amortization of
deferred subscriber
acquisition costs.... 5,786 2,488 -- --
Deferred subscriber
acquisition costs.... (18,371) (9,734) (209) (524)
Unearned installment
income............... (807) 1,110 -- --
Change in certain
assets and
liabilities, net of
business acquisitions
(Increase) decrease
in accounts
receivable.......... (9,723) (12,268) 95 241
(Increase) decrease
in inventory........ (135) (3,225) (524) 303
(Decrease) increase
in accrued
expenses............ (8,563) 3,716 597 112
Increase (decrease)
in accounts
payable............. 6,191 (14,729) 546 379
(Decrease) increase
in advance
billings............ (3) 2,099 -- --
Other, net........... 8 822 (39) 80
-------- --------- -------- -------
Net cash provided by
(used in) operating
activities......... (4,547) (14,394) 1,167 1,593
-------- --------- -------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisitions, net of
cash................. (44,665) (306,176) (67,028) --
Proceeds from the sale
of fixed assets...... 239 160 -- --
Capital expenditures
for property and
equipment and
intangibles.......... (44,592) (30,895) (1,308) (3,538)
-------- --------- -------- -------
Net cash used in
investing
activities......... (89,018) (336,911) (68,336) (3.538)
-------- --------- -------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of senior subordinated
notes................. -- 115,000 -- --
Change in book
overdrafts............ (6,820) 12,142 -- --
Repayment of floating
rate notes............ (36,540) -- -- --
Borrowing of floating
rate notes............ 36,000 -- -- --
Proceeds from issuance
of senior discount
notes................. -- 39,996 -- --
Proceeds from sale of
interest rate swap.... 4,364 -- -- --
Borrowings from senior
credit facility....... 10,000 165,000 -- --
Repayments of senior
credit facility....... (3,600) -- -- --
Proceeds from long-term
debt.................. -- -- -- 2,200
Proceeds from issuance
of preferred units,
net of fees........... 82,790 -- -- --
Proceeds from sale of
stock................. -- -- -- 7
Proceeds from issuance
of membership units... 35,636 24,279 27,262 --
Repayment of notes
payable to related
parties............... (3,000) (41,683) -- --
Issuance of notes
payable to related
party................. -- 30,000 40,818 --
Borrowings under
revolver.............. 39,400 33,500 -- --
Repayment of revolver.. (60,400) (8,500) -- --
Repayments of other
debt.................. (2,038) (3,534) (8) (552)
Payment of fees
associated with the
financing............. (1,490) (13,913) -- --
-------- --------- -------- -------
Net cash provided by
financing
activities......... 94,302 352,287 68,072 1,655
-------- --------- -------- -------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS........... 737 982 903 (290)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............. 2,275 1,293 390 680
-------- --------- -------- -------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................ $ 3,012 $ 2,275 $ 1,293 $ 390
======== ========= ======== =======
Significant non-cash
activities:
Issuances of common
stock in connection
with acquisitions.... $ 1,258 $ 21,880 -- --
Capital lease
obligations.......... 4,550 1,644 -- --

The Notes are an integral part of these consolidated financial statements.

F-5

MUZAK HOLDINGS LLC

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY AND MEMBERS' INTEREST
(In thousands, except for units)

Predecessor Company:

Contributed Contributed
Capital- Capital Total
Preferred Common in Excess Accumulated Stockholders'
Investment Warrants Stock of Par Deficit Equity
---------- ----------- ------ ----------- ----------- -------------

Balance, December 31,
1997................... -- -- 1,126 9,851 (2,799) 8,178
Stock options
exercised.............. -- -- 1 6 -- 7
Net loss................ -- -- -- -- (3,428) (3,428)
---- ---- ------ ------ ------- -------
Balance at October 6,
1998................... $-- $-- $1,127 $9,857 $(6,227) $ 4,757
==== ==== ====== ====== ======= =======

MUZAK HOLDINGS LLC:

Class A Class B
---------------- ---------------
Total
Accumulated Members'
Units Dollars Units Dollars Deficit Equity
------- -------- ------- ------- ----------- --------

Balance, October 7, 1998
(prior to initial
contribution by
members)............... -- $ -- -- $ -- $ -- $ --
Issuance of units....... 27,262 27,262 2,414 -- -- 27,262
Net loss................ -- -- -- -- (1,002) (1,002)
------- -------- ------- ------ -------- -------
Balance, December 31,
1998................... 27,262 27,262 2,414 -- (1,002) 26,260
Issuance of units....... 40,198 40,198 7,867 2,822 -- 43,020
Split of common units
affected in the form of
a dividend............. 3,139 3,139 -- -- (3,139) --
Net loss................ -- -- -- -- (26,212) (26,212)
------- -------- ------- ------ -------- -------
Balance, December 31,
1999................... 70,599 70,599 10,281 2,822 (30,353) 43,068
Issuance of units....... 26,311 42,383 2,529 4 -- 42,387
Preferred return on
preferred units........ -- (2,302) -- (304) -- (2,606)
Net loss................ -- -- -- -- (50,611) (50,611)
------- -------- ------- ------ -------- -------
Balance, December 31,
2000................... 96,910 $110,680 12,810 $2,522 $(80,964) $32,238
======= ======== ======= ====== ======== =======

The Notes are an integral part of these consolidated financial statements.

F-6

MUZAK HOLDINGS LLC

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Organization--Muzak Holdings LLC and its subsidiaries (the "Company"),
formerly known as ACN Holdings, LLC, was formed in September 1998 pursuant to
the laws of Delaware. Muzak LLC, a wholly owned subsidiary of the Company,
provides business music programming to clients through its integrated
nationwide network of owned operations and franchisees. Muzak LLC began its
operations on October 7, 1998 with the acquisition of the independent
franchisees in the Baltimore, Charlotte, Hillsborough, Kansas City, St. Louis,
Jacksonville, Phoenix, and Fresno areas from Audio Communications Network, Inc.
(the "Predecessor Company"). On March 18, 1999, Muzak Limited Partnership ("Old
Muzak") merged with and into ACN. At the time of the merger, ACN changed its
name to Muzak LLC.

As of December 31, 2000, ABRY Partners, LLC and its respective affiliates
collectively own approximately 62.4% of the beneficial interests in the
Company's voting interests.

Basis of presentation--The consolidated financial statements include the
accounts of the Company and its subsidiaries: Muzak LLC, Muzak Capital
Corporation, Muzak Holdings Finance Corporation, Muzak Finance Corporation,
Business Sound Inc., Electro Systems Corporation, BI Acquisition LLC, MLP
Environmental Music LLC, Audio Environments Inc., Background Music Broadcasters
Inc., Telephone Audio Productions Inc., Vortex Sound Communications Company
Inc., Music Incorporated, and Muzak Houston Inc. All significant intercompany
items have been eliminated in consolidation.

The 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 financials statements and the reported amounts
of revenues and expenses during the period. Actual results could differ from
those estimates.

Cash and cash equivalents--Cash and cash equivalents include all cash
balances and highly liquid investments with an original maturity of three
months or less. Book overdrafts of $5.3 million and $12.1 million as of
December 31, 2000 and 1999, respectively, are included in accounts payable.

Concentration of credit risk--Concentrations of credit risk with respect to
trade accounts receivable are limited as the Company sells its products to
clients in diversified industries throughout the United States. The Company
performs ongoing credit evaluations of its clients' financial condition and
maintains allowances for potential credit losses. Actual losses have been
within management's expectations and estimates.

In addition, the Company leases satellite capacity primarily through two
lessors. The Company transmits 78% of its music programs via broadcast
satellite. Although alternate satellite capacity exists, loss of these
suppliers or satellite capacity could temporarily disrupt operations. The
Company attempts to mitigate these risks by working closely with the lessors
and by purchasing insurance to cover its increased costs in the event of
satellite failure.

Inventories--Inventories consist primarily of electronic equipment and are
valued at the lower of cost or market, but not in excess of net realizable
value. Cost is determined on the first-in, first-out basis.

Property and Equipment--Property and equipment are stated at cost.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets, ranging from 3 to 30 years. Sound and music equipment
installed at client premises under contracts to provide music programming
services is transferred from inventory to property and equipment at cost plus
an allocation of installation costs and is amortized over 5 years. Impairment
losses are recognized if recorded values exceed undiscounted future cash flows,
by reducing them to estimated fair value. No impairment losses were recognized
by the Company or the Predecessor Company for the periods presented.

F-7

MUZAK HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Intangible Assets--Goodwill, the excess of the purchase price over the fair
value of net assets of businesses acquired, is amortized over twenty years.
Income producing contracts, acquired through acquisition, are amortized over
periods ranging from 8-14 years. Other intangible assets are recorded at cost
and are being charged to amortization expense over the estimated useful lives
or the period of their expected benefit, ranging from five to twenty years.
Management evaluates the recoverability of intangibles by comparing recorded
values to the undiscounted future cash flows that can be generated by such
assets. Impairment losses are recognized if recorded values exceed undiscounted
future cash flows, by reducing them to estimated fair value. No impairment
losses were recognized by the Company or the Predecessor Company for the
periods presented.

Deferred Charges and Other Assets, Net--Deferred charges and other assets
consist primarily of subscriber acquisition costs. Subscriber acquisition costs
are direct sales commissions incurred in connection with acquiring new
subscribers, which are amortized as a component of selling, general, and
administrative expenses over the life of the client contract or five years,
whichever is shorter, on a straight-line basis. If a client contract terminates
early, the unamortized subscriber acquisition costs is typically recovered from
the salesperson. The net subscriber acquisition balances were $30.6 million and
$18.0 million at December 31, 2000 and December 31, 1999, respectively.
Deferred financing costs are also included in deferred charges and other
assets, net and are charged to interest expense over the term of the related
agreements.

Advance Billings--The Company invoices certain clients in advance for
contracted music and other business services. Amounts received in advance of
the service period are deferred and recognized as revenue in the period
services are performed.

Income Taxes--The Company is a Limited Liability Company that is treated as
a partnership for income tax purposes. No provision for income taxes is
required by the Company as its income and expenses are taxable to or deductible
by its members. The Company's corporate subsidiaries are subject to income
taxes and account for deferred income taxes under the liability method which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax basis of assets and liabilities.

Revenue Recognition--Revenues from music services are recognized on a
straight-line basis over the term of the client contracts in the period
services are provided. Revenues for equipment sales and related installation
are recognized upon delivery or installation. Contracts are typically for a
five-year non-cancelable period with renewal options for an additional five
years. Fees received for services to franchisees are recognized as revenues in
the month services are provided.

Recently Issued Accounting Standards--In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 was amended in July 1999 by the issuance of Statement
of Accounting Standards No. 137 ("SFAS No. 137"), "Accounting for Derivative
Instruments and Hedging Activities- Deferral of the Effective Date of FASB
Statement No. 133-An Amendment of FASB No. 133." SFAS No. 137 defers the
implementation of SFAS No. 133 by one year. SFAS No. 133 was further amended in
June 2000 by the issuance of Statement of Accounting Standards No. 138 ("SFAS
No. 138"), "Accounting for Certain Derivative Instruments and Certain Hedging
Activities--An amendment of FASB Statement No. 133." SFAS No. 138 further
clarifies the provisions of SFAS No. 133. SFAS No. 133, as amended, is
effective for fiscal quarters beginning after January 1, 2001 for the Company
and its adoption will result in the recognition of a $1.6 million liability.

In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin No. 101, ("SAB 101"), "Revenue Recognition in
Financial Statements," as amended by SAB 101B, which is

F-8

MUZAK HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

effective no later than the year ended December 31, 2000. The bulletin
clarifies the SEC's views regarding recognition of revenue. The Company adopted
SAB 101 in the fourth quarter of 2000. The application of this guidance in SAB
101 did not have a material impact on the Company's results of operations.

Reclassifications--Certain prior year items have been reclassified to
conform with the fiscal 2000 presentation. Accounts receivable and advance
billings have been reduced by the amounts invoiced, but not received, in
advance of the service period. Book overdrafts have been reclassified as a
financing activity on the statement of cash flows.

2. Acquisitions

On October 7, 1998, the Company acquired certain assets and liabilities of
ACN for $66.8 million. The acquisition was accounted for using the purchase
method of accounting. Accordingly, the consideration paid was allocated based
on the estimated fair market value of the net assets acquired. The excess of
the consideration paid over the estimated fair market value of the net assets
acquired approximated $17.0 million and is being amortized using the straight-
line method over twenty years.

In order to complete the acquisition of ACN, the Company received a $8.4
million capital contribution, and issued notes payable to a related party of
$40.8 million to a member.

As discussed in Note 1, on March 18, 1999 Old Muzak merged with and into
ACN. Under the terms of the agreement, the Company paid total consideration of
$274.2 million, which is comprised of the following: $125.5 million cash
consideration, $114.9 million consideration in the tender offer and consent
solicitation for the 10% Senior Notes due 2003 of Old Muzak, $15.9 million for
debt repayment of Old Muzak outstanding obligations and assumed $17.9 million
of other obligations. In addition, at the time of the merger, the Company
repaid $41.7 million borrowed from ABRY Broadcast Partners by ACN in October
1998 in connection with the acquisition of the Company's independent
franchisees from the Predecessor Company and converted $0.7 million into voting
units of the Company.

In 1999, prior to the merger, the Company made the following acquisitions:

. On February 24, 1999, the Company acquired all of the outstanding stock
of Electro Systems for approximately $0.7 million. Electro Systems had
outstanding several promissory notes totalling $2.4 million as of the
acquisition date. Electro Systems was the Company's independent
franchisee located in Panama City, Florida.

The Company made twenty-one acquisitions between the merger on March 18,
1999 and December 31, 2000. The table below provides information regarding
these acquisitions (in millions, except for number of units).

Purchase Acquired
Date Price (1) Acquired Assets or Stock Acquired Business Markets
---- --------- ------------------------ ----------------- --------

April 1, 1999 $0.2 Net assets of Custom On Hold Audio Marketing Washington
Services Inc.
June 1, 1999 $6.9 Net assets of Advertising on Audio Marketing Georgia,
Hold, Inc. Florida,
North Carolina
June 1, 1999 $0.8 Net assets of CustomTronics Sound Business Music California
July 1, 1999 $0.9 Net assets of Penobscot Independent Maine
Broadcasting Corporation franchisee
August 1, 1999 $1.3 Net assets of LaBov and Beyond, Audio Marketing Indiana
Inc.
August 1, 1999 $3.5 Net assets of US West Audio Marketing National
Communications Services, Inc.'s
Please Hold Promotions

F-9

MUZAK HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Purchase Acquired
Date Price (1) Acquired Assets or Stock Acquired Business Markets
---- --------- ------------------------ ----------------- --------

September 1, 1999 $4.7 Stock of Broadcast International, Business Music National
Inc.
October 1, 1999 $10.3 Net assets of Midwest Systems and Business Music Illinois,
Services, Inc. Indiana,
Ohio, West
Virginia
November 1, 1999 $2.9 Net assets of A & D Music, Inc. Independent Oregon
franchisee
November 1, 1999 $7.9(2) Stock of Audio Environment, Inc. Independent California
and Background Music Broadcasters franchisee
Inc.
December 1, 1999 $13.2(3) Net assets of Mountain West Independent Utah, Idaho,
Audio, Inc. franchisee Washington
February 2, 2000 $0.4 Net assets of Quincy Broadcasting Independent Illinois
Company franchisee
February 2, 2000 $0.9 Net assets of General Audio Marketing Indiana,
Communications Corporation ("On Georgia,
Hold America") Florida,
Ohio
February 2, 2000 $0.4 Net assets of Texas Sound Co. Business Music Texas
Ltd.
February 24, 2000 $3.7 Stock of Telephone Audio Audio Marketing National
Productions, Inc.
March 24, 2000 $9.2(4) Stock of Vortex Sound Independent District of
Communications Company, Inc. franchisee Columbia
March 31, 2000 $1.6 Net assets of Dynamic Sound Independent Nevada,
franchisee California
March 31, 2000 $8.3 Stock of Muzak Houston, Inc. Independent Texas
franchisee
April 11, 2000 $1.0 Net assets of Audio Plus, Inc. Independent Ohio
franchisee
October 19, 2000 $9.4 Net assets of Ohio Sound & Music Independent Ohio
LLC franchisee
October 19, 2000 $0.6 Net assets of On Hold Audio Marketing Nevada
Communications, Inc.

- --------
(1) The purchase price does not include transaction costs for purposes of this
table. However, these costs have been included in the purchase price as
reflected in the financial statements.
(2) Total purchase price included 100 Class A units of the Company.
(3) The Company paid $3.1 million of the purchase price of Mountain West Audio
as of December 31, 1999. In February 2000, the Company paid the remaining
purchase price, which included 456 Class A units of the Company.
(4) Total purchase price included 802 Class A units of the Company.

The results of operations of the acquired companies are included in the
Company's consolidated statement of operations for the periods in which they
were owned by the Company.

The acquisitions were accounted for under the purchase method of accounting.
Accordingly, the consideration was allocated to the net assets acquired based
on the fair market values at the date of acquisition. The excess of purchase
price for each acquisition over the estimated fair value of the tangible and
identifiable intangible assets acquired approximated $158.2 million and is
being amortized over a period of twenty years on a straight-line basis.

F-10

MUZAK HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following presents the unaudited pro forma results assuming that the
acquisitions discussed above and financings (see Note 6) had occurred as of the
beginning of fiscal 2000 and 1999. These pro forma results are not necessarily
indicative of the results that will occur in future periods (in thousands).

Fiscal Year Ended
-------------------------
December 31, December 31,
2000 1999
------------ ------------
(Unaudited)

Revenues........................................... $197,205 $180,565
Loss from operations............................... (3,420) (1,037)
Net Loss........................................... (51,094) (42,387)

3. Property and Equipment

Property and equipment consists of the following (in thousands):

Useful Life December 31, December 31,
(Years) 2000 1999
----------- ------------ ------------

Equipment provided to subscribers.... 4-6 $ 99,305 $72,598
Capitalized installation labor....... 5 33,341 18,270
Equipment............................ 5-7 16,945 13,077
Other................................ 3-30 13,832 9,529
-------- -------
163,423 113,474
Less accumulated depreciation........ (48,852) (18,424)
-------- -------
$114,571 $95,050
======== =======

Depreciation of property and equipment was $30.7 million, $17.6 million,
$0.8 million, and $1.9 million for years ended December 31, 2000 and 1999, the
period from October 7, 1998 to December 31, 1998, and the period from January
1, 1998 to October 6, 1998, respectively.

4. Intangible Assets

Intangible assets consist of the following (in thousands):

Useful Life December 31, December 31,
(Years) 2000 1999
----------- ------------ ------------

Goodwill............................... 20 $158,172 $143,094
Income producing contracts............. 8-14 153,485 136,184
License agreements..................... 20 5,082 5,082
Deferred production costs.............. 10 3,166 1,584
Trademarks............................. 5 14,979 14,866
Non-compete agreements................. 1-7 24,604 16,401
Other.................................. 5-20 17,024 16,846
-------- --------
376,512 334,057
Less accumulated amortization.......... (51,968) (19,693)
-------- --------
$324,544 $314,364
======== ========

Amortization of intangible assets was $32.3 million, $18.8 million, $0.8
million, and $2.5 million for the years ended December 31, 2000 and 1999, the
period from October 7, 1998 to December 31, 1998, and for the period from
January 1, 1998 to October 6, 1998, respectively.

F-11

MUZAK HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. Accrued Expenses

Accrued expenses consist of the following (in thousands):

December 31, December 31,
2000 1999
------------ ------------

Accrued interest................................. $ 5,214 $ 7,245
Additional purchase price of Mountain West Audio,
Inc............................................. -- 10,200
Accrued compensation and benefits................ 2,382 2,323
Amounts payable to independent franchisees....... 2,337 1,818
Other............................................ 9,608 12,847
------- -------
$19,541 $34,433
======= =======

6. Debt

Debt obligations consist of the following (in thousands):

December 31, December 31,
2000 1999
------------ ------------

Revolving loan--Senior credit facility............. $ 4,000 $ 25,000
======== ========
Related Party Notes................................ $ 27,000 $ 30,000
======== ========
Long term debt:
Senior credit facility........................... $171,400 $165,000
Senior subordinated notes........................ 115,000 115,000
Senior discount notes............................ 50,139 44,214
Other............................................ 2,632 3,114
-------- --------
Total debt obligations........................... 339,171 327,328
Less current maturities.......................... (5,281) (4,197)
-------- --------
$333,890 $323,131
======== ========

Senior Credit Facility

In March 1999, the Company entered into a new senior credit facility
("Senior Credit Facility") consisting of: (i) a term loan facility in the
amount of $30.0 million payable in semi-annual installments until final
maturity on December 31, 2005 ("Term Loan A"); (ii) a term loan facility in the
amount of $105.0 million payable in semi-annual installments until final
maturity on December 31, 2006 ("Term Loan B") (together with Term Loan A, the
"Term Loans"); and (iii) a revolving loan (the "Revolving Loan") in an
aggregate principal amount of up to $35.0 million terminating on December 31,
2005. In July 1999, the Company amended the Senior Credit Facility which
increased the principal amount of the Term Loan B by $30.0 million to $135.0
million. On October 26, 1999, the lenders pre-approved various forms of junior
capital to be raised at a later date. The forms of junior capital approved
included permitted sponsor subordinated debt from specified entities and
additional senior subordinated debt. The Company received $20.0 million in
permitted sponsor subordinated debt on November 8, 1999 and $7.0 million in
permitted sponsor subordinated debt on November 24, 1999.

The Company was in violation of the total leverage and interest coverage
ratio covenants as of June 30, 2000 and obtained a waiver. In August 2000, the
Company amended the Senior Credit Facility as follows: (i) increased the
additional secured indebtedness permitted from $2.5 million to $9.0 million and
decreased the

F-12

MUZAK HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

additional unsecured indebtedness permitted from $5.0 million to $1.0 million;
(ii) amended the interest coverage ratio for the quarters ended June 30, 2000,
September 30, 2000, and December 31, 2000 from 1.80x to 1.65x; and
(iii) increased the total capital expenditures permitted for fiscal 2000 from
$32.0 million to $38.0 million. In connection with each permitted acquisition
of a Muzak independent franchisee, the amount of permitted consolidated capital
expenditures for the 12 month period after the acquisition can be increased as
provided in the Senior Credit Facility.

The Senior Credit Facility includes a provision that enabled the Company on
no more than three occasions prior to December 31, 2000, to increase either the
revolving loan or the Term Loan B amounts by an amount not in excess of $50
million. In accordance with this provision, on December 29, 2000, the Company
increased its borrowings under the Term Loan B of the Senior Credit Facility by
$10.0 million, for a total amount borrowed under Term Loan B of $145.0 million.
The Company had $30.1 million of borrowing availability under its credit
agreement as of December 31, 2000. Availability under the revolving credit
facility has been reduced by outstanding letters of credit of $0.9 million.

The Senior Credit Facility is guaranteed by the Company and certain 100%
owned subsidiaries. The non-guarantor subsidiary is minor and the consolidated
amounts in the Company's financial statements would be representative of the
combined guarantors. The Senior Credit Facility contains restrictive covenants
including maintenance of interest senior and total leverage and fixed charge
ratios and various other restrictive covenants which are customary for such
facilities. In addition, the Company is generally prohibited from incurring
additional indebtedness, incurring liens, paying dividends or making other
restricted payments, consummating asset sales, entering into transactions with
affiliates, merging or consolidating with any other person or selling
assigning, transferring, leasing, conveying, or otherwise disposing of assets.
These conditions, with the exception of the capital expenditure covenant, were
satisfied as of December 31, 2000. The Company exceeded its capital
expenditures covenant of $41.3 million by $1.3 million in 2000. On February 26,
2001, the Company received a waiver from the requisite lenders with respect to
the capital expenditures covenant.

Indebtedness under the Term Loan A and the Revolving Loans bear interest at
a per annum rate equal to the Company's choice of (i) the Alternate Base Rate
(which is the highest of prime rate and the Federal Funds Rate plus .5%) plus a
margin ranging from 1.00% to 2.00% or (ii) the offered rates for Eurodollar
deposits ("LIBOR") of one, two, three, or six months, as selected by the
Company, plus a margin ranging from 2.0% to 3.0%. Margins, which are subject to
adjustment based on the changes in the Company's ratio of consolidated total
debt to EBITDA (i.e., earnings before interest, taxes, interest, depreciation,
amortization and other non cash charges) were 2.0% in the case of Alternate
Base Rate and 3.0% in the case of LIBOR as of December 31, 2000. Indebtedness
under the Term Loan B bears interest at a per annum rate equal to the Company's
choice of (i) the Alternate Base Rate (as described above) plus a margin of
2.5% or (ii) LIBOR of one, two, three, or six months, as selected by the
Company plus a margin of 3.5%. The weighted average rate of interest on the
Senior Credit Facility at December 31, 2000 was 10.2%.

Senior Subordinated Notes

On March 18, 1999, Muzak LLC together with its wholly owned subsidiary,
Muzak Finance Corp., co-issued $115.0 million in principal amount of 9 7/8%
Senior Subordinated Notes ("Senior Notes") which mature on March 15, 2009.
Interest is payable semi-annually, in arrears, on March 15 and September 15 of
each year. The Senior Notes are general unsecured obligations of Muzak LLC and
Muzak Finance and are subordinated in right of payment to all existing and
future Senior Indebtedness of Muzak LLC and Muzak Finance. The Senior Notes are
guaranteed by the Company, MLP Environmental Music LLC, Business Sound Inc., BI
Acquisition LLC, Audio Environments Inc., Background Music Broadcasters Inc.,
Muzak Capital Corporation, Telephone Audio Productions Inc., Muzak Houston
Inc., Vortex Sound Communications

F-13

MUZAK HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company Inc., and Music Incorporated. Muzak LLC's non-guarantor subsidiary is
minor and the consolidated amounts in the Company's financial statements would
be representative of the combined guarantors financial statements. The
indenture governing the Senior Notes prohibits Muzak LLC from making certain
payments such as dividend and distributions of their capital stock, repurchases
or redemptions of their capital stock, and investments (other than permitted
investments) unless certain conditions are met by Muzak LLC. Before March 15,
2002, the issuers may redeem up to 35% of the aggregate principal amount of the
Notes originally issued under the indenture at a redemption price of 109.875%
of the aggregate principal amount so redeemed, plus accrued and unpaid interest
to the redemption date, with the net proceeds of one or more equity offerings
if certain conditions are met. After March 15, 2004, the issuers may redeem all
or part of the Notes at a redemption price equal to 104.938% of the principal
which redemption price declines to 100% of the principal amount in 2007.

Senior Discount Notes

On March 18, 1999, the Company together with its wholly owned subsidiary
Muzak Holdings Finance Corp., co-issued $75.0 million in principal amount at
maturity, or $39.9 million in accreted value on the issue date, of 13% Senior
Discount Notes (the "Senior Discount Notes") due March 2010. Cash interest on
the Senior Discount Notes does not accrue and is not payable prior to March 15,
2004. The Senior Discount Notes were issued at a substantial discount from
their principal amount at maturity. Until March 15, 2004, the Senior Discount
Notes will accrete in value such that the accreted value on March 15, 2004 will
equal the principal amount at maturity of the Senior Discount Notes. From and
after March 15, 2004, interest on the Senior Discount Notes will accrue at a
rate of 13% per annum. Interest will be payable semi-annually in arrears on
each March 15 and September 15, commencing September 15, 2004, to holders of
record of the Senior Discount Notes at the close of business on the immediately
preceding March 1 and September 1.

Floating Rate Notes

In January 2000, the Company entered into an indenture for up to $50.0
million Senior Subordinated Floating Rate Notes (the "Floating Rate Notes").
The Floating Rate Notes were redeemed at 101.50% on October 19, 2000.

Indebtedness under the Floating Rate Notes bore interest at a rate equal to
3 month LIBOR plus a margin of 5.0% for the period from January 2000 through
July 31, 2000, and at a rate of 3 month LIBOR plus a margin of 7.5% for the
period from August 1, 2000 through October 19, 2000.

Related Party Notes

From July 1, 1999 through November 24, 1999, the Company borrowed an
aggregate amount of $30.0 million, from MEM Holdings LLC in the form of Junior
Subordinated Unsecured Notes (the "ABRY Notes"). MEM Holdings is a company that
owns 62% of the voting interests in the Parent. ABRY Broadcast Partners III and
ABRY Broadcast Partners II are the beneficial owners of MEM Holdings. The
Company repaid a $3.0 million ABRY Note with the proceeds from the private
placement of preferred membership units.

The ABRY Notes mature on June 30, 2007, at which time principal and accrued
interest are due. Interest accrues at 15% per annum; any accrued interest not
paid as of March 31, June 30, September 30 or December 31 will bear interest at
15% per annum until such interest is paid or extinguished. The ABRY Notes are
junior and subordinate to payments for the Senior Credit Facility, and the
Senior Notes. At any time, all of the ABRY Notes may be converted into class A
units of the Company. If the ABRY Notes have not been repaid in full as of May,
2001, the ABRY Notes will automatically be converted into class A units of the
Company. Proceeds from the ABRY Notes were used to fund operations and
acquisitions.

F-14

MUZAK HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In order to complete the acquisition of the Predecessor Company, the Company
issued Notes payable to a related party for $40.8 million in 1998. The Company
repaid $41.7 million outstanding under this note at the time of the merger and
converted $0.7 million into Class A units of the Company.

Other Debt

Muzak purchased Electro Systems on February 24, 1999. Electro Systems has
several promissory notes outstanding, totaling $2.4 million as of the
acquisition date. All of the notes, with the exception of one, bear interest at
9.887% and mature in November 2016. Electro Systems 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.

Annual Maturities

Annual maturities of long-term debt obligations are as follows (in
thousands):

2001............................................................... $ 5,281
2002............................................................... 6,779
2003............................................................... 7,861
2004............................................................... 27,844
2005............................................................... 47,101
Thereafter......................................................... 275,305

Total interest paid by the Company on all indebtedness was $36.5 million,
$14.1 million, $2.0 thousand, and $2.9 million, for the years ended December
31, 2000 and 1999, the period from October 7, 1998 through December 31, 1998,
and for the period from January 1, 1998 through October 6, 1998, respectively.

Interest Rate Protection Programs

During April 1999, the Company entered into a four year interest rate swap
agreement in which the Company effectively exchanged $100.0 million of floating
rate debt at three month LIBOR for 5.59% fixed rate debt. The effect of this
interest rate protection agreement on the operating results of the Company was
to increase interest expense by $67 thousand for the years ended December 31,
1999. The Company terminated this agreement on January 28, 2000 and received
approximately $4.4 million for this agreement. The proceeds are being recorded
an as adjustment to interest expense over the term of the new interest rate
swap agreement.

On January 28, 2000, the Company entered into a new interest rate swap
agreement in which the Company effectively exchanged $100.0 million of floating
rate debt at three month LIBOR for 7.042% fixed rate debt. The interest rate
swap agreement terminates on April 19, 2002. This agreement is designated as a
hedge of interest rates, and the differential to be paid or received on the
swap is accrued as an adjustment to interest expense as interest rates change.
The Company is exposed to credit loss in the event of nonperformance by the
other party to the swap agreement. However, the Company does not anticipate
nonperformance by the counterparty. The effect of this interest rate protection
agreement on the operating results of the Company was to increase interest
expense by $0.4 million for the year ended December 31, 2000.

Fair Value of Financial Instruments

The estimated fair values of the Company's debt as of December 31, 2000 and
December 31, 1999 were $348.0 million and $334.5 million, respectively. The
fair value of the Senior Notes is based upon quoted market price. The fair
value of the other long-term debt of the Company approximates the carrying
value.

F-15

MUZAK HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The fair value of the interest rate swap agreement was approximately ($1.6)
million as of December 31, 2000. The fair values of interest rate swaps 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. Mandatorily Redeemable Preferred Units

On October 18, 2000, the Company completed a private placement of series A
preferred membership units ("preferred units") and Class A common units for a
total of $85 million. The Company used the proceeds (i) to repay the Revolving
Loan in full, (ii) to repay the Floating Rate Notes, (iii) to repay $3.0
million of the 15% junior subordinated unsecured notes, and (iv) to consummate
two acquisitions.

In connection with this transaction, the Company issued 85,000 preferred
units and approximately 5,489 Class A units to investors pursuant to a
Securities Purchase Agreement. The outstanding preferred units are entitled to
receive a preferential return equal to 15% per annum, which accrues and is
compounded quarterly, before any distributions are made with respect to any
other common or preferred units.

The Company has the option to redeem the preferred units under the terms of
the Securities Purchase Agreement, at any time after a qualified initial public
offering or change of control or after October 18, 2003, in whole or in part,
at an amount equal to the unreturned capital contribution of the preferred
units plus accrued preferential returns plus a prepayment premium. For
redemptions upon a qualified initial public offering or change of control, the
prepayment premium may be up to 5% of an amount based on the amount distributed
in the redemption and for redemptions after October 18, 2003, the prepayment
premium may be up to 6% of such amount.

The holders of the preferred units have the option to cause the Company to
redeem their preferred units under the terms of the Securities Purchase
Agreement at any time after October 17, 2011 or upon a change of control. In
addition, upon a change of control, the holders of the preferred units have the
option to cause the Company to redeem all or any portion of the purchased Class
A units under the terms of the Securities Purchase Agreement. All of the
redemptions at the option of the holders of the preferred units are subject to
a prepayment premium of up to 5% based on the amount distributed in the
redemption.

For all of the foregoing redemptions, whether at the option of the Company
or the holders of the preferred units, the Company may only make such
redemption if it does not violate the terms of any debt agreements of the
Company or of which the Company is a guarantor, including the indenture
governing the Senior Discount Notes, the indenture governing the Senior Notes
and the Senior Credit Agreement.

8. Lease Commitments

The Company is the lessee under various long-term operating and capital
leases for machinery, equipment, buildings, and vehicles for periods ranging
from 2 years to 15 years. The Company has also entered into various agreements
to lease transponders to transmit music programs via direct broadcast
satellite. The majority of these leases contain renewal provisions.

F-16

MUZAK HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At December 31, 2000, future minimum lease payments under operating and
capital leases are as follows (in thousands):

Fiscal Year Ending Capital Operating
------------------ ------- ---------

2001...................................................... $2,692 $ 7,637
2002...................................................... 2,084 7,981
2003...................................................... 1,006 7,361
2004...................................................... 483 6,835
2005...................................................... 334 3,894
Later Years............................................... -- 24,742
Less Imputed Interest..................................... (747) --
Less Executory Cost....................................... (570) --
------ -------
$5,282 $58,450
====== =======

Rental expense under operating leases was $3.8 million, $6.3 million, $94
thousand, and $0.2 million for the years ended December 31, 2000, and 1999, the
period from October 7, 1998 through December 31, 1998, and for the period from
January 1, 1998 through October 6, 1998, respectively.

9. Employee Benefit Plans

During 2000, the Company maintained a defined contribution plan.
Substantially all employees are covered under a plan whereby eligible employees
may contribute up to 14% of their compensation per year, subject to certain tax
law restrictions. The Company makes matching contributions of 60% of the first
6% of the total base salary contributed by the employee each year. Participants
are immediately vested in their contributions as well as the employer's
contributions.

Plan expense was $1.4 million, $0.8 million, $55 thousand, and $23 thousand
for the years ended December 31, 2000 and 1999, the period from October 7, 1998
to December 31, 1998 and for the period from January 1, 1998 to October 6,
1998, respectively.

10. Income Taxes

The provision (benefit) for income taxes is as follows (in thousands):

Predecessor Company
-------------------
Period From Period From
October 7, 1998 January 1, 1998
Year Ended Year Ended Through Through
December 31, 2000 December 31, 1999 December 31, 1998 October 6, 1998
----------------- ----------------- ----------------- -------------------

Current tax:
Federal............... $ -- $ 8 $-- $--
State................. 29 10 -- 8
------- ----- ---- ----
29 18 -- 8
Deferred tax (benefit):
Federal............... (937) (384) -- --
State................. (174) (73) -- --
------- ----- ---- ----
(1,111) (457) -- --
------- ----- ---- ----
Total............... $(1,082) $(439) $-- $ 8
======= ===== ==== ====

F-17

MUZAK HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's effective tax rate differs from the statutory federal tax rate
for the following reasons:

Federal tax (benefit) of
statutory rates........ $(15,903) $(7,761) $(401) $(1,197)
State income taxes...... (94) (40) -- --
Goodwill and
nondeductible
expenses............... 96 30 -- 467
Income earned by
partnership not Subject
to corporate income
tax.................... 14,819 7,332 401 --
Increase in valuation
allowance.............. -- -- -- 738
Other................... -- -- -- --
-------- ------- ----- -------
$ (1,082) $ (439) $ 0 $ 8
======== ======= ===== =======

The components of the net deferred tax (liability) at December 31 are as
follows (in thousands):

2000 1999
------- -------

Net operating loss carryforwards............................ $ 929 $ 937
Property and equipment...................................... (179) (150)
Intangible assets........................................... (5,552) (2,714)
Capitalized commissions..................................... (159) (217)
Other....................................................... 119 38
------- -------
Net deferred tax liability (included in other long-term
liabilities)............................................... $(4,842) $(2,106)
======= =======

11. Related Party Transactions

During October 1998, the Company entered into a Management and Consulting
Services Agreement, as amended and restated as of March 18, 1999 (the
"Management Agreement") with ABRY Partners which provides that the Company will
pay a management fee as defined in the Management Agreement. There were no fees
incurred under the agreement during 1999 and for the period from October 7,
1998 to December 31, 1998. During 2000, the Company incurred fees of $0.3
million under this agreement. Either the Company or ABRY Partners, with the
approval of the Board of Directors of the Parent, may terminate the Management
Agreement by prior written notice to the other.

During fiscal 1999, the Company borrowed $30.0 million from MEM Holdings
under junior subordinated notes. The Company repaid the $3.0 million ABRY Note
during 2000. See Note 6 for a description of this related party note.

12. Muzak Holdings Finance Corp.

Muzak Holdings Finance Corp. is a co-issuer of the Senior Discount Notes and
had no operating activities during the twelve months ended December 31, 2000.

13. Members' Interest

The Company has issued two classes of equity units: Class A units ("Class A
units") and Class B units ("Class B Units") (collectively, the "Units"). Each
class of units represents a fractional part of the membership units of the
Company.

F-18

MUZAK HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Voting Units

The Company has authorized and issued Class A and Class A-1 units (Class A-1
Units). The Class A-1 Units represent a class of membership interests in the
Company and have the rights and obligations specified in the Company's Third
Amended and Restated Limited Liability Company Agreement. Each Class A and A-1
Unit is entitled to voting rights equal to the percentage that such units
represent of the aggregate number of outstanding Class A and Class A-1 Units.
Each Class A and Class A-1 Unit accrues a preferred return annually on the
capital value of such unit at a rate of 15% per annum. The Company cannot pay
distributions (other than tax distributions or distributions related to the
mandatorily redeemable preferred stock) in respect of other classes of
securities (including distributions made in connection with a liquidation)
until the preferred return and capital value of the Class A Units and Class A-1
Units are paid to each holder thereof. In the event any residual value exists
after other classes of membership interests receive their respective
priorities, holders of Class A and Class A-1 Units are entitled to participate
pro rata with other holders of common units in such residual value. As of
December 31, 2000, the Company had 87,982 Class A units outstanding and 8,928
Class A-1 units outstanding.

Non Voting Units

The Class B units are non-voting equity interests in the Company which are
divided into four subclasses, Class B-1 units, Class B-2 units, Class B-3
units, and Class B-4 units. Each holder of class B units is entitled to
participate in Last Priority Distributions, if any, provided that Priority
Distributions on all voting interests have been paid in full. The Company is
authorized to issue class B-5 units, however no B-5 units are outstanding as of
December 31, 2000. The class B-1 units, B-2 units, and B-3 units have a vesting
period of five years, and the class B-4 units vest immediately upon issuance.
Upon a change in control, as defined, all of these units become fully vested
and exercisable. As of December 31, 2000 and 1999, the Company had 3,261 and
2,410 B-1 units outstanding, respectively. As of December 31, 2000 and 1999,
the Company had 3,269 and 2,429 B-2 units outstanding, respectively. As of
December 31, 2000 and 1999, the Company had 3,278 and 2,441 B-3 units
outstanding, respectively. As of December 31, 2000 and 1999, the Company had
3,002 B-4 units outstanding.

Pursuant to the terms of certain individual employment agreements, the
Company has provided key employees with equity units of the Company. In the
event of employee termination, the Company retains the right to repurchase
unvested units at the original purchase price. Units vest over five years. At
December 31, 2000, 9,808 units of restricted equity are subject to the
repurchase provision. Of this amount, 1,244 units are vested.

14. 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

F-19

MUZAK HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and its owned operations as well as licensed independent franchisees to BMI.
The period from which such "reasonable" license fees are payable covers the
period January 1, 1994 to December 31, 2000, and likely several years
thereafter. BMI contends that those fee levels understate reasonable fee levels
by as much as 100%. The Company vigorously contests BMI's assessment. The
eventual court ruling setting final fees for the period covered will require
retroactive adjustment, upward or downward, likely back to January 1, 1994, and
possibly will also entail payment of pre-judgment interest. Discovery in the
proceeding has commenced and is not yet completed. A trial date has not been
set.

The industry wide agreement between business music providers and ASCAP
expired in May 1999. Negotiations between American Society of Composers,
Authors and Publishers ("ASCAP") and the Company began in June 1999, and the
Company has continued to pay ASCAP royalties at the 1999 rates.

Other Commitments

As of December 31, 2000, the Company has approximately $33.3 million in
outstanding capital expenditure commitments covering a five year period. The
Company, as discussed in Note 7 above, is the lessee under various operating
and capital leases for equipment, vehicles, satellite capacity, and buildings.

15. Quarterly Financial Data (Unaudited): (In Thousands)

The quarterly data below is based on the Company's fiscal periods.

Fiscal 2000
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------

Net Sales.......................... $ 43,695 $ 48,016 $ 49,859 $ 50,578
Loss from operations before
extraordinary item................ (11,241) (14,409) (12,621) (10,922)
Net Loss........................... (11,241) (14,409) (12,621) (12,340)

Fiscal 1999
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------

Net Sales.......................... $ 12,151 $ 35,518 $ 40,255 $ 42,092
Net Loss........................... (816) (6,926) (8,550) (9,920)

Fiscal 1998
---------------------------
Period From October 7, 1998
Through December 31, 1998
---------------------------

Net Sales........................................ $5,914
Net Loss......................................... (1,002)

In the first quarter of 1999, the Company misreported a $0.7 million
extraordinary gain on the extinguishment of debt related to the conversion of
certain related party debt and associated interest and goodwill by the same
amount related to the Old Muzak acquisition. The effect of the adjustment was
to eliminate the extraordinary gain and reduce goodwill by $0.7 million for the
quarter ended March 31, 1999.

Muzak experiences slight seasonality in its equipment and related services
revenues and costs of revenues resulting primarily from a significant retail
client base which constructs and opens new retail stores in time for the fourth
quarter holiday season. Accordingly, Muzak experiences higher equipment and
related services revenues and costs of goods in the third and fourth quarters,
as opposed to the first half of the year, as a result of the installation and
servicing of these new retail locations.

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