<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 17, 2000
REGISTRATION NO. 333-30188
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE MTVi GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7375 13-4099684
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
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THE MTVi GROUP, INC.
770 BROADWAY
NEW YORK, NEW YORK 10003
(212) 654-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
NICHOLAS BUTTERWORTH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE MTVi GROUP, INC.
770 BROADWAY
NEW YORK, NEW YORK 10003
(212) 654-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
MICHAEL D. FRICKLAS
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
VIACOM INC.
1515 BROADWAY
NEW YORK, NEW YORK 10036
(212) 258-6000
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STEPHEN T. GIOVE KENNETH A. LEFKOWITZ DAVID J. GOLDSCHMIDT
SHEARMAN & STERLING HUGHES HUBBARD & REED LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
599 LEXINGTON AVENUE ONE BATTERY PARK PLAZA FOUR TIMES SQUARE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10036-6522
(212) 848-4000 (212) 837-6000 (212) 735-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be
used in connection with a United States and Canadian offering of the
registrant's Class A common stock and one to be used in connection with a
concurrent international offering of Class A common stock. The U.S. prospectus
and the international prospectus will be identical in all respects except that
they will have different front cover pages. The form of the U.S. prospectus is
included herein and is followed by the alternate front cover page to be used in
the international prospectus. The form of the front cover page of the
international prospectus is labeled "Alternate Cover Page for International
Prospectus." Final forms of each prospectus will be filed with the Securities
and Exchange Commission under Rule 424(b) of the General Rules and Regulations
under the Securities Act of 1933.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS (Subject to Completion)
Issued March 17, 2000
Shares
mtvi group logo
CLASS A COMMON STOCK
------------------------
THE MTVi GROUP, INC. IS OFFERING SHARES OF ITS CLASS A COMMON STOCK. THIS IS OUR
INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND
$ PER SHARE.
FOLLOWING THIS OFFERING, WE WILL HAVE TWO CLASSES OF AUTHORIZED COMMON STOCK,
CLASS A COMMON STOCK AND CLASS B COMMON STOCK. THE RIGHTS OF THE HOLDERS OF
CLASS A COMMON STOCK AND CLASS B COMMON STOCK ARE IDENTICAL, EXCEPT WITH RESPECT
TO VOTING AND CONVERSION.
------------------------
WE HAVE APPLIED TO HAVE OUR CLASS A COMMON STOCK APPROVED FOR LISTING ON THE
UNDER THE SYMBOL " ."
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INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
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PRICE $ A SHARE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
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Per Share..................................... $ $ $
Total......................................... $ $ $
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We have granted the underwriters the right to purchase up to an additional
shares of our Class A common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2000.
------------------------
MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS & CO. INC. MERRILL LYNCH & CO.
UTENDAHL CAPITAL PARTNERS, L.P. WIT SOUNDVIEW
, 2000
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................... 1
Risk Factors.......................... 7
Special Note Regarding Forward-Looking
Statements.......................... 19
Use of Proceeds....................... 20
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Selected Financial Data............... 23
Unaudited Pro Forma Consolidated
Condensed Financial Statements...... 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 29
Corporate History and
Reorganization...................... 35
Business.............................. 36
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Management............................ 52
Certain Relationships and Related
Transactions........................ 58
Principal Stockholders................ 66
Description of Capital Stock and
Partnership Units................... 68
Shares Eligible for Future Sale....... 73
Material United States Federal Tax
Consequences to Non-United States
Holders............................. 74
Underwriters.......................... 77
Legal Matters......................... 81
Experts............................... 81
Where You Can Find More Information... 82
Index to Consolidated Financial
Statements.......................... F-1
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of Class A common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of Class A common stock.
------------------------
Unless the context otherwise requires, in this prospectus:
-- "MTVi Group" refers to The MTVi Group, Inc. and, where applicable,
its wholly owned subsidiary upon completion of this offering,
Mischief New Media, Inc.;
-- "Partnership" refers to The MTVi Group, L.P. and its subsidiaries,
including all predecessor companies and other entities which operated
the business currently conducted by the Partnership;
-- "Viacom" refers to Viacom International Inc.;
-- "Viacom affiliates" or "Viacom and its affiliates" excludes MTVi
Group, unless otherwise indicated;
-- "MTV Networks" refers to MTV Networks, a division of Viacom;
-- "Liberty Digital" refers collectively to Liberty Digital Inc.,
formerly known as TCI Music, Inc., The Box Worldwide, Inc., Paradigm
Music Ent. Co., and SonicNet, Inc.;
-- "We," "us" and "our" refer collectively to MTVi Group and the
Partnership or either of these, as the case may be.
------------------------
UNTIL , 2000, WHICH IS 25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING, ALL DEALERS THAT BUY, SELL OR TRADE OUR CLASS A COMMON STOCK, WHETHER
OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully, including the "Risk Factors"
section and the consolidated financial statements and the notes to those
statements. MTVi Group is a holding company whose only asset after completion of
the offering will be a % equity interest in the Partnership. The only
business of MTVi Group will be to act as the sole general partner of the
Partnership. The business described in this prospectus is conducted by the
Partnership and its subsidiaries.
OUR COMPANY
We are the world's leading Internet music entertainment company, with 22
music website destinations around the world. Through our network of websites, we
deliver diverse and highly personalized music and music-related experiences to a
vibrant community of music fans. We were developed by MTV Networks, a leading
global media and entertainment business that has built its success on creating
strong brands and delivering compelling music content to more than 300 million
television homes in 80 countries around the world. We are positioning our
network of websites as a comprehensive collection of branded music destinations
with content that targets specific demographic segments. By amassing these
consumers, we believe that we are a powerful value-creating vehicle for music
enthusiasts, advertisers and commerce providers, as well as artists and record
companies. We reported revenues of $18.2 million and a net loss of $41.1 million
for the year ended December 31, 1999.
Our websites lead the online music entertainment category based on
consolidated reach among U.S. Internet users, according to Media Metrix, Inc.
research. We also have a substantial international presence through our 11
international websites in Japan, Europe and Latin America that offer content and
services customized to suit these regional markets. In the aggregate, our
existing websites, generated more than 140 million page views in January 2000.
Our primary online properties include:
-- MTV.com--a website that utilizes the MTV brand name to target the
13-24 year old audience, and was the #1 music entertainment site in
1999 based on average monthly unique visitors, as reported by Media
Metrix;
-- VH1.com--a website that utilizes the VH1 brand name to target the
25-plus age group; and
-- SonicNet.com -- a comprehensive music network, with content in 11
different genres aimed at all ages.
Our websites provide a variety of music-related content and community
features, including:
-- music and artist news, features, reviews, information, interviews and
chats;
-- streaming radio with both user-customized and professionally
programmed formats;
-- live and on-demand webcast performances, selected on-demand music
videos and exclusive video programming;
-- integrated online and on-air chats, polling and programming such as
game shows;
-- audience message boards;
-- coverage of local music scenes; and
-- free e-mail accounts.
We also offer users an array of e-commerce opportunities, including CDs,
digital music downloads, tickets, and MTV, VH1, SonicNet and other on-air
franchise branded merchandise.
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We believe that we have a unique set of strengths which positions our
network of websites to continue to lead the online music industry and makes us a
powerful value-creating vehicle for music enthusiasts, advertisers and commerce
providers, as well as artists and record companies. We consider our relationship
with MTV Networks to be our most important strength because of the brand
awareness, cross promotion, convergence programming opportunities and expertise
and relationships it affords us. MTV Networks has contractually committed to
vigorously promote us on its television networks through advertising, VJ
mentions, text on screen and other support, for no cash consideration. The value
of this on-air promotion will be at least $100 million, spread over a five-year
period ending July 15, 2004. MTV Networks has indicated that it intends to
provide us with at least an additional $25 million of on-air promotion over this
period, although it is not legally obligated to do so.
We believe that the highly personalized and content-rich experience
available on our network of websites is likely to increase the frequency of
visits among our users, as well as the duration of each visit. Our broad
international reach enables us to target specific regional audiences and to take
advantage of the growth in these markets.
We are pursuing a strategy consisting of the following key elements:
-- offer the most compelling content;
-- build the strongest brands through extensive cross-promotion;
-- develop and grow multiple revenue streams;
-- develop innovative application platforms; and
-- capitalize on strategic relationships.
As described more fully in "Risk Factors," we face a variety of obstacles
in implementing our strategy, including the failure to develop compelling
content that is attractive to our target audience, the potential decline in the
strength of our brands and competition from traditional and online media
companies and record labels. In addition, our relationship with MTV Networks
could lead to conflicts of interest and may result in limitations on our
business, including significant restrictions on our ability to use the MTV and
VH1 trademarks, logos and programming licensed to us by MTV Networks.
RECENT DEVELOPMENTS
In March 2000, we completed the following transactions:
- We acquired Mischief New Media, an online music business. Through this
acquisition, we have added four websites which provide users with
personalized music and entertainment information and related news and
services. In addition, Mischief New Media is creating several new
applications which will be launched as part of our SonicNet service.
- We entered into a two-year strategic alliance with House of Blues
Entertainment, Inc. to produce and co-brand pay-per-view live music
events. Under the agreement, House of Blues provides us with equity and
cash consideration in exchange for promotion and as a non-refundable
advance on e-commerce commissions.
- We purchased an equity interest in Beatnik, Inc. and received a
royalty-free license to use some of Beatnik's technology and song
re-mixes. Beatnik has committed to minimum advertising purchases on our
network of websites over two years.
------------------------
Our principal executive offices are located at 770 Broadway, New York, New
York 10003 and our telephone number is (212) 654-9000. Our corporate website
address is http://www.mtvigroup.com. The information contained in our corporate
website and the other websites described in this prospectus is not part of this
prospectus.
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ORGANIZATION
The following sets forth our simplified corporate structure as of the
completion of this offering:
MTVi Group Flow Chart
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(1) % equity interest and % voting interest if the underwriters'
over-allotment options are exercised in full.
(2) % equity interest and % voting interest if the underwriters'
over-allotment options are exercised in full. The public stockholders'
percentages include the shares issued in connection with our acquisition of
Mischief New Media and the employment by us of its sole shareholder.
(3) % equity interest if the underwriters' over-allotment options are
exercised in full.
(4) % equity interest if the underwriters' over-allotment options are
exercised in full.
(5) % equity interest if the underwriters' over-allotment options are
exercised in full.
For more information regarding our corporate history and organization, see
"Corporate History and Reorganization" and "Certain Relationships and Related
Transactions."
3
<PAGE> 8
THE OFFERING
Unless otherwise indicated, all information in this prospectus assumes that
the underwriters do not exercise their over-allotment options and that
optionholders do not exercise any outstanding options. We refer you to
"Description of Capital Stock and Partnership Units" for a discussion of the
terms of our common stock and partnership units.
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Class A common stock offered:
U.S. offering........................... shares
International offering.................. shares
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Total................................ shares
-------------
-------------
Common stock to be outstanding after this
offering:
Class A common stock(1)................. shares(2)(3)
Class B common stock(1)................. shares
-------------
Total common stock................... shares(2)(3)
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-------------
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Estimated net proceeds from
this offering................. $
Use of proceeds............... By MTVi Group: To acquire
partnership units, including the sole general
partner unit, representing a % equity
interest in the Partnership, or %, if the
underwriters' over-allotment options are
exercised in full.
By the Partnership: For advertising, promotion
and developing its brands and compelling music
content and other general corporate purposes,
including working capital, technology
enhancements, international expansion and
possible complementary acquisitions.
Dividend policy............... We do not expect to pay any cash dividends or
distributions for the foreseeable future.
Voting rights................. Except with respect to voting and conversion
rights, the rights of the holders of Class A
common stock and Class B common stock are
identical. Holders of Class A common stock are
entitled to one vote per share. A holder of
Class B common stock is entitled to a number of
votes per share based on the number of shares
of outstanding Class B common stock and
partnership units ex-
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(1) Shares of Class B common stock are convertible into shares of Class A common stock at any time
by the holder thereof on a one-for-one basis. Partnership units owned by Viacom affiliates and
Liberty Digital are also exchangeable for shares of Class A common stock at any time on a
one-for-one basis. If, immediately following the offering, Viacom converted its Class B common
stock and its affiliates exchanged all of their partnership units for Class A common stock, and
Liberty Digital exchanged all of its partnership units for Class A common stock, Viacom and its
affiliates, would own approximately % of the outstanding Class A common stock, or % if
the underwriters' over-allotment options are exercised in full, and Liberty Digital would own
approximately % of the outstanding Class A common stock, or % if the underwriters'
over-allotment options are exercised in full.
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(2) Excludes options to purchase shares of Class A common stock granted under our stock option plan.
As of , 2000, options for shares at a weighted average exercise
price of $ per share were outstanding under the stock option plan.
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(3) The number of shares of Class A common stock to be outstanding after the offering includes
shares to be issued to the sole shareholder of Mischief New Media Inc. in exchange
for the partnership units issued in connection with our acquisition of Mischief New
Media and the employment by us of its sole shareholder. We expect this exchange to occur
simultaneously with the completion of this offering.
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changeable for Class A common stock owned by
that holder and its affiliates. The result of
this formula is that Viacom, as the sole holder
of Class B common stock, is entitled to
votes for each share of Class B common stock
and each partnership unit held by Viacom and
its affiliates.
Holders of Class A common stock and Class B
common stock generally will vote together as a
single class on all matters, including the
election of the directors, presented to the
stockholders for their vote or approval.
Upon completion of this offering, Viacom and
its affiliates will own all of the issued and
outstanding Class B common stock and
approximately % of the outstanding
partnership units and, accordingly, will
control approximately % of the combined
voting power of all shares of our Class A and
Class B voting stock.
Proposed trading symbol.......
Risk factors.................. You should consider the risks involved in an
investment in our Class A common stock. We
refer you to "Risk Factors."
5
<PAGE> 10
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary financial data of the Partnership and its predecessor and the
pro forma financial data of MTVi Group presented below should be read together
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and have been derived from the audited financial statements and
the accompanying notes of the Partnership included elsewhere in this prospectus.
The summary unaudited pro forma financial data is derived from, and should be
read together with "Unaudited Pro Forma Consolidated Condensed Financial
Statements" and the accompanying notes included elsewhere in this prospectus.
The pro forma data may not necessarily reflect the operating results or
financial position that would have been achieved had the formation of the
Partnership, this offering and all other transactions been completed at the
dates or for the periods indicated or of the results that may be obtained in the
future.
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PRO FORMA
MTVi
GROUP(1)
------------
YEAR
ENDED
YEAR ENDED OR AT DECEMBER 31, DECEMBER 31,
------------------------------- ------------
1997 1998 1999 1999
------- -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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STATEMENT OF OPERATIONS DATA:
Total revenues.............................................. $ 5,778 $ 8,837 $ 18,247 $ 20,169
Operating income (loss)..................................... (6,933) (11,800) (44,158) (71,083)
Minority interest(2)........................................ -- -- --
Net income (loss)........................................... (4,298) (7,316) (41,100)
Net income (loss) per common share:
Basic and diluted(3)...................................... -- -- -- $
BALANCE SHEET DATA:
Total assets................................................ $ 1,884 $ 7,030 $145,908 $
Total equity................................................ 837 1,720 136,785
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(1) Pro Forma MTVi Group assumes that the formation of the Partnership and this
offering occurred on January 1, 1999 for pro forma statement of operations
data and that this offering occurred on December 31, 1999 for pro forma
balance sheet data. For additional information referring to the pro forma
adjustments made to our historical data we refer you to the notes to the
"Unaudited Pro Forma Consolidated Condensed Financial Statements" included
elsewhere in this prospectus.
(2) Minority interest represents the allocation of approximately % of the
Partnership's net loss to the limited partners of the Partnership.
(3) Immediately prior to this offering, MTVi Group will be recapitalized to
provide for Class A common stock and Class B common stock. Pro forma
weighted average shares outstanding reflects the issuance of all shares of
Class B common stock to Viacom and the issuance of the Class A common stock
in this offering, assuming the underwriters have not exercised their
over-allotment options and excluding the issuance of shares in connection
with the Mischief New Media acquisition, as if these shares had been
outstanding since the beginning of each respective period.
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RISK FACTORS
You should carefully consider the following risks and the other information
contained in this prospectus before investing in our Class A common stock. You
also should refer to the other information included in this prospectus,
including the financial statements and related notes. The trading price of our
Class A common stock could decline due to any of these risks, and you could lose
all or part of your investment.
ONLINE MUSIC INDUSTRY RISKS
THE MARKET FOR ONLINE MUSIC IS NEW AND UNPROVEN, AND IF IT DOES NOT DEVELOP
FURTHER, WE MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUE TO OPERATE OUR
BUSINESS SUCCESSFULLY
The market for online music is new and rapidly evolving, so there is
uncertainty whether demand for our services will develop, be sustained and
generate sufficient revenue to operate our business successfully. Our future
success substantially depends upon the continued growth in the use of the
Internet for music entertainment, as well as the growth of our targeted
audience. The number of online music users and the size of our audience may not
increase and the markets for online music content may not become more accepted
and widespread for a number of reasons, including the following:
-- failure to develop appealing online music content;
-- failure of consumers to adopt digital downloading as a means of
purchasing recorded music;
-- concerns of record companies and artists regarding unlawful
duplication and piracy, as well as their concerns regarding the
creation of a viable online infrastructure for the sale of their
music;
-- lack of access and ease of use; and
-- inconsistent quality of service and lack of availability of
cost-effective service at high enough access speeds.
COMPETITION FROM TRADITIONAL AND ONLINE MEDIA AND OTHER COMPANIES FOCUSED ON
MUSIC COULD REDUCE OUR MARKET SHARE AND THUS OUR ADVERTISING AND E-COMMERCE
REVENUES
Websites maintained by existing and potential competitors, such as record
companies, Internet portals and technology companies, may be perceived by
consumers, advertisers, artists, or other music-related vendors to be superior
to ours. In addition, the major record companies, which control the rights to
the vast majority of recorded music, have started to engage in strategic
arrangements, including business combinations, with Internet and
Internet-related businesses for the online distribution and other
commercialization of their music libraries and artist relationships. As a result
of these activities, we may not be able to maintain or increase traffic levels
and click-through rates, or rates at which users click on advertisers' banner
advertisements, on our network of websites, which may negatively affect our
market share and thus our advertising and e-commerce revenues. Our competitors
may also experience greater growth in these areas than we do.
Competition among media and Internet companies pursuing online consumers is
intense. The number of websites offering music content and related features has
increased dramatically and will likely continue to increase due to the
Internet's low barriers to entry. Rivalry for consumers' attention and leisure
time, and associated advertising dollars and e-commerce expenditures by
consumers will increase for all industry participants.
We compete for audiences, consumers, advertisers and artist relationships
with:
-- music-focused online services;
-- leading news/information/entertainment online sites;
-- online portal services that have music-oriented sections;
-- online broadcasters;
-- online music commerce companies, online record clubs and music
download sites;
-- online music technology companies;
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<PAGE> 12
-- traditional music retailers and their respective Internet properties;
-- traditional record labels and their respective Internet properties;
and
-- publishers and distributors of traditional media such as print,
television, cable and radio.
Many of our potential competitors are likely to enjoy competitive
advantages, including the following:
-- ownership of music rights;
-- strong financial and marketing resources;
-- superior technology;
-- more specialized content;
-- strong access to artists;
-- equity relationships with record labels; and
-- access to ownership of distribution platforms.
FINANCIAL RISKS
IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND OUR FUTURE PROSPECTS FOR
PROFITABILITY BECAUSE WE HAVE A LIMITED OPERATING HISTORY
Our predecessors commenced operations in 1994. Our integrated network of
websites, however, was only formed in July 1999. This limited operating history
makes it difficult to evaluate our current business and prospects or to
accurately predict our future revenue or results of operations. You should
consider our prospects in light of the risks, uncertainties, expenses and
difficulties frequently encountered by companies in an early stage of
development, particularly companies in new and rapidly evolving Internet-based
markets, such as the delivery of online music content, online advertising and
e-commerce.
WE HAVE A HISTORY OF LOSSES, WE EXPECT LOSSES TO CONTINUE AND WE MIGHT NOT
ACHIEVE OR MAINTAIN PROFITABILITY
We had net losses of approximately $7.3 million in 1998 and $41.1 million
in 1999. Since we began our operations, we have experienced significant
operating and net losses. These losses primarily relate to the expansion and
integration of our operations. We intend to continue to invest heavily in
ongoing expansion and integration efforts, including expenditures for sales and
marketing, advertising and promoting our brands, content development and
technology and infrastructure development. As a result, we expect to continue to
incur operating and net losses for the foreseeable future. Even if we ultimately
do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND CAUSE OUR STOCK PRICE TO
DECLINE
Our future operating results are likely to vary significantly from quarter
to quarter due to a variety of factors, many of which are outside of our
control. Factors which may affect our operating results include the following:
-- our ability to attract and retain advertisers;
-- the amount of expenditures for online advertising by businesses
seeking to reach consumers like ours;
-- the announcement or introduction of new websites, services or
products by us or our competitors;
-- the timing and uncertainty of advertising sales cycles;
-- the mix of online advertisements sold;
-- seasonal changes in advertising and e-commerce;
-- the level of Internet and online services usage;
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-- the amount of traffic on our websites;
-- the amount and timing of operating costs and capital expenditures
relating to expansion and further development of our business and
infrastructure;
-- technical difficulties or system downtime affecting the Internet
generally or the operation of our network of websites; and
-- general economic conditions, as well as economic conditions specific
to the Internet music industry.
Accordingly, you should not rely on quarter-to-quarter comparisons of our
operating results as an indication of future performance. It is possible that in
some future periods our operating results will be below the expectations of
public market analysts and investors. In this event, the price of our common
stock would likely decline.
RISKS RELATED TO OUR ADVERTISING REVENUES
IF WE DO NOT ADOPT SUCCESSFUL ADVERTISING PRICING MODELS AND INCREASE OUR
ADVERTISING REVENUES, WE MAY NOT BE ABLE TO OPERATE PROFITABLY AND OUR
BUSINESS MAY NOT GROW OR SURVIVE
Our revenues for the foreseeable future will depend substantially on sales
of advertising. Failure to adapt to pricing models that emerge as the industry
standards or to respond to competitive pressures could adversely affect our
advertising revenues and our business may not grow or survive. Since the market
for Internet advertising has recently emerged and a variety of pricing models
have been used, it is difficult to predict which, if any, will emerge as the
industry standards and thus to forecast our advertising revenues. Advertising
revenues accounted for 48.2% of our total revenues for the year ended December
31, 1999.
Furthermore, if we do not increase advertising revenues, we may not be able
to operate profitably and our business may not grow or survive. Increasing our
advertising revenues depends upon many factors, including our ability to do the
following:
-- conduct successful selling and marketing efforts aimed at increasing
awareness of our brands among advertisers;
-- enter into and maintain successive short-term agreements or long-term
contracts with advertisers;
-- increase the amount of revenues per advertisement;
-- increase the size of our audience by building a loyal community of
active registered members;
-- accurately measure the size and demographic characteristics of our
audience;
-- target advertisements to appropriate segments of our audience; and
-- make our content available through evolving broadband distribution
channels.
Increasing the size of our audience is critical to selling advertising and
to increasing our revenues. If we cannot increase the size of our audience, then
we may be unable to attract new or retain existing advertisers. To attract and
retain our audience, we must do the following:
-- continue to offer compelling music content;
-- conduct effective marketing campaigns to acquire new users;
-- develop new and maintain existing distribution relationships with
other websites;
-- update and enhance the features of our network of websites;
-- make our content available through broadband distribution channels as
they achieve widespread consumer acceptance;
-- offer targeted, relevant products and services; and
-- increase our financial expenditures on marketing our brand to
increase brand awareness.
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WE DEPEND ON A LIMITED NUMBER OF ADVERTISERS, AND THE LOSS OF A SIGNIFICANT
PORTION OF THESE ADVERTISERS COULD ADVERSELY AFFECT OUR ADVERTISING REVENUES
DURING A PARTICULAR PERIOD
We anticipate that our operating results in any given period will continue
to depend to a significant extent upon revenues from a small number of
advertisers. One advertiser accounted for 15% of advertising revenues for the
year ended December 31, 1999, and our five largest advertisers accounted for
33.7% of advertising revenues. There may be little or no continuity in our
advertisers from period to period because few advertisers are contractually
obligated to renew their advertising contracts or to purchase set amounts of
advertising in the future. As a result, our failure to renew such advertising
contracts, to replace advertisers who do not choose to continue advertising on
our network of websites or to sell our expected minimum number of advertisements
during a particular period could adversely affect our advertising revenues for
that period.
SALES CYCLES VARY FOR ADVERTISING AND MAY CAUSE OUR REVENUES FOR ONE OR MORE
QUARTERLY PERIODS TO BE ADVERSELY AFFECTED
The sales cycles for advertising vary significantly. The time between the
date of initial contact with a potential advertiser or sponsor and receipt of a
purchase order may range from as little as six weeks to up to nine months. In
addition, during these sales cycles, we may expend substantial funds and
management resources but not obtain advertising revenues. Therefore, if these
sales are delayed or do not otherwise occur, our revenues for one or more
quarterly periods may be adversely affected.
Advertising revenues are subject to delays over which we have little or no
control, including the following:
-- advertisers' budgetary constraints;
-- internal acceptance reviews by advertisers and their agencies;
-- the timing of completion of advertisements by advertisers; and
-- the possibility of cancellation or delay of projects by advertisers
or sponsors.
TRACKING AND MEASUREMENT STANDARDS FOR ONLINE ADVERTISING ARE EVOLVING AND
CREATE UNCERTAINTY WITH ADVERTISERS WHICH MAY LEAD TO A DECREASE IN
ADVERTISING REVENUES
The absence or insufficiency of online advertising measurement standards
could adversely impact our ability to attract and retain advertisers. There are
currently few well-established online advertising measurement standards, and the
industry may need to standardize these measurements. We cannot assure you that
standardization will occur. In addition, currently available software programs
that track Internet usage and other tracking methodologies are rapidly evolving.
We cannot assure you that the development of such software or other
methodologies will keep pace with our information needs, particularly to support
the growing needs of our internal business requirements and advertising clients.
In addition, if industry standards do develop, we cannot assure you that they
will accurately reflect our user base. Inaccurate data from such sources in any
particular period may cause advertisers not to advertise on our websites.
It is important to our advertisers that we accurately measure the
demographics of our user base and the delivery of advertisements on our network
of websites. We depend on third parties to provide certain of these measurement
services. If they are unable to provide these services in the future, we would
need to perform them ourselves or obtain them from another provider, if
available. This could cause us to incur additional costs or cause interruptions
in our business during the time we are replacing these services. Companies may
choose to not advertise on our network of websites or may pay less for
advertising if they do not perceive our measurements or measurements made by
third parties to be reliable.
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RISKS RELATED TO OPERATIONS
FAILURE TO CONTINUE TO DEVELOP COMPELLING CONTENT THAT ATTRACTS OUR TARGETED
AUDIENCES OR A DECLINE IN THE STRENGTH OF OUR BRANDS COULD CAUSE OUR AUDIENCE
SIZES TO DECREASE OR CHANGE THE DEMOGRAPHICS OF OUR AUDIENCES, RESULTING IN A
LOSS OF ADVERTISING AND E-COMMERCE REVENUES
Our future success depends on our ability to continue to develop or license
content that is interesting and engaging to our targeted audiences. In addition,
the success of our business will depend, to a large extent, upon the continued
brand strength of the MTV and VH1 trademarks and associated logos. The strength
of these brands will depend, among other things, upon continued promotion of the
brands by MTV Networks. If our audiences determine that our content does not
reflect their tastes, or if our brands become less appealing, then our audience
sizes could decrease or the demographic characteristics of our audiences could
change. Either of these results would adversely affect our ability to attract
advertisers and may also negatively impact our revenues from e-commerce.
Further, consumer tastes change, and we may be unable to react to those changes
effectively or in a timely manner.
IF A SIGNIFICANT AMOUNT OF MUSIC CONTENT DEVELOPED BY THIRD PARTIES IS NOT
AVAILABLE TO US ON FAVORABLE TERMS OR AT ALL, IT COULD ADVERSELY AFFECT OUR
MARKET SHARE AND COMPETITIVE POSITION
Because much of our content, including recording artist interviews, audio
and video performances and music, is provided to us by record labels, music
publishers and artists at minimal or no charge, we depend on our good relations
with record labels, music publishers and artists to offer compelling content.
However, most of this music content is provided on a non-exclusive basis.
Moreover, some of our content providers are competitors and in the future may
decide to limit our access to content or change prices or demand terms that are
unfavorable or discriminatory. We have no long-term contracts with any of the
record labels, music publishers or artists, and we cannot assure you that the
record labels, music publishers or artists will continue to make their content
available to us on reasonable terms or at all. If record labels, music
publishers or artists charge significant fees for their content or otherwise
alter or discontinue their relationships with us, then our content offering
could be adversely affected, which would adversely affect our market share and
competitive position.
FAILURE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL MAY ADVERSELY AFFECT OUR
BUSINESS
We believe that our performance and future success will depend in large
part upon our ability to attract and retain additional highly skilled creative,
technical, sales, marketing and financial personnel, especially those with
experience in the music and Internet industries. If we do not succeed in
attracting new personnel or retaining and motivating our current personnel, our
business could be adversely affected. Competition for such personnel, especially
creative and technical talent, is intense. We have in the past experienced, and
expect to continue to experience, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications.
WE MAY BE UNABLE TO ACQUIRE NECESSARY WEB DOMAIN NAMES IN OTHER COUNTRIES
WHICH COULD ADVERSELY AFFECT OUR BUSINESS IF OUR AUDIENCES CANNOT FIND OUR
INTERNATIONAL WEBSITES
We may be unable to acquire or maintain web domain names relating to our
brands or to specific channels in countries other than the United States in
which we may conduct business. The acquisition and maintenance of domain names
are generally regulated by Internet Corporation for Assigned Names and Numbers
and the governments of the United States and foreign countries and are subject
to change. The relationship between policies of the Internet Corporation for
Assigned Names and Numbers and government legislation governing domain names and
laws protecting trademarks and similar proprietary rights is still developing.
Therefore, we could be unable to prevent third parties from acquiring or using
domain names on an international basis that infringe upon or otherwise decrease
the value of our brands, trademarks and other proprietary rights and make it
difficult for our audiences to reach our international websites.
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WE DO NOT OWN THE MTV AND VH1 TRADEMARKS AND ASSOCIATED LOGOS THAT WE USE TO
PROMOTE SOME OF OUR BRANDS AND WE DO NOT HAVE TOTAL CONTROL OVER THEIR USE OR
THE DIRECTION OF SOME OF OUR BRANDS
The MTV and VH1 trademarks and associated logos are owned by MTV Networks
and licensed to us for specific uses. In addition, the agreement pursuant to
which we license these trademarks and logos includes significant restrictions on
our ability to use these trademarks and logos. These restrictions include MTV
Networks' right to pre-approve each use by us of these trademarks and logos and
each placement of a link from our websites that employ any of these trademarks
and logos to any other website. Accordingly, we may not be able to capitalize on
these trademarks and logos in exactly the manner in which we may desire. For a
description of our rights with respect to the MTV and VH1 trademarks and logos,
see "Certain Relationships and Related Transactions--License Agreements."
RISKS RELATED TO TECHNOLOGY
WE MIGHT NOT BE ABLE TO SCALE OUR TECHNOLOGY INFRASTRUCTURE TO MEET DEMAND FOR
OUR PRODUCTS AND SERVICES OR UPGRADE OUR WEBSITES IN A TIMELY MANNER OR
WITHOUT SERVICE DISRUPTIONS, WHICH MAY NEGATIVELY IMPACT OUR REVENUES
An essential element of our strategy to increase revenues and profitability
is to generate a high volume of traffic on our network of websites. Our present
systems may not be adequate to expand our network infrastructure on a timely
basis to accommodate rapid growth in user demand. Despite redundancy in our
systems, there is a possibility that a system error or failure, or a sudden
increase in traffic, may result in the unavailability of one or more of our
websites and significantly delay our response times. Our success will depend on
our ability to scale our technology infrastructure to meet the demand for our
products and services. Adding this new capacity will be expensive, and we might
not be able to do so successfully. Our inability to add additional hardware and
software to upgrade our existing technology or network infrastructure to
accommodate increased traffic may cause decreased levels of customer service and
satisfaction. Failure to connect existing systems or implement new systems
effectively or within a reasonable period of time could result in a loss of
existing or potential users, advertisers or strategic partners. Any disruption
in our ability to serve our users could adversely affect our revenues.
FAILURE OF NEW DISTRIBUTION TECHNOLOGIES TO ACHIEVE CONSUMER ACCEPTANCE COULD
LIMIT OUR GROWTH
To experience the full extent of our high-quality audio and full-motion
video content, consumers may, over time, need to access such content over a
high-bandwidth connection, such as cable or direct subscriber line modem or
satellite data broadcast. If such broadband distribution networks do not achieve
widespread consumer acceptance, we may be unable to effectively distribute our
audio and video content in its most compelling format. We cannot assure you that
broadband distribution networks will ever achieve consumer acceptance, and if
they do not, our growth may be limited.
SYSTEM FAILURES OR DELAYS COULD ADVERSELY AFFECT OUR OPERATING RESULTS
Our operations depend on our ability to protect our computer systems
against damage from fire, water, power loss, telecommunications failures,
computer viruses, vandalism and other malicious acts, and similar unexpected
adverse events. Despite precautions we have taken, unanticipated problems
affecting our systems could cause temporary interruptions or delays in the
services we provide. Our customers might become dissatisfied by any system
failure or delay that interrupts our ability to provide service to them or slows
our response time. Interruptions or slowdowns in our services could result from
the failure of our telecommunications providers to supply the necessary data
communications capacity in the time frame we require. In addition, slow response
time or system failures could also result from straining the capacity of our
software or hardware due to an increase in the volume of products and services
delivered through our servers. Any serious or prolonged system failure or
repeated system failures or delays would likely adversely affect our reputation
and our operating results. While we carry business interruption insurance for
serious or prolonged system failures, we cannot assure you that this insurance
will adequately compensate us for any reputational harm we will have suffered.
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OTHER BUSINESS RISKS
VIACOM MAY HAVE INTERESTS WHICH CONFLICT WITH OURS AND THOSE OF THE HOLDERS OF
OUR CLASS A COMMON STOCK
Following the offering, Viacom will beneficially own approximately %
of the voting power of all shares of voting stock of MTVi Group. Mr. Sumner
Redstone, who serves as Chairman of both Viacom and MTVi Group, currently
beneficially owns approximately 68% of the voting stock of Viacom Inc.
Because Viacom controls us and our business objectives may differ, there
are potential conflicts of interest between Viacom and us regarding, among other
things:
-- our ongoing relationship with MTV Networks;
-- potential competitive business activities; and
-- sales or distribution by Viacom of all or part of its ownership
interest in our company.
The business of the Partnership is not intended to include businesses that
are substantially similar to the businesses traditionally conducted by
television, cable and satellite television program services. Should the
distribution of television, cable and satellite television evolve into a medium
more closely resembling the Internet, our interests and those of MTV Networks
could come into conflict, as we both try to expand our respective operations. In
addition, technologies may develop which do not fit specifically into the
service categories which are currently understood to be included in the business
of the Partnership. This may result in questions of interpretation as to the
scope of the Partnership's business which may be resolved by Viacom in a manner
adverse to us.
For more information regarding our relationship with Viacom, see "Certain
Relationships and Related Transactions."
WE MAY NOT BE ABLE TO INTEGRATE BUSINESSES, PRODUCTS OR TECHNOLOGIES THAT WE
ACQUIRE, WHICH COULD ADVERSELY AFFECT OUR FUTURE OPERATING RESULTS, DIMINISH THE
VALUE OF THESE ACQUISITIONS AND DISRUPT OUR ONGOING OPERATIONS
As part of our business strategy, we expect to review acquisition prospects
that would complement our current content offerings, increase our market share
or otherwise offer growth opportunities. Such acquisitions could cause our
operating results or the price of our common stock to decline. While we have no
current agreements or commitments with respect to any such acquisitions, we may
acquire businesses, products or technologies in the future. Because business
acquisitions typically involve significant amounts of intangible assets, future
operating results may be adversely affected by amortization of intangible assets
acquired. In the event of such future acquisitions or business combinations, we
could do the following:
-- issue equity securities that would dilute current stockholders'
percentage ownership in our business;
-- incur substantial debt; or
-- assume contingent liabilities.
We may be unable to effectively integrate businesses we acquire, and any
such failure could diminish the value of an acquired business or cause
disruptions in our ongoing operations. We cannot assure you that we will be able
to successfully integrate any businesses, products, technologies or personnel
that we might acquire in the future, and our failure to do so could damage our
business. Acquisitions and business combinations entail numerous other
operational risks, including the following:
-- difficulties in the assimilation of acquired operations, technologies
or products;
-- diversion of management's attention from other business concerns;
-- diversion of resources;
-- risks of entering markets in which we have no or limited experience;
and
-- potential loss of key employees of acquired organizations.
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LEGAL RISKS AND POTENTIAL LIABILITIES
WE MAY BE UNABLE TO PROTECT INTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULT IN
THE LOSS OF OUR RIGHTS OR INCREASED COSTS
Copyrighted material that we develop internally, as well as trademarks
relating to our brands and other proprietary rights, are important to our
financial performance and our competitive position. If third parties were to use
or otherwise misappropriate our copyrighted materials, trademarks or other
proprietary rights without our consent or approval, our competitive position
could be adversely affected, or we could become involved in costly litigation to
enforce our rights. We seek to protect our copyrights, trademarks and other
proprietary rights through registrations and other means, but these actions may
be inadequate. We have trademark applications pending in several jurisdictions,
but we cannot guarantee that we will be able to register or use our trademarks
in all jurisdictions in which we presently conduct business or in which we
intend to conduct business. We generally enter into confidentiality or license
agreements with our key employees, consultants and corporate partners, and
generally control access to and distribution of our proprietary information. We
cannot assure you that the steps we have taken will prevent misappropriation of
our proprietary rights, particularly in foreign countries where laws or law
enforcement practices may not protect our proprietary rights as fully as in the
United States. In addition, policing the unauthorized use of our content,
trademarks and other proprietary rights could be very expensive, difficult or
impossible, particularly given the global nature of the Internet.
In order to distribute digital music and video, we must obtain rights from
a variety of third parties. We may not have obtained all rights that may
subsequently be deemed necessary for the performance of music and video
distribution on our websites. We could be subject to liability if we have not
obtained or cannot in the future obtain the required rights from third parties.
In addition, third parties may in the future obtain patents claiming
technologies we presently employ. Third parties may assert trademark, copyright,
patent and other types of infringement or unfair competition claims against us.
If we are forced to defend against any such claims, whether they are with or
without merit, or are determined in our favor, then we may face costly
litigation, diversion of technical and management personnel, or product shipment
delays. As a result of such a dispute, we may have to develop non-infringing
technology or enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may be unavailable on terms acceptable to us,
or at all. If there is a successful claim of product infringement against us and
we are unable to develop non-infringing technology or license the infringed or
similar technology, we would not be able to continue operating that portion of
our business.
If our efforts to enforce our intellectual property rights are unsuccessful
or if claims by third parties against us are successful, we may be required to
alter our content, alter our business practices or pay financial damages. We
cannot assure you that such alteration of content, alteration of business
practices or payment of financial damages will not adversely affect our
business.
GOVERNMENT REGULATION OF THE INTERNET COULD LIMIT OUR GROWTH AND OTHERWISE
ADVERSELY AFFECT OUR BUSINESS
The applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain. In addition,
governmental authorities may seek to further regulate the Internet with respect
to issues such as intellectual property, user privacy, pornography, acceptable
content, e-commerce, taxation, and the pricing, characteristics and quality of
products and services. The application of existing laws or any new legislation
regulating the Internet could inhibit the growth of the Internet and decrease
the acceptance of the Internet as a communications and commercial medium, which
might adversely affect our business. Finally, the global nature of the Internet
could subject us to the laws of a foreign jurisdiction in an unpredictable
manner.
In addition, the growing use of the Internet has burdened the existing
telecommunications infrastructure and has caused interruptions in telephone
service. Telephone carriers have petitioned the government to regulate the
Internet and impose usage fees on Internet service providers. Any regulations of
this type could increase the costs of using the Internet and impede our growth,
which could in turn decrease the demand for our services or otherwise adversely
affect our business.
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OUR CONTESTS AND SWEEPSTAKES MAY BE SUBJECT TO STATE, FEDERAL AND FOREIGN LAWS
WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS
Our contests and sweepstakes may be subject to state, federal and foreign
laws governing lotteries and gambling, which could subject us to legal liability
or statutory penalties if we fail to comply with these laws, if any. In
addition, if we face restrictions or prohibitions on our ability to offer
contests and sweepstakes in some geographic areas we would lose a significant
method for attracting user traffic to our websites. Reductions in our user
audience would adversely affect our revenues. Costs associated with legal
liabilities or penalties and a loss in revenues would adversely affect our
operating results.
THE COST AND SCOPE OF SOME MUSIC RIGHTS WE USE HAVE NOT BEEN DETERMINED AND
COULD INCREASE OUR CONTENT ACQUISITION COSTS AND LIMIT THE AVAILABILITY OF
THESE RIGHTS
We typically must pay royalties to third parties for the right to use their
music content on our websites. These royalties are established either by law or
through negotiation with the owner of the content or with performing arts
societies on behalf of the content owner. At present there is uncertainty about
the scope of some music rights and we may be responsible for the cost of past
use of some content. If past or future royalties exceed our expectations, our
content acquisition costs may increase. In addition, it may be too expensive for
us to continue to provide some types of content on our websites. We also may not
be able to successfully negotiate with third parties licenses to use some types
of content. In either circumstance, our content offering could be adversely
affected, which would adversely affect our market share and competitive
position.
Changes to the United States copyright law made in 1995 and 1998
established a new right of performers and record companies to receive royalties
from, and in some cases, control, the performance of recorded music over the
Internet. The rate at which royalties will be paid by us and other members of
our industry for performances covered by a "compulsory" license will be
determined by a royalty arbitration convened by the Librarian of Congress or by
negotiation. A compulsory license is one in which the copyright owners must
grant permission for particular uses of their copyrighted works in exchange for
a license fee set by law. We will be required to pay a royalty for past use of
recorded music in addition to future uses.
In addition, composers and publishers of songs are entitled to royalties
when the songs are publicly performed. These royalties are collected by
societies such as ASCAP and BMI. Although we pay royalties to composers and
publishers through these societies at interim rates, final royalties have not
been established. Final rates will be determined either by subsequent
negotiation with the performing rights societies or, failing that, by
proceedings in the federal courts having jurisdiction over ASCAP and BMI to
determine reasonable ASCAP/BMI license fees.
Some record companies, acting alone and through the Recording Industry
Association of America, assert that some of the customizable features of our
Internet radio business make the music used by that portion of the business
ineligible for the compulsory license. We recently received letters from two
major record companies making these assertions to us regarding some features of
our Internet radio business and demanding that we cease our use of their music
in this manner and pay for our past use. If the views of these record companies
were to prevail, we could not take advantage of the compulsory license and would
need to negotiate individual licenses with each record company. Absent licenses
from the record companies, we would be unable to provide these features to
consumers and could be liable to the record companies for damages, and our
business would be adversely affected. To date, we have not paid license fees to
the record companies because we believe that the features we offer are within
the scope of the compulsory license and the compulsory license fees are being
determined as part of the royalty arbitration convened by the Librarian of
Congress.
The laws relating to online rights for music and other copyrighted works in
the United States and internationally continue to evolve. It is therefore
possible that other parties from whom we currently do not obtain individual
licenses will demand that we obtain them and pay fees for continued or even
prior use.
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WE MAY BE SUBJECT TO LIABILITY IF PRIVATE INFORMATION PROVIDED TO US BY OUR
USERS WERE MISUSED
Our privacy policy discloses how we use individually identifiable
information that we collect. This policy is displayed and accessible throughout
our websites. Despite this policy, however, if third persons were able to
penetrate our network security or otherwise misappropriate our users' personal
information or credit card information, we could be subject to liability. We
could also be subject to liability for claims for unauthorized purchases with
credit card information, impersonation or other similar fraud claims, or other
misuses of personal information, such as for unauthorized marketing purposes.
These claims could result in costly and time-consuming litigation.
Congress is considering adopting stricter privacy laws regarding the
collection and use of personal information obtained from individuals when
accessing websites. For example, Congress recently enacted the Children's Online
Privacy Protection Act, which restricts the ability of Internet companies to
collect information on children under the age of 13 without their parents'
consent. In addition, the Federal Trade Commission and state and local
authorities have been investigating Internet companies regarding their use of
personal information under existing laws governing fraudulent and deceptive
practices. Legislative and regulatory initiatives may adversely affect our
ability to collect and use demographic and personal information from users,
which could have an adverse effect on our ability to provide advertisers with
demographic information. The European Union has adopted a directive that imposes
restrictions on the collection and use of personal data. The directive could
impose restrictions that are more stringent than current Internet privacy
standards in the United States. If this directive were applied to us, it could
prevent us from collecting and using data from users in European Union member
countries or subject us to liability for use of information in contravention of
the directive. Other countries have adopted or may adopt similar legislation.
The U.S. government and the European Union are negotiating the provisions of a
"safe harbor" that would permit U.S. companies operating from the United States
to abide by those provisions in lieu of the directive. We could incur additional
expenses if new regulations regarding the use of personal information are
introduced or if government authorities choose to investigate our privacy
practices.
WE MAY HAVE LIABILITY FOR CONTENT ON OUR WEBSITES RESULTING IN DAMAGE TO OUR
REPUTATION OR COSTS ASSOCIATED WITH LEGAL ACTIONS
We may be liable to third parties for content we distribute on our website:
-- if the music, text, graphics or other content on our website violates
their copyright, trademark or other intellectual property rights;
-- if our artists and other content providers violate their contractual
obligations to others by providing content on our website; and
-- if content we distribute is deemed obscene or defamatory.
We may also be subject to these types of liability for content that is
accessible from our website through links to other websites. Liability or
alleged liability could damage our reputation, require us to incur legal costs
in defense, expose us to awards of damages and costs, and divert management's
attention away from our business.
WE COULD BE DEEMED AN "INVESTMENT COMPANY" UNDER THE INVESTMENT COMPANY ACT OF
1940, WHICH WOULD IMPOSE SIGNIFICANT RESTRICTIONS ON US AND ADVERSELY AFFECT
OUR ABILITY TO CONTINUE OPERATING OUR BUSINESS
We do not believe that MTVi Group is an "investment company" under the
Investment Company Act of 1940. Because MTVi Group, as sole general partner,
controls the Partnership, its interest in the Partnership is not an "investment
security" as that term is used in the Investment Company Act. If MTVi Group were
to cease to control the Partnership, its interest in the Partnership could be
deemed an "investment security" for purposes of the Investment Company Act.
Generally, a person is an "investment company" if it owns investment securities
having a value exceeding 40% of the value of its total assets, exclusive of U.S.
government securities and cash items. Following this offering, the sole asset of
MTVi Group will be its equity interest in the Partnership. A determination that
such investment was an investment security could result in
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MTVi Group being an investment company under the Investment Company Act and
becoming subject to the registration and other requirements of the Investment
Company Act. We intend to conduct our operations so that MTVi Group is not
deemed to be an investment company under the Investment Company Act. However, if
anything were to happen which would cause MTVi Group to be deemed to be an
investment company under the Investment Company Act, restrictions imposed by the
Investment Company Act, including limitations on MTVi Group's capital structure
and its ability to transact with affiliates, could make it impractical for MTVi
Group to continue its business as currently conducted.
RISKS RELATED TO OWNERSHIP OF OUR CLASS A COMMON STOCK
WE WILL BE CONTROLLED BY VIACOM AS LONG AS IT OWNS A MAJORITY OF THE VOTING
POWER OF ALL SHARES OF OUR VOTING STOCK, AND OUR OTHER STOCKHOLDERS WILL BE
UNABLE TO AFFECT THE OUTCOME OF STOCKHOLDER VOTING DURING THIS TIME
After the closing of this offering, we will be controlled by Viacom. As a
result, Viacom will be able to determine the outcome of all corporate actions
requiring stockholder approval. Upon the completion of this offering, Viacom and
its affiliates will own all of the issued and outstanding Class B common stock
and approximately % of the outstanding partnership units. Accordingly,
following the closing of the offering, Viacom and its affiliates will own less
than % of the outstanding common stock but will control approximately
% of the voting power of all shares of our voting stock.
Because Viacom has the ability to control us, it has the power to act
without taking the best interests of our company into consideration. For
example, Viacom will continue to control decisions with respect to:
-- the direction and policies of our company, including the election and
removal of directors;
-- mergers or other business combinations involving us;
-- the acquisition or disposition of assets by us;
-- future issuances of our common stock or other securities;
-- the incurrence of debt by us;
-- the payment of dividends, if any, on our common stock; and
-- amendments to our certificate of incorporation and bylaws.
Any of these provisions could be used by Viacom for its own advantage to
the detriment of our other stockholders and our company. This in turn may have
an adverse effect on the price of our Class A common stock.
THE HOLDING COMPANY STRUCTURE MAY NEGATIVELY AFFECT OUR ABILITY TO COVER TAX
LIABILITIES AND OUR OPERATING RESULTS
We are a holding company, the sole asset of which is our equity interest in
the Partnership. We have no independent means of generating revenues. As a
partner of the Partnership, we will incur income taxes on our proportionate
share of any net taxable income of the Partnership. We intend to cause the
Partnership to distribute cash to its partners in amounts sufficient to cover
their tax liabilities, if any. To the extent we need funds to pay these taxes or
for any other purpose and the Partnership has insufficient cash flow to
distribute such funds to us, we may need to seek financing to pay these taxes.
We cannot assure you that financing would be available on favorable terms, or at
all.
FUTURE SALES OF SHARES BY EXISTING STOCKHOLDERS OR HOLDERS OF PARTNERSHIP
UNITS WHO EXCHANGE SUCH UNITS FOR SHARES OF OUR CLASS A COMMON STOCK COULD
NEGATIVELY AFFECT OUR STOCK PRICE
If our existing stockholders or holders of partnership units who exchange
such units for shares of our Class A common stock sell substantial amounts of
our Class A common stock in the public market following this offering, the
market price of our Class A common stock could decline. Based on shares
outstanding as of , 2000, upon completion of this offering we will have
outstanding shares of Class A common stock,
18
<PAGE> 22
assuming no exercise of the underwriters' over-allotment option. Of these
shares, only shares of Class A common stock sold in this offering will be
freely tradeable, without restriction, in the public market. In addition,
additional shares of Class A common stock will be issuable upon the conversion
of Class B common stock and upon the exchange of partnership units not owned by
us. These additional shares have "demand" and "piggyback" registration rights
attached to them and will become eligible for resale 180 days following the
completion of the offering, provided that their resale is not prohibited by Rule
144 under the Securities Act. After the lockup agreements pertaining to this
offering expire 180 days from the date of this prospectus, an additional
shares will be eligible for sale in the public market. Morgan Stanley & Co.
Incorporated, on behalf of the underwriters, may waive the lockup period.
In addition, the shares subject to outstanding options and shares
reserved for future issuance under our stock option plan are not available for
sale for 180 days from the date of this prospectus.
19
<PAGE> 23
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by such forward-looking statements. Such factors include, among other things,
those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "forecasts," "potential" or
"continue" or the negative of such terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. We are under no duty to update any of
the forward-looking statements after the date of this prospectus, except as
otherwise required by applicable law.
20
<PAGE> 24
USE OF PROCEEDS
We estimate that our net proceeds from the sale of shares of
Class A common stock in this offering are to be approximately $ million,
assuming an initial offering price of $ per share and after deducting
underwriting discounts and commissions and estimated offering expenses. If the
underwriters exercise their over-allotment options in full, we estimate our net
proceeds will be $ million.
MTVi Group plans to use the net proceeds for the following purpose:
-- to acquire partnership units in the Partnership, including the sole
general partnership unit, representing an approximate % equity
interest in the Partnership, or % if the underwriters'
over-allotment options are exercised in full. The price of the
partnership units MTVi Group acquires will equal the net proceeds from
the sale of the shares of Class A common stock in this offering.
The principal purposes of this offering are to generate funds to enable the
Partnership to conduct its business, to create a public market for our Class A
common stock and to facilitate our future access to the public capital markets.
The Partnership plans to use the net proceeds for the following purposes:
-- advertising, promoting and developing our brands and network of
websites to increase consumer traffic, which may include the funding
of operating losses;
-- developing compelling music content; and
-- general corporate purposes, including working capital, technology
enhancements, international expansion and possible complementary
acquisitions.
The Partnership is not currently a party to any contract with respect to any
acquisitions, and our expansion plans may not be realized or, if realized, may
not be profitable for us.
The Partnership has not yet determined the amount of net proceeds to be
used specifically for any of the purposes specified above. Accordingly,
management of the Partnership will have broad discretion in allocating the net
proceeds of this offering. The Partnership intends to invest the net proceeds in
appropriate investments, as determined by the Partnership, until the proceeds
are used for the purposes described above.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock since
inception and the Partnership has not declared any distributions to its partners
since inception. MTVi Group and the Partnership do not expect to pay any cash
dividends or distributions for the foreseeable future, except we expect to cause
the Partnership to pay distributions to its partners to the extent necessary to
enable such partners, including MTVi Group, to pay taxes incurred with respect
to taxable income of the Partnership. We currently intend to cause the
Partnership to retain future earnings, if any in excess of amounts required to
pay taxes, to finance the expansion of the business of the Partnership. Any
future determination by MTVi Group to pay cash dividends will be at the
discretion of our board of directors and will depend on our financial condition,
results of operations, general economic conditions and other factors the board
of directors may deem relevant.
21
<PAGE> 25
CAPITALIZATION
The following table sets forth as of December 31, 1999:
(1) the cash and cash equivalents and capitalization of the
Partnership;
(2) the cash and cash equivalents and capitalization of MTVi Group;
and
(3) the pro forma cash and cash equivalents and capitalization of MTVi
Group and the Partnership on a consolidated basis to reflect the
issuance and sale of shares of Class A common stock in this
offering, and deducting the underwriting discounts and commissions
and estimated offering expenses, the receipt of the estimated net
proceeds from this offering and the purchase by MTVi Group of
partnership units.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
---------------------------------------
PARTNERSHIP MTVI GROUP PRO FORMA(1)
----------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................ $ 240 $ -- $
======== ========== ==========
Long-term capital lease obligations...................... $ 14 $ -- $
Revolving credit facility(2).............................
Minority interest(3)..................................... -- --
Stockholders' equity:
Net equity investment.................................. 139,267 --
Common stock; $.01 par value; 1,000 shares authorized
on an actual basis; none issued and outstanding on an
actual basis; none authorized on a pro forma basis;
none issued and outstanding on a pro forma basis..... -- --
Preferred stock; $.01 par value; none authorized on an
actual basis; none issued and outstanding on an
actual basis; shares authorized on a pro forma
basis; no shares issued and outstanding on a pro
forma basis.......................................... -- --
Class A common stock; $.01 par value; none authorized
on an actual basis; none issued and outstanding on an
actual basis; shares authorized on a pro forma
basis; shares issued and outstanding on a pro
forma basis(4)(5)(6)................................. -- --
Class B common stock; $.01 par value; none authorized
on an actual basis; none issued and outstanding on an
actual basis; shares authorized on a pro forma
basis; shares issued and outstanding on a pro
forma basis.......................................... -- --
Paid-in capital........................................ -- --
Accumulated other comprehensive income (loss).......... (2,482) --
--------
Total stockholders' equity(5)........................ 136,785 --
-------- ---------- ----------
Total capitalization..................................... $136,799 $ -- $ --
======== ========== ==========
</TABLE>
- ---------------
(1) We refer you to the "Unaudited Pro Forma Consolidated Condensed Financial
Statements" included elsewhere in this prospectus.
(2) We intend to enter into a $200 million senior unsecured credit agreement
with Viacom Inc. as the lender prior to completion of this offering.
Borrowings under the credit agreement will accrue interest at a rate equal
to the interest rates prevailing on the date of determination in the London
interbank market for the interest period selected by the Partnership, plus a
margin of 1% over this rate. For more information regarding the credit
agreement, we refer you to "Certain Relationships and Related
Transactions -- Credit Agreement with Viacom Inc."
(3) Minority interest represents the limited partnership units owned by Viacom
affiliates and Liberty Digital.
(4) Excludes shares of Class A common stock issuable upon conversion of
the Class B common stock and upon exchange of the partnership units and
shares of Class A common stock reserved for the exercise of options
granted under our stock option plan. We refer you to "Description of Capital
Stock and Partnership Units."
(5) The pro forma amounts assume that the underwriters have not exercised their
over-allotment options. If the underwriters exercise in full their
over-allotment options, the number of issued and outstanding shares of Class
A common stock will increase to . In addition, it is estimated that
total stockholders' equity will increase by $ million.
(6) The pro forma amounts do not reflect the issuance of shares of
Class A common stock to the sole shareholder of Mischief New Media in
exchange for the partnership units issued in connection with our
acquisition of Mischief New Media and the employment by us of its sole
shareholder.
22
<PAGE> 26
DILUTION
The following table illustrates the dilution in pro forma net tangible book
value, which represents total assets less total liabilities, on a per share
basis, assuming the exchange of all outstanding partnership units in the
Partnership for, and the conversion of all outstanding shares of Class B common
stock into, shares of Class A common stock as of the date of the offering
and the issuance of shares of Class A common stock in this offering,
assuming an initial public offering price of $ per share.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at December
31, 1999............................................... $
Increase in pro forma net tangible book value per share
attributable to new investors purchasing shares in this
offering...............................................
----------
Pro forma net tangible book value per share after this
offering..................................................
----------
Pro forma dilution per share to new investors assuming full
conversion of all partnership units and Class B common
stock into shares of Class A common stock................. $
==========
</TABLE>
The following table summarizes the relative investment in the Partnership
of the existing partners and MTVi Group, giving pro forma effect to the sale of
partnership units to MTVi Group and the acquisition by MTVi Group of partnership
units issued in connection with the acquisition of Mischief New Media in
exchange for shares of Class A common stock and the employment by us of its sole
shareholder. The following table assumes no exercise of the underwriters'
over-allotment options.
<TABLE>
<CAPTION>
TOTAL CASH
PARTNERSHIP INTERESTS CONSIDERATION AVERAGE
---------------------- -------------------- PRICE PER
UNITS PERCENT AMOUNT PERCENT PARTNERSHIP UNIT
--------- --------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Existing partners............ % $ % $
MTVi Group...................
-------- -------- -------- --------
Total.............. % $ %
======== ======== ======== ========
</TABLE>
The foregoing discussions and table assumes no exercise of any stock
options outstanding. At , 2000, there were options outstanding to
purchase shares of Class A common stock at a weighted-average exercise
price of $ per share. To the extent that any of these options are
exercised, there be further dilution to the new investors. If the underwriters'
over-allotment options are exercised in full, the number of shares held by new
investors will increase to shares or % of the total number of
shares of Class A common stock outstanding after this offering.
23
<PAGE> 27
SELECTED FINANCIAL DATA
The selected financial data of the Partnership and its predecessor
presented below should be read together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and have been derived
from the audited financial statements and the accompanying notes included
elsewhere in this prospectus. The financial information herein may not
necessarily reflect our results of operations or financial position in the
future or what the results of operations or financial position would have been
had we been a separate, stand-alone entity during the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED OR AT DECEMBER 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
----------- ------- ------- -------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Advertising...................... $ -- $ 551 $ 1,751 $ 3,538 $ 8,786
Promotional...................... -- -- -- 2,766 7,722
Distribution..................... 1,000 2,876 4,027 2,533 1,739
------ ------- ------- -------- --------
Total revenues................ 1,000 3,427 5,778 8,837 18,247
Operating income (loss)............ (539) (3,340) (6,933) (11,800) (44,158)
Net income (loss).................. (334) (2,070) (4,298) (7,316) (41,100)
BALANCE SHEET DATA:
Total assets....................... $ 15 $ 2,708 $ 1,884 $ 7,030 $145,908
Total equity....................... (26) 2,028 837 1,720 136,785
</TABLE>
24
<PAGE> 28
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
GENERAL
The following unaudited pro forma consolidated condensed balance sheet of
MTVi Group gives effect to this offering as if it occurred on December 31, 1999.
The unaudited pro forma consolidated condensed statements of operations have
been prepared as if the acquisition of Imagine Radio, Inc. and the acquisitions
of the business of SonicNet, Inc., among other assets, as described in note 2 to
these unaudited pro forma consolidated condensed financial statements, and this
offering, had occurred on January 1, 1999.
In the opinion of our management, all adjustments and disclosures necessary
for a fair presentation of the pro forma data have been made. These unaudited
pro forma consolidated condensed financial statements are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or the financial position that would have been achieved had the
acquisitions of Imagine Radio and the business of SonicNet and this offering
been consummated on January 1, 1999, or of the results of operations that may be
obtained in the future.
These unaudited pro forma consolidated condensed financial statements
should be read in conjunction with the following:
-- the audited consolidated financial statements of the Partnership for
the three years ended or at December 31, 1999 and the related notes;
-- "Management's Discussion and Analysis of Financial Condition and
Results of Operations;"
-- the audited financial statements for SonicNet at and for two years
ended December 31, 1998 and unaudited financial statements for
SonicNet at and for the six-month period ended June 30, 1999; and
-- the audited financial statements for The Box at and for two years
ended December 31, 1998 and unaudited financial statements for The
Box at and for the six-month period ended June 30, 1999.
Each of the items described above are included elsewhere in this
prospectus.
25
<PAGE> 29
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------------- ----------------------------------------------------------------
SONICNET PARTNERSHIP
FOR THE SIX MONTHS AS ADJUSTED MTVI GROUP
ENDED JUNE 30, FOR ADJUSTMENTS FOR AS ADJUSTED FOR
PARTNERSHIP 1999 ADJUSTMENTS ACQUISITIONS THIS OFFERING THIS OFFERING(1)
----------- ------------------ ----------- ------------ --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues............. $ 18,247 $ 1,129 $ 793(2) $ 20,169 $ $ 20,169
-------- -------- -------- -------- ------- --------
Costs and expenses:
Production............... 23,238 4,986 28,224 28,224
Related party cross
promotion expense...... 5,008 -- 5,008 5,008
Allocated charges from
parent................. 14,511 815 15,326 15,326
Selling, general and
administrative......... 3,531 3,387 6,918 6,918
Depreciation............. 1,163 117 943(2) 2,223 2,223
Amortization of
intangibles and other
assets................. 14,954 4,012 14,587(2) 33,553 33,553
-------- -------- -------- -------- ------- --------
Total costs and
expenses............. 62,405 13,317 15,530 91,252 91,252
-------- -------- -------- -------- ------- --------
Operating income (loss).... (44,158) (12,188) (14,737) (71,083) (71,083)
Benefit for income taxes... 3,058 -- (3,058)(4) -- --
Minority interest(5)....... -- -- -- (5)
-------- -------- -------- -------- ------- --------
Net income (loss).......... $(41,100) $(12,188) $(17,795) $(71,083) $ $
======== ======== ======== ======== ======= ========
Net income (loss) per
common share:
Basic and diluted........ $
Weighted average number of
common shares
outstanding:
Basic and diluted........ (3)
</TABLE>
See notes to unaudited pro forma consolidated condensed financial statements.
26
<PAGE> 30
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEETS
AT DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------
MTVI GROUP
ADJUSTMENTS FOR AS ADJUSTED FOR
PARTNERSHIP(1) THIS OFFERING THIS OFFERING(1)
-------------- --------------- ----------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 240 $ (3) $
Receivables, net............................... 5,407 -- 5,407
Other current assets........................... 1,407 -- 1,407
-------- --------- --------
Total current assets........................ 7,054
Property and equipment, net...................... 5,269 -- 5,269
Intangibles, net................................. 131,980 -- 131,980
Other assets..................................... 1,605 -- 1,605
-------- --------- --------
$145,908 $ $
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current
liabilities................................. $ 6,775 $ -- $ 6,775
Deferred revenue............................... 2,084 -- 2,084
-------- --------- --------
Total current liabilities................... 8,859 -- 8,859
-------- --------- --------
Capital lease obligations........................ 14 -- 14
Deferred rent.................................... 250 -- 250
Minority interest(5)............................. -- 139,267(3) 139,267
Stockholders' Equity:
Common stock................................... -- (3)
Additional paid-in capital..................... -- (3)
(3)
Net equity investment.......................... 139,267 (139,267)(3) --
Accumulated other comprehensive income
(loss)...................................... (2,482) -- (2,482)
-------- --------- --------
Total equity................................ 136,785
-------- --------- --------
$145,908 $ $
======== ========= ========
</TABLE>
See notes to unaudited pro forma consolidated condensed financial statements.
27
<PAGE> 31
NOTES TO THE MTVi GROUP INC. UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
On July 15, 1999, MTV Networks and certain of its affiliates contributed to
the Partnership substantially all of their assets used exclusively in its
Internet music business for an aggregate 90% equity interest in the Partnership
and Liberty Digital contributed to the Partnership all of its assets used in its
Internet music business, among other assets, for an aggregate 10% equity
interest in the Partnership.
On December 21, 1999, Viacom incorporated MTVi Group, with Viacom owning
all of the outstanding shares of its common stock. Concurrent with this
offering, the Partnership will be reorganized resulting in MTVi Group becoming
its sole general partner. Certain of Viacom's affiliates and Liberty Digital, as
well as MTVi Group, will own limited partnership units. The accompanying pro
forma balance sheet at December 31, 1999 assumes this offering occurred on
December 31, 1999. The accompanying pro forma statement of operations for the
year ended 1999 assumes that the formation of the Partnership and this offering
occurred on January 1, 1999.
2. ACQUISITIONS
On July 15, 1999, as described in Note 1, Liberty Digital contributed to
the Partnership its SonicNet business, among other assets, in exchange for an
aggregate 10% equity interest in the Partnership. MTV Networks contributed to
the Partnership MTV.com, VH1.com and Imagine Radio, among other online
businesses. Imagine Radio was acquired by MTV Networks in February of 1999.
Imagine Radio's operating results have been included in the historical financial
statements at and for the year ended December 31, 1999 from the date of
acquisition.
The purchase method of accounting has been used in the preparation of the
accompanying unaudited pro forma financial statements for SonicNet, The Box and
Imagine Radio acquisitions. The purchase consideration is allocated to tangible
and identifiable intangible assets acquired and liabilities assumed based on
their respective fair values, with the excess purchase consideration being
allocated to goodwill. Pro forma adjustments to amortization expense of $14,587
for the year ended December 31, 1999 represent additional amortization of
purchase goodwill assuming the acquisitions described above occurred on January
1, 1999. SonicNet's historical operating results for the period from July 1,
1999 to July 15, 1999 were insignificant and therefore are not reflected in the
accompanying pro forma statements of operations.
On July 15, 1999, the Partnership and MTV Networks entered into a
three-year license and distribution agreement pursuant to which MTV Networks
licenses from the Partnership, for a fee, the use of substantially all of the
intellectual property rights, technology and subscriber base of The Box
business. Property and equipment and launch incentive fees related to MTV
Networks' use of the assets of The Box business under the agreement have been
recorded as assets of the Partnership and are being amortized on a straight line
basis over three years, which is the intended life of the agreement. As a result
of the agreement, substantially all of the results of the business of The Box
are not reflected in the Partnership's historical statements of operations.
Acquisition adjustments to revenues and depreciation of $793 and $943,
respectively, for the year ended December 31, 1999, reflect the license fee
revenues and depreciation of the capitalized assets assuming the agreement was
signed January 1, 1999.
28
<PAGE> 32
NOTES TO THE MTVi GROUP INC. UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
For the reasons described above, the results of operations of The Box will
not have a continuing impact on the Partnership's results of operations. The
following table represents the historical results of The Box for the six months
ended June 30, 1999:
<TABLE>
<CAPTION>
THE BOX
FOR THE SIX MONTHS
ENDED JUNE 30, 1999
-------------------
<S> <C>
Revenues.................................................... $ 13,424
Costs and expenses:
Production................................................ 5,721
Allocated charges from parent............................. 1,155
Selling, general and administrative....................... 26,473
Depreciation.............................................. 885
Amortization of intangibles and other assets.............. 3,022
--------
Total costs and expenses.......................... 37,256
--------
Operating income (loss)..................................... (23,832)
Interest expenses, net...................................... (587)
Benefit/(provision) for income taxes........................ 0
Interest in income (losses) of equity investee.............. (223)
--------
Net income (loss)........................................... $(24,642)
========
</TABLE>
3. INITIAL PUBLIC OFFERING
The pro forma adjustments to cash in the pro forma balance sheet at
December 31, 1999, reflect the sale of shares of the Company's Class
A common stock offered by this prospectus at the price of $ per share.
The total proceeds from the offering are reduced by $ million for
underwriting discounts and commissions and for estimated offering expenses.
The pro forma adjustment to net equity investment of $139,267 reflects the
conversion of the equity interest of Viacom affiliates and Liberty Digital in
the Partnership to minority interest.
The pro forma basic net loss per share includes both Class A common stock
and Class B common stock expected to be outstanding as of the date of this
offering. The pro forma diluted net loss per share is the same as the basic loss
per share as the employee stock options have an anti-dilutive effect for all
periods presented.
4. INCOME TAX
The reversal of tax benefits of $3,058 for the year ended December 31,
1999, reflects a full valuation allowance on historical tax benefits which is
required based upon management's expectation of continued operating losses for
the foreseeable future.
5. MINORITY INTEREST
The pro forma adjustment to minority interest reflected on the pro forma
balance sheet of $139,267 represents the limited partnership units owned by
Viacom affiliates and Liberty Digital.
The pro forma adjustment to minority interest reflected on the pro forma
statements of operations represents the allocation of approximately % of
the Partnership's net loss to the limited partners of the Partnership.
29
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the notes to those financial statements
included elsewhere in this prospectus. The following discussion contains
forward-looking statements that involve risks and uncertainties. The statements
are based on current expectations and actual results could differ materially
from those discussed herein. Factors that could cause or contribute to the
differences are discussed in "Risk Factors" and elsewhere in this prospectus.
See also "Special Note Regarding Forward-Looking Statements."
OVERVIEW
We are the world's leading Internet music entertainment company, with 22
music website destinations around the world. Through our MTV.com, VH1.com and
SonicNet.com network of websites, we deliver diverse and highly personalized
music and music-related experiences to a vibrant community of music fans.
We commenced operations on July 15, 1999, when MTV Networks, some of its
affiliates and Liberty Digital contributed assets to the Partnership. Prior to
that date, our business was conducted by MTV Networks and Liberty Digital. Since
we began our operations, we have experienced significant operating and net
losses. These losses primarily relate to the expansion and integration of our
operations. We intend to continue to invest heavily in ongoing expansion and
integration efforts, including expenditures for sales and marketing, advertising
and promoting our brands, content development and technology and infrastructure
development. As a result, we expect to continue to incur operating and net
losses for the foreseeable future. Moreover, the rate at which these losses will
be incurred may increase from current levels.
The acquisition of Imagine Radio in February 1999 and the contribution, by
Liberty Digital, of substantially all of the businesses of SonicNet and The Box
in July 1999 were each accounted for as a purchase. Our results of operations
include the results of Imagine Radio and the business of SonicNet subsequent to
acquisition. We are amortizing the excess of the purchase price of Imagine Radio
and the business of SonicNet over the useful life of these assets, which is
generally five years. As a result of the license and distribution agreement
between the Partnership and MTV Networks for the use of the intellectual
property rights, technology and subscriber base of The Box business,
substantially all of the results of the business of The Box are not reflected in
our results of operations.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of our operating
results are not necessarily meaningful and should not be relied upon as an
indication of future performance. In addition, the financial information
included in this prospectus may not necessarily be indicative of the financial
position, results of operations and cash flows had we been operating as a
separate stand-alone company during the periods presented.
REVENUES
We generate revenues from multiple sources, including advertising,
promotional and distribution revenues. In the future, we expect to recognize
revenues from e-commerce, including the sale of CDs, tickets and other
merchandise, as well as digital downloads.
Advertising. We currently derive a significant portion of our revenues
from the sale of advertising. For the year ended December 31, 1999, advertising
represented 48.2% of our total revenues. In this period, one advertiser
represented 15% of advertising revenues. Currently, we employ a direct
advertising sales force of 13 people and an advertising and marketing support
staff of 23 people, all located in New York, San Francisco, Chicago and Los
Angeles.
Advertising revenues consist primarily of sponsorship and banner
advertisements. We sell to advertisers sponsorship of a certain webpage or event
for a specified period of time, and we recognize sponsorship revenues over that
period of time. Sponsorship arrangements generally range from one to six months
in length. To the extent that obligations under sponsorship agreements are not
met, revenue recognition is deferred until the obligations are met. We earn
revenues on sales of banner advertisements based on our delivery of a
30
<PAGE> 34
guaranteed number of impressions, or times an advertisement appears on pages
viewed within our network of websites. Our banner advertising commitments
generally range from 30 to 60 days. Banner advertising revenues are recognized
ratably over the period in which the advertising is displayed, provided no
significant obligations remain.
Promotional. Promotional revenues reflect fees and equity received by us
from third parties, including CDnow, Inc. and America Online, Inc., for the
on-air mention of their brand names in connection with our brand names and
advertisements in the closing credits of television programs that appear on the
MTV and VH1 television networks along with our advertisements, as well as online
promotion. For the year ended December 31, 1999, promotional revenues
represented 42.3% of our total revenues.
Distribution. Distribution revenues include revenues from our syndication
of information, news and other original content to third parties, primarily AOL,
in exchange for license fees and/or a share of advertising and e-commerce
revenues. Distribution revenues also include fees attributable to a license and
distribution agreement we entered into granting MTV Networks the use of the
intellectual property rights, technology and subscriber base of The Box
business. For the year ended December 31, 1999, distribution revenues
represented 9.5% of our total revenues.
We expect our future revenues to include an extensive range of e-commerce
offerings. We currently sell CDs on MTV.com and VH1.com through an arrangement
with CDnow. The sales are completed on CDnow's website and we receive a
guaranteed promotion fee from CDnow, regardless of actual sales levels. We
intend to sell CDs directly to consumers on SonicNet beginning in the third
quarter of 2000, and on MTV.com and VH1.com after the expiration of the CDnow
agreement in 2001. In December 1999, we began selling merchandise related to
on-air and online properties, such as MTV's Total Request Live and VH1's Behind
The Music, through an arrangement with WhatsHotNow.com, Inc.
We have an agreement with RioPort Inc., which provides an MTVi-branded
digital download platform that includes all download tools and software and
supports all commonly used digital audio formats such as MP3 and Audible. Under
this two-year exclusive agreement, we share revenues from digital download
purchases, subject to RioPort guaranteeing payment of certain minimum revenues
to us over the term of the agreement. These revenues are not dependent upon the
volume of downloads completed or the revenues related to such downloads. As part
of this agreement, we received a minority equity interest in RioPort. We began
offering digital downloads in December 1999.
In January 2000, under a revenue-sharing agreement, we began selling
concert tickets on MTV.com and VH1.com in conjunction with Ticketmaster. We will
continue to offer ticket purchasing opportunities with leading online ticket
agencies through co-branded ticketing areas on our websites. We expect to offer
our website visitors special pre-event ticket sales as well as additional ticket
promotions through charity auctions.
COSTS AND EXPENSES
Production. Production consists primarily of (1) the expenses required to
create, design, produce, program, develop and maintain our websites, (2) the
personnel-related expenses needed to support such production and (3) the
technology-related expenses necessary to develop and maintain the underlying
infrastructure.
Related Party Cross Promotion Expense. Related party cross promotion
expense represents expenses associated with the on-air advertising we receive
from MTV Networks. MTV Networks promotes us during live or produced programming
with advertising, VJ mentions, text on screen and other support.
Allocated Charges from Parent. Allocated charges from parent represent
expenses related to general and administrative services, including insurance,
legal, treasury, financial and other corporate functions, provided to us by
Viacom. The allocation of these expenses are based on actual costs incurred and
are apportioned to us based upon the average of specified ratios of revenues and
headcount.
Selling, General and Administrative. Selling expense consists primarily of
other advertising, marketing and promotion expenses incurred to promote our
websites and brands not received from MTV Networks, plus
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payroll and related expense for personnel engaged in advertising sales,
marketing and customer service activities. General and administrative expense
consists primarily of executive and support personnel, such as legal, finance,
research, human resources and communications, professional services, facilities
and other general corporate expenses not included in such services received from
MTV Networks as part of the allocated charges.
Depreciation. Depreciation expense consists of the depreciation of
property and equipment. Property and equipment consist primarily of computer
equipment and audio visual equipment and are generally depreciated over the
estimated useful lives, which range from three to five years.
Amortization of Intangibles and Other Assets. Amortization of intangibles
and other assets is principally the expense associated with acquiring intangible
assets. The purchase price of acquisitions is allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their fair
values on the acquisition dates. The aggregate excess purchase price over the
net tangible assets is amortized over the expected estimated average useful life
of these assets, generally five years. These non-cash amortization charges will
significantly reduce our operating results over the next several years.
RESULTS OF OPERATIONS
The following table sets forth our results of operations for the years
ended December 31, 1997, 1998 and 1999, expressed as a percentage of total
revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Revenues:
Advertising............................................... 30.3% 40.0% 48.2%
Promotional............................................... -- 31.3 42.3
Distribution.............................................. 69.7 28.7 9.5
------ ------ ------
Total revenues......................................... 100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Production................................................ 113.5 109.6 127.4
Related party cross promotion expense..................... 29.5 54.5 27.4
Allocated charges from parent............................. 63.2 55.4 79.5
Selling, general and administrative....................... 13.4 12.2 19.3
Depreciation.............................................. 0.4 1.9 6.4
Amortization of intangibles and other assets.............. -- -- 82.0
------ ------ ------
Total costs and expenses............................... 220.0 233.6 342.0
Operating income (loss)..................................... (120.0) (133.6) (242.0)
Benefit for income taxes.................................. 45.6 50.8 16.8
------ ------ ------
Net income (loss)........................................... (74.4)% (82.8)% (225.2)%
</TABLE>
The following table sets forth a summary of our results of operations for the
years ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues.................................................... $ 5,778 $ 8,837 $ 18,247
Operating income (loss)..................................... (6,933) (11,800) (44,158)
Net income (loss)........................................... (4,298) (7,316) (41,100)
</TABLE>
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YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues increased 107% to $18.2 million for the year ended December 31,
1999 from $8.8 million for the year ended December 31, 1998. Advertising
revenues increased to $8.8 million from $3.5 million primarily due to a
substantial increase in the volume of advertising transactions and the 1999
acquisitions of Imagine Radio and the business of SonicNet. Distribution revenue
decreased to $1.7 million from $2.5 million as a result of changes in the terms
of the agreement with AOL, which reflect a shift in allocation of revenue from
distribution to promotion. This decrease in distribution revenue was more than
offset by an increase in promotional revenue to $7.7 million from $2.8 million
under the revised terms of the AOL agreement. Promotional revenues also
increased due to our CDnow agreement being in effect for the full year ended
December 31, 1999 as compared to only the seven month period ended December 31,
1998.
Total costs and expenses increased 203% to $62.4 million for the year ended
December 31, 1999 from $20.6 million for the year ended December 31, 1998. This
increase was primarily due to the following:
- Production costs associated with programming and content creation
increased $9.8 million, personnel costs associated with the creation of
an operations group and expansion of production staff increased $3.7
million;
- Related party cross promotion expense increased $196,000 as a result of
an increase in the level of on-air promotional activity;
- Allocated charges from the parent increased $9.6 million primarily due to
increases in personnel and our overall growth;
- Selling, general and administrative expense increased $2.5 million
primarily due to the creation of an independent executive team, sales
group and support organization; and
- Depreciation and amortization of intangibles and other assets expense
increased primarily due to the growth of our business and goodwill
amortization of $15.0 million attributable to the 1999 acquisitions of
Imagine Radio and business of SonicNet.
As a result of the factors discussed above, our operating loss increased
275% to $44.2 million for the year ended December 31, 1999 from $11.8 million
for the year ended December 31, 1998, and our net loss increased 463% to $41.1
million for the year ended December 31, 1999 from $7.3 million for the year
ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues increased 52% to $8.8 million for the year ended December 31, 1998
from $5.8 million for the year ended December 31, 1997. Advertising revenues
increased to $3.5 million from $1.8 million due primarily to a substantial
increase in the volume of advertising transactions. In addition, advertising
revenues for the year ended December 31, 1998 benefitted from the creation of a
dedicated online ad sales group charged with negotiating online-specific
advertising agreements. Distribution revenue decreased to $2.5 million from $4.0
million as a result of changes in the terms of the AOL agreement, which reflect
a shift in allocation of revenue from distribution to promotion. The decrease in
distribution revenue was more than offset by an increase in promotional revenue
to $2.8 million from $0 under the revised terms of the AOL agreement. The
increase in promotional revenue also reflects our agreement with CDnow.
Total costs and expenses increased 62% to $20.6 million for the year ended
December 31, 1998 from $12.7 million for the year ended December 31, 1997. This
increase was generally due to the following:
- Increases in production costs associated with the creation of independent
design, news and creative groups at a cost of $1.1 million, increases in
costs associated with programming and content creation at a cost of $0.9
million and the increases in personnel to support increased production at
a cost of $1.1 million;
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<PAGE> 37
- Related party cross promotion expense increased $3.1 million as a result
of an increase in the level of on-air promotional activity;
- Allocated charges from parent increased $1.1 million primarily due to
increases in personnel and our overall growth; and
- Selling, general and administrative expense increased $306,000 primarily
due to the creation of independent marketing and research groups and a
dedicated online ad sales group.
As a result of the factors discussed above, our operating loss increased
70% to $11.8 million for the year ended December 31, 1998 from $6.9 million for
the year ended December 31, 1997, and our net loss increased 70% to $7.3 million
for the year ended December 31, 1998 from $4.3 million for the year ended
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations and growth entirely from
internally generated cash flow and capital contributions from MTV Networks.
Net cash used for operating activities was $26.4 million for the year ended
December 31, 1999, $7.9 million for the year ended December 31, 1998 and $2.9
million for the year ended December 31, 1997. Net cash used for operating
activities for each of these periods primarily consisted of net losses,
partially offset by increases in accounts payable and accrued liabilities.
Net cash used for investing activities was $16.7 million for the year ended
December 31, 1999, $593,000 for the year ended December 31, 1998 and $173,000
for the year ended December 31, 1997. Net cash used for investing activities for
each of these periods consisted of: the acquisition of Imagine Radio for $14.5
million for the year ended December 31, 1999, and capital expenditures,
primarily computer equipment and systems, totaling $2.3 million for the year
ended December 31, 1999, $593,000 for the year ended December 31, 1998 and
$173,000 for the year ended December 31, 1997.
Net cash provided by financing activities was $43.3 million for the year
ended December 31, 1999, $8.5 million for the year ended December 31, 1998 and
$3.1 million for the year ended December 31, 1997. Net cash provided by
financing activities during each of these periods consisted of capital
contributions from MTV Networks, which were used to fund operations and the
acquisition of Imagine Radio.
As of December 31, 1999, we had $240,095 of cash and cash equivalents.
Viacom and Liberty Digital have agreed in connection with the formation of the
Partnership to make capital contributions to the Partnership of up to $90
million and $10 million, respectively. The obligation to make capital
contributions terminates on the closing of this offering. In addition, to the
extent that the Partnership requires funds in excess of these capital
contributions, Viacom intends to make intercompany loans to the Partnership
until this offering is completed. As of December 31, 1999, our principal
commitments consisted of obligations outstanding under operating leases and
music rights royalties. Although we have no material commitments for capital
expenditures, we anticipate a substantial increase in our capital expenditures
and lease commitments in connection with anticipated growth in operations and
infrastructure. Furthermore, we will need to spend significant amounts for sales
and marketing, advertising and promoting our brands, content development and
technology and infrastructure development. We will need to expend funds to add
personnel in all areas.
The Partnership expects to enter into a $200 million senior unsecured
credit agreement with Viacom Inc. as the lender prior to completion of this
offering. The agreement provides that the Partnership can borrow up to $200
million on a revolving basis until the maturity date. The credit agreement will
have a term of two years. Borrowings under the credit agreement will accrue
interest at a rate equal to the interest rates prevailing on the date of
determination in the London interbank market for the interest period selected by
the Partnership, plus a margin of 1% over this rate. For more information
regarding the credit agreement, we refer you to "Certain Relationships and
Related Transactions -- Credit Agreement with Viacom Inc."
We currently anticipate that the net proceeds from this offering, together
with our cash, cash equivalents and short-term investments, will be sufficient
to meet our anticipated cash needs for working capital and
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capital expenditures for at least the 12 month period following the offering.
However, we may need to raise additional funds in future periods through public
or private financings, or other arrangements to fund our operations and
potential acquisitions, if any. If additional funds are raised through the
issuance of equity securities, the percentage of ownership of our stockholders
would be reduced. Furthermore, these equity securities may have rights,
preferences or privileges senior to our common stock.
YEAR 2000 COMPLIANCE
We have completed our program to identify and mitigate year 2000 risks. To
date, we have not encountered any disruptions related to the year 2000 issue.
However, we will continue to devote the necessary resources to monitor any
possible disruptions caused by the year 2000 issue. We cannot provide
assurances, however, that our suppliers and vendors have not been or will not be
affected in any manner. As a result, we will continue to monitor our own year
2000 compliance and that of our suppliers and vendors. Based on the actions
described above, we do not expect to encounter any significant disruptions in
the future.
Year 2000 costs have been expensed as incurred, except those costs directly
related to the replacement of systems requiring upgrades in the ordinary course
of business, which have been capitalized. The total cost of the year 2000
program is not material to our results of operations, financial position or
liquidity.
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CORPORATE HISTORY AND REORGANIZATION
Prior to July 15, 1999, our business was conducted by MTV Networks and
Liberty Digital. On July 15, 1999, MTV Networks, some of its affiliates and
Liberty Digital caused the Partnership to commence operations. On this date, MTV
Networks and some of its affiliates contributed to the Partnership substantially
all of their assets used exclusively in their Internet music business. In
addition, Liberty Digital contributed to the Partnership all of its assets used
in its Internet music business. MTV Networks and its affiliates contributed,
among other assets, its MTV.com, VH1.com and Imagine Radio businesses, and
Liberty Digital contributed, among other assets, its SonicNet.com and related
businesses. For their respective contributions, MTV Networks' affiliates
received an aggregate 90% general and limited partnership interest in the
Partnership, and Liberty Digital received an aggregate 10% limited partnership
interest in the Partnership.
On December 21, 1999, Viacom incorporated MTVi Group under the laws of
Delaware as a new wholly owned subsidiary. Concurrent with the completion of
this offering, the Partnership will be reorganized pursuant to its Amended and
Restated Agreement of Limited Partnership, resulting in MTVi Group becoming the
sole general partner of the Partnership, and MTVi Group, Viacom affiliates and
Liberty Digital owning limited partnership units in the Partnership.
Immediately prior to the completion of this offering, MTVi Group will file
a restated certificate of incorporation which, among other things, will provide
for Class A common stock and Class B common stock and reclassify all outstanding
common stock into shares of Class B common stock. In connection with
this offering, MTVi Group will issue shares of Class A common
stock offered to the public and will then immediately take the net proceeds
received from the sale of its Class A common stock and contribute them to the
Partnership in exchange for limited partnership units in the
Partnership. Immediately following the offering, the Partnership will be owned
approximately % by Viacom affiliates, % by Liberty Digital and % by MTVi
Group. As a result of its ownership of all shares of Class B
common stock of MTVi Group, together with the ownership by Viacom affiliates of
partnership units as described above, Viacom and its affiliates will
beneficially control % of the voting power of all of the voting stock of MTVi
Group and will control both MTVi Group and the Partnership. See "Description of
Capital Stock and Partnership Units."
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<PAGE> 40
BUSINESS
OVERVIEW
We are the world's leading Internet music entertainment company, with 22
music website destinations around the world. Through our MTV.com, VH1.com and
SonicNet.com network of websites, we deliver diverse and highly personalized
music and music-related experiences to a vibrant community of music fans. We
were developed by MTV Networks, a leading global media and entertainment
business that has built its success on creating strong brands and delivering
compelling music content to more than 300 million television homes in 80
countries around the world. Our relationship with MTV Networks provides us with
extensive cross promotion and content creation opportunities, and we believe
uniquely positions our websites to provide consumers with an on-air/online
convergent experience. We are positioning our network of websites as a
comprehensive collection of branded music destinations with content that targets
specific demographic segments. By amassing these consumers, we believe that we
are a powerful value-creating vehicle for music enthusiasts, advertisers and
commerce providers, as well as artists and record companies.
Our network of websites offers a music-focused mix of content, community
and commerce. Within our network of websites, visitors can experience:
<TABLE>
<S> <C>
CONTENT SPANNING ALL GENRES
- --------------------------------
-- Music news and features
-- Artist information and
interviews
-- Streaming radio with both
user-customized and
professionally programmed
formats
-- Live and on-demand webcast
performances
-- Selected on-demand music
videos and exclusive video
programming
-- Album reviews
-- Tour information
-- Online music search engines
and links to music-related
websites worldwide
COMMUNITY FEATURES
- --------------------------------
-- Integrated online and
on-air chats
-- Polling
-- Programming such as game
shows
-- Audience message boards
-- Coverage of local music
scenes
-- Free e-mail accounts
E-COMMERCE
- --------------------------------
-- CDs
-- Digital music downloads
-- Tickets
-- MTV, VH1, SonicNet and
other on-air franchise
branded merchandise
-- Auctions
</TABLE>
We also selectively syndicate elements of our offerings to third parties,
including content aggregators and other entities seeking music-oriented
programming. Among the elements we syndicate are daily news headlines, daily
album review headlines, music events and weekly features, as well as our
streaming radio services. We typically syndicate these elements in connection
with strategic transactions where we receive promotion on third party websites.
Usage of our websites has grown in recent years, resulting in substantial
traffic and the development of a significant user base. Our network of websites
leads the online music entertainment category, based upon consolidated reach
among U.S. Internet users, according to Media Metrix research. Our network of
websites also generates substantial traffic from international markets, although
this traffic is unmeasured by syndicated research services. In the aggregate,
our websites, generated more than 140 million page views in January 2000.
MTV.com was the #1 music entertainment website in 1999 based on average monthly
unique visitors, as reported by Media Metrix.
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INDUSTRY BACKGROUND
THE MUSIC INDUSTRY
Music is one of the leading forms of entertainment and plays a major role
in the everyday lives of people around the world. The Recording Industry
Association of America reports that listening to music is one of the most
popular entertainment pastimes, with nearly nine out of 10 adults accompanying
their leisure activities with music. According to the Radio Advertising Bureau,
95% of U.S. persons aged 12 and over listen to radio on a weekly basis and,
according to the Soundata Consumer Panel, almost half of all U.S. households
include at least one person who purchased three or more CDs or cassettes over a
six month period. Because of its worldwide scope, music is a multi-billion
dollar industry. In 1998, according to the International Federation of the
Phonographic Industry, worldwide music shipments of recorded music amounted to
$38.7 billion and, according to the RIAA, domestic sales were $13.7 billion.
Music also generates significant media revenues through music television, music
magazines and radio broadcasting, which in total amounted to approximately $16.7
billion in the United States in 1998, based on information from Paul Kagan
Associates, Folio Magazine and Radio Advertising Bureau. Music also generates
revenue from concert ticket sales, sponsorships, promotions and merchandise
related to music artists and events.
MUSIC AND THE INTERNET
The Internet enables users to access and share information, entertainment
content and services and to communicate in an efficient, personalized and
powerful way. Online information and service providers can customize their
offerings to individual preferences and market dynamics, and still reach global
audiences with low marginal costs. As a result of increased access to personal
computers, Jupiter Communications projects the number of worldwide Internet
users to grow from approximately 170 million in 1998 to approximately 500
million in 2003.
We believe that the music marketplace is particularly well suited for
online activity, because of the relatively finite capacity in conventional media
outlets, and increasing specialization in consumer music preferences. By
creating a new level of access and personalization, the Internet is changing the
ways in which music is created, distributed and consumed. For example, on the
Internet, music enthusiasts can access a wide range of content that is not
limited by local radio playlists, retail shelf space, or major label artist
rosters. The Internet also provides access to tools and enabling technology that
empower consumers with greater access to their music through a variety of
Internet-based applications that allow consumers to remix music in real time,
vote online to determine the popularity of unsigned bands or write reviews of
music and artists.
Artists find the Internet a powerful tool, as it lowers entry barriers to a
business that has traditionally been controlled by the record labels that
finance the expensive processes of production, manufacturing, promotion and
distribution. As artists begin to use the Internet to communicate more directly
with fans worldwide, online music platforms with strong brands will be well
positioned to attract consumers. In addition, the community aspects of the
Internet provide a forum for artists to drive consumer interest by interacting
directly with their fans and reaping the benefits of listener feedback.
The Internet presents new opportunities for music commerce by providing
users with an efficient way to access, store and play back content on demand
through computers and portable devices. The digitization of music content
eliminates many of the costs associated with the manufacturing, distribution and
retailing of music. Further, as the Secured Digital Music Initiative is
implemented to establish a formal standard to effect the secure and authorized
downloading of music files, traditional record labels will make more music
available in digital form, broadening the range of music that is available to
consumers in an efficient manner. Unlike some other product categories, music
lends itself well to online sampling before purchase. The online environment
also allows consumers to access a greater amount of product and artist
information than is available through traditional retail channels. The delivery
of entertainment content over the Internet will also become increasingly
compelling for audiences as broadband Internet connections become more common.
High-speed access will heighten the quality of audio and particularly video on
the Internet, creating richer environments for users and more interactive
options for advertisers. Forrester Research, Inc. projects domestic sales of
recorded music over the Internet to increase to $4.3 billion in 2004 from
approximately $848 million in
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1999. Forrester Research estimates that 50 million individuals will be capable
of downloading and playing digital music by the end of 1999. Forrester Research
projects that the music industry will generate $1.1 billion of digital download
revenues in 2004, representing 25% of the $4.3 billion projected total domestic
online music revenues.
OUR COMPETITIVE ADVANTAGES
We believe that Internet users are drawn to those websites that offer the
most attractive branded entertainment, community and e-commerce experiences. For
the music consumer, this means websites that contain the broadest range of music
content and that offer the user the opportunity to develop closer relationships
with music artists and the technology that puts the user in control of the
entertainment and e-commerce experiences.
We believe that we have the following strengths that position our network
of websites to continue to lead the online music industry:
RELATIONSHIP WITH MTV NETWORKS
We were developed by MTV Networks, a leading global media and entertainment
business that reaches more than 300 million television homes worldwide through
its MTV, VH1 and other music-themed television services. MTV is the largest
cable television network worldwide and was the number one cable network for 12-
24 year olds in the U.S. in 1999. VH1 is the second most widely distributed
music network worldwide. We benefit from our continuing relationship with MTV
Networks through:
Brand Awareness. We have a long-term, royalty-free license for the "MTV"
and "VH1" brands and trademarks from MTV Networks for use in connection
with our licensed services. MTV and VH1 are among the most recognizable
brands in the music industry and represent leadership and innovation in
music programming and content. We believe that this provides significant
name recognition for our MTV.com and VH1.com websites and allows Internet
users to associate these websites with the look and quality of the
programming content of MTV and VH1. As a result, unlike other music
websites, we can focus more of our resources on developing content and
site functionality and fewer resources on brand development.
Cross Promotion. MTV Networks has contractually committed to vigorously
promote us on its television networks through advertising, VJ mentions,
text on screen and other support, for no cash consideration. The value of
this on-air promotion will be at least $100 million, spread over a
five-year period ending July 15, 2004. In addition, our management and
management of MTV Networks have held discussions regarding on-air
promotion. In these discussions, management of MTV Networks indicated
that it intends to cause MTV Networks to provide us with at least an
additional $25 million of on-air promotion over this period, although it
is not legally obligated to do so. We believe that this aspect of our
relationship creates significant opportunities for cross promoting our
online offerings and MTV Networks' on-air programming in a way that
distinguishes us from other online music companies.
Convergence of On-Air Programming and the Online Experience. MTV
Networks has granted to us a long-term, royalty-free license to exhibit
on our websites segments up to 10 minutes in length of the programming
for which MTV Networks has freely licensable rights and that is exhibited
on MTV, VH1 or on similar music-themed television services that are
wholly owned and operated by MTV Networks. As a result, our network of
websites is uniquely positioned to generate user traffic by offering
users the ability to integrate their online experience with MTV Networks'
on-air programming. We were at the forefront of convergence when, in
1995, MTV.com featured what we believe is the first online chat/live
interview with the Michael Jackson Simulchat and what we believe is the
first ongoing
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show to integrate live broadcasts and online chat with YackLive! Since
then, we have launched the next generation of convergence programming.
Our most recent examples include:
-- @MTV Week, the first ever weeklong convergent music experience
hosted by MTV and MTV.com, which included live televised studio
performances of featured artists combined with online streamed
video, downloads, live chats, contests and voting. This event
generated more than two million online interactive responses and
submissions to the various areas of @MTV.
-- webRIOT, a live, simultaneous television and online game show that
allows Internet users to play along with the on-air program. To
date more than three million webRIOT games have been played;
-- simultaneous on-air/online auctions, such as MTV.com's Cool Crap
and Real World Garage Sale and VH1.com's Rock Collectors;
-- online audience polling used real-time in on-air programs, such as
MTV's Total Request Live;
-- on-air/online promotions, such as VH1's Harley Davidson
Sweepstakes; and
-- integrated chat programming, such as MTV.com's Real World Live
Wire Chat.
Expertise and Relationships. We benefit from MTV Networks' more than 20
years of experience in the music programming and promotion business and
through its in-depth knowledge of the music consumer and its
relationships within the music industry. We share MTV Networks' core
values of deep consumer understanding, brand orientation, a low-cost
production emphasis and a global perspective. Further, we have been in
the Internet business for nearly six years and have a deep and
experienced management team, including Internet entrepreneurs,
technology experts and creative innovators.
For a discussion of agreements involving our relationship with MTV Networks,
particularly with respect to significant restrictions on our use of the MTV and
VHI trademarks and programming, see "Certain Relationships and Related
Transactions."
LEADING NETWORK OF MUSIC WEBSITES
Our network of websites leads the online music entertainment market. We
believe that the combination of our content, community features and e-commerce
opportunities makes our network of websites the ultimate destination for music
enthusiasts. Our content incorporates live and on-demand music performances,
music videos, music news and artist information for a wide range of music
genres, including all types of rock music, R&B, soul, dance, rap, hip-hop,
country, classical and jazz. Our community features allow audiences to share
music experiences with direct connections between music fans and artists through
chat rooms, themed message boards and e-mail. In addition, our websites
incorporate tools and technologies that permit users to create highly
personalized experiences. For example, with Radio SonicNet, users can enjoy a
high-quality streaming audio experience featuring professionally and artist
preprogrammed radio stations. In addition, users can create personalized
Internet radio stations that reflect their own unique tastes by mixing and
matching music from 75 different genres. VH1.com's Roadie is a character that
allows users to personalize their VH1.com experience, send pages to friends and
keep track of music information. MTV.com offers city-by-city coverage of local
music scenes, providing users with information on band and venue reviews,
features and news. We believe that these features, along with e-commerce
opportunities, such as music and merchandise purchases and digital music
downloads, create significant value for customers, thereby increasing the length
of time users spend on our websites and the number of repeat visits by users.
INTERNATIONAL REACH
We believe that we have the broadest international reach in the online
music industry. Our network of websites includes 11 international websites
targeting the major music markets of the United Kingdom, Germany and Japan, as
well as other local markets in Europe and Latin America. Our international
websites are associated with MTV Networks' more than 20 international television
channels. This reach provides us
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with a platform to develop our branding, content and positioning on a global
basis, as well as to target specific cultures and audiences with specialized
local content and local language websites. Given that 65% of the shipments of
recorded music are outside of the United States, we believe that there is
potential for significant growth in our business internationally.
OUR STRATEGY
Our objective is to continue to offer what we believe is the premier
interactive music experience that will continually set new standards for our
audiences and that will allow music enthusiasts to create, distribute and
consume music in innovative and engaging ways. On the foundation of our
strengths, we are pursuing a strategy consisting of the following key elements:
OFFER THE MOST COMPELLING CONTENT
To keep pace with the constantly changing music world and to maintain our
market leadership, we must continually present a wide and evolving range of
innovative content and online offerings. We intend to continue to develop
compelling music content, community offerings and other features that enhance
the online experience for music fans and artists and that drive user traffic,
visit duration and loyalty. We also intend to deliver new forms of content to
take advantage of new technologies, such as the widespread deployment of
broadband distribution. In addition to presenting internally developed original
and exclusive content, we expect our network of websites to showcase superior
branded content that we secure through affiliate relationships and license
partnerships.
BUILD THE STRONGEST BRANDS THROUGH EXTENSIVE CROSS PROMOTION
We already have a competitive advantage over other online music companies
through our relationship with MTV Networks and the right to use the "MTV" and
"VH1" names. In addition, "SonicNet" is a powerful online music brand within the
Internet music industry. We intend to continue to build the premier online music
brands and generate user traffic through extensive cross promotion over MTV
Networks' television channels and through our network of websites. Cross
promotion over MTV Networks' television channels will include linking MTV
Networks' on-air content with our online offerings, integrating references to
our network of websites and driving the convergence of on-air programming and
online content, as well as airing traditional advertisements. Cross promotion
over our network of websites also includes linking the content of each website
through our network's navigation features. We also intend to use traditional
third-party advertising and marketing methods in order to solidify the brand
identity of our network of websites.
DEVELOP AND GROW MULTIPLE REVENUE STREAMS
From the foundation of our broad user base, we have developed an in-depth
understanding of music consumers. We believe that we can use this understanding
to develop various revenue-generating online products and services, including
the following:
Advertising Sales. Our advertising sales currently consist principally of
banner ads and sponsorships. We believe that our network of websites
provides opportunities for advertisers seeking to reach a range of groups
from premium-priced narrow groups to large audiences or various combinations
of target customers. Within the next year, we expect technology to permit
audio and video advertisements, or "rich media" ads. We intend to expand
advertising sales to include these rich media ads. So long as individuals
use computers which can receive streaming audio, they will not need special
equipment to receive rich media ads. We also plan to develop an integrated
database of audience demographics, preferences and behaviors. This
integrated database is intended to increase our ability to target users,
which will allow us to increase our advertising and commerce click-through
rates.
Anchor Tenancy Relationships. We are offering selected third parties anchor
tenancies, or permanent links to their websites on our network of websites,
in exchange for a fee. We are offering these opportunities to those third
parties who are not direct competitors but with whom we believe we share
users.
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e-Commerce. We intend to feature a full range of e-commerce options related
to our entertainment programming across our websites. We currently have
arrangements with third party e-commerce providers for the sale of CDs and
other merchandise on co-branded pages on their websites reachable through
direct links from our websites. In addition, we currently offer merchandise
based on MTV Networks' franchises such as Total Request Live and Behind the
Music. Our current e-commerce offerings also include auctions, event tickets
and pay-per-view live events. In the future, we plan to sell a broad range
of music merchandise through artist sites developed under arrangements with
prominent musicians.
Digital Music Downloads. Through an arrangement we have with RioPort,
RioPort developed for us a private-label digital music download platform and
licensed to us RioPort's library of digital music. RioPort's digital
download platform is capable of supporting all commonly used digital audio
formats such as MP3, Audible and Windows Media Audio. We intend to use this
platform to offer users the ability to download music on all of our websites
through secure and authorized transactions. We also obtain digital music for
download from artists and record labels.
Content Syndication. We currently license elements of our original content
and that of MTV Networks to third-party websites and intend to continue to
do so in the future. For example, we currently license music news,
interviews and other content to Yahoo!. Revenue sources from these
opportunities may include license fees or arrangements to share advertising
or e-commerce revenues. All of our arrangements to license elements of the
content of MTV Networks must be approved in advance by MTV Networks.
Platform Services and Other Business-to-Business Offerings. We license to
third parties music-oriented solutions based on our technologies. For
example, we licensed our Radio SonicNet platform to allow other website
operators, such as HOB.com, a website owned by House of Blues Entertainment,
Inc., and Candies.com, to offer their own online radio stations that would
broaden the online experiences of their users.
DEVELOP INNOVATIVE APPLICATION PLATFORMS
We are developing, acquiring and maintaining state-of-the-art core
technology platforms to support our brands, business and creative goals, while
establishing ourselves as a key source for music services and functionality to a
wide range of third parties. We intend to use these platforms to further
integrate our network of websites and strategic partners, and thereby take
advantage of the extensive scale and scope of our network. In addition to
streamlining our operations, we believe these platforms will enhance the online
experience of our users and make our websites more valuable to advertisers. Our
application platforms include an extensive database back-end for music
information and media, a rich media delivery system, personalization and
customization tools, community tools and commerce applications. We have designed
the database back-end to manage a large variety of music information and digital
media for presentation to users worldwide, streaming music programming and
distribution to third parties. Through authorized registration of our website
consumers, we are also compiling a database of user-supplied information that we
intend to use, together with our music content and information databases, to
offer highly customized information, personalized music programming and targeted
advertising.
CAPITALIZE ON BUSINESS RELATIONSHIPS
We have entered into several business relationships from which we expect to
benefit in the future. In addition to our relationship with MTV Networks, which
we view as one of our most important competitive strengths, we have a
relationship with Liberty Digital, a subsidiary of Liberty Media Corporation and
a member of AT&T Corp.'s "Liberty Media Group." Liberty Media Group holds
interests in a broad range of programming, communications, technology and
Internet businesses, with widely recognized brands such as Encore, Discovery, TV
Guide and STARZ!. Liberty Digital owns a significant stake in the Partnership
and has an agreement not to compete with our business through July 2002, with
some exceptions. Our relationship with RioPort provides us with the technology
to support digital downloads of music from our websites. We
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intend to pursue further business relationships, ventures and acquisitions to
support our network of websites. In the United States, we expect that these
arrangements will be primarily for the purpose of enhancing our content,
e-commerce initiatives and technological capabilities. Internationally, we also
expect to support our roll-out of additional websites by entering into various
types of business relationships with parties that can offer content expertise,
infrastructure, distribution capabilities, promotional relationships and
advertising sales capabilities within the various local markets that we enter.
OUR NETWORK OF WEBSITES
Our websites share a number of common features, including a music library
of more than 115,000 songs, web links for 25,000 artists and 14,000 artist
pages. In addition, each of our websites has features unique to it, which are
described below.
MTV.COM
Launched in 1995, MTV.com was the #1 music entertainment website in 1999
based on average monthly unique visitors, as reported by Media Metrix. MTV.com
also was named by the public as the best media site at the first MIDEMNET Awards
at MIDEM 2000, a prominent international music convention and trade show.
MTV.com is targeted toward music fans between the ages of 13 and 24 and
features music and lifestyle offerings that capitalize on MTV's relationship
with its current audience. The website provides an easy-to-use navigation system
designed to allow users to explore a full range of the latest music content,
including thousands of on-demand music videos and clips, music news and
exclusive artist performances, information and features. MTV.com also showcases
content based on key television franchises, such as The Real World, Road Rules,
Daria, Celebrity Deathmatch, House of Style and the MTV Video Music Awards.
Through community offerings such as chat, interactive game shows and localized
music information, MTV.com continually redefines entertainment experiences by
allowing audiences to participate in integrated online/on-air programming.
MTV.com also provides a full range of shopping options, including a wide
selection of CDs, digital music downloads, auctions and branded music
merchandise.
To capture the long-term growth opportunities in foreign Internet markets,
we have established MTV-based websites in Europe and Latin America. We also plan
to launch MTV-branded websites in India, Japan and Poland in 2000.
VH1.COM
Launched in 1995, VH1.com targets music fans in the 25-plus age range and
reflects VH1's "Music First" positioning, which recognizes the important role
music plays in the lives of persons in its core demographic group. The website
offers The Wire, a music news and information service. The website also brings
streaming video from artist performances and VH1 programming, such as
Storytellers, Behind the Music and Divas Live to users' computers on VH1.0 The
Desktop Channel. In addition, the VH1 at Work radio station enables VH1 fans to
listen to the same style of music at the office that they watch on VH1 at home.
The VH1.com audience can also interact using themed message boards and chats and
can personalize their own music space with the My VH1 service that customizes
news, commerce and music information feeds to individual preferences. VH1.com's
Roadie is a personalization tool designed to allow users to send pages to
friends and keep track of music information. The Roadie stores information on
each individual user for future visits. The website also enables users to make
music purchases through the site by offering products such as CDs, digital music
downloads, tickets, auctions and branded music merchandise.
In addition to its presence in North America, we have established VH1-based
websites in Germany and the United Kingdom. We also plan to launch a VH1-based
website in Poland in 2000.
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SONICNET.COM
Launched in 1994, SonicNet.com targets music lovers of all ages with
entertainment and information from 11 different genres of music. Named the best
music hub site in 1999 by Yahoo! Internet Life Online Music Awards and one of
the best music sites in 1999 by U.S. News & World Report Online, the website
features SonicNet.com news, record reviews, live events and e-commerce
opportunities. At the time we received the Yahoo! award, SonicNet was providing
syndicated content to Yahoo!. SonicNet.com features the Radio SonicNet platform,
which allows users to create radio stations that play only the music that they
want to hear, by choosing preferred genres. Users also have the option to listen
to numerous professionally programmed radio formats, ranging from electronica,
hip-hop, classic soul and jazz to world music, country, Latin pop, and
classical. In addition, Radio SonicNet features stations preprogrammed by
well-known recording artists. Based on the music that users listen to, Radio
SonicNet's music player provides album cover artwork, artist highlights and
information, artist recommendations and radio station referrals for personalized
streaming audio. The website also offers a full range of shopping options,
including a wide selection of CDs, digital music downloads, auctions and branded
music merchandise.
We have established SonicNet-based websites through licensees in Germany,
Switzerland and Japan.
INTERNATIONAL SITES
Our network of websites currently includes 11 international websites that
take advantage of our content, platform, brands and relationships. To capture
the long-term growth opportunities in foreign Internet markets, we have pursued
various strategies, including full ownership, partnership and licensing
arrangements. Of our 11 international websites, eight are wholly owned and three
are operated through licensees. In January 2000, our existing international
websites generated more than 13.5 million page views outside the United States.
In addition, in discussions between our management and management of MTV
Networks, management of MTV Networks indicated that it intends to cause MTV
Networks to contribute to us its interest in a joint venture which owns three
MTV-based websites in Asia, although it is not legally obligated to do so. The
following table provides information regarding our international websites and
these Asian MTV-based websites:
<TABLE>
<CAPTION>
COUNTRY/REGION PROPERTY WEBSITE RELATIONSHIP
- -------------- -------- ------- ------------
<S> <C> <C> <C>
Europe............................. M2 www.m2europe.com Wholly owned
United Kingdom/Ireland........... MTV www.mtv.co.uk Wholly owned
VH1 www.vh1online.co.uk Wholly owned
Germany MTV www.mtvhome.de Wholly owned
VH1 www.vh1.de Wholly owned
SonicNet www.sonicnet.de Licensee(1)
Italy............................ MTV www.mtv.it Wholly owned
Scandinavia...................... MTV www.mtve.com Wholly owned
Switzerland...................... SonicNet www.sonicnet.ch Licensee(1)
Latin America...................... MTV www.mtvla.com Wholly owned
Asia
Japan............................ SonicNet www.sonicnet.co.jp Licensee(1)
Southeast Asia................... MTV www.mtvasia.com Joint venture with
Tricast(2)
China............................ MTV www.mtvchinese.com Joint venture with
Tricast(2)
Korea............................ MTV www.mtvkorea.co.kr Joint venture with
Tricast(2)
</TABLE>
- ------------
(1) The license agreements with respect to www.sonicnet.de and www.sonicnet.ch
will renew automatically in December 2000 unless we provide 60 days' prior
notice that we do not want to renew them. The license agreement with respect
to www.sonicnet.co.jp is terminable by either party on 45 days' prior
notice.
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(2) MTV Networks has indicated that it intends to contribute to us its interest
in this joint venture, although it is not legally obligated to do so.
In 2000, we also plan to launch MTV-branded sites through joint ventures in
India, Japan and Poland, and a VH1-branded site through a joint venture in
Poland. In addition, MTV Networks has advised us that it is negotiating with
Abril S.A., a leading Brazilian Internet company with whom it has developed an
MTV-based website in Brazil, regarding the contribution to us of MTV Networks'
interest in this website. Depending upon how the contribution is structured, MTV
Networks may need Abril's consent before it can make the contribution.
All of our international websites are customized to suit regional markets.
These sites are designed to take advantage of the strong global brand equity and
television franchises that MTV Networks has created. Our international sites are
associated with MTV Networks' more than 20 international television channels,
which cross-promote our network of websites in their respective television
markets.
OTHER SITES
Addicted to Noise (Addict.com). Addicted to Noise (Addict.com) is an
online rock music magazine targeting the alternative music scene and featuring
original music editorials, columns, features, artist interviews and album
reviews. The website also programs Radio ATN, a streaming radio channel with
shows featuring new music and new artists.
Streamland.com. Streamland allows music fans to watch over 1,000
full-length music videos free and on demand. Users can create personalized
playlists and can browse videos by style or search by artist.
Thebox.com. Thebox.com is a website that provides music video previews and
enables viewers to interact through an online chat service and bulletin boards
about music videos and their favorite artists. In addition, Thebox.com is a
venue for viewers of MTV Networks' The Box Music Network, a 24-hour, interactive
all-music basic cable channel which airs specific videos selected by consumers,
to make online requests for specific videos they want to be aired on The Box.
Cinemachine.com. Cinemachine is a movie review search engine that presents
listings of the latest movie reviews for films of all genres, including new
releases, classic films, Hollywood blockbusters and independent features.
Cinemachine gathers hundreds of movie reviews in one convenient listing for
users and makes weekly recommendations on new films.
Mischief New Media websites. In March 2000, we acquired, in exchange for
partnership units, Mischief New Media, an online music content business.
Mischief New Media's business is comprised of four main websites which provide
users with personalized music and entertainment information and related news and
services. RockOnTv.com lists upcoming television appearances of performing
artists. Musicnewswire.com compiles music-related headlines from various sources
on the Internet, and Showbizwire.com compiles entertainment-related headlines
from various sources on the Internet. Cd-clubs.com provides information and
catalogs for the BMG and Columbia House music clubs. In addition, Mischief New
Media is creating several new applications which will be launched as part of our
SonicNet service.
ADVERTISING AND SPONSORSHIPS
We have a dedicated online sales force which is responsible for effecting
our advertising and sponsorship efforts. We intend to expand advertising sales,
which currently consist of banner ads and sponsorships, to include rich media
ads and business-to-business sponsorship opportunities. We believe we have a
competitive advantage in advertising sales as a result of our:
-- well-known brand names;
-- attractive demographics in key segments;
-- unique rich media platform and programming;
-- artist and programming-driven sponsorships;
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-- multinational client base;
-- multi-brand sales opportunities; and
-- targeted, database marketing products.
We also have the unique ability among online music companies to coordinate
our independent advertising and sponsorship efforts with the established
worldwide on-air sales force of MTV Networks. Our dedicated online sales force
is independent from MTV Networks' on-air sales force, although the two sales
forces from time to time share advertiser leads and other information. We do not
offer online advertising as a free or discounted add-on to purchases of on-air
advertising. Our dedicated online sales force is committed to increasing the
spending per existing advertiser as well as the number of advertisers and
advertising sales across our network of websites.
We sell advertising and sponsorships to a variety of advertisers seeking to
reach one or more of the distinct demographic audiences that use our websites.
On MTV.com, we will continue to target music fans between the ages of 13 and 24
and on VH1.com we will continue to target the 25-plus age range. Additionally,
the incorporation of SonicNet as an umbrella brand with a broad music offering
of all genres will allow us to expand our demographic reach to virtually all age
groups, enabling advertisers to target an expanded roster of product and service
categories.
Because of the distinctive characteristics of each of our websites,
advertisers may choose a traditional advertising buy in the form of (1) a
run-of-network buy, which is, with respect to demographics, an untargeted
campaign on several of our sites, as well as affiliated sites, or (2) a broad
run-of-site ad buy, which is an untargeted buy on one of our sites. Advertisers
may also pay a premium to choose a highly targeted sponsorship campaign based
upon the demographics or activity of a particular section within a single site
or a grouping of sites. Additionally, we expect that over the next year rich
media inserts will enable us to charge advertisers a premium.
In addition to selling ads across our own sites, we are implementing an
affiliate program, by which we deliver our content under co-branded pages to
selected partners. In exchange for providing us with incremental traffic and
saleable ad impressions, these affiliate sites may receive a share of
advertising revenue generated by the co-branded pages. Included in these
affiliate sites will be specialized sites designed and hosted for specific
artists. We plan to maintain and promote these sites, either by ourselves or
with partners, in exchange for a royalty paid to the artists and/or a share of
revenues derived from the sites' traffic.
E-COMMERCE
Our e-commerce strategy is based on our belief that entertainment brands
and programming create a uniquely valuable platform to sell entertainment
related products. Our goal is to make the purchase of music and music-related
products, branded and lifestyle products, and artist-related merchandise simple
and easy for both our web-based audience and MTV Networks' core viewing
audience.
Currently, our network of websites links to third-party merchants,
including CDnow in the United States and Boxman in the United Kingdom, under
agreements which provide us with a flat, guaranteed payment regardless of the
amount of merchandise sold on our sites. These arrangements provide us with a
complete outsourced solution for e-commerce transactions and fulfillment. In the
future, we plan to link a variety of third-party retailers, merchandisers, and
fulfillment centers, utilizing a proprietary commerce platform we have
developed. The procedure for establishing a link includes negotiating the terms
of the link with a suitable third party and integrating our systems with those
of the third party. We believe that by combining online and on-air promotion of
our entertainment programming events with our targeted audience database, we are
creating a significant commerce opportunity.
In addition, we are in the process of building a proprietary ordering
system that is designed to facilitate convenient online purchasing of
pre-recorded music and merchandise. Customers will be able to add items to their
"shopping cart" while using our websites. At any time, customers will be able to
securely "checkout," at which time new customers will need to register and
registered customers will need to enter a username and
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password to retrieve previously saved billing, shipping and credit card
information. We will verify orders submitted for credit card payment for fraud
detection and sufficient funds before releasing them for fulfillment. The
ordering system also will accept alternative modes of payment, such as checks
and money orders and we expect that it will be able to accept digital wallet, or
online debit account, payments in the future. Credit card numbers will be
encrypted and all customer, commerce and transactional data will be stored in
secure databases protected by firewalls. We currently expect that this system
will become operational in the second half of 2000.
In addition to offering commerce across our own sites, we plan to implement
an affiliate program by which we will offer third-party sites the ability to
access our electronic commerce systems to process orders. In exchange for
providing us with these customers, these affiliate sites will receive a
percentage of gross commerce revenue generated by co-branded content. Providing
this service across a consolidated network of sites will allow us to realize
incremental transaction revenue while spreading our costs over our existing
commerce infrastructure. We currently expect that we will implement this program
in the second half of 2000.
We currently offer or intend to offer the following products and services
to consumers through our websites:
<TABLE>
<CAPTION>
PRODUCT LAUNCH DATE* SERVICE PROVIDER DESCRIPTION
- ------- ------------ ---------------- -----------
<S> <C> <C> <C>
CDs..................... June 1998 CDnow (U.S.), Boxman Currently offered in the United
(U.K.), CIM (Brazil) States through CDnow until June 2001
and others with private-label "boutiques" for
MTV.com and VH1.com
Franchise and Artist
Merchandise........... December 1999 WhatsHotNow.com We offer merchandise related to
on-air and online properties, such
as MTV's Total Request Live and
VH1's Behind The Music. We intend to
offer third-party artist-specific
merchandise, such as t-shirts
Digital Downloads....... December 1999 RioPort RioPort provides software and
back-end services for digital audio
downloads
Ticket Sales............ January 2000 Ticketmaster Concert tickets are offered through
our relationships with third-party
ticketing partners or through
auctions, and integrated with
editorial, news or information
relating to particular artists
Auctions................ May 1999 Fairmarket, Ebay Auctions include custom auctions for
MTV's Cool Crap and Real World
Garage Sale and VH1's Rock
Collectors
Live Music Events....... Second House of Blues House of Blues will produce and host
Quarter 2000 live co-branded pay-per-view
concerts and other events which we
will promote and co-present across
our U.S. websites
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT LAUNCH DATE* SERVICE PROVIDER DESCRIPTION
- ------- ------------ ---------------- -----------
<S> <C> <C> <C>
Music Re-mix Software... Second Beatnik We will offer downloads of a
Quarter 2000 software product that allows users
to re-mix music and music tracks
</TABLE>
- ---------------
*Represents launch date of initial offering in the applicable product category.
BUSINESS TO BUSINESS SERVICES
CONTENT SYNDICATION
We have been providing content to third-party websites since the MTV area
was first launched on AOL in 1994. In addition to AOL, we currently provide
content to companies such as Yahoo!, Real Networks and Apple Quicktime, among
others, typically in exchange for an annual license fee, a share of advertising
and e-commerce revenues or equity.
PLATFORM SERVICES AND OTHER BUSINESS TO BUSINESS OFFERINGS
We currently license our technology platforms to other websites. For
example, we license the platform for our streaming audio player to websites that
want to offer multiple genre radio streams for use on a co-branded audio player,
such as HOB.com and Candies.com. Revenue sources from these opportunities may
include license fees, arrangements to share advertising and e-commerce revenues
or equity.
MARKETING AND PROMOTION STRATEGY
Our marketing team consists of 12 employees. We use and intend to continue
to use a variety of methods to create awareness of our websites, most notably
our strong relationship with MTV and VH1. MTV Networks has contractually
committed to vigorously promote us on its television networks through
advertising, VJ mentions, text on screen and other support, for no cash
consideration. The value of this promotion will be at least $100 million, spread
over a five year period ending July 15, 2004. In discussions between our
management and management of MTV Networks, management of MTV Networks indicated
that it intends to cause MTV Networks to provide us with at least an additional
$25 million of on-air promotion over this period, although it is not legally
obligated to do so. Because of these networks' global reach to over 300 million
total television households and their strong connection to music fans worldwide,
they offer us promotional capabilities and opportunities that few other websites
can match. Similarly, each of our websites plans to set aside online advertising
inventory to use to cross promote our other websites, creating a broader
marketing effort that will stimulate customer usage.
We also plan to spend a significant amount of money over the next five
years in cash marketing and promotional activities, including traditional
consumer ads, for example, television, radio, outdoor, online and print;
advertising and music trade ads; contests; tour and concert sponsorships; and
trade shows.
We intend to also use e-mail direct marketing to communicate with
registered users of our websites. Campaigns will include direct notification of
special merchandise offers, live artist chats, music downloads and non-scheduled
live performances. As we continue to build our user databases, we intend to
expand the use of e-mail direct marketing to facilitate user retention and
create loyalty and affinity programs. Users will be able to elect to not receive
e-mail direct marketing.
INFRASTRUCTURE AND OPERATIONS
Our technical architecture has been designed to support the large number of
simultaneous users of our websites, as well as the continued growth in overall
usage throughout our network of websites and services. This architecture has
also been scaled and optimized to provide for dynamic database-driven generation
of content throughout the sites based on continually published updates and
user-preference data and behavior.
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Our network of websites is supported by a core set of technology platforms
managed by our personnel and composed of internally developed applications and
systems as well as third-party tools, systems and services.
The central database back-end architecture for our websites as well as for
affiliate websites is a fully load-balanced, fault-tolerant, and highly scalable
architecture based on Microsoft SQL Server 7.0 and Dell Computer Clustering
Services. All database content is stored on clustered hardware systems so that
if any one system fails, its counterpart immediately and automatically picks up
and continues to deliver that data. In addition, user data is partitioned across
multiple database systems so that as usage increases, addition of new clusters
to handle the load is trivial. This architecture has been developed with
high-level support from Microsoft and Dell Computer, with whom we maintain a
continued consulting relationship.
Features and content of the central database back-end architecture include:
-- a single unified repository for all user sign-up, login, preference
data and behavioral user data;
-- a centralized music information library including artist information,
discographies, bios, news, reviews, concert listings and search data
for related sites;
-- on-air schedules and associations with music data for both MTV/VH1
and other television entities; and
-- links to third parties for e-commerce and downloadable music.
The unified architecture for streaming and downloadable media supporting
our websites and third-party affiliates is a scalable, redundant architecture
based on Sun Microsystems and Dell Computer hardware, Microsoft Windows Media
and Real Networks streaming software, and internally developed publishing, music
programming, and systems management tools. The architecture also integrates
InterVu, iBeam, and Apple, as well as some other hosting services, to provide
additional streaming capacity and fail-over capability beyond our internal
systems.
COMPETITION
Competition among media and Internet companies pursuing online consumers is
intense. The number of sites offering music content and related features has
increased dramatically, and will likely continue to increase due to the
Internet's low entry barriers. Rivalry for consumers' attention and leisure
time, and the associated commerce expenditures and advertising dollars will
therefore become increasingly difficult to capture for all industry
participants.
We compete for audiences, consumers, advertisers and artist relationships
with:
-- music-focused online services, including but not limited to, Launch
Media, ARTISTdirect, Tunes.com, GetMusic.com, MP3.com and Emusic;
-- leading News/Information/Entertainment online sites such as Sony
Online and Warner Bros. Online;
-- online portal services that have music-oriented sections, including
Yahoo!, Lycos and Go.com;
-- online broadcasters such as Broadcast.com, Spinner and NetRadio;
-- online music commerce companies, including retailers such as
Amazon.com, online record clubs such as Columbiahouse, and music
download sites;
-- online music technology companies, including Real Networks;
-- traditional music retailers, including Tower Records and the Virgin
Group, and their respective Internet properties;
-- traditional record labels, including Universal Music Group, Sony
Music Entertainment, Warner Music Group, EMI Music, BMG
Entertainment, and their respective Internet properties; and
-- publishers and distributors of traditional media such as print,
television, cable and radio, such as MTV and VH1.
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We believe that we compete primarily on the basis of our:
-- premier music brands;
-- deep understanding of consumers and branding expertise;
-- quality, depth and popularity of original, exclusive and
affiliate-produced online content;
-- integrated online and on-air convergent programming;
-- integrated online and on-air cross-promotional capabilities;
-- extensive worldwide reach into on-air and online communities; and
-- broad relationship with artists.
INTELLECTUAL PROPERTY
The music, music videos and live and archived webcasts featured on our
network of websites include copyrighted works of third parties, including record
labels, artists and songwriters. Each piece of music or music video content may
have multiple copyright owners, some with rights in the sound recording,
covering the particular performance, others with rights in the musical
composition, covering the lyrics and music, and in the case of music videos,
others with rights to the visual content. We have different licensing
arrangements with some of these parties depending on our use of the song or
music video and the song portion included. In some cases, the rate of royalties
to be paid will be determined by negotiation or an arbitration convened by the
Librarian of Congress. Our arrangements range from formal contracts to informal
agreements based on the promotional nature of the content. In some cases, we pay
a fee to the licensor for use of the music or music video, and in other cases
our use is free. We also use other content, including images, that are
copyrighted works of others. The law dealing with rights to use copyrighted
content online is uncertain and continues to evolve. Although we currently do
not believe licenses are required for some uses of third-party content, owners
of that content could demand that we obtain licenses from them and pay them fees
for future use, or even for past use. Where we believe it necessary to obtain
licenses, we rely on our positive working relationships with copyright owners to
obtain licenses on favorable terms. Any changes in the nature or terms of these
arrangements, including any requirement for us to pay significant fees for the
prior or future use of the content, could have a negative impact on the
availability of content or our business. See "Risk Factors--The cost and scope
of some music rights we use have not been determined and could adversely affect
our business and operating results."
Copyrighted material that we develop internally, as well as trademarks and
domain names relating to the MTV, VH1 and SonicNet brands and other proprietary
rights, are important to our success and our competitive position. We seek to
protect our copyrights, trademarks and other proprietary rights, but these
actions may be inadequate. We generally enter into confidentiality or license
agreements with our key employees, consultants and corporate partners, and
generally control access to and distribution of our proprietary information. We
cannot assure you that the steps we have taken will prevent misappropriation of
our proprietary rights, particularly in foreign countries where laws or
enforcement practices may not protect our proprietary rights as fully as in the
United States. In addition, we rely on MTV Networks to protect intellectual
property rights we license from them, most importantly, the "MTV" and "VH1"
trademarks. If third parties were to use or otherwise misappropriate our
copyrighted materials, trademarks or other proprietary rights without our
consent or approval, our competitive position could be harmed, or we could
become involved in litigation to enforce our rights. It is also possible that we
could become subject to infringement actions based upon the content licensed
from third parties. Any such claims or disputes could subject us to costly
litigation and the diversion of our financial resources and technical and
management personnel. Further, if our efforts to enforce our intellectual
property rights are unsuccessful or if claims by third parties against us are
successful, we may be required to change our trademarks, alter the content and
pay financial damages. We cannot assure you that such changes of trademarks,
alteration of content or payment of financial damages will not adversely affect
our business.
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<PAGE> 54
For a discussion of the arrangements pursuant to which we license the MTV
trademarks and associated logos, see "Certain Relationships and Related
Transactions--License Agreements."
REGULATION
In the United States and abroad there is an increasing number of laws and
regulations pertaining to the Internet, including laws or regulations relating
to the offering of digital music, user privacy, liability for information
retrieved from or transmitted over the Internet, online content regulation,
taxation and domain name registration. Moreover, the applicability to the
Internet of existing laws governing issues such as intellectual property
ownership and infringement, copyright, patent, trademark, trade secret,
obscenity, libel employment and personal privacy is uncertain and developing.
PRIVACY CONCERNS
Legislatures and government agencies have adopted and are considering
adopting additional laws and regulations restricting the collection and use of
personal information obtained from individuals when accessing websites, which
could limit our ability to use our databases to e-mail our users and otherwise
generate revenue. We refer you to "Risk Factors--We may be subject to liability
if private information provided to us by our users were misused."
INTERNET TAXATION
Various legislative proposals would impose additional taxes on the sale of
goods and services over the Internet, which may substantially impair the growth
of commerce on the Internet and, as a result, affect our opportunity to derive
financial benefit from these activities.
DOMAIN NAMES
Domain names are addresses on the Internet, namely the World Wide Web. The
current system for registering, allocating and managing domain names has been
the subject of litigation and proposed regulatory reform. Although we assert
trademark rights in our domain names, third parties may bring claims for
infringement against us for the use of these trademarks. There can be no
assurance that these domain names will not lose their value, or that we will not
have to obtain entirely new domain names in addition to or in lieu of our
current domain names if reform efforts result in a restructuring in the current
system. In addition, third parties may seek to obtain domain names that
incorporate or are based on our or MTV Networks' trademarks. We refer you to
"Risk Factors--We may be unable to acquire necessary web domain names in other
countries which could adversely affect our business if our audiences cannot find
our international websites."
JURISDICTION
Due to the global nature of the Internet, it is possible that the
governments of states and foreign countries might attempt to regulate our
business activities. In addition, as our service is available over the Internet
in multiple states and foreign countries, these jurisdictions may require us to
qualify to do business as a foreign corporation in each of these states or
foreign countries, which could subject us to taxes and other regulations. It is
difficult, if not impossible, to limit the geographical reach of our Internet
websites, so we may be unable to limit our activities to avoid states or foreign
countries that wish to impose legal or financial burdens on us.
FACILITIES
Our principal corporate offices are located in New York, New York where we
occupy portions of two buildings with approximately 100,000 and 14,000 square
feet, respectively, under lease agreements that expire in 2010 and 2009. We also
operate an office in San Francisco, California, where we occupy approximately
8,000 square feet under a lease agreement that expires in 2002.
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<PAGE> 55
EMPLOYEES
As of January 31, 2000, we had 212 full-time employees. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our employee relations to be good.
LEGAL PROCEEDINGS
We are involved in various routine legal proceedings incidental to the
conduct of our business. We do not believe that any of these legal proceedings
will have material adverse effect on our business, financial condition or
results of operations.
In January 2000, we received letters from two major record companies
asserting that some of the features of our Internet radio business make the use
of their music ineligible for a compulsory license under applicable U.S.
copyright law. One of those letters also asserts that we are streaming
full-length music videos without authorization. These letters demand that we
cease our use of their music in these manners and pay for our past use. We
believe that the uses of their music in connection with the features of our
Internet music business is within the scope of the compulsory license and that
the compulsory license fees will be determined as part of a royalty arbitration
convened by the Librarian of Congress. We also believe that use of the videos is
authorized by the terms of our existing agreement with that record company.
Although we cannot provide any assurances, we do not expect that these
assertions will result in a material adverse effect on our business, financial
condition or results of operations.
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<PAGE> 56
MANAGEMENT
EXECUTIVE OFFICERS, SIGNIFICANT EMPLOYEES AND DIRECTORS
Set forth below is information concerning our current executive officers,
directors and significant employees. There are no family relationships among any
officers, significant employees or directors. The ages listed below are as of
December 31, 1999.
Following this offering, our intention is to have a Board of Directors
consisting of seven persons, three of whom will be independent directors that
are not affiliated with us. No person has been identified or has agreed to
become an independent director. However, we intend to identify and elect the
independent directors within 90 days after completion of this offering.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Nicholas Butterworth..................... 32 President, Chief Executive Officer and
Director
Fred Graver.............................. 45 Senior Vice President, VH1.com and
Interim General Manager, SonicNet.com
Alex Maghen.............................. 32 Senior Vice President, Chief Technology
Officer
Peggy Mansfield.......................... 37 Senior Vice President, Advertising Sales
Sumner M. Redstone....................... 76 Chairman of the Board
Philippe P. Dauman....................... 45 Director
Thomas E. Dooley......................... 43 Director
Lee Masters.............................. 48 Director
</TABLE>
EXECUTIVE OFFICERS
Nicholas Butterworth has served as our president and chief executive
officer since 1999 and was appointed as one of our directors in February 2000.
From 1994 to 1999, Mr. Butterworth served in a variety of positions at SonicNet,
the award-winning Internet music service, including president from 1996 to 1999,
editor-in-chief from 1996 to 1998 and creative director from 1994 to 1996.
SIGNIFICANT EMPLOYEES
Fred Graver has served as senior vice president of VH1.com and interim
general manager of SonicNet.com since 1999. Mr. Graver served as an executive
producer for Disney and ABC Cable for its convergence programming since 1995. He
created a variety of television and Web interactive experiences including
ZoogDisney and the Disney Imagineer's "Telefusion" project. Mr. Graver has an
additional 15 years of experience in entertainment as a writer and producer for
"Late Night with David Letterman," as a writer for both "In Living Color" and
"Cheers" and began his career as an editor at National Lampoon.
Alex Maghen has served as senior vice president, chief technology officer
of MTVi Group since 1999. From 1995 to 1999, Mr. Maghen served in various
positions for MTV Networks including vice president of Online & Interactive
Technology and vice president of Production and Technology for Nickelodeon
Online. Mr. Maghen has an additional five years of experience serving as
director of Content Software Development for AT&T's interactive television
projects.
Peggy Mansfield has served as senior vice president, advertising sales for
MTVi Group since 1999. From 1994 to 1999, Ms. Mansfield served as vice president
and publisher of Nickelodeon MediaWorks. Prior to that, Ms. Mansfield served as
advertising director of the Walt Disney Company's Disney Adventures magazine.
Ms. Mansfield has an additional seven years of experience in advertising,
serving in other senior advertising positions at The New York Times Magazine
Group and Earnshaw Publications.
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DIRECTORS
Sumner M. Redstone was appointed as our chairman of the board of directors
in February 2000. Mr. Redstone has been the chairman of the board of Viacom Inc.
since 1987 and its chief executive officer since 1996. Mr. Redstone has served
as chairman of the board of National Amusements, Inc. since 1986 and its chief
executive officer since 1967. He is also a director of Blockbuster Inc.
Philippe P. Dauman was appointed as one of our directors in February 2000.
Mr. Dauman has been deputy chairman of Viacom Inc. since January 1996 and its
executive vice president since 1994. From 1993 until 1998, Mr. Dauman also
served as general counsel and secretary of Viacom Inc. Mr. Dauman is a director
of National Amusements, Inc., Blockbuster Inc. and Lafarge Corporation.
Thomas E. Dooley was appointed as one of our directors in February 2000.
Mr. Dooley has been deputy chairman of Viacom Inc. since 1996 and its executive
vice president since 1994. From 1992 until 1994, Mr. Dooley served as senior
vice president, corporate development, of Viacom Inc. He is also a director of
Blockbuster Inc.
Lee Masters was appointed as one of our directors in February 2000. Mr.
Masters has served as chairman of the board of Liberty Digital since January
1999 and was appointed president and chief executive officer of Liberty Digital
in June 1999. From January 1999 to September 1999, Mr. Masters also served as a
director and president and chief executive officer of a subsidiary of Liberty
Media Corporation. From 1990 to 1998, Mr. Masters served as president and chief
executive officer of E! Entertainment Television. From 1986 to 1989, he served
as executive vice president and general manager of MTV Networks. Mr. Masters'
legal name is Jarl Mohn. Mr. Masters also serves as a director of NewStar Media,
Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to or immediately following the consummation of this offering, we
will establish an audit committee of the board of directors which will consist
solely of three or more independent directors. In addition, we will adopt an
audit committee charter. The audit committee will review, act on and report to
the board of directors with respect to various auditing and accounting matters,
including the selection of our auditors, the scope of the annual audits, fees to
be paid to the auditors, the performance of our independent auditors and our
accounting practices.
Prior to or immediately following the consummation of this offering, we
will establish a compensation committee of the board of directors which will
consist of at least two independent directors. The compensation committee will
determine the salaries and incentive compensation of our officers and provide
recommendations for the salaries and incentive compensation of our other
employees and consultants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1999, MTVi Group did not have a compensation committee or any
other committee serving a similar function. Decisions as to the compensation of
our executive officers were made by the Viacom Inc. Senior Compensation
Committee or the compensation committee of the management committee of the
Partnership.
COMPENSATION OF OUR DIRECTORS
We intend to compensate non-employee directors for their services as
directors, but have not yet determined the amount of compensation. Non-employee
directors will be eligible to participate in The MTVi Group, L.P. Long-Term
Incentive Plan. All of our directors will be reimbursed for their expenses for
each board and committee meeting attended.
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<PAGE> 58
COMPENSATION OF OUR EXECUTIVE OFFICERS
The following summary compensation table sets forth information regarding
compensation paid by the Partnership for fiscal 1999 for services rendered to
the Partnership by our chief executive officer. We did not have any other
executive officers who were serving as such on December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
- ------------------------------------ ---- ---------- --------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Nicholas Butterworth................ 1999...
President and Chief Executive
Officer
</TABLE>
OPTION GRANTS AND HOLDINGS
The following table provides information related to options to purchase
units of the Partnership granted during fiscal 1999 to the executive officer
named in the summary compensation table above.
INDIVIDUAL OPTION GRANTS DURING 1999 FISCAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS EXERCISE
PARTNERSHIP UNITS GRANTED TO OR BASE
UNDERLYING EMPLOYEES IN PRICE EXPIRATION GRANT DATE
NAME OPTIONS FISCAL 1999 ($/SH) DATE PRESENT VALUE($)
- ---------------------------------------------- ----------------- ------------ -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Nicholas Butterworth..........................
</TABLE>
The following table provides information related to the number and value of
options to purchase partnership units held at December 31, 1999 by the executive
officer named in the summary compensation table above. Such executive officer
did not exercise options during fiscal 1999.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AS OF DECEMBER 31, OPTIONS AS OF DECEMBER 31,
1999 1999($)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Nicholas Butterworth.....................................
</TABLE>
THE MTVI GROUP, L.P. LONG-TERM INCENTIVE PLAN
GENERAL DESCRIPTION OF THIS PLAN
The following is a description of the material features of this plan. The
full text of the plan is attached as an exhibit to this registration statement.
This plan provides for the grant of options to purchase units of the
Partnership, as well as restricted Partnership units and, following completion
of this offering, options to purchase shares of Class A common stock and
restricted Class A common stock. Upon the completion of this offering, any
outstanding options to purchase the Partnership units and the restricted
Partnership units will automatically become options to purchase Class A common
stock and restricted Class A common stock, respectively. Approximately 375
employees of the Partnership are eligible for grants under this plan. Our non-
employee directors are also eligible for grants under this plan.
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<PAGE> 59
Prior to this offering, the maximum aggregate number of Partnership units
that may be issued or transferred under this plan, whether reserved for issuance
upon grants of options or granted as restricted awards, was 12,000,000
Partnership units. Upon the consummation of this offering, the maximum aggregate
number of shares of Class A common stock that may be issued or transferred under
this plan, whether reserved for issuance upon grants of options or granted as
restricted awards, will be 12,000,000 shares of Class A common stock (including
the grant for Partnership units and restricted Partnership units granted before
the Offering which converted to options to purchase Class A common stock and
restricted Class A common stock). Partnership units and shares of Class A common
stock covered by expired or terminated stock options and restricted Partnership
units and restricted Class A common stock awards that are forfeited under the
terms of this plan or are settled through the issuance of consideration other
than Partnership units or Class A common stock will not be counted in applying
such limit. Partnership units or shares of Class A common stock issued or
transferred pursuant to awards granted upon assumption of, or in substitution
for, outstanding awards granted by an entity acquired by MTVi Group or the
Partnership will not count against this aggregate limit. This limit will be
increased by the number of Partnership units or shares of Class A common stock
tendered to the Partnership to pay the exercise price or withheld by the
Partnership to satisfy tax obligations.
ADMINISTRATION
This plan is administered by a committee of the Partnership. This committee
must be comprised of at least two individuals.
OPTIONS
Prior to this offering, [NUMBER] options were granted to purchase units of
the Partnership with a $15 exercise price. Upon the completion of this offering,
these options will automatically become options to purchase Class A common
stock. Unless otherwise determined by the committee and set forth in the
applicable agreement, no option shall be subject to exercise unless and until it
has become an option to purchase a share of Class A common stock following this
offering in accordance with the terms of the plan and no recipient of options
will have any right to receive, upon payment of an exercise price or otherwise,
Partnership units or any other direct interest in the Partnership. Following the
completion of this offering, any options granted under this plan will be options
to purchase Class A common stock.
The committee generally determines the number of options granted, the
exercise price of the options, the vesting schedule applicable to the options
and the period during which they may be exercised. The committee may, in its
sole discretion, accelerate the vesting date of any option. No option may be
exercised after the tenth anniversary of the date of grant. Payment for the
Class A common stock issuable upon exercise of an option and, if required by the
Partnership, to satisfy tax withholding obligations related to the option must
be made in full at the time of exercise as follows:
-- in cash;
-- in the discretion of the committee, in shares of Class A common stock
(including the shares of Class A common stock subject to the option);
-- in a combination of cash or Class A common stock;
-- through an exercise procedure by which a participant sells some or
all of the Class A common stock underlying the exercised portion of
the option; or
-- any other method approved by the committee.
Generally, if a participant who is an employee of the Partnership or an
affiliate of the Partnership voluntarily terminates employment or his or her
employment is terminated other than for cause, his or her outstanding options
may be exercised, to the extent then exercisable, for 180 days following the
date of termination. In the event of a participant's death, his or her options
may be exercised, to the extent exercisable at the date of death, by the person
who acquired the right to exercise the options by will or the laws of descent
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<PAGE> 60
and distribution until the one year anniversary of the date of death. In the
event of the permanent disability of a participant who is an employee, his or
her options may be exercised, to the extent exercisable upon the date of the
onset of such permanent disability, until the one year anniversary of such date.
If a nonemployee director ceases to be a member of our board of directors for
any reason, other than due to a termination for cause, his or her stock options
may be exercised to the extent then exercisable, until the one year anniversary
of the date of such termination. If any participant's employment or service is
terminated for cause, then, unless the committee determines otherwise, all
options, whether or not then vested, will be forfeited by the participant
effective as of the date of such termination. The committee generally has the
discretion to set post-termination exercise periods in excess of those described
above. However, in no event may a stock option be exercised following the
earlier to occur of the expiration of the option and the tenth anniversary of
the date of grant. Additionally, in no event may an option be exercisable
following a termination of employment or service while it is an option to
purchase Partnership units.
RESTRICTED AWARDS
Prior to this offering, [NUMBER] restricted Partnership units were granted
under the plan. Upon the completion of this offering, these restricted
Partnership units will automatically become restricted shares of Class A Common
Stock. Following the completion of this offering, any restricted awards granted
under this plan will be for restricted Class A Common Stock. Restricted awards
granted under the plan are subject to a vesting schedule established by the
committee. The committee may, in its discretion, accelerate the dates on which
restricted awards vest. Upon satisfaction of the restrictions and other
conditions specified in the plan and the applicable agreement, the appropriate
number of stock certificates, free of the restrictions, will be delivered to the
participant with any necessary legends. Unless otherwise determined by the
committee and set forth in the applicable agreement, no restricted Partnership
unit will ever be vested, free of restrictions and transferable unless and until
it is exchanged for restricted Class A Common Stock following this offering and
no recipient of restricted Partnership units will have any right to receive
Partnership units which are vested, free of restrictions and transferable or any
other direct interest in the Partnership.
If a participant's employment or service terminates for any reason or, in
the event of the participant's death or, in the case of a participant who is an
employee, permanent disability, the unvested restricted Partnership units and
restricted Class A common stock will be forfeited as of the date of such event,
unless, other than in the case of a termination for cause, the committee
determines otherwise with respect to some or all of the restricted Partnership
units or restricted Class A common stock.
ADJUSTMENTS
In the event of a stock split, stock dividend, recapitalization,
reorganization, merger, consolidation, extraordinary dividend, split-off,
spin-off, combination, exchange of shares, the issuance of warrants or rights to
purchase Partnership units or shares of Class A common stock at a price
substantially below fair market value or other similar corporate event affecting
the Partnership units or shares of Class A common stock, the committee will make
any adjustments, substitutions or conversions it deems appropriate to the
following:
-- the number, kind and class of Partnership units or Class A common
stock subject to any awards under the plan;
-- the exercise price of any outstanding options; and
-- the maximum number of Partnership units and shares of Class A common
stock that may be granted under the plan or the aggregate number of
Partnership units and shares that may be granted to any participant.
The committee also has the right, in its sole discretion, to adjust the
number of shares of Class A common stock which are substituted for Partnership
units upon the consummation of this offering, the exercise price or other
purchase price applicable to any awards and to make any and all other
adjustments as the committee deems necessary or appropriate to preserve the
economic equivalency between Partnership units and shares of Class A common
stock issued or to be issued pursuant to the plan and awards.
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<PAGE> 61
TRANSFER RESTRICTIONS, ETC.
The rights of a participant with respect to the awards granted under this
plan are not transferable by the participant except:
-- by will or the laws of descent and distribution; or
-- to members of the participant's immediate family or trusts whose
beneficiaries are members of the participant's immediate family, as
permitted by the committee.
AMENDMENT AND TERMINATION OF THIS PLAN
This plan, by its terms, expires on October 1, 2004. This plan may be
terminated and may be altered, amended, suspended or terminated at any time, in
whole or in part, by the committee, except that no alteration or amendment will
be effective without shareholder approval if the committee determines that such
approval is required.
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<PAGE> 62
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following summary descriptions of the material terms of agreements to
which we are a party are qualified in their entirety by reference to the
agreement to which each summary description relates, each of which we have filed
as an exhibit to the registration statement of which this prospectus is a part.
TRANSACTIONS ESTABLISHING THE PARTNERSHIP
On July 15, 1999, Liberty Digital and its affiliates, including Liberty
Media Corporation ("Liberty Media"), SonicNet, Inc., The Box Worldwide, Inc.
("The Box Worldwide"), Viacom and its affiliates, MTVN Online Partner I LLC
("MTVN Online Partner"), Imagine Radio, Inc., MTVN Online, Inc. ("MTVN Online"),
and the Partnership, entered into an Organization Agreement. The agreement
governed the formation of the Partnership and the contributions of assets made
by each of the partners and some of their owners. The following diagram sets
forth the organization of the Partnership, its partners and related parties
after giving effect to this offering and the acquisition of Mischief New Media:
[THE MTV I GROUP, INC. FLOW CHART]
- ------------
(1) % equity interest and % voting interest if the underwriters'
over-allotment options are exercised in full.
(2) % equity interest and % voting interest if the underwriters'
over-allotment options are exercised in full. The public stockholders'
percentages include the shares issued in connection with our acquisition of
Mischief New Media and the employment by us of its sole shareholder.
(3) % equity interest if the underwriters' over-allotment options are
exercised in full.
(4) % equity interest if the underwriters' over-allotment options are
exercised in full. The sole asset of Mischief New Media is its interest in
the Partnership.
(5) The sole asset of Mischief New Media is its interest in the Partnership.
(6) % equity interest if the underwriters' over-allotment options are
exercised in full.
(7) % equity interest if the underwriters' over-allotment options are
exercised in full.
(8) % equity interest if the underwriters' over-allotment options are
exercised in full.
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<PAGE> 63
On July 15, 1999, each of MTV Networks, MTVN Online, MTVN Online Partner,
Imagine Radio, SonicNet, Inc. and The Box Worldwide entered into various
contribution, assignment and assumption agreements pursuant to which they
directly or indirectly contributed their respective assets to the Partnership.
Pursuant to the Organization Agreement, Liberty Digital has agreed that, if
AT&T makes available to Liberty Digital the functionality and other requirements
necessary to create television channels which offers viewers the ability to
interact with on-air programming and, if Liberty Digital determines to provide
this kind of channel with respect to music on-air, it will offer the Partnership
the opportunity to enter into a joint venture with Liberty Digital to provide
such a channel. In connection with such a joint venture, the Partnership would
offer the joint venture a license to use the Partnership's music database,
digitized music database and customer database on terms no less favorable than
those of the Database and Software License Agreement described below.
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
On July 15, 1999, MTVN Online Partner, Imagine Radio, SonicNet, Inc. and
The Box Worldwide entered into the Agreement of Limited Partnership, which
agreement will be amended and restated by the parties and MTVi Group
concurrently with this offering.
Under the amended and restated agreement of limited partnership, the
business of the Partnership is to develop, operate, manage, market, promote,
distribute and license text, audio and/or video music, music-related and
music-themed services online and to engage in related activities, including
e-commerce applications and consumer oriented commercial transactions. The
business of the Partnership includes services intended principally to be
delivered to Internet "browsers" or software with "browser functionality," even
if operating through a set-top box or television set and/or are used to deliver
video clips or video programs. The terms "browsers" and "browser functionality"
refer to software consisting of or containing a graphical user interface which
provides the capability for the user to exercise substantial control over the
selection, timing, sequence and configuration of content being viewed, when such
software is used to view content that has been specifically adapted to be
subject to user control, and is not intended to be viewed in a linear,
sequential manner. The business of the Partnership is not intended to include
businesses that are substantially similar to the businesses traditionally
conducted by television, cable and satellite television program services. The
Partnership may elect to expand the scope of its business, but if it does so,
the noncompetition and other covenants described under "Amended and Restated
Parent Agreement" and "License Agreements" will apply only to the business
described above.
MTVi Group, as general partner, manages the Partnership and appoints such
officers as it chooses.
Partnership units are freely transferable by the partners, subject to the
following exceptions:
-- If Viacom and its affiliates decide to transfer units in the
Partnership, they must comply with the Stockholders Agreement,
described below, which provides Liberty Digital with tag along rights
in some circumstances.
-- Viacom and its affiliates have a right of first offer, pursuant to
which Liberty Digital may transfer any or all of its units in the
Partnership so long as it first allows Viacom and its affiliates to
make an offer to purchase such partnership units.
Liberty Digital has a limited preemptive right, pursuant to which it may
maintain its percentage interest in the Partnership relative to that of Viacom
and its affiliates, other than MTVi Group, by purchasing a proportional number
of any additional partnership units sold by the Partnership to Viacom and its
affiliates, other than MTVi Group.
Under an exchange agreement, holders of limited partnership units, other
than MTVi Group, may exchange partnership units for shares of Class A common
stock in MTVi Group on a one-for-one basis. See "Description of Capital Stock
and Partnership Units--Partnership Units." If MTVi Group issues additional
stock, other than in an exchange of partnership units, MTVi Group must
contribute to the Partnership the
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consideration received for such additional stock. MTVi Group will receive, in
exchange, additional limited partnership units.
The Partnership will continue indefinitely at the discretion of the general
partner, subject to some termination events.
AMENDED AND RESTATED PARENT AGREEMENT
In connection with the formation of the Partnership, MTV Networks, Liberty
Digital, Liberty Media, SonicNet, Inc., The Box Worldwide and the Partnership
entered into the Parent Agreement and Guaranty on July 15, 1999. This agreement
will be amended and restated by the parties and MTVi Group concurrently with
this offering.
Under this agreement, as amended, Liberty Media and its affiliates have
agreed not to compete with the business of MTVi Group until the earlier of July
15, 2002 or the date on which Viacom and its affiliates cease to own shares, or
the equivalent partnership units, which entitle them to a majority of votes for
the election of directors of MTVi Group. Until the earlier of July 15, 2004 or
the date on which Viacom and its affiliates cease to own the equivalent
partnership units described in the preceding sentence, Liberty Media and its
controlled affiliates cannot own, operate or invest in any television services
principally devoted to music-related or music-themed programming, with various
enumerated exceptions.
MTV Networks has agreed to give Liberty Digital the right with some
restrictions to participate on a pro rata basis in any operations of, or any
investments made by MTV Networks in, any entity which engages in a business
similar to ours for a period ending on July 15, 2004. MTV Networks has also
agreed, for a period ending on July 15, 2004, that if it promotes a business
similar to the business of MTVi Group but not owned or operated by MTVi Group or
the Partnership, it will do so only on commercial terms. These provisions will
not apply if Liberty Digital owns less than the equivalent of 5% of the shares
of MTVi Group, is in material default of provisions of the agreements described
herein or has transferred part of their interest in MTVi Group or the
Partnership other than as permitted.
Liberty Media will be released from its obligations not to compete under
the amended and restated parent agreement in certain circumstances upon the
transfer of its assets to a subsidiary of Liberty Media.
STOCKHOLDERS AGREEMENT
Concurrently with this offering, Liberty Digital, Viacom, MTVi Group, MTVN
Online Partner, Imagine Radio, SonicNet, Inc. and The Box Worldwide will enter
into a stockholders agreement. Under this agreement, Viacom and its affiliates
will agree that, so long as Liberty Digital and its affiliates own the
equivalent of at least 5% of the shares of MTVi Group, are not in material
default and have not transferred part of their partnership units in violation of
the Partnership Agreement, they will vote for one director of MTVi Group
nominated by Liberty Digital and its affiliates. They have also agreed that, so
long as the same requirements are met, Liberty Digital and its affiliates will
have limited preemptive rights, which will provide them the ability to maintain
their percentage interest in MTVi Group relative to that of Viacom and its
affiliates, other than MTVi Group, by purchasing a proportional number of shares
of any additional capital stock issued by MTVi Group to Viacom and its
affiliates, other than MTVi Group, other than in exchange for partnership units
or pursuant to some employee stock plans.
Viacom and its affiliates have a right of first offer such that if Liberty
Digital and its affiliates decide to transfer any of the stock in MTVi Group
held by them to someone other than a transferee expressly permitted by the
agreement, they must first allow Viacom and its affiliates to make an offer to
purchase such stock.
Liberty Digital and its affiliates will have tag along rights and drag
along obligations. If, at any time before the sixth anniversary of this
offering, Viacom and its affiliates decide to sell interests in MTVi Group or
partnership units in an amount that either would entitle the person to whom they
were transferred to beneficially own shares entitling it to a majority of the
votes that might be cast in the election of directors of MTVi Group or would
cause Viacom and its affiliates to cease to own at least a majority of the
combined shares of MTV Group and the partnership units of the Partnership.
Viacom and its affiliates must offer Liberty
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Digital and its affiliates the opportunity to participate in the sale. In
addition, if at any time before the sixth anniversary of this offering, Viacom
and its affiliates decide to sell capital stock in MTVi Group in an amount that
either would permit the purchaser to cast a majority of the votes that might be
cast in an election of directors of MTVi Group or would cause Viacom and its
affiliates to cease to own at least a majority of the combined shares of MTV
Group and the partnership units of the Partnership, Viacom and its affiliates
may require Liberty Digital and its affiliates to sell the same percentage of
stock held by them in MTVi Group or partnership units in the Partnership, as
applicable, but Viacom and its affiliates may exercise this tag along right no
more than once.
Liberty Digital and its affiliates will also have a put right, and Viacom
and its affiliates will have a call right. For sixty days beginning July 15,
2004, Viacom and its affiliates may be required by Liberty Digital to purchase
all units in the Partnership and stock in MTVi Group exchanged for partnership
units held by Liberty Digital. For sixty days beginning July 15, 2005, Viacom
may require Liberty Digital to sell to Viacom and its affiliates all partnership
units and stock in MTVi Group exchanged for units in the Partnership held by
Liberty Digital.
At any time after the offering, to the extent permitted by any lock-up
provision which applies to the shares, Liberty Digital and its affiliates will
have demand registration rights. These rights will entitle Liberty Digital to
require that MTVi Group effect a registration statement for the resale of its
shares provided that (1) at least 25% of the shares owned by them are to be
registered and (2) MTVi Group has not delivered a legal opinion to the effect
that registration is not required. There is a limit of two such demands.
In addition, each time MTVi Group effects a registration statement for the
sale of its shares, MTVi Group must give Liberty Digital at least 20 days'
notice of the registration, provided that Liberty Digital and its affiliates
beneficially own at least 1% of the outstanding shares of MTVi Group. At that
point, Liberty Digital may exercise its piggy-back registration rights and
request MTVi Group to include shares held by Liberty Digital and its affiliates
in the registration statement. If the offering pursuant to the registration
statement is underwritten, the shares beneficially owned by Liberty Digital and
its affiliates may be excluded from the offering to the extent that the managing
underwriter so recommends. MTVi Group is not required to reduce the number of
shares it intends to offer or the price for those shares in order to accommodate
a piggy-back registration.
LICENSE AGREEMENTS
In connection with the formation of the Partnership on July 15, 1999, MTVN
Online Partner entered into a series of agreements which MTVN Online Partner has
assigned to the Partnership pursuant to the contribution, assignment and
assumption agreements referred to above. MTVi Group believes that, due to the
relationship of MTVN Online Partner with MTV Networks, the terms of these
agreements are more favorable to MTVN Online Partner than terms MTVN Online
Partner could have obtained in the absence of such relationship. Because these
agreements were assigned to the Partnership, for purposes of this discussion we
will refer to the Partnership as the party in interest rather than MTVN Online
Partner.
The parties to the agreements agreed in some cases to provide services and
in other cases to license assets for use in connection with licensed services.
Licensed services include the interactive services of distributing text, audio
and/or video music and music-related and music-themed services online and the
advertising and promotion of those services in the business of the Partnership,
excluding the manufacture or sale of goods. The business of the Partnership
includes the development, operation, management, marketing, promotion,
distribution and licensing of text, audio and/or video music, music-related
and/or music-themed services online. For purposes of the licensed services, the
business of the Partnership is limited as described under
"--Amended and Restated Agreement of Limited Partnership," without giving effect
to any expansion of the scope of the business by the general partner.
TRADEMARK LICENSE AGREEMENT
Under this agreement, MTV Networks granted to the Partnership an exclusive,
royalty-free license for the worldwide use of specified trademarks, including
MTV.com, VH1.com, MTV Online and VH1 Online, in
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connection with the licensed services and for goods sold or distributed in
connection with the business of the Partnership.
MTV Networks also granted to the Partnership a non-exclusive, royalty-free
license to use specified trademarks, including MTV, VH1, MTV: Music Television
and VH1 Music First, in connection with the licensed services. The Partnership
is expressly prohibited from using these trademarks in connection with any other
media and producing any goods or products bearing these marks. These licenses
were granted on a quitclaim basis, meaning that MTV Networks granted a license
for the specified trademarks to the extent MTV Networks had any rights to the
specified trademarks, without making any representations or warranties as to the
extent or validity of any such rights. Further restrictions on the use of the
licensed trademarks include the following:
-- MTV Networks has pre-approval rights over every use of the licensed
trademarks;
-- MTV Networks has pre-approval rights over every use of any licensed
trademark in combination with any other trademark;
-- MTV Networks has pre-approval rights over every placement of a link
from a website operating under one of the licensed trademarks to any
other website;
-- if the Partnership authorizes a link from a third party's website to
a website that operates under one of the licensed trademarks, MTV
Networks has the right to demand that the authorization of the link
be retracted; and
-- the Partnership is not permitted to promote or distribute any
products or services under any trademark that MTV Networks determines
is competitive with the businesses associated with the trademarks of
MTV Networks.
These limitations on the ability to use key trademarks may significantly
limit our ability to develop and conduct marketing campaigns, enter into
relationships with third parties, and modify website designs, without obtaining
the consent of MTV Networks, which it is under no obligation to grant.
MTV Networks can continue to use and license these trademarks in any media.
However, until July 15, 2002, MTV Networks cannot use or license to a third
party the MTV and VH1 trademarks in connection with the activities that the
Partnership is authorized to pursue using these trademarks, except for
advertising, sponsorship or promotion consistent with past practice. For the
remainder of the term, MTV Networks cannot use or license to a third party the
MTV and VH1 trademarks as a domain name or to brand or co-brand a service in
connection with activities which, if operated by the Partnership, would be
licensed services.
This agreement terminates automatically on July 15, 2049, and does not
automatically renew. This agreement automatically terminates upon termination of
the Programming License Agreement (described below) due to material breach by
the Partnership after the notice requirements set forth in the Trademark License
Agreement have been met or upon specified bankruptcy or liquidation events
involving the Partnership. This agreement may be terminated by MTV Networks with
notice (1) upon continuing default by the Partnership and (2) upon continuing
abandonment by the Partnership of the online music business. This agreement also
may be terminated in part by MTV Networks in any country or jurisdiction where
the license granted is determined to infringe or to be invalid or, with some
exceptions, is in violation of law or court order.
PROGRAMMING LICENSE AGREEMENT
Under this agreement, MTV Networks granted, on a quitclaim basis, to the
Partnership a worldwide, royalty-free, non-exclusive license to exhibit up to 10
minutes of any programming and program elements produced by MTV and VH1 in
connection with the business of the Partnership, provided that MTV Networks owns
or has obtained rights for the online use of this programming and program
elements, and that these rights are licensable without requiring MTV Networks to
make any additional payments for online use. The Partnership, not MTV Networks,
is responsible for obtaining any necessary consents or licenses for the
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exhibition of the programming. MTV Networks must reasonably cooperate, but has
no obligation to obtain or negotiate for these rights.
The license granted under this agreement is not exclusive, but until July
15, 2002, MTV Networks cannot use or license to a third party the exhibition of
programming and program elements produced by MTV and VH1 in connection with
activities which, if operated by the Partnership, would be licensed services,
except for advertising or promotion consistent with past practice. For the
remainder of the term, MTV Networks cannot authorize the online display by a
third party of substantial blocks of programming and program elements produced
by MTV and VH1 in connection with activities which, if operated by the
Partnership, would be licensed services.
The Partnership may not edit the programming in any way without the prior
approval of MTV Networks, which it is under no obligation to grant. The
Partnership may have to pay amounts to cover royalty and other fees in order to
exhibit certain programming if MTV Networks must pay a third party for the
exhibition. MTV Networks has the right to protect, and the Partnership must
assist in the protection of, the intellectual property rights in the
programming. MTV Networks also retains the merchandising rights in the
programming.
If the Partnership creates programming or obtains rights to programming
which it can license, MTV Networks has the right to negotiate first with the
Partnership to license such programming, and if these negotiations do not yield
an agreement, then MTV Networks also has the right of first refusal on any terms
reached with a third party with regard to this programming.
This Programming License Agreement may be terminated at any time by mutual
consent of MTV Networks and the Partnership. Otherwise, this agreement
terminates automatically on July 15, 2049. This agreement also automatically
terminates upon termination of the Trademark License Agreement or upon a
bankruptcy or liquidation event of the Partnership. This agreement may be
terminated by MTV Networks with notice of continuing default by the Partnership.
This agreement may be terminated in part by MTV Networks in any country or
jurisdiction where the programming license granted is determined to infringe or,
with some exceptions, is in violation of law or court order.
PROMOTION AGREEMENT
Under this agreement, MTV Networks has agreed to vigorously promote the
business of the Partnership on MTV, VH1 and any other programming services that
MTV Networks controls through advertising, VJ mentions, text on screen, web
links and other support. For the first five years of the term, which commenced
on July 15, 1999, the promotion will have a fair market value of at least $100
million. In discussions between our management and management of MTV Networks,
management of MTV Networks indicated that it intends to cause MTV Networks to
provide us with additional promotion having a fair market value of $25 million
over this five year period, although it is not legally obligated to do so.
This agreement expires two years after Viacom Inc. and its wholly owned
subsidiaries, including Imagine Radio, cease to own at least 50% of the equity
interests of the Partnership, but in any event not earlier than July 15, 2004.
This agreement may be terminated earlier by either party with notice upon a
bankruptcy or liquidation event or for a continuing breach. However, so long as
Viacom Inc. and its wholly owned subsidiaries, including Imagine Radio, own a
majority of the interests in the Partnership or the right to designate a
majority of the management committee of the Partnership, MTV Networks cannot
terminate this agreement solely for breach by the Partnership of this agreement.
MTV Networks can terminate this agreement upon 10 days' prior notice if Liberty
Digital and its subsidiaries cease to own any equity interests in the
Partnership.
TECHNOLOGY SHARING AND LICENSE AGREEMENT
Under this agreement, MTV Networks, InfoWorks, also a division of Viacom,
and MTVN Online granted to the Partnership, on a quitclaim basis, a
non-exclusive and, with some exceptions, nontransferable license to use
machine-executable programming instructions and the related source code and
applicable programming interface owned by them and used in connection with the
businesses contributed by Viacom to
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the Partnership. The Partnership can use the licensed materials only in
connection with the business of the Partnership. The Partnership also has the
same rights, so long as it pays royalties and fees to, and receives the consent
of, the third-party licensors, to license computer software products and related
documentation licensed by MTV Networks, InfoWorks and MTVN Online from
third-party licensors in connection with the businesses contributed by Viacom to
the Partnership.
This agreement terminates automatically on July 15, 2049. This agreement
also automatically terminates upon a bankruptcy or liquidation event of the
Partnership. This agreement may be terminated earlier by MTV Networks, InfoWorks
and MTVN Online with notice (1) on continuing default by the Partnership and (2)
upon continuing abandonment by the Partnership of the online music business. The
Box Worldwide and SonicNet, Inc. have the right to cure either event in clauses
(1) and (2) if MTV Networks, InfoWorks and MTVN Online own a majority of the
outstanding equity in the Partnership, and Liberty Digital and its wholly owned
subsidiaries hold at least 5% of the partnership units in the Partnership and
have not defaulted under the Partnership formation agreements described above.
MTV Networks, Infoworks and MTVN Online Partner have the right to terminate the
agreement in part if the use of the licensed products results in infringement of
a third party's rights or causes one of them to breach a license obligation owed
to a third party.
MUTUAL SERVICES AGREEMENT
Under this agreement, Viacom agreed to provide services to the Partnership
and MTVi Group. These services include, among others, accounts payable and
purchasing, financial and risk management, auditing, tax, legal, information,
creative and international management services. The Partnership agreed to
provide access to market research and music entertainment news, as well as
online production and hosting services, to various programming services owned by
Viacom and operated by MTV Networks. Each party is obligated to reimburse the
other party for direct costs and expenses as well as a pro rata share of such
party's overhead.
This agreement terminates on July 15, 2004, but may be terminated earlier
with notice by either party with respect to services such party is owed. Either
party may terminate with notice for continuing breach, except that so long as
Viacom and its subsidiaries, including Imagine Radio, own a controlling interest
in the Partnership, MTV Networks cannot terminate the agreement for breach by
the Partnership other than nonpayment to Viacom.
DATABASE AND SOFTWARE LICENSE AGREEMENT
The Partnership has granted to MTV Networks a royalty-free, non-exclusive
license to use its music database, digitized music database and customer
database, as well as related customer data and demographic information. MTV
Networks may only use the licensed databases for the purpose of conducting its
business and may sublicense the licensed databases to its affiliates for use in
connection with the operation of their businesses.
This Database and Software License Agreement terminates on the earlier of
July 15, 2049 and five years following the date on which MTV Networks and its
affiliates own, in the aggregate, less than 25% of the equity interests in the
Partnership. This agreement terminates automatically upon a bankruptcy or
insolvency event of MTV Networks. The Partnership may terminate this agreement
at any time if the use of the materials licensed under this agreement infringes
on a third party's intellectual property rights or is illegal or with notice
upon continuing breach.
REGISTRATION RIGHTS AGREEMENT
As of the completion of this offering, we will enter into a registration
rights agreement with Viacom which requires us, from time to time upon Viacom's
request, to use our reasonable best efforts to register under the applicable
federal and state securities laws any of the shares of our equity securities
owned by Viacom and its affiliates for sale in accordance with Viacom's intended
method of disposition, and will take such other actions as may be necessary to
permit the sale in other jurisdictions, provided that at least 10% of the shares
owned by them are to be registered.
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In addition, each time we effect a registration statement for the sale of
our shares, we must give Viacom at least 20 days' notice of the registration,
provided that Viacom and its affiliates beneficially own at least 10% of our
outstanding shares. At that point, Viacom may exercise its piggy-back
registration rights and request that we include shares held by Viacom and its
affiliates in the registration statement. If the offering pursuant to the
registration statement is underwritten, we may exclude from the offering the
shares beneficially owned by Viacom and its affiliates to the extent that the
managing underwriter so recommends. We are not required to reduce the number of
shares we intend to offer or the price for those shares in order to accommodate
a piggy-back registration.
Except for our legal and accounting fees and expenses, the registration
rights agreement provides that Viacom will generally pay all or its pro rata
portion of out-of-pocket costs and expenses relating to each such registration
that Viacom requests or in which Viacom participates. With some specified
limitations, the registration rights will be assignable by Viacom and its
assigns. The registration rights agreement will contain indemnification and
contribution provisions that are customary in transactions similar to those
contemplated by this prospectus.
INDEMNIFICATION AGREEMENT
As of the completion of this offering, we will enter into an
indemnification agreement with Viacom pursuant to which both parties will agree
to indemnify each other and to release each other with respect to some matters.
We will generally agree to indemnify Viacom and some of its affiliates against
all liabilities arising out of any material untrue statements and omissions in
any prospectus and any related registration statement filed with the SEC
relating to this offering or any other primary offering of our common stock or
our other securities. However, our indemnification of Viacom will not apply to
information relating to Viacom, excluding information relating to us. Viacom
will agree to indemnify us for this information.
CREDIT AGREEMENT WITH VIACOM INC.
The following is a summary of the material provisions of the Partnership's
credit agreement with Viacom Inc.
The Partnership expects to enter into a $200 million senior unsecured
credit agreement with Viacom Inc. as the lender prior to completion of this
offering. The agreement provides that the Partnership can borrow up to $200
million on a revolving basis until the maturity date. The credit agreement will
have a term of two years. Proceeds from borrowings may be used by the
Partnership for working capital and other general corporate purposes. There are
no mandatory prepayment requirements.
Borrowings under the Partnership's credit agreement will accrue interest at
a rate equal to the interest rates prevailing on the date of determination in
the London interbank market for the interest period selected by the Partnership,
plus a margin of 1% over this rate. The Partnership will pay commitment fees on
the undrawn portion of the facility.
The Partnership's credit agreement contains customary covenants for the
Partnership not to, among other things:
-- grant liens;
-- merge;
-- sell substantially all of its assets;
-- incur additional indebtedness; and
-- invest in or make loans to any business, other than investments or
loans that are reasonably related to the operation or growth of the
Partnership's core business.
Events of default under the Partnership's credit agreement include, among
others: failure to pay principal and interest when due, breach of the
representations and warranties, failure to perform or observe some of the
covenants, a cross default with other indebtedness, and bankruptcy. In the event
of a default or nonpayment upon maturity, Viacom will have the rights of a
senior creditor.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Class A common stock and Class B common stock as of
, 2000 by:
(1) each person known by MTVi Group to own beneficially more than 5%
of the outstanding shares of common stock;
(2) each of MTVi Group's directors;
(3) the named executive officer; and
(4) all current executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES % OF SHARES
BENEFICIALLY OWNED(1) BENEFICIALLY OWNED % OF VOTING POWER
---------------------- -------------------- --------------------
BEFORE AFTER BEFORE AFTER BEFORE AFTER
NAME OFFERING OFFERING OFFERING OFFERING OFFERING OFFERING
- --------------------------- --------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Viacom International
Inc......................
1515 Broadway
New York, NY 10036
Liberty Digital, Inc.......
12312 West Olympic Blvd.
Los Angeles, CA 90064
Nicholas Butterworth.......
Summer M. Redstone.........
Philippe P. Dauman.........
Thomas E. Dooley...........
Lee Masters................
All current executive
officers and directors as
a group (five
persons)(2)..............
</TABLE>
- ------------
* Represents less than 1%.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, limited by community property laws where applicable.
Shares of Class A common stock for which there are outstanding options that
are currently exercisable or exercisable within 60 days of the date of this
prospectus are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person.
(2) Includes shares of Class A common stock issuable upon exercise
of options exercisable within 60 days following the date of this prospectus.
Excludes shares of Class A common stock issuable upon exercise
of options, which options are not exercisable within 60 days following the
date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of Class A common stock offered hereby for
employees and directors of MTVi Group and business associates and related
persons of MTVi Group and its affiliates who have expressed an interest in
purchasing such shares of Class A common stock in the offering. Some of the
officers and directors set forth above may acquire additional shares of Class A
common stock in the offering through such program or otherwise. We refer you to
"Underwriters."
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The following table sets forth the number of shares of each class of
Viacom's common stock beneficially owned as of December 31, 1999 by (1) each of
MTVi Group's directors; (2) the named executive officer; and (3) all current
executive officers and directors as a group.
BENEFICIAL OWNERSHIP OF VIACOM EQUITY SECURITIES
<TABLE>
<CAPTION>
TITLE OF NUMBER OF NUMBER OF PERCENT
NAME EQUITY SECURITY EQUITY SHARES OPTION SHARES(1) OF CLASS
- ----------------------------- --------------- ------------- ---------------- --------
<S> <C> <C> <C> <C>
Nicholas Butterworth......... Class A common -- -- --
Class B common -- -- --
Sumner M. Redstone........... Class A common 93,658,988(2) -- 67.7%
Class B common 104,334,988(2) 2,583,333 18.7%
Philippe P. Dauman........... Class A common 2,121(3) -- *
Class B common 17,485(3) 1,490,000 *
Thomas E. Dooley............. Class A common 7,666(3) -- *
Class B common 8,530(3) 1,464,000 *
Lee Masters.................. Class A common -- -- --
Class B common -- -- --
Our current executive
officers and directors and
as a group (five
persons)................... Class A common 93,668,775 -- 67.7%
Class B common 104,361,003 5,537,333 19.3%
</TABLE>
- ---------------
* Less than 1%.
(1) Reflects shares for which there are outstanding options to purchase such
shares which on December 31, 1999 were unexercised but were exercisable
within a period of 60 days from that date. These shares are excluded from
the column headed "Number of Equity Shares."
(2) Except for 160 shares of each class of Common Stock owned directly by Mr.
Redstone, all shares are owned by National Amusements, Inc. Mr. Redstone is
the Chairman and the beneficial owner of the controlling interest in
National Amusements and accordingly, beneficially owns all such shares.
(3) Includes shares held through Viacom Inc.'s 401(k) plan as of December 31,
1999.
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DESCRIPTION OF CAPITAL STOCK AND PARTNERSHIP UNITS
The following description of the capital stock of MTVi Group and provisions
of the certificate of incorporation, and the by-laws, each of which will be in
effect prior to the date of this prospectus, are summaries and are qualified by
reference to the certificate of incorporation and the by-laws, copies of which
have been filed with the Commission as exhibits to MTVi Group's registration
statement, of which this prospectus forms a part.
The authorized capital stock of MTVi Group consists of
shares of Class A common stock, par value $.01 per share,
shares of Class B common stock, par value $.01 per share, and
shares of preferred stock, par value $.01 per share.
COMMON STOCK
As of the completion of the offering, there will be shares
of Class A common stock issued and outstanding excluding shares to be issued if
underwriters exercise their over-allotment option. In addition, there will be
shares of Class B common stock issued and outstanding and
beneficially held of record by Viacom.
VOTING RIGHTS. The holders of Class A common stock and Class B common
stock generally have identical rights, except each holder of Class A common
stock is entitled to one vote per share and each holder of Class B common stock
is entitled to the number of votes per share equal to: (1) ,
multiplied by the sum of (a) the aggregate number of shares of Class B common
stock owned by such holder and (b) the aggregate number of partnership units
beneficially owned by such holder and the pro rata portion, based on its
ownership of Class B common stock, of the aggregate number of partnership units
beneficially owned by affiliates of such holder divided by (2) the number of
shares of Class B common stock owned by such holder. Holders of shares of Class
A common stock and Class B common stock are not entitled to cumulate their votes
in the election of directors. Generally, all matters to be voted on by
stockholders must be approved by at least a majority of the votes entitled to be
cast by all shares of Class A common stock and Class B common stock present in
person or represented by proxy, voting together as a single class, limited by
any voting rights granted to holders of any preferred stock. Except as otherwise
provided by law or as limited by the terms of any voting rights granted to
holders of any outstanding preferred stock, amendments to the certificate of
incorporation must be approved by at least a majority of the combined voting
power of all of Class A common stock and Class B common stock, voting together
as a single class. However, amendments to the certificate of incorporation that
would alter or change the powers, preferences or special rights of Class A
common stock or Class B common stock so as to affect them adversely also must be
approved by at least a majority of the votes entitled to be cast by the holders
of the shares affected by the amendment, voting as a separate class.
Notwithstanding the foregoing, any amendment to MTVi Group's certificate of
incorporation to increase or decrease the authorized shares of any class shall
be approved upon the affirmative vote of the holders of a majority of the Class
A and Class B common stock, voting together as a single class. Holders of a
majority of the outstanding shares of Class B common stock may, without a vote
of the holders of Class A common stock, approve a merger of the Partnership into
MTVi Group.
DIVIDENDS. Holders of Class A common stock and Class B common stock will
share ratably, based on the number of shares of common stock held, in any
dividend declared by the board of directors, subject to any preferential rights
of any outstanding preferred stock. Dividends consisting of shares of Class A
common stock and Class B common stock may be paid only as follows: (1) shares of
Class A common stock may be paid only to holders of shares of Class A common
stock, and shares of Class B common stock may be paid only to holders of Class B
common stock; and (2) shares shall be paid proportionally with respect to each
outstanding share of Class A common stock and Class B common stock. MTVi Group
may not subdivide or combine shares of either class of common stock without at
the same time proportionally subdividing or combining shares of the other class.
CONVERSION OF CLASS B COMMON STOCK. Each share of Class B common stock is
convertible at the option of the holder of the share into one share of Class A
common stock. If the number of outstanding shares of Class B common stock plus
the number of partnership units owned by the holders of Class B common stock
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and their affiliates falls below 15% of the number of outstanding shares of
Class A common stock, assuming conversion of all outstanding Class B common
stock and exchange of all outstanding partnership units, then all outstanding
shares of Class B common stock shall automatically convert into Class A common
stock.
OTHER RIGHTS. In the event of any merger or consolidation of MTVi Group
with or into another company in connection with which shares of common stock are
converted into or exchangeable for shares of stock, other securities or
property, including cash, all holders of common stock, regardless of class, will
be entitled to receive the same kind and amount of shares of stock and other
securities and property, including cash.
On liquidation, dissolution or winding up of MTVi Group, after payment in
full of the amounts required to be paid to holders of preferred stock, if any,
all holders of common stock, regardless of class, are entitled to share ratably
in any assets available for distribution to holders of shares of common stock.
No shares of any class of common stock are subject to redemption or have
preemptive rights to purchase additional shares of common stock, except for the
limited preemptive right held by Liberty Digital, as described in "Certain
Relationships and Related Transactions."
Upon consummation of the offering, all the outstanding shares of Class A
common stock and Class B common stock will be legally issued, fully paid and
nonassessable.
PREFERRED STOCK
Upon the closing of the offering, the board of directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of million shares of preferred stock in one or
more series and to fix the numbers, powers, designations, preferences, rights
and any qualifications, limitations or restrictions of the shares of each such
series thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. Upon the closing of the
offering, there will be no shares of preferred stock outstanding. MTVi Group has
no present plans to issue any shares of preferred stock. We refer you to
"--Anti-Takeover Effects of Some of the Provisions of Our Certificate of
Incorporation and Bylaws and Section 203 of the Delaware General Corporation
Law."
OPTIONS
As of , 2000, options to purchase a total of
shares, the option shares, of Class A common stock were outstanding,
of which are restricted by lock-up agreements entered into with
the underwriters. Of the remaining option shares,
will be eligible for sale immediately following the completion of the offering.
The total number of shares of Class A common stock for which options may be
granted under The MTVi Group, L.P. Long-Term Incentive Plan shall be equal to
shares of common stock. We refer you to "Shares Eligible for
Future Sale."
LIMITATION ON LIABILITY OF DIRECTORS
Our certificate of incorporation provides that our directors will not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability imposed by law, as in effect
from time to time:
-- for any breach of the director's duty of loyalty to us or our
stockholders;
-- for any act or omission not in good faith or which involved
intentional misconduct or a knowing violation of law;
-- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
-- for any transaction from which the director derived an improper
personal benefit.
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The inclusion of this provision in our certificate of incorporation may
have the effect of reducing the likelihood of derivative litigation against our
directors and may discourage or deter stockholders or us from bringing a lawsuit
against our directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefitted us and our stockholders.
ANTI-TAKEOVER EFFECTS OF SOME OF THE PROVISIONS OF OUR CERTIFICATE OF
INCORPORATION AND BYLAWS AND SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Some of the provisions of our certificate of incorporation and bylaws and
Section 203 of the Delaware General Corporation Law could have the following
effects, among others:
-- delaying, deferring or preventing a change in control;
-- delaying, deferring or preventing the removal of our existing
management;
-- deterring potential acquirors from making an offer to our
stockholders; and
-- limiting our stockholders' opportunity to realize premiums over
prevailing market prices of our common stock in connection with
offers by potential acquirors.
This could be the case, despite the fact that a majority of our stockholders
might benefit from such a change in control or offer. The following is a summary
of these provisions.
DIRECTORS, AND NOT STOCKHOLDERS, FIX THE SIZE OF OUR BOARD OF
DIRECTORS. Our certificate of incorporation and bylaws provide that the number
of directors shall be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of our board of directors, but in no event
shall it consist of less than three nor more than fifteen.
BOARD VACANCIES TO BE FILLED BY REMAINING DIRECTORS, AND NOT
STOCKHOLDERS. Our certificate of incorporation and bylaws provide that any
vacancies on our board of directors will be filled by the affirmative vote of
the majority of the remaining directors, even if less than a quorum, or by a
sole remaining director. In any event, no vacancy shall be filled by our
stockholders.
ADVANCE NOTICE FOR STOCKHOLDER PROPOSALS. Our bylaws contain provisions
requiring that advance notice be delivered to us of any business to be brought
by a stockholder before an annual meeting and providing for procedures to be
followed by stockholders in nominating persons for election to our board of
directors. Generally, such advance notice provisions require that the
stockholder must give written notice to us not less than 120 calendar days
before the date our proxy statement was released to stockholders in connection
with our previous year's annual meeting. Our bylaws provide that the notice must
set forth specific information regarding the stockholder and each director
nominee by the stockholder or other business proposed by the stockholder. Our
certificate of incorporation and bylaws provide that as long as Viacom
beneficially owns 15% or more of the combined voting power of the outstanding
common stock, Viacom is exempt from this provision.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. MTVi Group is a
Delaware corporation and subject to Section 203 of the Delaware General
Corporation Law. Generally, Section 203 prohibits a publicly held Delaware
company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the time such stockholder became
an interested stockholder unless, as described below, specified conditions are
satisfied. Thus, it may make acquisition of control of our company more
difficult. The prohibitions in Section 203 of the Delaware General Corporation
Law do not apply if:
-- prior to the time the stockholder became an interested stockholder,
the board of directors of the corporation approved either the
business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
-- upon consummation of the transaction, which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced; or
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-- at or subsequent to the time the stockholder became an interested
stockholder, the business combination is approved by the board of
directors and authorized by the affirmative vote of at least 66% of
the outstanding voting stock that is not owned by the interested
stockholder.
Under Section 203 of the Delaware General Corporation Law, a "business
combination" includes:
-- any merger or consolidation of the corporation with the interested
stockholder;
-- any sale, lease, exchange or other disposition, except
proportionately as a stockholder of such corporation, to or with the
interested stockholder of assets of the corporation having an
aggregate market value equal to 10% or more of either the aggregate
market value of all the assets of the corporation or the aggregate
market value of all the outstanding stock of the corporation;
-- transactions resulting in the issuance or transfer by the corporation
of stock of the corporation to the interested stockholder;
-- transactions involving the corporation, which have the effect of
increasing the proportionate share of the corporation's stock of any
class or series that is owned by the interested stockholder; or
-- transactions in which the interested stockholder receives financial
benefits provided by the corporation.
Under Section 203 of the Delaware General Corporation Law, an "interested
stockholder" generally is:
-- any person that owns 15% or more of the outstanding voting stock of
the corporation;
-- any person that is an affiliate or associate of the corporation and
was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether or
not such person is an interested stockholder; or
-- the affiliates or associates of either of the above-stated categories
person.
Because Viacom owned more than 15% of our voting stock before we became a
public company in this offering, Section 203 of the Delaware General Corporation
Law by its terms is currently not applicable to business combinations with
Viacom even though Viacom owns 15% or more of our outstanding stock. If any
other person acquires 15% or more of our outstanding stock, such person must
comply with to the provisions of Section 203 of the Delaware General Corporation
Law.
Under some circumstances, Section 203 of the Delaware General Corporation
Law makes it more difficult for an "interested stockholder" to effect various
business combinations with us for a three-year period, although our stockholders
may elect to exclude us from the restrictions imposed thereunder. By virtue of
its ownership of 15% or more of our outstanding stock, Viacom is in a position
to elect to exclude us from the restrictions under Section 203. Currently,
Viacom has indicated to us that it has no intention to do so.
TRANSACTIONS WITH INTERESTED PARTIES
Our certificate of incorporation includes provisions addressing potential
conflicts of interest between us and Viacom and its non-MTVi Group-related
subsidiaries and other similar entities. In addition, our certificate of
incorporation includes provisions regulating and defining our conduct as it may
involve us and Viacom and our and its subsidiaries, directors and officers. Our
certificate of incorporation provides that no contract or transaction:
-- between us and Viacom or any of its non-MTVi Group-related
subsidiaries and other similar entities; or
-- between us and any entity in which one or more of our directors or
officers has a financial interest, which we refer to as a "related
entity;" or
-- between us and any of our directors or officers, Viacom, any
subsidiary of Viacom or any related entity;
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shall be void or voidable solely because:
-- Viacom, any non-MTVi Group-related subsidiary or other similar entity
of Viacom or any related entity, or any of their or our directors or
officers are parties to the contract or transaction; or
-- any of those directors or officers is present at or participates in
the meeting of the board of directors or committee thereof that
authorizes the contract or transaction.
PARTNERSHIP UNITS
Interests in the Partnership are represented by partnership units.
Immediately following the offering, there will be partnership units issued
and outstanding, of which will be owned by Viacom affiliates, of which
will be owned by Liberty Digital, and of which will be owned by MTVi Group.
The number of outstanding partnership units owned by MTVi Group will at all
times equal the number of shares of outstanding Class A common stock. The net
cash proceeds received by MTVi Group from any issuance of shares of Class A
common stock, including with regard to the exercise of options issued under the
incentive plan, shall be concurrently transferred to the Partnership in exchange
for partnership units equal in number to such number of shares of Class A common
stock issued by MTVi Group.
Pursuant to the terms of an exchange agreement, entered into concurrently
with this offering, by MTVi Group and the partners of the Partnership, each
partnership unit not owned by MTVi Group is exchangeable for one share of Class
A common stock at any time by the holder of such share. The exchange agreement
includes provisions to adjust the exchange ratio if the number of outstanding
shares of the Class A common stock of MTVi Group does not equal the number of
partnership units after the issuance of additional shares of Class A common
stock related to a stock split, a stock dividend, an employee benefit plan or
the exercise of a warrant or option.
REGISTRATION RIGHTS
Some of our stockholders have registration rights with respect to some of
our shares of Class A common stock. Registration of these securities under the
Securities Act would result in those shares becoming freely tradeable by persons
not affiliated with us.
In connection with the acquisition of Mischief New Media, we granted its
sole shareholder limited demand and piggy-back registration rights. Beginning
after the one-year anniversary of the consummation of this offering, the holder
will have one demand registration right requiring us to file a registration
statement for the resale of shares. In addition, beginning six months after the
consummation of this offering, each time we effect a registration statement for
the sale of our shares, we must provide the holder with 20 days' notice of the
registration. The holder may then exercise his piggy-back registration rights,
up to a limit of two requests. All of the above registration rights are further
limited by, among other things, the requirement that the shares not be permitted
to be sold to the public without registration.
For a discussion of other registration rights, we refer you to "Certain
Relationships and Related Transactions--Transactions Establishing the
Partnership" and "--Registration Rights Agreement."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our Class A common stock is The Bank
of New York.
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SHARES ELIGIBLE FOR FUTURE SALE
Following the offering, shares of Class A common stock will be
issued and outstanding. An additional shares of Class A common stock
will be issuable upon the conversion of Class B common stock and exchange of
partnership units not owned by MTVi Group, which shares have "demand" and
"piggyback" registration rights attached to them and will become eligible for
resale 180 days following the completion of the offering, provided that their
resale is not prohibited by Rule 144 under the Securities Act. In addition, as
of , 2000, shares were issuable upon exercise of options
granted under our stock option plan. Of these: (1) will be eligible
for sale immediately following the completion of the offering; and (2) an
additional will become eligible for resale 180 days following the
completion of the offering, in each case, subject to Rule 144 under the
Securities Act. The balance of shares issuable upon exercise of options relate
to options which are not scheduled to vest within 180 days following the
completion of the offering. The sale of a substantial number of shares of common
stock, or the perception that such sales could occur, could adversely affect
prevailing market prices for Class A common stock. In addition, any such sale or
perception could make it more difficult for MTVi Group to sell equity securities
or equity-related securities in the future at a time and price that MTVi Group
deems appropriate. We refer you to "Risk Factors -- Future sales of shares by
existing stockholders or holders of partnership units who exchange such units
for shares of our Class A common stock could negatively affect our stock price,"
"Principal Stockholders," "Description of Capital Stock and Partnership Units"
and "Underwriters."
It is anticipated that a Registration Statement on Form S-8 covering Class
A common stock that may be issued pursuant to the options granted under our
stock option plan will be filed promptly after the completion of the offering.
The shares of Class A common stock issued pursuant to the Form S-8 registration
statement generally may be resold in the public market without restriction or
limitation, except in the case of affiliates of MTVi Group who generally may
only resell such shares in accordance with the provisions of Rule 144, other
than the holding period requirement.
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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a discussion of the material United States federal income
and estate tax consequences of the ownership and disposition of Class A common
stock applicable to Non-United States Holders of such Class A common stock. For
the purpose of this discussion, a "Non-United States Holder" is any holder that
for United States federal income tax purposes is not a "United States person,"
as defined below. This discussion does not address all aspects of United States
federal income and estate taxation that may be relevant in light of such
Non-United States Holder's particular facts and circumstances, such as being a
U.S. expatriate, and does not address any tax consequences arising under the
laws of any state, local or non-United States taxing jurisdiction. Furthermore,
the following discussion is based on current provisions of the Internal Revenue
Code of 1986, as amended, and administrative and judicial interpretations
thereof, all as in effect on the date hereof, and all of which are subject to
change, possibly with retroactive effect. We have not and will not seek a ruling
from the Internal Revenue Service with respect to the United States federal
income and estate tax consequences described below, and as a result, there can
be no assurance that the Internal Revenue Service will not disagree with or
challenge any of the conclusions set forth in this discussion. For purposes of
this discussion, the term "United States person" means:
-- a citizen or resident of the United States;
-- a corporation, partnership, or other entity created or organized in
the United States or under the laws of the United States or of any
political subdivision thereof;
-- an estate whose income is included in gross income for United States
federal income tax purposes regardless of its source; or
-- a trust whose administration is subject to the primary supervision of
a United States court and which has one or more United States persons
who have the authority to control all substantial decisions of the
trust.
DIVIDENDS
If we pay a dividend, any dividend paid to a Non-United States Holder of
Class A common stock generally will be subject to United States withholding tax
either at a rate of 30% of the gross amount of the dividend or such lower rate
as may be specified by an applicable tax treaty. Dividends received by a Non-
United States Holder which are effectively connected with a United States trade
or business conducted by such Non-United States Holder are exempt from such
withholding tax. However, such effectively connected dividends, net of some
types of deductions and credits, are taxed at the same graduated rates
applicable to United States persons.
In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business of the corporate Non-United States Holder may also be
subject to a branch profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty.
A Non-United States Holder of Class A common stock that is eligible for a
reduced rate of withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the Internal Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his shares of Class A common stock unless:
-- such gain is effectively connected with a United States trade or
business of such Non-United States Holder, which gain, in the case of
a corporate Non-United States Holder, must also be taken into account
for branch profits tax purposes;
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-- the Non-United States Holder is an individual who holds such shares
of Class A common stock as a capital asset within the meaning of
section 1221 of the Internal Revenue Code of 1986, as amended, and
who is present in the United States for a period or periods
aggregating 183 days or more during the calendar year in which such
sale or disposition occurs and some other conditions are met; or
-- we are or have been a "United States real property holding
corporation" for federal income tax purposes at any time within the
shorter of the five-year period preceding such disposition or such
holder's holding period.
We have determined that we are not and do not believe that we will become a
"United States real property holding corporation" for United States federal
income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we must report annually to the Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or other agreements, the Internal Revenue Service may make its reports
available to tax authorities in the recipient's country of residence.
Dividends paid to a Non-United States Holder at an address within the
United States may be subject to backup withholding at a rate of 31% if the
Non-United States Holder fails to establish that it is entitled to an exemption
or to provide a correct taxpayer identification number and other information to
the payer. Backup withholding will generally not apply to dividends paid to
Non-United States Holders at an address outside the United States on or prior to
December 31, 2000 unless the payer has knowledge that the payee is a United
States person. Under recently finalized Treasury Regulations regarding
withholding and information reporting (we refer to these regulations as the "New
Regulations"), payment of dividends to Non-United States Holders at an address
outside the United States after December 31, 2000 may be subject to backup
withholding at a rate of 31% unless such non-United States Holder satisfies
certification requirements.
The payment of the proceeds of the disposition of shares of Class A common
stock to or through the United States office of a broker is subject to
information reporting and backup withholding at a rate of 31% unless the holder
certifies its non-United States status under penalties of perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a Non-United States Holder of Class A common stock outside the
United States to or through a foreign office of a broker will not be subject to
backup withholding but will be subject to information reporting requirements if
the broker is:
-- a United States person;
-- a "controlled foreign corporation" for United States tax purposes; or
-- a foreign person 50% or more of whose gross income for specified
periods is from the conduct of a United States trade or business
unless such broker has documentary evidence in its files of the
holder's non-United States status and some conditions are met or the
holder otherwise establishes an exemption.
Under the New Regulations backup withholding may apply to any payment made
after December 31, 2000 which the broker is required to report if such broker
has actual knowledge that the payee is a United States person.
In general, the New Regulations do not significantly alter the substantive
withholding and information reporting requirements but would alter the
procedures for claiming benefits of an income tax treaty and change the
certification procedures relating to the receipt by intermediaries of payments
on behalf of the beneficial owner of shares of Class A common stock. Non-United
States Holders should consult their tax advisors regarding the effect, if any,
of the New Regulations on an investment in Class A common stock. The New
Regulations are generally effective for payments made after December 31, 2000.
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Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
ESTATE TAX
An individual Non-United States Holder who owns Class A common stock at the
time of his death or had made some types of lifetime transfers of an interest in
Class A common stock will be required to include the value of such shares of
Class A common stock in such holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF CLASS A
COMMON STOCK BY NON-UNITED STATES HOLDERS. ACCORDINGLY, INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE INCOME TAX CONSEQUENCES OF
THE OWNERSHIP AND DISPOSITION OF SHARES OF CLASS A COMMON STOCK, INCLUDING THE
APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING
JURISDICTION.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus the U.S. underwriters named below,
for whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston
Corporation, Bear, Stearns & Co. Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Utendahl Capital Partners, L.P. and SoundView Technology Group,
Inc. are acting as U.S. representatives, and the international underwriters
named below for whom Morgan Stanley & Co. International Limited, Credit Suisse
First Boston (Europe) Limited, Bear, Stearns International Limited, Merrill
Lynch International, Utendahl Capital Partners, L.P. and SoundView Technology
Group, Inc. are acting as international representatives, have severally agreed
to purchase, and MTVi Group has agreed to sell to them, severally, the number of
shares indicated below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.........................
Credit Suisse First Boston Corporation....................
Bear, Stearns & Co. Inc. .................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated........
Utendahl Capital Partners, L.P. ..........................
SoundView Technology Group, Inc. .........................
--------
Subtotal.............................................
--------
International Underwriters:
Morgan Stanley & Co. International Limited................
Credit Suisse First Boston (Europe) Limited...............
Bear, Stearns International Limited.......................
Merrill Lynch International...............................
Utendahl Capital Partners, L.P. ..........................
SoundView Technology Group, Inc. .........................
--------
Subtotal.............................................
--------
Total.............................................
========
</TABLE>
The U.S. underwriters and the international underwriters, and the U.S.
representatives and the international representatives, are collectively referred
to as the "underwriters" and the "representatives," respectively. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of Class A common stock offered by
this prospectus are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The underwriters are obligated to take
and pay for all of the shares of Class A common stock offered by this prospectus
if any shares are taken. However, the underwriters are not required to take or
pay for the shares covered by the underwriters over-allotment option described
below.
Pursuant to the agreement between U.S. and international underwriters, each
U.S. underwriter has represented and agreed that, with certain exceptions:
-- it is not purchasing any shares for the account of anyone other than
a United States or Canadian person, as defined below; and
-- it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the
shares outside the United States or Canada or to anyone other than a
United States or Canadian person.
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Pursuant to the agreement between U.S. and international underwriters, each
international underwriter has represented and agreed that, with certain
exceptions:
-- it is not purchasing any shares for the account of any United States
or Canadian person; and
-- it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the
shares in the United States or Canada or to any United States or
Canadian person.
With respect to any underwriter that is a U.S. underwriter and an
international underwriter, the foregoing representations and agreements (1) made
by it in its capacity as a U.S. underwriter apply only to it in its capacity as
a U.S. underwriter and (2) made by it in its capacity as an international
underwriter apply only to it in its capacity as an international underwriter.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the agreement between U.S. and
international underwriters. As used herein, "United States or Canadian person"
means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof, other than a branch located outside the United States and Canada of any
United States or Canadian person, and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian person. All
shares of Class A common stock to be purchased by the underwriters under the
underwriting agreement are referred to in this prospectus as the "shares."
Pursuant to the agreement between U.S. and international underwriters,
sales may be made between the U.S. underwriters and international underwriters
of any number of shares as may be mutually agreed. The per share price of any
shares sold shall be the public offering price set forth on the cover page of
this prospectus, in United States dollars, less an amount not greater than the
per share amount of the concession to dealers set forth below.
Pursuant to the agreement between U.S. and international underwriters, each
U.S. underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
underwriter has further agreed to send to any dealer who purchases from it any
of the shares a notice stating in substance that, by purchasing such shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the agreement between U.S. and international underwriters, each
international underwriter has represented and agreed that:
-- it has not offered or sold and, prior to the date six months after
the closing date for the sale of the shares to the international
underwriters, will not offer or sell, any shares to persons in the
United Kingdom except to persons whose ordinary activities involve
them in acquiring, holding, managing or disposing of investments, as
principal or agent, for the purposes of their businesses or otherwise
in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995;
-- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the shares in, from or otherwise involving the United
Kingdom; and
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-- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
offering of the shares to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 (as amended) or is a person
to whom such document may otherwise lawfully be issued or passed on.
Pursuant to the agreement between U.S. and international underwriters, each
international underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese international underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
international underwriter has further agreed to send to any dealer who purchases
from it any of the shares a notice stating in substance that, by purchasing such
shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such shares, directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales to
Japanese international underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law, and that
such dealer will send to any other dealer to whom it sells any of such shares a
notice containing substantially the same statement as is contained in this
sentence.
The underwriters initially propose to offer part of the shares of Class A
common stock directly to the public at the public offering price set forth on
the cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public
offering price. Any underwriter may allow, and such dealers may reallow, a
concession not in excess of $ a share to other underwriters or to
certain dealers. After the initial offering of the shares of Class A common
stock, the offering price and other selling terms may from time to time be
varied by the representatives.
MTVi Group has granted to the U.S. underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to an aggregate of
additional shares of Class A common stock at the public offering price
listed on the cover page of this prospectus, less underwriting discounts and
commissions. The U.S. underwriters may exercise this option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Class A common stock offered by this prospectus. To
the extent the option is exercised, each U.S. underwriter will become obligated,
subject to certain conditions, to purchase about the same percentage of the
additional shares of Class A common stock as the number listed next to the U.S.
underwriter's name in the preceding table bears to the total number of shares of
Class A common stock listed next to the names of all U.S. underwriters in the
preceding table. If the U.S. underwriters' option is exercised in full, the
total price to the public would be $ , the total underwriters'
discounts and commissions would be $ and total proceeds to MTVi Group
would be $ .
The underwriters have informed MTVi Group that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A common stock offered by them.
We have applied to have our Class A common stock approved for listing on
the under the symbol " ."
Each of Viacom, Liberty Digital and MTVi Group and the directors, executive
officers and certain other stockholders of MTVi Group has agreed that, without
the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, it will not, during the period ending 180 days after the date of
this prospectus:
-- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common
stock; or
80
<PAGE> 84
-- enter into any swap or other arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership of
Class A common stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
-- the sale of shares to the underwriters;
-- the issuance by MTVi Group of shares of Class A common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters
have been advised in writing;
-- transactions by any person other than MTVi Group and Viacom relating
to shares of Class A common stock or other securities acquired in
open market transactions after the completion of the offering of the
shares;
-- the issuance by MTVi Group of shares of common stock or securities
convertible into or exercisable or exchangeable for common stock for
the benefit of MTVi Group directors, officers and employees under any
MTVi Group bonus, option, incentive, employee stock purchase or other
compensatory plans described in this prospectus; provided that, if
any shares of Class A common stock are issued prior to 180 days after
the date of this offering, the recipient of those shares must agree
in writing to be bound by the terms of the immediately preceding
paragraph as if that recipient were MTVi Group; or
-- shares of common stock issued as consideration for any acquisition,
including, without limitation, by way of merger or consolidation, by
MTVi Group or any of its subsidiaries, provided that the above
consent obligation is assumed by the recipient of the common stock or
other securities.
Morgan Stanley & Co. Incorporated, on behalf of the underwriters, may waive the
180 day lockup period.
In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of Class A
common stock. Specifically, the underwriters may over-allot in connection with
the offering, creating a short position in Class A common stock for their own
account. In addition, to cover over-allotments or to stabilize the price of
Class A common stock, the underwriters may bid for, and purchase, shares of
Class A common stock in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a dealer for
distributing shares of Class A common stock in the offering, if the syndicate
repurchases previously distributed Class A common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of Class A common
stock above independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities at any time.
From time to time, some of the underwriters have provided, and continue to
provide, investment banking services to Viacom and MTVi Group and their
affiliates for which they have received customary fees and commissions.
MTVi Group and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
ELECTRONIC FORMAT
A prospectus in electronic format is being made available on an Internet
website maintained by Wit Soundview's affiliate, Wit Capital Corporation. In
addition, other dealers purchasing shares from Wit SoundView in this offering
have agreed to make a prospectus in electronic format available on websites
maintained by each of the dealers. Other than the prospectus in electronic
format, the information on Wit Capital's website and any information contained
on any other website maintained by Wit Capital is not part of the prospectus or
the registration statement of which this prospectus forms a part, has not been
approved
81
<PAGE> 85
and/or endorsed by us or any underwriter in its capacity as underwriter and
should not be relied upon by investors.
DIRECTED SHARE PROGRAM
At our request, some of the underwriters have reserved for sale, at the
initial public offering price, shares of Class A common stock for
directors, officers, employees and business associates and related persons of
MTVi Group. The number of shares available of Class A common stock for sale to
the general public will be reduced to the extent these individuals purchase the
reserved shares. Any reserved shares that are not purchased in the directed
share program will be offered by the underwriters to the general public on the
same basis as the other shares offered in this prospectus. We have agreed to
indemnify those underwriters against some liabilities and expenses, including
liabilities under the Securities Act, in connection with the sales of shares
under the directed share program.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for Class A common
stock. The initial public offering price will be determined by negotiations
between us and Viacom, on the one hand, and the U.S. representatives, on the
other. Among the factors to be considered in determining the initial public
offering price will be the future prospects of MTVi Group and its industry in
general, sales, earnings and certain other financial and operating information
of MTVi Group in recent periods, and the price-earnings ratios, price-sales
ratios, market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of MTVi Group.
The estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
LEGAL MATTERS
Some legal matters with respect to the validity of the shares of common
stock offered hereby will be passed upon for us by Shearman & Sterling, and for
the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP and Hughes Hubbard
& Reed LLP. Hughes Hubbard & Reed LLP has provided legal services to us, Viacom
and our respective affiliates from time to time for which they have received
customary fees and expenses.
EXPERTS
The balance sheet of The MTVi Group, Inc. as of December 31, 1999 included
in this registration statement has been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of The MTVi Group, L.P. as of
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999 included in this registration statement have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of The Box Worldwide, Inc. as of
December 31, 1997 and 1998 and for the period from December 17, 1997 through
December 31, 1997 and the year ended December 31, 1998 included in this
registration statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of SonicNet, Inc. as of December 31, 1997 and 1998
and for each of the two years in the period ended December 31, 1998 included in
the registration statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
82
<PAGE> 86
The consolidated financial statements of The Box Worldwide, Inc. and
subsidiaries (Predecessor) for the period January 1, 1997 through December 16,
1997, appearing in the registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement, as amended, on Form
S-1 under the Securities Act with respect to the shares of our Class A common
stock offered hereby. This prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules thereto.
Some items are omitted in accordance with the rules and regulations of the SEC.
For further information about us and our Class A common stock, reference is made
to the registration statement and the exhibits and any schedules filed
therewith. Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance, if such contract or document is filed as an exhibit, reference is made
to the copy of such contract or other documents filed as an exhibit to the
registration statement, each statement being qualified in all respects by such
reference. A copy of the registration statement, including the exhibits and
schedules thereto, may be read and copied at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices
at Seven World Trade Center, New York, New York 10048 and 500 West Madison
Street, Chicago, Illinois 60661. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site at http://www.sec.gov, from which
interested persons can electronically access the registration statement,
including the exhibits and any schedules thereto.
Subject to the foregoing, you should rely only on the information contained
in this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. The information
contained in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of Class A
common stock.
As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also maintain our U.S.
Internet site at http://www.mtvigroup.com. Our U.S. Internet site and the
information contained therein or connected thereto shall not be deemed to be
incorporated into this prospectus or the registration statement of which it
forms a part.
------------------------
"MTV.com," "VH1.com," "MTV Online," "VH1 Online," "MTV," and "VH1" are
registered trademarks of MTV Networks. "SonicNet.com" and "SonicNet" are
trademarks of the Partnership. This prospectus also contains other trademarks of
MTVi Group, the Partnership, MTV Networks and other companies. All rights
reserved.
83
<PAGE> 87
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE MTVi GROUP, INC.
Report of Independent Accountants........................... F-2
Balance Sheet............................................... F-3
Notes to Balance Sheet...................................... F-4
THE MTVi GROUP, L.P.
Report of Independent Accountants........................... F-6
Consolidated Statements of Operations--Years Ended December
31, 1997, 1998 and 1999................................... F-7
Consolidated Balance Sheets--at December 31, 1998 and
1999...................................................... F-8
Consolidated Statements of Changes in Equity--Years Ended
December 31, 1997, 1998 and 1999.......................... F-9
Consolidated Statements of Cash Flows--Years Ended December
31, 1997, 1998 and 1999................................... F-10
Notes to Consolidated Financial Statements.................. F-11
SONICNET, INC.
Statements of Operations--For the Six Months Ended June 30,
1998 and 1999 (Unaudited)................................. F-23
Balance Sheets--at December 31, 1998 and June 30, 1999
(Unaudited)............................................... F-24
Statements of Cash Flows--For the Six Months Ended June 30,
1998 and 1999 (Unaudited)................................. F-25
Notes to Financial Statements (Unaudited)................... F-26
Report of Independent Accountants........................... F-30
Statements of Operations--Years Ended December 31, 1997 and
1998...................................................... F-31
Balance Sheets--at December 31, 1997 and 1998............... F-32
Statements of Cash Flows--Years Ended December 31, 1997 and
1998...................................................... F-33
Notes to Financial Statements............................... F-34
THE BOX WORLDWIDE, INC.
Consolidated Statements of Operations--For the Six Months
Ended June 30, 1998 and 1999 (Unaudited).................. F-42
Consolidated Balance Sheets--at December 31, 1998 and June
30, 1999 (Unaudited)...................................... F-43
Consolidated Statements of Cash Flows--For the Six Months
Ended June 30, 1998 and 1999 (Unaudited).................. F-44
Notes to Consolidated Financial Statements (Unaudited)...... F-45
Report of Independent Accountants........................... F-50
Report of Independent Auditors.............................. F-51
Consolidated Statements of Operations--Years Ended December
31, 1997 and 1998......................................... F-52
Consolidated Balance Sheets--at December 31, 1997 and
1998...................................................... F-53
Consolidated Statements of Changes in Equity--Years Ended
December 31, 1997 and 1998................................ F-54
Consolidated Statements of Cash Flows--Years Ended December
31, 1997 and 1998......................................... F-55
Notes to Consolidated Financial Statements.................. F-56
</TABLE>
F-1
<PAGE> 88
REPORT OF INDEPENDENT ACCOUNTANTS
[The following is the form of opinion PricewaterhouseCoopers LLP is in a
position to issue upon the consummation of the reclassification described in
Note 1 of Notes to Balance Sheet.]
To the Board of Directors and Stockholder of The MTVi Group, Inc.
In our opinion, the accompanying balance sheet presents fairly, in all material
respects, the financial position of The MTVi Group, Inc. at December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
The financial statement is the responsibility of management; our responsibility
is to express an opinion on the financial statement based on our audit. We
conducted our audit of the balance sheet in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for the opinion expressed above.
F-2
<PAGE> 89
THE MTVi GROUP, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
1999
ASSETS ---------------
<S> <C>
Cash........................................................ $--
--
Total assets........................................... $--
==
STOCKHOLDER'S EQUITY
Common stock; $.01 par value; 1,000 shares authorized; none
issued and outstanding.................................... $--
Paid-in capital............................................. --
--
Total stockholder's equity............................. $--
==
</TABLE>
See notes to balance sheet.
F-3
<PAGE> 90
THE MTVI GROUP, INC.
NOTES TO BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--ORGANIZATION
The MTVi Group, L.P. (the "Partnership") is the world's leading Internet
music entertainment company. The Partnership delivers diverse and highly
personalized music and music-related experiences. Prior to July 15, 1999, the
business of the Partnership was conducted by MTV Networks ("MTVN"), a unit of
Viacom Inc. ("Viacom"), and Liberty Digital Inc. (formerly known as TCI Music,
Inc.) ("Liberty Digital"). On July 15, 1999, MTVN and some of its affiliates
contributed to the Partnership substantially all of their assets used
exclusively in their Internet music business. In addition, Liberty Digital and
some of its affiliates contributed, among other things, their SonicNet, Inc. and
related businesses. For their respective contributions, MTVN's affiliates
received an aggregate 90% general and limited partnership interest in the
Partnership, and affiliates of Liberty Digital received an aggregate 10% limited
partnership interest in the Partnership.
On December 21, 1999, Viacom incorporated The MTVi Group, Inc. (the
"Company") under the laws of Delaware as a wholly owned subsidiary. Concurrent
with the completion of the Offering (as described in Note 3), the Partnership
will be reorganized pursuant to its Amended and Restated Agreement of Limited
Partnership, resulting in the Company becoming the sole general partner of the
Partnership, and the Company, Viacom affiliates and Liberty Digital affiliates
owning limited partnership units in the Partnership.
Immediately prior to the completion of the Offering, the Company will file
a restated certificate of incorporation which among other things, will provide
for Class A common stock and Class B common stock and reclassify all outstanding
common stock into shares of Class B common stock. In connection with
the Offering, the Company will issue shares of Class A common stock to
the public and will then immediately take the net proceeds received from the
sale of its Class A common stock and contribute them to the Partnership in
exchange for limited partnership units in the Partnership. Immediately
following to the Offering, the Partnership will be owned approximately % by
Viacom affiliates (other than the Company), % by Liberty Digital affiliates
and % by the Company. As a result of its ownership of all shares
of Class B common stock of the Company, together with the ownership of Viacom
affiliates (other than the Company) of partnership units as described above,
Viacom and its affiliates (other than the Company) will beneficially control
% of the voting power of all of the voting stock of the Company and will
control both the Company and the Partnership.
The acquisition of the ownership interest in the Partnership using the
proceeds from the Offering will result in consolidation of the Company with the
Partnership as a result of the Company's control as sole general partner.
Accordingly, the net assets of the Partnership will be consolidated into the
Company's consolidated financial statements at historical cost, with minority
interests representing Viacom's and Liberty Digital's aggregate % ownership
of the Partnership.
NOTE 2--STOCKHOLDER'S EQUITY
At December 31, 1999, the Company had one class of common stock authorized.
Immediately prior to the completion of the Offering upon the reclassification
described in Note 1, there will be two classes of common stock authorized: Class
A common stock and Class B common stock. The holders of Class A common stock and
Class B common stock generally will have identical rights, except each holder of
Class A common stock will be entitled to one vote per share and each holder of
Class B common stock will be entitled to the number of votes per share equal to:
(1) , multiplied by the sum of (a) the aggregate number of shares of
Class B common stock owned by such holder and (b) the aggregate number of
partnership units beneficially owned by such holder and divided by (2) the
number of shares of Class B common stock owned by such holder the pro rata
portion, based on its ownership of Class B common stock, of the aggregate number
of partnership units beneficially owned by affiliates of such holder. Holders of
shares of Class A common stock and Class B common stock are not entitled to
cumulate their votes in the election of directors. Generally, all matters to be
voted on by stockholders must be approved by at least a majority of the
F-4
<PAGE> 91
THE MTVI GROUP, INC.
NOTES TO BALANCE SHEET--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
votes entitled to be cast by all shares of Class A common stock and Class B
common stock present in person or represented by proxy, voting together as a
single class, limited by any voting rights granted to holders of any preferred
stock. Except as otherwise provided by law or as limited by the terms of any
voting rights granted to holders of any outstanding preferred stock, amendments
to the certificate of incorporation must be approved by at least a majority of
the combined voting power of all Class A common stock and Class B common stock,
voting together as a single class. However, amendments to the certificate of
incorporation that would alter or change the powers, preferences or special
rights of Class A common stock or Class B common stock so as to affect them
adversely also must be approved by at least a majority of the votes entitled to
be cast by the holders of the shares affected by the amendment, voting as a
separate class. Notwithstanding the foregoing, any amendment to the certificate
of incorporation to increase or decrease the authorized shares of any class
shall be approved upon the affirmative vote of the holders of a majority of the
Class A and Class B common stock, voting together as a single class. Holders of
a majority of the outstanding shares of Class B common stock may, without a vote
of the holders of Class A common stock, approve a merger of the Partnership into
the Company.
NOTE 3--PUBLIC OFFERING
On February 11, 2000, the Company filed a registration statement on Form
S-1 with the Securities and Exchange Commission for a public offering (the
"Offering") of Class A common stock. The number of shares to be offered and the
initial public offering price will be determined at a future date. The Company
intends to use all of the net proceeds of the Offering to purchase partnership
units in the Partnership. The Partnership intends to use the proceeds from the
sale of partnership units to fund operations.
F-5
<PAGE> 92
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of The MTVi Group, L.P.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in equity and of cash flows
present fairly, in all material respects, the financial position of The MTVi
Group, L.P., as defined in Note 1, at December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of 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, 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 the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 13, 2000
F-6
<PAGE> 93
THE MTVI GROUP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
REVENUES
Advertising............................................... $ 1,751 $ 3,538 $ 8,786
Distribution.............................................. 4,027 2,533 1,739
Promotional............................................... -- 2,766 7,722
------- ------- --------
Total revenues......................................... 5,778 8,837 18,247
------- ------- --------
COSTS AND EXPENSES
Production................................................ 6,556 9,684 23,238
Related party cross promotion expense..................... 1,704 4,812 5,008
Allocated charges from parent............................. 3,653 4,892 14,511
Selling, general and administrative....................... 772 1,078 3,531
Depreciation.............................................. 26 171 1,163
Amortization of intangibles and other assets.............. -- -- 14,954
------- ------- --------
Total costs and expenses............................... 12,711 20,637 62,405
------- ------- --------
OPERATING INCOME (LOSS)..................................... (6,933) (11,800) (44,158)
Benefit for income taxes.................................. 2,635 4,484 3,058
------- ------- --------
NET INCOME (LOSS)........................................... $(4,298) $(7,316) $(41,100)
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 94
THE MTVI GROUP, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ 240
Accounts receivable, less allowances of $77 (1998) and
$150 (1999)............................................ 3,380 5,407
Other current assets...................................... -- 1,407
Deferred income taxes..................................... 332 --
------ --------
Total current assets................................... 3,712 7,054
Property and equipment, net................................. 573 5,269
Investment in equity security............................... 2,745 518
Intangibles, net............................................ -- 131,980
Other assets................................................ -- 1,087
------ --------
$7,030 $145,908
====== ========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable.......................................... $ 949 $ 1,862
Accrued compensation...................................... 585 1,533
Deferred revenue.......................................... 3,609 2,084
Other accrued liabilities................................. 167 3,380
------ --------
Total current liabilities.............................. 5,310 8,859
------ --------
Capital lease obligations................................... -- 14
Deferred rent............................................... -- 250
Commitments and contingencies (Notes 8 and 9)
Net equity investment....................................... 1,975 139,267
Accumulated other comprehensive income (loss)............... (255) (2,482)
------ --------
Total equity........................................... 1,720 136,785
------ --------
$7,030 $145,908
====== ========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 95
THE MTVI GROUP, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
NET COMPREHENSIVE COMPREHENSIVE
EQUITY INCOME INCOME TOTAL
INVESTMENT (LOSS) (LOSS) EQUITY
---------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997............... $ 2,028 $ 2,028
Net income (loss)...................... (4,298) $ (4,298) (4,298)
========
Net contributions from Viacom.......... 3,107 3,107
-------- --------
BALANCE AT DECEMBER 31, 1997............. 837 837
Net income (loss)...................... (7,316) $ (7,316) (7,316)
Other comprehensive income (loss):
Unrealized loss on equity
security.......................... (255) $ (255) (255)
--------
Total comprehensive income
(loss)......................... $ (7,571)
========
Net contributions from Viacom.......... 8,454 8,454
-------- ------- --------
BALANCE AT DECEMBER 31, 1998............. 1,975 (255) 1,720
Net income (loss)...................... (41,100) $(41,100) (41,100)
Other comprehensive income (loss):
Unrealized loss on equity
security.......................... (2,227) (2,227) (2,227)
--------
Total comprehensive income
(loss)......................... $(43,327)
========
Net contributions from partners........ 178,392 178,392
-------- ------- --------
BALANCE AT DECEMBER 31, 1999............. $139,267 $(2,482) $136,785
======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 96
THE MTVI GROUP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $(4,298) $(7,316) $(41,100)
Adjustments to reconcile net income (loss) to net cash
flow from operating activities:
Depreciation........................................... 26 171 1,163
Amortization of intangibles and other assets........... -- -- 14,954
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable, net........ 292 (2,319) (981)
(Increase) decrease in other current assets............ 793 485 (1,404)
(Increase) decrease in deferred income taxes........... (115) (145) 332
Increase (decrease) in accounts payable................ 306 (24) 95
Increase (decrease) in accrued compensation............ (87) 366 924
Increase (decrease) in deferred revenue................ (84) 554 (2,024)
Increase in other accrued liabilities.................. 233 367 1,609
Increase in deferred rent.............................. -- -- 66
------- ------- --------
NET CASH FLOW USED FOR OPERATING ACTIVITIES................. (2,934) (7,861) (26,366)
------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures...................................... (173) (593) (2,252)
Acquisition of Imagine Radio.............................. -- -- (14,484)
------- ------- --------
NET CASH FLOW USED FOR INVESTING ACTIVITIES................. (173) (593) (16,736)
------- ------- --------
FINANCING ACTIVITIES:
Contribution of capital by Viacom, net.................... 3,107 8,454 43,372
Payment on capital lease obligations...................... -- -- (30)
------- ------- --------
NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES.............. 3,107 8,454 43,342
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ -- -- 240
Cash and cash equivalents at beginning of year.............. -- -- --
------- ------- --------
Cash and cash equivalents at end of year.................... $ -- $ -- 240
======= ======= ========
NONCASH INVESTING ACTIVITIES:
Acquisition of The Box Worldwide, Inc. and SonicNet, Inc.,
net....................................................... $ -- $ -- $135,020
Investment in equity security............................... -- 3,000 --
NONCASH FINANCING ACTIVITIES:
In-kind acquisition of equipment............................ -- -- $ 54
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE> 97
THE MTVI GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The MTVi Group, L.P. (the "Partnership"), formerly known as MTVN Online
Music (the "Predecessor"), consists of the assets and businesses used in
connection with the MTV.com and VH1.com businesses, SonicNet, Inc. ("SonicNet"),
and certain of their related wholly owned international online operations, which
were owned by MTV Networks ("MTVN"), a unit of Viacom Inc. ("Viacom"), and by
Liberty Digital, Inc. (formerly known as TCI Music, Inc.) ("Liberty Digital").
The Partnership develops, operates, manages, markets, promotes and distributes
music, music-related and/or music-themed services online. The accompanying
consolidated financial statements are presented on a carve-out basis and reflect
the consolidated historical results of operations, financial position, changes
in equity and cash flows of the Partnership.
For all periods presented, certain expenses reflected in the consolidated
financial statements include allocations of corporate expenses from Viacom and
MTVN. All such costs and expenses have been charged to the Partnership by Viacom
and MTVN in the period in which the services were performed. Management believes
that these allocations were made on a reasonable basis; however, the allocations
of costs and expenses do not necessarily indicate the costs that would have been
or will be incurred by the Partnership on a stand-alone basis. Also, the
consolidated financial statements may not necessarily reflect the results of
operations, financial position, changes in equity and cash flows of the
Partnership in the future or what the results of operations, financial position,
changes in equity or cash flows would have been if the Partnership had been a
separate, stand-alone entity during the periods presented.
On February 4, 1999, MTVN acquired 100% of the capital stock of Imagine
Radio, Inc. ("Imagine Radio"), an Internet broadcaster, for $14,484. The
acquisition of Imagine Radio was accounted for as a purchase; therefore, the
results of operations of Imagine Radio have been included in the financial
statements as of February 4, 1999. The excess of the purchase price over the
fair value of the net assets acquired is being amortized on a straight-line
basis over five years.
On July 15, 1999, MTVN contributed to the Partnership substantially all of
its Internet music businesses' assets, including its MTV.com, VH1.com and
Imagine Radio businesses, and certain related wholly owned international online
operations, in exchange for an aggregate 90% general and limited partnership
interest in the Partnership. Liberty Digital contributed, among other assets,
SonicNet, The Box Worldwide, Inc. ("The Box"), and certain related wholly owned
international online operations in exchange for an aggregate 10% limited
partnership interest. Additionally, Viacom and Liberty Digital have agreed in
connection with the formation of the Partnership to make capital contributions
to the Partnership of up to $90,000 and $10,000, respectively. The obligation to
make capital contributions terminates on the closing of an initial public
offering by the Partnership. To the extent that the Partnership requires funds
in excess of these capital contributions, Viacom intends to make intercompany
loans to the Partnership until a planned initial public offering is completed.
Also, the Partnership and MTVN entered into a license and distribution
agreement wherein MTVN will pay a license fee for the use of the intellectual
property rights, technology and subscriber base of The Box business. The license
agreement between MTVN and the Partnership, which includes an option to purchase
these assets in three years for $1,000, is considered a transfer of the
substantial economic benefit of the assets of The Box business to MTVN. As such,
this transaction has been recorded as a distribution to MTVN of approximately
80% of the fair value of these assets, or approximately $15,000. The remaining
assets of The Box business on the Partnership's financial statements, which are
being used to facilitate the license and distribution agreement with MTVN, are
being amortized over three years on a straight-line basis consistent with the
intended term of the license and distribution agreement. As a result, the impact
of the remaining components of The Box business do not significantly effect the
financial results of the Partnership.
F-11
<PAGE> 98
THE MTVI GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The contribution of SonicNet by Liberty Digital to the Partnership has been
accounted for as a purchase; therefore, the results of operations of SonicNet
are included in the financial statements as of July 15, 1999. The excess of the
purchase price of approximately $132,000 over the fair value of the net assets
acquired is being amortized on a straight-line basis over five years.
On July 15, 1999, MTVN entered into an agreement to provide the Partnership
with $100,000 of cross promotional on-air advertising support over a five-year
period. On July 15, 1999, the Partnership was granted a worldwide, royalty-free,
non-exclusive license to exhibit all programming and program elements owned by
MTVN, with certain limitations and restrictions.
The Partnership and Viacom have entered into a mutual services agreement
whereby Viacom will provide the Partnership administrative services including
cash management, accounting, financial, legal, auditing, information, insurance
and tax services as well as employee benefit plan and insurance administration.
The fee for these services approximates Viacom's cost of providing the services
and is subject to adjustment.
On February 11, 2000, The MTVi Group, Inc. (the "Company") filed a
registration statement with the Securities and Exchange Commission for the sale
of its Class A Common Stock (the "Offering"). The Company intends to use all of
the net proceeds of the Offering to purchase partnership units in the
Partnership. The Partnership intends to use the proceeds from the Offering for:
- advertising, promoting and developing our brands and network of websites
to increase consumer traffic, which may include the funding of operating
losses;
- developing compelling music content; and
- general corporate purposes, including working capital, technology
enhancements, international expansion and possible complementary
acquisitions.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash on hand and highly liquid
investments having short-term original maturities of three months or less.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Partnership and investments of more than 50% in subsidiaries and other entities.
Investments in affiliated companies over which the Partnership has a significant
influence or ownership of more than 20% but less than or equal to 50% are
accounted for under the equity method. Investments of 20% or less are accounted
for under the cost method. All significant intercompany transactions have been
eliminated.
F-12
<PAGE> 99
THE MTVI GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
REVENUE RECOGNITION
Revenues are generated from the sale of advertising on the Partnership's
websites and from distribution and promotional agreements.
Advertising revenue is recognized ratably during the period in which the
advertising is displayed and obligations are satisfied. Partnership obligations
typically include guarantees of a minimum number of "impressions" (the number of
times that an advertisement is viewed by users of the Partnership's online
services over a specified period of time). To the extent that the minimum
guaranteed impressions are not met, the Partnership defers recognition of the
corresponding revenue until the guaranteed impressions are attained. The
Partnership sells to advertisers sponsorship of a certain web page or event for
a specified period of time and recognizes sponsorship revenues over that period
of time or until the obligations are satisfied. Sponsorship arrangements
generally range from one to six months in length.
Distribution revenue represents fees paid to the Partnership for marketing,
distribution and other licenses related to the Partnership's websites and the
licensed content contained therein during the term of the agreement.
Accordingly, distribution revenue is recognized ratably over the term of the
agreement. Distribution revenue also includes the license fee attributable to a
license and distribution agreement entered into which granted MTVN the use of
intellectual property rights, technology and subscriber base of The Box
business.
Promotional revenue primarily represents fees and equity received by the
Partnership from third parties for on-air co-branded keyword mentions and
closing tag advertisements that appear on MTV: Music Television and VH1: Music
First (collectively, the "MTVN Music Channels"). As further discussed in Note 5,
the MTVN Music Channels promote the Partnership during live or produced
programming and in on-air advertisements promoting the MTVN Music Channel's own
on-air content. The Partnership earns promotional revenue from third parties by
concurrently mentioning (for a fee) the third parties during the Partnership's
own on-air keyword mention and closing tag promotions. Promotional revenue is
recognized ratably over the period in which the promotion is aired, and the
obligation is satisfied. In addition, promotional revenue also includes online
promotional activities such as exclusivity arrangements.
CONCENTRATION OF CREDIT RISK
The Partnership performs ongoing credit evaluations of its customers'
financial conditions and generally does not require collateral on its customers'
receivables. The Partnership maintains allowances for credit losses, and such
losses have been within management's expectations. The Partnership sells
advertising to customers in several industries.
Accounts receivable are stated net of allowances for doubtful accounts of
$77 and $150 in 1998 and 1999, respectively. One customer accounted for 64% and
12% of total accounts receivable at December 31, 1998 and 1999. One, two and two
customers accounted for 70%, 60% and 38% of revenues for the years ended
December 31, 1997, 1998 and 1999, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation expense is computed
principally by the straight-line method over the estimated useful lives, which
typically range from three to five years. Maintenance and repair costs are
charged to expense as incurred. Renewals and improvements that extend the useful
life of the assets are capitalized.
F-13
<PAGE> 100
THE MTVI GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Balances of major classes of assets and accumulated depreciation are as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1998 1999
---- -------
<S> <C> <C>
Computer equipment.......................................... $679 $ 3,191
Furniture and fixtures...................................... -- 2,695
Audio visual equipment...................................... 91 421
Leasehold improvements...................................... -- 238
Capital leases.............................................. -- 55
---- -------
Total..................................................... 770 6,600
Less accumulated depreciation............................... (197) (1,331)
---- -------
Property and equipment, net................................. $573 $ 5,269
==== =======
</TABLE>
DEFERRED REVENUE
Deferred revenue primarily represents the unearned revenue associated with
warrants received by the Partnership in exchange for advertising and promotion.
Revenue is recognized ratably over the three year term of the agreement.
INTANGIBLE ASSETS
Intangible assets, which primarily consists of the cost of acquired
businesses in excess of the fair value of tangible assets and liabilities
acquired ("goodwill"), are generally amortized by the straight-line method over
estimated remaining useful lives, not exceeding five years. Accumulated
amortization of intangible assets and the related amortization expense were
$14,761 at December 31, 1999.
IMPAIRMENT OF LONG-LIVED ASSETS
The Partnership assesses its long-lived assets (i.e. property and equipment
and certain identifiable intangibles) for impairment whenever there is an
indication that the carrying amount of the asset may not be recoverable.
Recoverability of these assets is determined by comparing the forecasted
undiscounted cash flows generated by those assets to their respective net
carrying values. The amount of impairment loss, if any, will generally be
measured as the difference between the net book value of the assets and the
estimated fair value of the related assets. The Partnership has identified no
such impairment losses.
INCOME TAXES
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes ("SFAS 109")." Deferred income taxes are recorded
to reflect the tax benefit and consequences of future years' differences between
the tax basis of assets and liabilities and their financial reporting bases. The
Partnership records a valuation allowance to reduce deferred tax assets if it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1998 and 1999, the Partnership's carrying value of
financial instruments approximates fair value due to the short-term maturities
of these instruments or variable rates of interest. During 1997, 1998, and 1999
no financial instruments were held or issued for trading purposes. The
investment in equity securities is being accounted for in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as
an available-for-sale equity security.
F-14
<PAGE> 101
THE MTVI GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, the Partnership adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which is effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for the
reporting and displaying of comprehensive income (loss) and its components in
financial statements. Comprehensive income (loss) is defined as the change in
equity (net assets) of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. Comprehensive income
consists of net income (loss) and other gains and losses affecting stockholder's
equity that, under generally accepted accounting principles, are excluded from
net income (loss), such as unrealized equity security gains (losses). Unrealized
equity security gains (losses) is the only item of other comprehensive income
(loss) impacting the Partnership during the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Maintained for Internal Use"("SOP 98-1"). SOP
98-1 became effective for fiscal years beginning after December 15, 1998. SOP
98-1 provides accounting guidance for accounting for computer software developed
or obtained for internal use, including the requirements of capitalizing
specified costs and the amortization of such costs. The Partnership's
capitalization policy falls within the guidelines of SOP 98-1.
Additionally, the Financial Accounting Standards Board issued Financial
Accounting Standard Board Statement No. 131 ("SFAS 131") "Disclosure about
Segments of an Enterprise and Related Information," which establishes standards
for the way public business enterprises report information in annual statements
and interim financial reports regarding operating segments, products and
services, geographic areas, and major customers. This statement is effective for
financial statements for periods beginning after December 15, 1997. The
Partnership operates in one business segment, Internet service to customers.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"), which states that start-up costs
should be expensed as incurred. SOP 98-5 became effective for fiscal years
beginning after December 15, 1998. The Partnership's capitalization policy falls
within the guidelines of SOP 98-5.
NOTE 3--SUMMARY PRO FORMA FINANCIAL DATA (UNAUDITED)
The following unaudited pro forma summary presents consolidated condensed
results of operations for the Partnership as if the acquisitions of SonicNet,
The Box and Imagine Radio and the related distribution of The Box had occurred
on January 1, 1998. The unaudited pro forma financial data are presented for
illustrative purposes only and are not necessarily indicative of the operating
results that would have been achieved had the acquisitions of SonicNet, The Box
and Imagine Radio and the related distribution of The Box and this offering been
consummated on January 1, 1998, or of the results of operations that may be
obtained in the future.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Revenues.................................................... $ 11,483 $ 20,169
Amortization of intangibles and other assets................ $ 33,260 $ 33,553
Net income (loss)........................................... $(53,133) $(71,083)
</TABLE>
F-15
<PAGE> 102
THE MTVI GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Summary unaudited pro forma financial data includes: (1) historical results
of operations of SonicNet and Imagine Radio, prior to acquisition, (2)
amortization of purchase goodwill as a result of the acquisitions, (3)
acquisition adjustments to reflect license fee revenues and depreciation of
capitalized assets related to a licensing agreement between MTVN and the
Partnership for the use of substantially all of the property rights, technology
and subscriber base of The Box business, and (4) the reversal of tax benefits to
reflect the full valuation allowance on historical tax benefits which is
required based on management's expectation of continued operating losses for the
foreseeable future.
NOTE 4--NET EQUITY INVESTMENT
Viacom funds the working capital requirements of the Partnership based upon
a centralized cash management system. The net equity investment includes
accumulated equity as well as any contributions of capital resulting from cash
transfers and other intercompany activity. Viacom generally does not charge the
Partnership interest on intercompany balances.
An analysis of the net equity investment activity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Balance, beginning of the year....................... $ 2,028 $ 837 $ 1,975
Net loss............................................. (4,298) (7,316) (41,100)
Contributions of capital, net........................ 385 3,234 12,427
Benefit for income taxes............................. (2,635) (4,484) (3,058)
Allocated charges from parent, net................... 3,653 4,892 14,511
Cross promotional on-air advertising................. 1,704 4,812 5,008
Acquisition of Imagine Radio......................... -- -- 14,484
Acquisition of SonicNet and The Box, net............. -- -- 150,000
Distribution of certain of The Box's assets to
MTVN............................................... -- -- (14,980)
------- ------- --------
Balance, end of the year............................. $ 837 $ 1,975 $139,267
======= ======= ========
</TABLE>
NOTE 5--RELATED PARTY TRANSACTIONS
LICENSE AGREEMENTS
The Partnership has entered into a series of license agreements with Viacom
and MTVN. Management believes that the terms of these license agreements are
more favorable to the Partnership than terms that could have been obtained by
the Partnership in the absence of its relationship with Viacom and MTVN. The
parties to the agreements agreed in some cases to provide services and in other
cases to license assets for use in connection with licensed services. Licensed
services include the interactive services of distributing text, audio and/or
video music and music-related and music-themed services online and the
advertising and promotion of those services in the business of the Partnership,
excluding the manufacture or sale of goods. The business of the Partnership
includes the development, operation, management, marketing, promotion,
distribution and licensing of text, audio and/or video music, music-related
and/or music-themed services online. For purposes of the licensed services,
however, the business of the Partnership is limited and is generally not
intended to include businesses that are substantially similar to the businesses
traditionally conducted by television, cable and satellite television program
services.
The agreements for the trademark, programming, technology sharing and
database and software licenses are for a period of 50 years and include certain
limitations and significant restrictions.
F-16
<PAGE> 103
THE MTVI GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
TRADEMARK LICENSE AGREEMENT
Under the Trademark License Agreement, MTVN granted to the Partnership an
exclusive, royalty-free license for the worldwide use of specified trademarks,
including MTV.com, VH1.com, MTV Online and VH1 Online, in connection with the
licensed services and for goods sold or distributed in connection with the
business of the Partnership. In addition, MTVN also granted to the Partnership a
non-exclusive, royalty-free license to use specified trademarks, including MTV,
VH1, MTV: Music Television and VH1 Music First, in connection with the licensed
services.
PROGRAMMING LICENSE AGREEMENT
Under the Programming License Agreement, MTVN granted to the Partnership a
worldwide, royalty-free, non-exclusive license to exhibit up to 10 minutes of
any programming and program elements produced by MTV and VH1 in connection with
the business of the Partnership, provided that MTVN owns or has obtained rights
for the online use of this programming and program elements, and that these
rights are licensable without requiring MTVN to make any additional payments for
online use. In addition, MTVN has a right of first refusal on any terms reached
with a third party on programming obtained or created by the Partnership. The
Partnership is responsible for consents and licenses for the exhibition of
programming.
TECHNOLOGY SHARING AND LICENSE AGREEMENT
Under the Technology Sharing and License Agreement, Viacom and certain of
its subsidiaries granted to the Partnership a non-exclusive, non-transferable
license to use machine executable programming instructions and the related
source code and applicable programming interface owned by them and used in
connection with the businesses contributed by Viacom to the Partnership.
DATABASE AND SOFTWARE LICENSE AGREEMENT
The Partnership has granted to MTVN a royalty-free, non-exclusive license
to use its music database, digitized music database and customer database as
well as related customer data and demographic information.
PROMOTION AGREEMENT
The Partnership receives cross promotional on-air advertising from the MTVN
Music Channels whereby the MTVN Music Channels promote the Partnership during
live or produced programming with keyword mentions, closing tags, custom
promotions and generic promotions. For the five-year period beginning July 15,
1999, MTVN has committed to provide the Partnership with $100 million of on-air
promotion. Prior to the formation of the Partnership, the predecessor entity
also received such cross promotional on-air advertising from the MTVN Music
Channels. Cross-promotional on-air advertising provided by MTVN is recorded as
an expense and a capital contribution during the period in which services are
provided. The expense to the Partnership for such cross promotional on-air
advertising was approximately $1,704 (1997), $4,812 (1998) and $5,008 (1999). As
discussed more fully in Note 2, the Partnership earns promotional revenue by
selling a portion of the cross promotional on-air advertising received from the
MTVN Music Channels to third parties for a fee.
MUTUAL SERVICES AGREEMENT
Viacom and MTVN provide the Partnership with certain general and
administrative services, including insurance, legal, treasury, financial and
other corporate functions. The allocation of expenses was generally based on
actual costs incurred, and such costs were apportioned to the Partnership based
upon the average of
F-17
<PAGE> 104
THE MTVI GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
certain specified ratios of revenues and headcount. Prior to the formation of
the Partnership, the Predecessor was allocated certain general and
administrative expenses on a consistent basis with the methodology used by the
Partnership. The charges for such services were $3,653 (1997), $4,892 (1998) and
$14,511 (1999). Management believes that the methodologies used to allocate
these charges are reasonable; however, these allocations of costs and expenses
do not necessarily indicate the costs and expenses that would have been or will
be incurred by the Partnership on a stand-alone basis.
In addition, the Partnership agreed to provide various programming services
owned by Viacom access to market research and music entertainment news as well
as online production and hosting services. The mutual services agreement
terminates on July 15, 2004.
Viacom has a noncontributory defined benefit pension plan covering
substantially all of its employees, including certain employees of the
Partnership during 1997, 1998 and 1999. Retirement benefits are based
principally on years of service and salary. Viacom also offers participation in
a 401(k) savings plan to the employees of the Partnership and has charged the
Partnership for pension and 401(k) savings plan expenses of approximately $53
(1997), $92 (1998) and $59 (1999). The related pension liability was
approximately $96, $167 and $226 at December 31, 1997, 1998 and 1999,
respectively. Viacom also provides other employee benefits to the Partnership's
employees, including certain postemployment benefits, medical, dental, life and
disability insurance costs. The costs of providing such benefits to the
Partnership have been considered in the corporate overhead allocation charge
reflected in the Partnership's consolidated financial statements. Management
believes that the methodologies used to allocate pension and other employee
benefit charges to the Partnership are reasonable.
The Partnership, through the normal course of business, is involved in
other transactions with companies owned by or affiliated with Viacom and is
involved in other third party transactions jointly with other companies owned by
or affiliated with Viacom. All such transactions did not have a material impact
on the results of operations, financial position, changes in equity or cash
flows presented herein.
NOTE 6--INCOME TAXES
Prior to July 15, 1999, the Predecessor was included in the consolidated
federal, state and local income tax returns filed by Viacom. The Predecessor's
income tax benefit and net deferred tax assets reflected in the consolidated
financial statements have been prepared as if such benefits were computed on a
separate return basis. The tax losses generated by the Predecessor have been
utilized by Viacom to reduce its consolidated taxable income. Viacom credited
the Predecessor for the benefit of using its net operating loss, which has been
reflected in Viacom's net equity investment.
Effective July 16, 1999, the Partnership, is a pass-through entity which is
generally not required to provide for or pay income taxes. Accordingly, no
provision has been made for income taxes for the period from July 16, 1999 to
December 31, 1999, as these taxes are the responsibility of the partners.
Components of the income tax benefit are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................ $2,232 $3,812 $2,501
State and local........................................ 309 527 346
Deferred................................................. 94 145 211
------ ------ ------
$2,635 $4,484 $3,058
====== ====== ======
</TABLE>
F-18
<PAGE> 105
THE MTVI GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
A reconciliation of the U.S. Federal statutory tax rate to the
Partnership's effective tax rate on the income (loss) before income taxes is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. tax rate................................... 35% 35% 35%
Goodwill amortization..................................... -- -- (5)
State and local taxes, net of federal tax benefit......... 3% 3% 3%
-- -- --
Effective tax rate........................................ 38% 38% 33%
== == ==
</TABLE>
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Pension expense........................................... $ 36 $ 64 $ --
Book-tax basis differences in reserves.................... 155 274 --
---- ---- ----
Total deferred tax assets................................... 191 338 --
---- ---- ----
Deferred tax liabilities:
Book-tax basis differences in fixed assets................ (4) (6) --
---- ---- ----
Total deferred tax liabilities.............................. (4) (6) --
Valuation allowance......................................... -- -- --
---- ---- ----
Total net deferred tax assets............................. $187 $332 $ --
==== ==== ====
</TABLE>
NOTE 7--STOCK COMPENSATION
The Partnership has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock -- Based Compensation." In accordance with the provisions
of SFAS 123, the Partnership applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for the plan and accordingly, does not recognize compensation expense
for stock options granted at fair market value.
MTVi Option Plan
Prior to 1999, the Partnership did not have a separate long-term incentive
plan. On October 1, 1999, the Partnership established MTVi's Long-Term Incentive
Plan (the "Plan"), and accordingly reserved approximately 12 million units for
option grants to its employees and to the non-employee directors of the
Partnership. The purpose of the Plan is to benefit and advance the interests of
the Partnership by rewarding employees and non-employee directors for their
contributions to the financial success of the Partnership and thereby motivating
them to continue to make such contributions in the future. The Partnership may
grant options to purchase partnership units, options to purchase Class A common
stock, restricted partnership units and restricted Class A common stock pursuant
to the Plan, as well as other forms of equity-based or equity-related awards
determined to be consistent with the purpose of the Plan and the interests of
the Partnership. The options generally vest over a three to four year period
from the date of grant and expire 10 years after the date of grant.
F-19
<PAGE> 106
THE MTVI GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The estimated weighted average fair value of the options as of their grant
dates was $11.45 in 1999. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
1999
-----
<S> <C>
Expected dividend yield(a).................................. --
Expected stock price volatility............................. 97.60%
Risk-free interest rate..................................... 6.04%
Expected life of options (years)............................ 5.0
</TABLE>
- ---------------
(a) The Partnership has not declared and has no present intention of declaring
any cash dividends.
The following table summarizes option activity under the Plan as it relates
to MTVi's employees:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1998...................... -- $ --
Granted......................................... 5,106,500 15.00
Exercised....................................... -- --
Canceled........................................ 32,000 15.00
---------
BALANCE AT DECEMBER 31, 1999...................... 5,074,500 15.00
=========
</TABLE>
The following table summarizes information concerning currently outstanding
(none of which are exercisable) MTVi options issued to MTVi employees at
December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING
--------------------------------------------
REMAINING
RANGE OF CONTRACTUAL WEIGHTED-AVERAGE
EXERCISE PRICES OPTIONS LIFE (YEARS) EXERCISE PRICE
- --------------- ------- ------------ ----------------
<S> <C> <C> <C>
$15.00 4,863,000 9.58 $15.00
$15.00 110,400 9.83 $15.00
$15.00 101,100 9.92 $15.00
-----------
5,074,500
===========
</TABLE>
Viacom Option Plans
Viacom granted stock options to employees of the Partnership under Viacom's
Long-Term Management Incentive Plans (the "Viacom Option Plans"). Options issued
under the Viacom Option Plans generally vest over a four to six year period from
the date of grant and expire ten years after the date of grant.
The estimated weighted-average fair value of each option as of the grant
date was $6.58, $12.97 and $19.84 in 1997, 1998 and 1999. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
F-20
<PAGE> 107
THE MTVI GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Expected dividend yield(a).................................. -- -- --
Expected stock price volatility............................. 31.74% 32.76% 29.70%
Risk-free interest rate..................................... 6.04% 5.43% 6.09%
Expected life of options (years)............................ 6.0 6.0 7.5
</TABLE>
- ---------------
(a) Viacom has not declared and has no present intention of declaring any cash
dividend.
The following table summarizes stock option activity under the Viacom
Option Plans as it relates to the Partnership's employees:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1996...................... 7,000 $17.50
Granted......................................... 26,000 15.25
Exercised....................................... -- --
Canceled........................................ -- --
------
BALANCE AT DECEMBER 31, 1997...................... 33,000 15.73
Granted......................................... 4,000 30.56
Exercised....................................... -- --
Canceled........................................ -- --
------
BALANCE AT DECEMBER 31, 1998...................... 37,000 17.33
Granted......................................... 15,440 41.94
Exercised....................................... -- --
Canceled........................................ -- --
------
BALANCE AT DECEMBER 31, 1999...................... 52,440 24.58
======
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable Viacom stock options issued to the Partnership's employees at
December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------------------------------------- -----------------------
RANGE OF REMAINING WEIGHTED- WEIGHTED-
EXERCISE CONTRACTUAL AVERAGE AVERAGE
PRICES OPTIONS LIFE (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- --------------- ------- ------------ -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$15.25 26,000 7.58 $15.25 6,500 $15.25
17.50 7,000 6.58 17.50 4,000 17.50
30.56 4,000 8.64 30.56 -- --
41.94 15,440 9.58 41.94 -- --
------ -------
52,440 10,500
====== =======
</TABLE>
Had total compensation expense associated with both the Partnership and
Viacom option plans applicable to the Partnership's employees been determined
based upon the fair value at the grant date for awards consistent with the
methodology prescribed by SFAS 123, the Partnership's combined pretax income
would have decreased by $24 ($14 after tax), $44 ($26 after tax) and $3,933
($3,921 after tax), for the years
F-21
<PAGE> 108
THE MTVI GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ended December 31, 1997, 1998 and 1999, respectively. These pro forma effects
may not be representative of expense in future periods since the estimated fair
value of stock options on the date of grant is amortized to expense over the
vesting period. Additional options may be granted under the Plan in future
years.
NOTE 8--COMMITMENTS
The Partnership leases its facilities under noncancelable leases for
varying periods through 2009.
At December 31, 1999 minimum rental payments under noncancelable leases are
as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
2000........................................................ $ 532
2001........................................................ 578
2002........................................................ 471
2003........................................................ 417
2004........................................................ 434
2005, and thereafter........................................ 1,971
------
Total lease payments........................................ $4,403
======
</TABLE>
Rent expense under operating lease arrangements for the years ended December 31,
1997, 1998 and 1999, totaled $228, $254 and $532, respectively.
NOTE 9--CONTINGENCIES
The Partnership accrues music rights royalties payable to American Society
of Composers, Authors, and Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI"),
and Recording Industry Association of America ("RIAA"). Management is currently
accruing royalties based on interim rates. Final rates will be determined either
by subsequent negotiation with the performing arts societies, or, failing that,
by proceedings in federal courts. Management believes its accruals are adequate.
However, actual payments may differ from amounts accrued.
In January 2000, MTVN received letters from two major record companies
asserting that some of the features of the Partnership's internet radio business
make the use of the record companies' music ineligible for a compulsory license
under applicable U.S. copyright law. One of those letters also asserts that the
Partnership is streaming full-length music videos without authorization. These
letters demand that the Partnership cease its use of their music in these
manners and pay for the Partnership's past use. The Partnership believes that
the uses of the record companies' music in connection with the features of the
Partnership's Internet music business is within the scope of the compulsory
license and that the compulsory license fees will be determined as part of a
royalty arbitration convened by the Librarian of Congress. The Partnership also
believes that use of the videos is authorized by the terms of the existing
agreement with that record company. Although the Partnership cannot provide any
assurances, the Partnership does not expect that these assertions will result in
a material adverse effect on our business, financial condition or results of
operations.
The Partnership is involved in ordinary and routine litigation incidental
to its business. Management believes that any ultimate liability resulting from
those actions or claims will not have a material adverse effect on the
Partnership's consolidated results of operations, financial position or cash
flows.
NOTE 10--SUBSEQUENT EVENT
On March 3, 2000, the Partnership entered into an agreement with the sole
shareholder of Mischief New Media Inc. ("Mischief") whereby certain assets and
liabilities of Mischief were contributed to the Partnership in exchange for
partnership units valued at $3,750. Under this agreement, simultaneously with
the Offering, all of the shares of Mischief will be exchanged for shares of
Class A common stock of the Company.
F-22
<PAGE> 109
SONICNET, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1999
------- --------
<S> <C> <C>
REVENUES
Advertising............................................... $ 554 $ 1,108
Other..................................................... -- 21
------- --------
Total revenues......................................... 554 1,129
------- --------
COSTS AND EXPENSES
Production................................................ 1,724 4,986
Allocated charges from parent............................. 370 815
Selling, general and administrative....................... 1,434 3,387
Depreciation.............................................. 65 117
Amortization of intangibles............................... 1,957 4,012
------- --------
Total costs and expenses............................... 5,550 13,317
------- --------
OPERATING INCOME (LOSS)..................................... (4,996) (12,188)
Benefit for income taxes.................................. -- --
------- --------
NET INCOME (LOSS)........................................... $(4,996) $(12,188)
======= ========
</TABLE>
See notes to financial statements.
F-23
<PAGE> 110
SONICNET, INC.
BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 25 $ 64
Accounts receivable....................................... 361 735
Prepaid expenses.......................................... 288 185
------- -------
Total current assets................................... 674 984
Property and equipment, net................................. 305 747
Goodwill, net............................................... 15,653 48,814
Other assets................................................ 31 14
------- -------
$16,663 $50,559
======= =======
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable.......................................... $ 912 $ 776
Accrued expenses.......................................... 1,017 1,841
Deferred revenue.......................................... 8 --
Note payable.............................................. 13 13
Current portion of capital lease obligations.............. 11 11
------- -------
Total current liabilities.............................. 1,961 2,641
Capital lease obligations, less current portion............. 22 33
Commitments and contingencies (Note 7)
TCIM's net equity investment................................ 14,680 47,885
------- -------
Total equity........................................... 14,680 47,885
------- -------
$16,663 $50,559
======= =======
</TABLE>
See notes to financial statements.
F-24
<PAGE> 111
SONICNET, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1999
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $(4,996) $(12,188)
Adjustments to reconcile net income (loss) to net cash
flow from operating activities:
Depreciation........................................... 65 117
Amortization of intangibles............................ 1,957 4,012
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable............. 9 (374)
(Increase) decrease in prepaid and other assets........ (48) 120
Increase (decrease) in accounts payable................ 894 (136)
Increase in accrued expenses........................... 357 824
Decrease in deferred revenue........................... (117) (8)
------- --------
NET CASH FLOW USED FOR OPERATING ACTIVITIES................. (1,879) (7,633)
------- --------
INVESTING ACTIVITIES:
Capital expenditures...................................... (138) (548)
------- --------
NET CASH FLOW USED FOR INVESTING ACTIVITIES:................ (138) (548)
------- --------
FINANCING ACTIVITIES:
Advances from TCIM, net................................... 2,034 8,220
Repayment of note payable................................. (81) --
------- --------
NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES.............. 1,953 8,220
------- --------
Net (decrease) increase in cash and cash equivalents........ (64) 39
Cash and cash equivalents at beginning of period............ 89 25
------- --------
Cash and cash equivalents at end of period.................. $ 25 $ 64
======= ========
NONCASH INVESTING ACTIVITIES:
Incremental revaluation of SonicNet's assets (Note 1)....... $ -- $ 37,173
NONCASH FINANCING ACTIVITIES:
Equipment acquired under capital leases..................... $ -- $ 11
</TABLE>
See notes to financial statements.
F-25
<PAGE> 112
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The interim financial statements and related notes of the business and
operations of SonicNet, Inc. (the "Company"), owned directly by TCI Music, Inc.
("TCIM" or the "Parent"), for the six months ended June 30, 1998 and 1999 have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and are unaudited. The interim financial statements are
presented on a carve-out basis and reflect the historical results of operations,
financial position and cash flows of the Company. TCIM's net investment in the
Company is included in the equity section of the accompanying interim financial
statements.
In the opinion of management, the interim financial statements include all
recurring adjustments and normal accruals necessary to present fairly the
Company's financial position and its results of operations for the dates and
periods presented. For all periods presented, certain expenses reflected in the
financial statements include allocations of corporate overhead expenses from the
Parent. All such costs and expenses have been charged to the Company by the
Parent in the period in which the services were performed. Management believes
that these allocations were made on a reasonable basis; however, the allocations
of costs and expenses do not necessarily indicate the costs that would have been
or will be incurred by the Company on a stand-alone basis. Also, the financial
statements may not necessarily reflect the financial position, results of
operations and cash flows of the Company in the future or what the financial
position, results of operations or cash flows would have been if the Company had
been a separate, stand-alone company during the periods presented.
These financial statements should be read in conjunction with the Company's
audited financial statements and notes thereto for the years ended December 31,
1997 and 1998.
Goodwill and accumulated amortization are summarized in the following
table:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1998 1999
----------------- -------------
<S> <C> <C>
Goodwill......................................... $19,566 $52,066
Less accumulated amortization.................... (3,913) (3,252)
------- -------
Goodwill, net.................................... $15,653 $48,814
======= =======
</TABLE>
The March 9, 1999 acquisition by AT&T Corp. of TCIM resulted in $37,173 of
additional goodwill being reflected in the financial statements and is being
amortized on a straight-line basis over five years.
NOTE 2--SUBSEQUENT EVENTS
On July 15, 1999, Liberty Digital, Inc. (formerly known as TCI Music, Inc.)
("Liberty Digital") contributed, among other assets, substantially all of the
businesses of the Company, The Box Worldwide, Inc. ("The Box") and certain
related wholly owned international online operations in exchange for an
aggregate 10% limited partnership interest in The MTVi Group, L.P. (the
"Partnership") formed by MTV Networks ("MTVN"), a unit of Viacom Inc.
("Viacom"), and Liberty Digital and certain of their affiliates. MTVN
contributed to the Partnership substantially all of its Internet music
businesses' assets, including its MTV.com, VH1.com and Imagine Radio businesses
and certain related wholly owned international online operations in exchange for
an aggregate 90% general and limited partnership interest in the Partnership.
In connection with the acquisition, TCIM accelerated the vesting for 20% of
all the outstanding unvested stock options granted under the TCIM 1997 Stock
Incentive Plan. All remaining outstanding unvested or unexercised options were
cancelled.
F-26
<PAGE> 113
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform with the current year's
presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash on hand and highly liquid
investments having short-term original maturities of three months or less.
NOTE 4--TCIM'S NET EQUITY INVESTMENT
TCIM's net equity investment includes accumulated equity as well as any
payable and receivable due to/ from the parent resulting from cash transfers and
other intercompany activity. An analysis of the TCIM's net equity investment
activity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------------
<S> <C> <C>
Balance, beginning of period...................... $ 19,177 $ 14,680
Net loss.......................................... (11,063) (12,188)
Cash advances, net................................ 5,707 4,424
Acquisition of Company............................ -- 37,173
Stock compensation................................ 54 2,981
Allocated charges from TCIM....................... 805 815
-------- --------
Balance, end of period............................ $ 14,680 $ 47,885
======== ========
</TABLE>
NOTE 5--RELATED PARTY TRANSACTIONS
On October 1, 1998, the Company entered into a one year agreement with
America Online, Inc. ("AOL") whereby the Company receives anchor tenant
distribution within the music subchannel offered on the AOL Service in exchange
for $800 and the equivalent $450 of in-kind advertising commitments from The
Box. As a result of this transaction, the Company is recording the advertising
expense related to The Box's in-kind advertising commitment ratably over the
term of the agreement. The balance payable to The Box related to such in-kind
advertising is included in the parent's net equity investment.
For the six months ended June 30, 1998 and 1999, TCIM provided the Company
with certain general and administrative services including insurance, legal,
treasury, financial and other corporate functions. TCIM's allocation of expenses
was based on a percentage of weighted average funding provided to the Company.
The charges for such services were $188 and $230 for the six months ended June
30, 1998 and 1999, respectively. Management believes that the methodologies used
to allocate these charges are reasonable, however, these
F-27
<PAGE> 114
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
allocations of costs and expenses do not necessarily indicate the costs and
expenses that would have been incurred by the Company had they been on a
stand-alone basis.
For the six months ended June 30, 1998 and 1999, in addition to the
overhead allocation discussed above, TCIM allocated approximately $182 and $585
in interest expense to the Company on advances due to TCIM.
The Company, through the normal course of business, is involved in other
transactions with companies owned by or affiliated with TCIM, and such
transactions, except those previously disclosed, did not have a material impact
on the financial position or results of operations presented herein.
NOTE 6--INCOME TAXES
The calculation of the Company's income tax benefit for the six months
ended June 30, 1998 and deferred tax assets at June 30, 1998 and at December 31,
1998 has been prepared on a separate return basis as though the Company had
filed stand-alone tax returns and in accordance with a tax sharing agreement
with Tele-Communications, Inc. As further discussed below, the Company does not
reflect any income tax benefit or deferred tax assets in the financial
statements for the six months ended June 30, 1998 and the year ended December
31, 1998.
The calculation of the Company's income tax benefit for the six months
ended June 30, 1999 and deferred tax assets at June 30, 1999 has been prepared
on a separate return basis as though the Company had filed stand-alone tax
returns and in accordance with a tax sharing agreement with AT&T Corp. As
further discussed below, the Company does not reflect any income tax benefit or
deferred tax assets in the financial statements for the six months ended and at
June 30, 1999.
A reconciliation of the U.S. Federal statutory tax rate to the Company's
effective tax rate on income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1998 1999
---- ----
<S> <C> <C>
Statutory U.S. tax rate..................................... 35% 35%
Amortization of goodwill.................................... (14) (12)
State and local taxes, net of federal tax benefit........... 2 2
Valuation allowance......................................... (23) (25)
--- ---
Effective tax rate.......................................... --% --%
=== ===
</TABLE>
F-28
<PAGE> 115
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1998 1999
--------------- -----------
<S> <C> <C>
Current deferred tax assets:
Employee compensation.............................. $ 21 $ 1,038
Net operating loss carryforward.................... 4,854 6,831
------- -------
Gross deferred tax assets............................ 4,875 7,869
------- -------
Current deferred tax liabilities:
Deferred income.................................... (457) (457)
Book-tax basis differences in fixed assets......... (47) (37)
------- -------
Gross deferred tax liabilities....................... (504) (494)
------- -------
Valuation allowance.................................. (4,371) (7,375)
------- -------
Total net deferred tax assets................... $ -- $ --
======= =======
</TABLE>
At December 31, 1998 and June 30, 1999, the Company had net deferred tax
assets of $4,371 and $7,375, respectively. In compliance with tax sharing
agreements with Tele-Communications Inc. and AT&T Corp., a full valuation
allowance has been provided against the net deferred tax assets at December 31,
1998 and June 30, 1999, respectively, principally associated with the tax
benefits of net operating losses for which the Company will not likely receive
any benefit.
The Company has $8,908 and $17,975 of net operating loss carryforwards for
the six months ended June 30, 1998 and 1999, respectively. These net operating
loss carryforwards expire between the years 2009 and 2018 and are available to
offset future taxable income. The utilization of the net operating loss
carryforwards may be subject to limitations under U.S. federal income tax laws.
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company accrues music rights royalties payable to American Society of
Composers, Authors, and Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI"), and
Recording Industry Association of America ("RIAA"). Management is currently
accruing royalties based on interim rates. Final rates will be determined either
by subsequent negotiation with the performing arts societies, or, failing that,
by proceedings in federal courts. Management believes its accruals are adequate.
However actual payments may differ from amounts accrued.
The Company is involved in ordinary and routine litigation incidental to
its business. Management believes that any ultimate liability resulting from
those actions or claims will not have a material adverse effect on the Company's
results of operations, financial position or cash flows.
F-29
<PAGE> 116
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Viacom Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations and of cash flows present fairly, in all material respects, the
financial position of SonicNet, Inc. at December 31, 1997 and 1998, and the
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of 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
generally accepted auditing standards, 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 the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
January 10, 2000
F-30
<PAGE> 117
SONICNET, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1997 1998
------- --------
<S> <C> <C>
REVENUES
Advertising............................................... $ 745 $ 1,252
Other..................................................... 5 302
------- --------
Total revenues......................................... 750 1,554
------- --------
COSTS AND EXPENSES
Production................................................ 1,702 4,086
Allocated charges from parent............................. 630 805
Selling, general and administrative....................... 1,225 3,686
Depreciation.............................................. 52 127
Amortization of intangibles............................... 180 3,913
------- --------
Total costs and expenses............................... 3,789 12,617
------- --------
OPERATING INCOME (LOSS)..................................... (3,039) (11,063)
Benefit for income taxes.................................. -- --
------- --------
NET INCOME (LOSS)........................................... $(3,039) $(11,063)
======= ========
</TABLE>
See notes to the financial statements.
F-31
<PAGE> 118
SONICNET, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 89 $ 25
Accounts receivable....................................... 189 361
Prepaid expenses.......................................... -- 288
------- -------
Total current assets................................... 278 674
Property and equipment, net................................. 184 305
Goodwill, net............................................... 19,566 15,653
Other assets................................................ 24 31
------- -------
$20,052 $16,663
======= =======
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable.......................................... $ 106 $ 912
Accrued expenses.......................................... 475 1,017
Deferred revenue.......................................... 117 8
Note payable.............................................. 126 13
Current portion of capital lease obligations.............. 18 11
------- -------
Total current liabilities.............................. 842 1,961
------- -------
Capital lease obligations, less current portion........... 33 22
Commitments and contingencies (Note 8)
Parent's net equity investment............................ 19,177 14,680
------- -------
Total equity........................................... 19,177 14,680
------- -------
$20,052 $16,663
======= =======
</TABLE>
See notes to financial statements.
F-32
<PAGE> 119
SONICNET, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1997 1998
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $(3,039) $(11,063)
Adjustments to reconcile net income (loss) to net cash
flow from operating activities:
Depreciation........................................... 52 127
Amortization of intangibles............................ 180 3,913
Change in operating assets and liabilities:
Increase in accounts receivable........................ (134) (172)
Increase in prepaid and other assets................... (3) (295)
(Decrease) increase in accounts payable................ (9) 806
Increase in accrued expenses........................... 458 542
Increase (decrease) in deferred revenue................ 117 (109)
------- --------
NET CASH FLOW USED FOR OPERATING ACTIVITIES................. (2,378) (6,251)
------- --------
INVESTING ACTIVITIES:
Capital expenditures...................................... (105) (248)
Payment of acquisition transaction costs.................. (137) --
------- --------
NET CASH FLOW USED FOR INVESTING ACTIVITIES................. (242) (248)
------- --------
FINANCING ACTIVITIES:
Advances from Parent, net................................. 2,796 6,566
Repayment of note payable................................. (99) (113)
Payment of obligations under capital leases............... -- (18)
------- --------
NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES.............. 2,697 6,435
------- --------
Net increase (decrease) in cash and cash equivalents........ 77 (64)
Cash and cash equivalents at beginning of year.............. 12 89
------- --------
Cash and cash equivalents at end of year.................... $ 89 $ 25
======= ========
NONCASH INVESTING ACTIVITIES:
Paradigm acquisition of SonicNet (Note 1)................. $ 725 $ --
SonicNet acquisition of Addicted to Noise (Note 1)........ $ 300 $ --
TCIM acquisition of Paradigm (Note 1)..................... $19,247 $ --
NONCASH FINANCING ACTIVITIES:
Equipment acquired under capital leases................... $ 23 $ --
</TABLE>
See notes to financial statements.
F-33
<PAGE> 120
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
SonicNet, Inc. (the "Company") is a network of premiere music and related
websites, combining news coverage, live artist events and programmed music
channels with a fully searchable music and artist focused database. The emphasis
of the Company's website is to inform consumers of new artists and their
performances and provide interviews and chats with artists, product samples and
reviews and the option to purchase related artists' music products and
merchandise. Revenues to date have been primarily derived from advertising,
sponsorship and subscription fees. The accompanying financial statements are
presented on a carve-out basis and reflect the historical results of operations,
financial position and cash flows of the Company.
On January 9, 1997, Paradigm Music Entertainment Company ("Paradigm")
acquired all of the issued and outstanding capital stock of the Company from
Prodigy Service Corporation ("Prodigy") and Sunshine Interactive Network, Inc.
("Sunshine") for a purchase price consisting of 200,000 shares of Paradigm's
Class A Common Stock, 100,000 Class A Warrants and $100 in cash. The shares and
warrants were valued at $3.50 and $.25, respectively. The acquisition was
accounted for as a purchase; therefore, Paradigm's basis in the acquired assets
has been pushed down to the Company in the accompanying financial statements.
The excess of the purchase price over the fair value of the net assets acquired
("goodwill") is being amortized on a straight-line basis over five years.
In November 1997, Paradigm acquired substantially all of the assets
(including trademarks and specific liabilities) of Addicted To Noise ("ATN"), an
online music magazine and news and information provider, for 75,000 shares of
Paradigm Class A Stock and the assumption of approximately $325 of liabilities
and merged ATN into the Company. The Paradigm Class A shares were valued at
$4.00. The acquisition was accounted for as a purchase; therefore, the net
assets of ATN have been recorded at their fair value. The goodwill is being
amortized on a straight-line basis over five years.
On December 31, 1997, TCI Music, Inc. ("TCIM") acquired Paradigm for
3,204,532 shares of TCIM stock in exchange for all of the outstanding shares and
options of Paradigm, with the exception of 25,000 shares of Paradigm held by an
officer of the Company. The value of TCIM shares exchanged was $6.97. Associated
transaction costs were approximately $137. As TCIM acquired nearly 100% of the
Paradigm stock outstanding, the acquisition was accounted for as a purchase;
therefore, TCIM's basis in the acquired assets and liabilities of the Company
has been pushed down to the Company in the accompanying financial statements. As
Paradigm also had operations other than the Company, the purchase price for
Paradigm was allocated among the Company and the other operations based upon
fair market value. The Company therefore was allocated approximately 85% of the
total consideration of $22,473, or approximately $19,000. The goodwill is being
amortized on a straight-line basis over five years.
Prodigy, Sunshine, Paradigm, and TCIM individually and collectively
represent the "Parent" or "Former Parent." For all periods presented, certain
expenses reflected in the financial statements include allocations of corporate
overhead expenses from the Parent. All such costs and expenses have been charged
to the Company by the Parent in the period in which the services were performed.
Management believes that the foregoing allocations were made on a reasonable
basis; however, the allocations of costs and expenses do not necessarily
indicate the costs that would have been or will be incurred by the Company on a
stand-alone basis. Also, the financial statements may not necessarily reflect
the financial position, results of operations and cash flows of the Company in
the future or what the financial position, results of operations or cash flows
would have been if the Company had been a separate, stand-alone company during
the periods presented.
F-34
<PAGE> 121
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 2--SUBSEQUENT EVENT
On July 15, 1999, Liberty Digital, Inc. (formerly known as TCI Music, Inc.)
("Liberty Digital") contributed, among other assets, substantially all of the
businesses of the Company, The Box Worldwide, Inc. ("The Box") and certain
related wholly owned international online operations in exchange for an
aggregate 10% limited partnership interest in The MTVi Group, L.P. (the
"Partnership") formed by MTV Networks ("MTVN"), a unit of Viacom Inc.
("Viacom"), and Liberty Digital and certain of their affiliates. MTVN
contributed to the Partnership substantially all of its Internet music
businesses' assets including its MTV.com, VH1.com and Imagine Radio businesses,
and certain related wholly owned international online operations, in exchange
for an aggregate 90% general and limited partnership interest in the
Partnership.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform with the current year's
presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash on hand and highly liquid
investments having short-term original maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repair costs are
charged to expense as incurred. Renewals and improvements that extend the useful
life of the assets are capitalized. Depreciation expense is computed principally
by the straight-line method over the estimated useful lives as follows:
<TABLE>
<S> <C>
Leasehold improvements...................................... 4-10 years
Equipment, furniture and fixtures........................... 3 years
</TABLE>
Balances of major classes of assets and accumulated depreciation are as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1997 1998
---- -----
<S> <C> <C>
Leasehold improvements...................................... $ 21 $ 29
Equipment and other......................................... 155 394
Furniture and fixtures...................................... 8 9
---- -----
Total..................................................... 184 432
Less accumulated depreciation............................... -- (127)
---- -----
Property and equipment, net................................. $184 $ 305
==== =====
</TABLE>
F-35
<PAGE> 122
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
As a result of TCIM's acquisition of the Company on December 31, 1997 as
described in Note 1, the property and equipment balances at December 31, 1997
have been recorded at their fair market value on that date.
GOODWILL
Goodwill is amortized on a straight-line basis over the estimated remaining
economic useful life, not exceeding five years. Amortization expense related to
intangible assets was $180 and $3,913 in 1997 and 1998, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses its long-lived assets (primarily property, equipment
and goodwill) for impairment whenever there is an indication that the carrying
amount of the asset may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted undiscounted cash flows generated by
those assets to their respective net carrying values. The amount of impairment
loss, if any, will generally be measured as the difference between the net book
value of the assets and the estimated fair value of the related assets. No such
impairment losses have been identified by the Company.
REVENUE RECOGNITION
Revenues are generated principally from the sale of advertising on the
Company's Internet website. Advertising revenue is recognized ratably in the
period that the advertising is displayed, provided that no Company obligations
remain. Company obligations typically include guarantees of a minimum number of
"impressions" (times that an advertisement is viewed by users of the Company's
online services over a specified period of time). To the extent that the minimum
guaranteed impressions are not met, the Company defers recognition of the
corresponding revenue until the guaranteed impressions are attained.
CONCENTRATION OF CREDIT RISK
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally does not require collateral on its customers'
receivables. The Company maintains allowances for credit losses, if required.
The Company sells advertising to customers in several industries.
Two customers accounted for 58% of total accounts receivable at December
31, 1998. No individual customer accounted for more than 10% of total accounts
receivable at December 31, 1997. One customer accounted for 30% and 29% of
revenues for the years ended December 31, 1997 and 1998, respectively.
INCOME TAXES
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Deferred income taxes are recorded
to reflect the tax benefit and consequences of future years' differences between
the tax bases of assets and liabilities and their financial reporting bases. The
Company records a valuation allowance to reduce deferred tax assets if it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997 and 1998, the Company's carrying value of financial
instruments approximates fair value due to the short-term maturities of these
instruments or variable rates of interest. During 1997 and 1998, no financial
instruments were held or issued for trading purposes.
F-36
<PAGE> 123
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Maintained for Internal Use"("SOP 98-1"). SOP
98-1 became effective for financial statements for years beginning after
December 15, 1998. SOP 98-1 provides accounting guidance for accounting for
computer software developed or obtained for internal use, including the
requirements of capitalizing specified costs and the amortization of such costs.
The Company does not anticipate that the adoption of SOP 98-1 will have a
material effect on its capitalization policy.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5") which states that start-up costs
should be expensed as incurred. SOP 98-5 became effective for all fiscal years
beginning after December 15, 1998. The Company's policy complies with the
guidelines of SOP 98-5.
NOTE 4--PARENT'S NET EQUITY INVESTMENT
The Parent's net equity investment includes accumulated equity as well as
any payable and receivable due to/from the parent resulting from cash transfers
and other intercompany activity. An analysis of the Parent's net equity
investment activity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1997 1998
------- --------
<S> <C> <C>
Balance, beginning of year.................................. $ 36 $ 19,177
Net loss.................................................... (3,039) (11,063)
Cash advances, net.......................................... 2,078 5,707
Stock compensation.......................................... 88 54
Allocated charges from parent............................... 630 805
Acquisition of Company...................................... 19,384 --
------- --------
Balance, end of year........................................ $19,177 $ 14,680
======= ========
</TABLE>
NOTE 5--RELATED PARTY TRANSACTIONS
During 1998, the Company designed and developed an Internet website for
DMX, a wholly owned subsidiary of TCIM. The Company has recorded other revenue
in 1998 of $94 related to the Company's work for DMX, and the related accounts
receivable balance of $94 is included in the balance sheet at December 31, 1998.
During 1998, the Company designed and developed an Internet website for The
Box. The Company has recorded other revenue in 1998 of $123 related to this
work.
On October 1, 1998, the Company entered into a one year agreement with
America Online, Inc. ("AOL") whereby the Company receives anchor tenant
distribution within the music subchannel offered on the AOL Service in exchange
for $800 and the equivalent $450 of in-kind advertising commitments from The
Box. As a result of this transaction, the Company has recorded the advertising
expense related to The Box's in-kind advertising commitment ratably over the
term of the agreement. The balance payable to The Box related to this in-kind
advertising is included in the Parent's net equity investment.
In 1997 and 1998, Paradigm and TCIM, respectively, provided the Company
with certain general and administrative services including insurance, legal,
treasury, financial and other corporate functions. Paradigm's
F-37
<PAGE> 124
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
allocation of expenses was based upon management's estimate of executives' time
and effort incurred related to the Company, and TCIM's allocation of expenses
was based on a percentage of weighted average funding provided to the Company.
The charges for such services were $630 and $420 for 1997 and 1998,
respectively. Management believes that the methodologies used to allocate these
charges are reasonable, however, these allocations of costs and expenses do not
necessarily indicate the costs and expenses that would have been incurred by the
Company had they been on a stand-alone basis. See Note 7 for a discussion of
employee benefit costs charged to the Company by TCIM.
In 1998, in addition to the overhead allocation discussed above, TCIM
allocated approximately $385 in interest expense to the Company on advances due
to TCIM. No interest charge was allocated on advances due to Paradigm in 1997.
The Company, through the normal course of business, is involved in other
transactions with companies owned by or affiliated with Paradigm or TCIM, and
such transactions except those previously disclosed did not have a material
impact on the financial position or results of operations presented herein.
NOTE 6--INCOME TAXES
The calculation of the Company's income tax benefit/expense and deferred
tax asset/liability has been prepared on a separate return basis as though the
Company had filed stand-alone tax returns and in accordance with the tax sharing
agreements with Paradigm and Tele-Communications Inc. As further discussed
below, the Company does not reflect any income tax benefit or deferred tax
asset/liability in the financial statements.
A reconciliation of the U.S. Federal statutory tax rate to the Company's
effective tax rate on income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Statutory U.S. tax rate..................................... 35% 35%
Amortization of goodwill.................................... (2) (12)
State and local taxes, net of federal tax benefit........... 3 2
Valuation allowance......................................... (36) (25)
--- ---
Effective tax rate.......................................... --% --%
=== ===
</TABLE>
F-38
<PAGE> 125
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Employee compensation..................................... $ -- $ 21
Net operating loss carryforward........................... 2,308 4,854
------- -------
Gross deferred tax assets................................... 2,308 4,875
------- -------
Deferred tax liabilities:
Deferred income........................................... (457) (457)
Book-tax basis differences in fixed assets................ (58) (47)
------- -------
Gross deferred tax liabilities.............................. (515) (504)
------- -------
Valuation allowance......................................... (1,793) (4,371)
------- -------
Total net deferred tax assets.......................... $ -- $ --
======= =======
</TABLE>
At December 31, 1997 and December 31, 1998, the Company had net deferred
tax assets of $1,793 and $4,371, respectively. In compliance with a tax sharing
agreement with Tele-Communications Inc., a full valuation allowance has been
provided against the 1997 and 1998 net deferred tax assets, principally
associated with the tax benefits of net operating losses for which the Company
will not likely receive any benefit.
The Company has $6,073 and $12,773 of net operating loss carryforwards at
the year ended December 31, 1997 and December 31, 1998, respectively. These net
operating loss carryforwards expire between the years 2009 and 2018 and are
available to offset future taxable income. The utilization of the net operating
loss carryforwards may be subject to limitations under U.S. federal income tax
laws.
NOTE 7--OTHER EMPLOYEE BENEFITS
STOCK COMPENSATION
During 1998, TCIM granted stock options with tandem stock appreciation
rights ("SARs") to employees of the Company under the TCIM 1997 Stock Incentive
Plan (the "Stock Plan"). Options granted under the Stock Plan expire ten years
from the date of grant. Options issued under the Stock Plan vest annually in 20%
cumulative increments.
On December 11, 1998, TCIM re-priced the stock options with tandem SARs at
$4.00 for all grants to its employees.
The Stock Plan provides for variable grants of equity-based interests
pursuant to awards of SAR's and for subsequent payments of cash based on their
appreciation in value over stated periods of time. Accordingly, the Company has
recognized compensation expense of $54 in 1998. The calculation of compensation
expense was based on the excess of the market price over the option price,
adjusted for the December 11, 1998 re-pricing, in accordance with the vesting
schedule.
F-39
<PAGE> 126
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes the Company's stock option activity under
the Stock Plan:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Balance at December 31, 1997........................ -- --
Granted........................................... 172,500 $6.50
Exercised......................................... -- --
Canceled.......................................... -- --
-------
Balance at December 31, 1998........................ 172,500 $4.00
=======
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable stock options of the Company at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
-----------------------
REMAINING
CONTRACTUAL EXERCISABLE
EXERCISE PRICE OPTIONS LIFE (YEARS) OPTIONS
-------------- ------- ------------ -----------
<S> <C> <C> <C>
$4.00..................................... 172,500 9.04 --
</TABLE>
At December 31, 1998, no shares were issuable for exercisable stock
options.
Additionally, an officer of the Company received 25,000 shares of Paradigm
during 1997 in conjunction with his 1997 employment agreement. The fair market
value of such shares has been included in stock compensation expense during
1997.
OTHER EMPLOYEE BENEFITS
Paradigm and TCIM provide employee benefits to the Company's employees,
including certain postemployment benefits, medical, dental, life and disability
insurance costs. The Company also participates in a 401(k) plan covering
substantially all employees, which is maintained by TCIM. The costs of providing
such benefits to the Company have been considered in the corporate overhead
allocation charge reflected in the Company's financial statements. Management
believes that the methodologies used to allocate employee benefit charges to the
Company are reasonable.
NOTE 8--COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Company leased office space in two locations. For
the years ended December 31, 1997 and 1998, the Company's rent expense was $216
and $303 respectively. Minimum annual rent obligations under noncancellable
long-term operating leases are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 379
2000........................................................ 495
2001........................................................ 567
2002........................................................ 457
2003........................................................ 417
2004, and thereafter........................................ 2,405
-------
$ 4,720
=======
</TABLE>
The Company accrues music rights royalties payable to American Society of
Composers, Authors, and Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI"), and
Recording Industry Association of America ("RIAA"). Management is currently
accruing royalties based on interim rates. Final rates will be determined either
by subsequent negotiation with the performing arts societies, or, failing that,
by proceedings in federal
F-40
<PAGE> 127
courts. Management believes its acruals are adequate. However actual payments
may differ from amounts accrued.
The Company is involved in ordinary and routine litigation incidental to
its business. Management believes that any ultimate liability resulting from
those actions or claims will not have a material adverse effect on the Company's
results of operations, financial position or liquidity.
F-41
<PAGE> 128
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1999
------- --------
<S> <C> <C>
REVENUES
Advertising revenues...................................... $ 6,022 $ 6,901
Viewer revenues, net...................................... 5,164 6,320
Other revenues............................................ 296 203
------- --------
Total revenues......................................... 11,482 13,424
------- --------
COSTS AND EXPENSES
Distribution, general and administrative (Note 3)......... 10,412 26,473
Allocated charges from parent............................. 628 1,155
Affiliate fees, site costs and telephone service.......... 3,563 4,866
Depreciation.............................................. 1,311 885
Amortization of intangibles............................... 1,445 3,022
Satellite transponder and rent paid to related party...... 761 855
------- --------
Total costs and expenses............................... 18,120 37,256
------- --------
Income (loss) before income taxes, interest, and interest in
income (losses) of equity investee........................ (6,638) (23,832)
Interest expense............................................ (252) (690)
Interest income............................................. 116 103
Benefit for income taxes.................................... -- --
------- --------
Income (loss) before interest in income (losses) of equity
investee.................................................. (6,774) (24,419)
Interest in income (losses) of equity investee.............. (304) (223)
------- --------
Net income (loss)...................................... $(7,078) $(24,642)
======= ========
</TABLE>
See notes to consolidated financial statements.
F-42
<PAGE> 129
THE BOX WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 1,719 $ 1,021
Accounts receivable, less allowance for doubtful accounts
of $393 (1998) and $525 (1999)......................... 5,041 4,956
Prepaid expenses and other current assets................. 531 628
------- -------
Total current assets................................... 7,291 6,605
Property and equipment, net................................. 10,587 10,580
Deferred costs and other assets, net........................ 6,839 6,014
Goodwill, net............................................... 25,910 47,159
Investment in and advances to equity investee............... 534 371
------- -------
$51,161 $70,729
======= =======
LIABILITIES AND EQUITY
Current liabilities
Accounts payable.......................................... $ 3,347 $ 1,592
Accrued expenses.......................................... 5,462 5,342
------- -------
Total current liabilities.............................. 8,809 6,934
Affiliate fees payable...................................... 941 1,456
------- -------
9,750 8,390
------- -------
Commitments and contingencies (Note 8)
TCIM's net equity investment................................ 41,408 62,534
Accumulated other comprehensive income (loss) -- foreign
currency translation...................................... 3 (195)
------- -------
Total equity........................................... 41,411 62,339
------- -------
$51,161 $70,729
======= =======
</TABLE>
See notes to consolidated financial statements.
F-43
<PAGE> 130
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1999
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $(7,078) $(24,642)
Adjustment to reconcile net income (loss) to net cash flow
from operating activities
Depreciation........................................... 1,311 885
Amortization of intangibles............................ 1,445 3,022
Interest in income (losses) of equity investee......... 304 223
Provision for bad debts and estimated chargebacks...... 80 24
Changes in assets and liabilities:
(Increase) decrease in accounts receivable........... (95) 59
Increase in prepaid expenses and other current
assets.............................................. (26) (96)
Decrease in accounts payable and accrued expenses.... (455) (1,360)
------- --------
NET CASH FLOW USED FOR OPERATING ACTIVITIES....... (4,514) (21,885)
------- --------
INVESTING ACTIVITIES:
Capital expenditures...................................... (2,081) (878)
Launch incentives and other fees paid..................... (105) (146)
Increase in investment in and advances to equity
investee............................................... (275) (59)
------- --------
NET CASH FLOW USED FOR INVESTING ACTIVITIES....... (2,461) (1,083)
------- --------
FINANCING ACTIVITIES:
Advances from TCIM, net................................... 6,387 22,468
------- --------
NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES.... 6,387 22,468
------- --------
Effect of exchange rate changes on cash..................... 14 (198)
------- --------
Net decrease in cash........................................ (574) (698)
Cash at beginning of period................................. 934 1,719
------- --------
Cash at end of period....................................... $ 360 $ 1,021
======= ========
NONCASH INVESTING ACTIVITIES
Incremental revaluation of The Box's assets (Note 3)...... $ -- $ 23,300
</TABLE>
See notes to consolidated financial statements.
F-44
<PAGE> 131
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
NOTE 1--BASIS OF PRESENTATION
The interim consolidated financial statements and related notes of the
business and operations of The Box Worldwide, Inc. ("the Company"), which
consists of the domestic division as well as the various international divisions
of the Company, for the six months ended June 30, 1998 and 1999 and as of
December 31, 1998 and June 30, 1999 have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and are unaudited. The
interim consolidated financial statements are presented on a carve-out basis
from TCI Music, Inc. ("TCIM") and reflect the consolidated historical results of
operations, financial position, and cash flows of the Company.
In the opinion of management, the interim financial statements include all
recurring adjustments and normal accruals necessary to present fairly the
Company's combined financial position and its consolidated results of operations
for the dates and periods presented. For the six months ended June 30, 1998 and
1999 and as of December 31, 1998 and June 30, 1999 certain expenses in the
consolidated financial statements include an allocation of corporate expenses
from TCIM (see Note 7). All such costs and expenses have been charged to the
Company by TCIM in the period in which the services were performed. Management
believes that these allocations were made on a reasonable basis, however, the
allocations of costs and expenses do not necessarily indicate the costs that
would have been incurred by the Company on a stand-alone basis. Also, the
financial statements may not necessarily reflect the financial position, results
of operations and cash flows of the Company in the future or what the financial
position, results of operations and cash flows of the Company in the future
would have been if the Company had been a separate, stand-alone company during
the periods presented. All significant intercompany balances and transactions
have been eliminated in consolidation.
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the years ended December
1997 and 1998 presented herein.
NOTE 2--SUBSEQUENT EVENTS
On July 15, 1999, Liberty Digital, Inc. (formerly known as TCI Music, Inc.)
("Liberty Digital") contributed, among other assets, substantially all of the
businesses of the Company, SonicNet, Inc. ("SonicNet"), and certain related
wholly owned international online operations in exchange for an aggregate 10%
limited partnership interest in The MTVi Group, L.P. (the "Partnership") formed
by MTV Networks ("MTVN"), a unit of Viacom Inc. ("Viacom"), and Liberty Digital
and certain of their affiliates. MTVN contributed to the Partnership
substantially all of its Internet music businesses' assets, including its
MTV.com, VH1.com and Imagine Radio Inc. businesses and certain of their related
wholly owned international online operations in exchange for an aggregate 90%
general and limited partnership interest in the Partnership. Liberty Digital
contributed, among other assets, substantially all of the businesses of the
Company, SonicNet, and certain related wholly owned international online
operations to the Partnership.
Also, the Partnership and MTVN entered into a license and distribution
agreement wherein MTVN will license for a fee the use of the Company's
intellectual property rights, technology and subscriber base.
In connection with the Acquisition, TCIM accelerated the vesting for 20% of
all the outstanding unvested stock options granted under the TCIM 1997 Stock
Incentive Plan.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities
F-45
<PAGE> 132
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods presented. Actual results could differ from those estimates.
GOODWILL
Goodwill and accumulated amortization are summarized in the following
table:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1998 1999
--------------- -----------
<S> <C> <C>
Goodwill............................................. $28,912 $48,679
Less accumulated amortization........................ (3,002) (1,520)
------- -------
Goodwill, net........................................ $25,910 $47,159
======= =======
</TABLE>
The March 9, 1999 acquisition by AT&T Corp. of TCIM resulted in $23,300 of
additional goodwill being reflected in the Company's financial statements and is
being amortized on a straight line basis over ten years. Amortization expense
related to goodwill was $1,445 and $2,051 for the six months ended June 30, 1998
and 1999, respectively.
STOCK COMPENSATION
The TCIM 1997 Stock Incentive Plan provides for variable grants of
equity-based interests pursuant to awards of stock options with tandem stock
appreciation rights, and for subsequent payments of cash based on their
appreciation in value over stated periods of time. Accordingly, the Company has
recorded compensation expense related to the TCIM 1997 Stock Incentive Plan of
$216 and $15,222 for the six months ended June 30, 1998 and 1999, respectively,
which is included in distribution, general and administrative expense.
NOTE 4--INCOME TAXES
The calculation of the Company's benefit for income taxes for the six
months ended June 30, 1998 and deferred tax asset/liability at June 30, 1998 and
at December 31, 1998 has been prepared on a separate return basis as though the
Company had filed stand-alone tax returns and in accordance with a tax sharing
agreement with Tele-Communications Inc. As further discussed below, the Company
does not reflect any income tax benefit or deferred tax asset/liability in the
financial statements for the six months ended June 30, 1998 and at December 31,
1998.
The calculation of the Company's benefit for income taxes for the six
months ended June 30, 1999 and deferred tax asset/liability at June 30, 1999 has
been prepared on a separate return basis as though the Company had filed
stand-alone tax returns and in accordance with a tax sharing agreement with AT&T
Corp. As further discussed below, the Company does not reflect any income tax
benefit or deferred tax asset/liability in the financial statements for the six
months ended and at June 30, 1999.
F-46
<PAGE> 133
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate on income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Statutory U.S. tax rate.................................. 35% 35%
Amortization of goodwill................................. (8) (3)
State and local taxes, net of federal tax benefit........ 2 3
Foreign operations....................................... (10) (2)
Valuation allowance...................................... (19) (33)
--- ---
Effective tax rate....................................... --% --%
=== ===
</TABLE>
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1998 1999
--------------- -----------
<S> <C> <C>
Deferred tax assets:
Book-tax basis differences in reserves............. $ 386 $ 234
Employee compensation.............................. 757 4,871
Net operating loss carryforward.................... 6,157 10,082
Equity interest.................................... 1,882 1,882
------- --------
Gross deferred tax assets............................ 9,182 $ 17,069
------- --------
Deferred tax liabilities:
Book-tax basis differences in intangibles.......... (472) (589)
Book-tax basis differences in fixed assets......... (1,077) (1,132)
------- --------
Gross deferred tax liabilities....................... (1,549) (1,721)
Valuation allowance.................................. (7,633) (15,348)
------- --------
Total net deferred tax assets................... $ -- $ --
======= ========
</TABLE>
As of December 31, 1998 and June 30, 1999, the Company had net deferred tax
assets of $7,633 and $15,348, respectively. In compliance with the tax sharing
agreements with Tele-Communications Inc. and AT&T Corp., a full valuation
allowance has been provided against the December 31, 1998 and June 30, 1999 net
deferred tax assets, principally associated with tax benefits of net operating
losses for which the Company will not likely receive any benefit.
For tax purposes, the Company has $17,461 and $26,531 of net operating loss
carryforwards at June 30, 1998 and June 30, 1999, respectively. These net
operating loss carryforwards expire between 2009 and 2018 and are available to
offset future taxable income. The utilization of the net operating loss
carryforwards may be subject to limitations under U.S. federal income tax laws.
F-47
<PAGE> 134
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
NOTE 5--UNCONSOLIDATED INVESTMENT
Summary financial information for the Company's equity investee in Holland
accounted for under the equity method is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1998 1999
--------------- -----------
<S> <C> <C>
Current assets...................................... $647 $ 837
Current liabilities................................. 511 1,665
Equity, advances and notes payable to
shareholders...................................... 763 300
Company's share of net assets....................... 637 983
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1998 1999
------------ -----------
<S> <C> <C>
Net revenues........................................... $ 464 $ 825
Net losses............................................. (609) (446)
Company's share of net losses.......................... (304) (223)
</TABLE>
NOTE 6--TCIM'S NET EQUITY INVESTMENT
TCIM's net equity investment includes accumulated equity as well as any
interest bearing payable and receivable due to/from the parent resulting from
cash transfers and other intercompany activity. An analysis of TCIM's net equity
investment activity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Balance, beginning of period................. $ 38,836 $ 41,408
Net loss..................................... (13,925) (24,642)
Advances from TCIM........................... 14,994 6,091
Allocated charges from TCIM.................. 1,404 1,155
Stock compensation........................... 99 15,222
Allocated goodwill (see Note 3).............. -- 23,300
-------- --------
Balance, end of period....................... $ 41,408 $ 62,534
======== ========
</TABLE>
NOTE 7--RELATED PARTY TRANSACTIONS
From December 17, 1997, TCIM provided the Company with certain general and
administrative services including insurance, legal, treasury, financial and
other corporate functions. The allocation of expenses was based on a percentage
of weighted average funding provided to the Company by TCIM.
The charges for such services were $376 and $465 for the six months ended
June 30, 1998 and 1999, respectively. Management believes that the methodologies
used to allocate these charges are reasonable; however, these allocations of
costs and expenses do not necessarily indicate the costs and expenses that would
have been incurred by the Company had they been on a stand-alone basis.
For the six months ended June 30, 1998 and 1999, in addition to the
overhead allocation discussed above, TCIM allocated approximately $252 and $690
in interest expense to the Company on advances due to TCIM.
F-48
<PAGE> 135
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
On October 1, 1998, the Company entered into a one year agreement with
America Online, Inc. ("AOL") and SonicNet whereby AOL provides SonicNet with
anchor tenant distribution within the music subchannel offered on the AOL
Service. As part of this agreement, the Company will provide $450 of in-kind
advertising commitments on behalf of SonicNet. The Company is recording the
revenue from SonicNet ratably over the term of the agreement.
NOTE 8--COMMITMENTS AND CONTINGENCIES
The Company has entered into written programming agreements with
approximately 81% of the cable system operators that presently carry the
Company's programming in the United States. Pursuant to such affiliation
agreements entered into prior to 1998, the Company pays cable operators the
greater of a guaranteed minimum monthly fee per subscriber or a specified
percentage of the gross revenues generated by each cable operator's system.
Agreements entered into in 1998, and planned to be offered for new affiliates in
1999 and thereafter, generally do not require any monthly payments to be made to
affiliates. Instead, an upfront launch incentive is paid for a long-term
carriage agreement.
The Company is involved in ordinary and routine litigation incidental to
its business. Management believes that any ultimate liability resulting from
those actions or claims will not have a material adverse effect on the Company's
consolidated results of operations, financial position or cash flows.
F-49
<PAGE> 136
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Viacom Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in equity and of cash flows
present fairly, in all material respects, the financial position of The Box
Worldwide, Inc. at December 31, 1997 and 1998, and the results of their
operations and their cash flows for the period from December 17, 1997 through
December 31, 1997 and the year ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of 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 generally accepted auditing standards, 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 the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
January 10, 2000
F-50
<PAGE> 137
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Box Worldwide, Inc.
We have audited the consolidated balance sheet of The Box Worldwide, Inc.
and subsidiaries (Predecessor) as of December 16, 1997 (which is not presented
herein), and the related consolidated statements of operations, cash flows and
stockholders' equity for the period January 1, 1997 through December 16, 1997.
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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Box Worldwide, Inc. and subsidiaries (Predecessor) at December 16, 1997, and
the consolidated results of their operations and their cash flows for the period
January 1, 1997 through December 16, 1997, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Miami, Florida
February 4, 1998
F-51
<PAGE> 138
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------ ----------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, DECEMBER 17,
1997 THROUGH 1997 THROUGH YEAR ENDED
DECEMBER 16, DECEMBER 31, DECEMBER 31,
1997 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Advertising revenues......................... $10,625 $ 365 $ 13,669
Net viewer revenues, net..................... 9,184 459 11,641
Other revenues............................... 582 18 474
------- ----- --------
Total revenues............................ 20,391 842 25,784
------- ----- --------
COSTS AND EXPENSES
Distribution, general and administrative..... 17,622 1,036 22,146
Allocated charges from parent................ -- 60 1,404
Affiliate fees, site costs and telephone
service................................... 6,306 297 7,783
Depreciation................................. 2,179 111 2,794
Amortization of intangibles and deferred
costs..................................... 116 116 3,170
Satellite transponder and rent paid to
related party............................. 453 20 1,363
------- ----- --------
Total costs and expenses.................. 26,676 1,640 38,660
------- ----- --------
INCOME (LOSS) BEFORE INCOME TAXES, INTEREST,
AND INTEREST IN INCOME (LOSSES) OF EQUITY
INVESTEE..................................... (6,285) (798) (12,876)
Interest expense............................... -- -- (564)
Interest income................................ 322 8 191
Income tax benefit............................. 17 -- --
------- ----- --------
Income (loss) before interest in income
(losses) of equity investee.................. (5,946) (790) (13,249)
Interest in income (losses) of equity
investee..................................... (580) (43) (676)
------- ----- --------
NET INCOME (LOSS)......................... $(6,526) $(833) $(13,925)
======= ===== ========
</TABLE>
See notes to consolidated financial statements.
F-52
<PAGE> 139
THE BOX WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 934 $ 1,719
Accounts receivable, less allowance for doubtful accounts
of $335 (1997) and $393 (1998)......................... 3,489 5,041
Prepaid expenses and other current assets................. 376 531
------- -------
Total current assets................................... 4,799 7,291
Receivable from officer..................................... 100 --
Property and equipment, net................................. 8,823 10,587
Deferred costs and other assets, net........................ 1,924 6,839
Goodwill, net............................................... 28,801 25,910
Investment in advances to equity investee................... 423 534
------- -------
$44,870 $51,161
======= =======
LIABILITIES AND EQUITY
Current liabilities
Accounts payable.......................................... $ 1,728 $ 3,347
Accrued affiliate fees.................................... 719 2,852
Accrued expenses.......................................... 3,589 2,610
------- -------
Total current liabilities.............................. 6,036 8,809
Affiliate fees payable...................................... -- 941
------- -------
6,036 9,750
------- -------
Commitments and contingencies (Note 10)
TCIM's net equity investment................................ 38,836 41,408
Accumulated other comprehensive income (loss)--foreign
currency translation...................................... (2) 3
------- -------
Total equity........................................... 38,834 41,411
------- -------
$44,870 $51,161
======= =======
</TABLE>
See notes to consolidated financial statements.
F-53
<PAGE> 140
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET ACCUMULATED OTHER
EQUITY COMPREHENSIVE COMPREHENSIVE
INVESTMENT INCOME(LOSS) INCOME(LOSS) TOTAL EQUITY
---------- ------------- ----------------- ------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996...... $ 12,582 $ 29 $ 12,611
Proceeds from common stock
issuance........................ 120 120
Issuance of common stock for
affiliate launch incentive
fees............................ 771 771
Cumulative dividends on 6%
convertible redeemable preferred
stock........................... (143) (143)
Comprehensive income (loss)
Net income (loss)............... (6,526) $ (6,526) (6,526)
Other comprehensive income
(loss):
Cumulative translation
adjustment................... (83) (83) (83)
--------
Total comprehensive income
(loss)..................... $ (6,609)
-------- ======== ---- --------
BALANCE AT DECEMBER 16, 1997...... 6,804 (54) 6,750
Adjustment from TCIM
acquisition..................... 31,300 54 31,354
Comprehensive income (loss)
Net income (loss)............... (833) $ (833) (833)
Other comprehensive income
(loss):
Cumulative translation
adjustment................... (2) (2) (2)
--------
Total comprehensive income
(loss)..................... $ (835)
========
Allocated charges................. 60 60
Stock compensation................ 155 155
Advances from TCIM................ 1,350 1,350
-------- ---- --------
BALANCE AT DECEMBER 31, 1997...... 38,836 (2) 38,834
Comprehensive income (loss)
Net income (loss)............... (13,925) $(13,925) (13,925)
Other comprehensive income
(loss):
Cumulative translation
adjustment................... 5 5 5
--------
Total comprehensive income
(loss)..................... $(13,920)
========
Allocated charges................. 1,404 1,404
Stock compensation................ 99 99
Advances from TCIM................ 14,994 14,994
-------- ---- --------
BALANCE AT DECEMBER 31, 1998...... $ 41,408 $ 3 $ 41,411
======== ==== ========
</TABLE>
See notes to consolidated financial statements.
F-54
<PAGE> 141
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------- ----------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, DECEMBER 17,
1997 THROUGH 1997 THROUGH YEAR ENDED
DECEMBER 16, DECEMBER 31, DECEMBER 31,
1997 1997 1998
------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................... $(6,526) $ (833) $(13,925)
Adjustment to reconcile net income (loss) to
net cash flow from operating activities:
Depreciation............................. 2,179 111 2,794
Amortization of intangibles and deferred
costs.................................. 116 116 3,170
Interest in income (losses) of equity
investee............................... 580 43 676
Provision for bad debts and estimated
chargebacks............................ 39 -- 43
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable............................. (1,282) 262 (1,494)
(Increase) decrease in prepaid expenses
and other current assets............... (105) 171 (154)
Increase in accounts payable and accrued
expenses............................... 1,282 159 3,712
------- ------- --------
NET CASH FLOW (USED FOR) PROVIDED BY OPERATING
ACTIVITIES.................................. (3,717) 29 (5,178)
------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures........................ (4,236) (242) (4,570)
Launch incentives and other fees paid....... (217) (131) (5,193)
Disposal of equipment....................... 93 -- 12
Increase in investment in and advances to
equity investee.......................... (724) (48) (787)
------- ------- --------
NET CASH FLOW USED FOR INVESTING ACTIVITIES... (5,084) (421) (10,538)
------- ------- --------
FINANCING ACTIVITIES:
Proceeds from common stock issuance......... 120 -- --
Advances from TCIM, net..................... 1,350 215 16,497
------- ------- --------
NET CASH FLOW PROVIDED BY FINANCING
ACTIVITIES.................................. 1,470 215 16,497
------- ------- --------
Effect of exchange rate changes on cash....... (7) (2) 4
------- ------- --------
Net (decrease) increase in cash............... (7,338) (179) 785
Cash at beginning of period................... 8,451 1,113 934
------- ------- --------
Cash at end of period......................... $ 1,113 $ 934 $ 1,719
======= ======= ========
NONCASH INVESTING ACTIVITIES:
TCIM acquisition of The Box................. $ -- $35,700 $ --
Forgiveness of loan to officer.............. $ -- $ -- $ 100
NONCASH FINANCING ACTIVITIES:
Stock issued for affiliate launch incentive
fees..................................... $ 771 $ -- $ --
</TABLE>
See notes to consolidated financial statements.
F-55
<PAGE> 142
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The Box Worldwide, Inc. (the "Company"), a Florida corporation, operates an
interactive television channel serving subscribers on various cable systems and
broadcast stations throughout the world.
The accompanying consolidated financial statements for the period from
December 17, 1997 through December 31, 1997 and for the year ended December 31,
1998 are presented on a carve-out basis from TCI Music, Inc. ("TCIM") and
reflect the historical results of operations, financial position and cash flows
of the Company. Certain expenses in the consolidated financial statements
include an allocation of corporate expenses from TCIM (see Note 9). All such
costs and expenses have been charged to the Company by TCIM in the period in
which the services were performed. Management believes that these allocations
were made on a reasonable basis, however, the allocations of costs and expenses
do not necessarily indicate the costs that would have been incurred by the
Company on a stand-alone basis. Also, the financial statements may not
necessarily reflect the financial position, results of operations and cash flows
of the Company in the future or what the financial position, results of
operations or cash flows would have been if the Company had been a separate,
stand-alone company during the periods presented. All significant intercompany
accounts and transactions have been eliminated.
NOTE 2--ACQUISITION OF THE COMPANY BY TCIM
On December 16, 1997, the Company's stockholders approved the acquisition
of the Company by TCIM. Shortly after the stockholder approval, the Company
filed Form 15 which relieved the Company of its filing requirements under the
Securities and Exchange Act of 1934. TCIM acquired the Company in exchange for
approximately 5,100,000 TCIM common shares. The value of the TCIM shares
exchanged was $6.97. The acquisition was accounted for as a purchase; therefore,
the results of operations of the Company are included in TCIM's financial
statements as of December 16, 1997. The excess of the purchase price over the
fair value of the net assets acquired of $28,912 is being amortized on a
straight-line basis over ten years.
In connection with this business combination, the Company incurred
investment advisory fees and legal fees, as well as other related costs. In
addition, the Company settled certain previously outstanding stock options for
cash. The total cost associated with these activities approximated $900 and has
been charged to operations for the period ended December 16, 1997.
TCIM advanced to the Company cash totaling $1,565, net of a loan
forgiveness of approximately $200, and $16,497 as of December 31, 1997 and
December 31, 1998, respectively.
NOTE 3--SUBSEQUENT EVENTS
On July 15, 1999, Liberty Digital (formerly known as TCI Music, Inc.)
("Liberty Digital") contributed, among other assets, substantially all of the
businesses of the Company, SonicNet, Inc. ("SonicNet") and certain related
wholly owned international online operations in exchange for an aggregate 10%
limited partnership interest in MTVi Group L.P. (the "Partnership") formed by
MTV Networks ("MTVN"), a unit of Viacom Inc. ("Viacom"), and Liberty Digital and
certain of their affiliates. MTVN contributed to the Partnership substantially
all of its Internet music businesses' assets, including its MTV.com, VH1.com and
Imagine Radio businesses, and certain related wholly owned international online
operations, in exchange for an aggregate 90% general and limited partnership
interest in the Partnership.
Also, the Partnership and MTVN entered into a license and distribution
agreement wherein MTVN will pay a license fee for the use of the Company's
intellectual property rights, technology and subscriber base.
F-56
<PAGE> 143
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods presented. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and investments of more than 50% in subsidiaries and other entities. Investments
in affiliated companies over which the Company has a significant influence or
ownership of more than 20% but less than or equal to 50% are accounted for under
the equity method. All significant intercompany balances have been eliminated.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets, which range
from five to ten years. Equipment with no continuing value is written off.
Balances of major classes and accumulated depreciation consist of the
following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1997 1998
------ -------
<S> <C> <C>
Machinery and equipment..................................... $6,710 $10,471
Furniture and office equipment.............................. 1,178 1,417
Capitalized software........................................ 676 1,232
Leasehold improvements...................................... 370 372
------ -------
8,934 13,492
Less accumulated depreciation............................... (111) (2,905)
------ -------
$8,823 $10,587
====== =======
</TABLE>
As a result of the purchase accounting method used to record the
acquisition of the Company by TCIM, all acquired assets and liabilities were
recorded at their net realizable value as of December 16, 1997.
CAPITALIZED SOFTWARE COSTS
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP
98-1"), effective for fiscal years beginning after December 15, 1998. The
Company's policies fall within the guidelines of SOP 98-1. SOP 98-1 requires
that computer software developed or obtained for internal use be expensed during
the preliminary project and post-implementation/operations stages. Costs
incurred during the application development stage are capitalized.
The Company capitalizes qualifying costs related to developing or obtaining
internal software. Capitalization of costs begins after the conceptual
formulation stage has been completed. Capitalized costs are depreciated over the
estimated useful life of the software, not to exceed five years. Approximately
$312, $0 and $573 in charges related to the development, enhancement and
improvement of the software were capitalized for the period from January 1, 1997
through December 16, 1997, the period from December 17, 1997 to
F-57
<PAGE> 144
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
December 31, 1997 and the year ended December 31, 1998, respectively.
Amortization expense related to capitalized software was $142, $8 and $246, for
the period from January 1, 1997 through December 16, 1997, the period from
December 17, 1997 through December 31, 1997 and the year ended December 31, 1998
respectively.
DEFERRED COSTS
Deferred costs consist primarily of legal and accounting costs related to
obtaining copyrights, patents, trademarks and affiliate launch incentive fees.
These costs are amortized using the straight-line method over a period not to
exceed ten years.
Deferred costs and other assets consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1997 1998
------ -------
<S> <C> <C>
Cable affiliation prepaid fees.............................. $ 861 $ 7,126
Channel acquisition costs................................... 478 151
Patent, copyright and trademarks............................ 312 402
Other....................................................... 278 260
------ -------
1,929 7,939
Less accumulated amortization............................... (5) (1,100)
------ -------
$1,924 $ 6,839
====== =======
</TABLE>
GOODWILL
Goodwill and accumulated amortization are summarized in the following
table:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Goodwill.................................................... $28,912 $28,912
Less accumulated amortization............................... (111) (3,002)
------- -------
Goodwill, net............................................... $28,801 $25,910
======= =======
</TABLE>
The excess of the consideration paid over the fair value of net assets
acquired is recorded as goodwill and is amortized on a straight-line basis over
ten years. Amortization expense related to goodwill was $111 and $2,891 for the
period from December 17, 1997 through December 31, 1997 and the year ended
December 31, 1998, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses its long-lived assets (primarily property, plant and
equipment and goodwill) for impairment whenever there is an indication that the
carrying amount of the assets may not be recoverable. Recoverability is
determined by comparing the forecasted undiscounted cash flows generated by
these assets to their respective net carrying values. The amount of impairment
loss, if any, will generally be measured as the difference between the net book
value of the assets and their estimated fair value.
F-58
<PAGE> 145
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
REVENUE RECOGNITION
Income is earned when the viewer-requested music video has aired, and is
recorded net of estimated denial calls and other billing charges. Advertising
revenue is recognized when the commercials have aired, whereas production and
promotional revenues are recognized when the produced spots are delivered or the
promotions aired.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. The Company recognized
advertising expenses of $305, $0 and $1,106 for the period from January 1, 1997
through December 16, 1997, the period from December 17, 1997 to December 31,
1997 and the year ended December 31, 1998, respectively. These expenses are
included in distribution, general and administrative expenses.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial statements of the Company's foreign operations were prepared
in their respective local currencies and translated into U.S. dollars for
reporting purposes. The assets and liabilities are translated at exchange rates
in effect at the balance sheet date, while results of operations are translated
at average exchange for the respective periods. The cumulative effects of
exchange rate changes on net assets are included as a part of accumulated other
comprehensive loss. Translation (losses) gains were $(83), $(2) and $5 for the
period from January 1, 1997 through December 16, 1997, the period from December
17, 1997 to December 31, 1997 and the year ended December 31, 1998,
respectively. Net foreign currency transaction gains and losses were not
significant for any of the periods presented.
INCOME TAXES
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards 109, "Accounting for
Income Taxes" ("SFAS 109"). Deferred income taxes are recorded to reflect the
tax benefit and consequences of future years' differences between the tax bases
of assets and liabilities and their financial reporting bases. The Company
records a valuation allowance to reduce deferred tax assets if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards 130, "Reporting Comprehensive Income" ("SFAS 130"),
effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for the reporting and displaying of comprehensive income
(loss) and its components in financial statements. Comprehensive income (loss)
is defined as the change in equity (net assets) of a business enterprise during
a period from transactions and other events and circumstances from non-owner
sources. It consists of net income (loss) and other gains and losses affecting
stockholder's equity that, under generally accepted accounting principles, are
excluded from net income (loss), such as foreign currency translation
gains/losses. Foreign currency translation is the only item of other
comprehensive income (loss) impacting the Company.
RECLASSIFICATIONS
Certain amounts reported for prior years have been reclassified to conform
with the current year's presentation.
F-59
<PAGE> 146
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 5--ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Accrued compensation........................................ $ 749 $ 648
Accrual for viewer revenue chargebacks...................... 647 612
Accrued lease commitment.................................... 486 488
Legal and audit............................................. 303 165
Music costs................................................. 207 228
State and local taxes....................................... 191 172
Other....................................................... 1,006 297
------ ------
$3,589 $2,610
====== ======
</TABLE>
NOTE 6--BENEFITS
STOCK COMPENSATION
During 1997 and 1998, TCIM granted stock options with tandem Stock
Appreciation Rights ("SARs") to employees of the Company under the TCIM 1997
Stock Incentive Plan (the "Stock Plan"). Options granted under the Stock Plan
expire ten years from the date of grant. Options issued in 1998 under the Stock
Plan vest annually in 20% cumulative increments, and options issued in 1997 have
various vesting schedules.
On December 11, 1998, TCIM re-priced the stock options with tandem SARs at
$4.00 for all grants to its employees.
The Stock Plan provides for variable grants of equity-based interests
pursuant to awards of SARs, and for subsequent payments of cash based on their
appreciation in value over stated periods of time. Accordingly, the Company has
recognized in the statement of operations, compensation expense of $155 and $99
in 1997 and 1998, respectively. The calculation of compensation expense was
based on the excess of the market price over the option price, adjusted for the
December 11, 1998 re-pricing, in accordance with vesting schedule.
The following table summarizes the Company's stock option activity under
the various plans:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Balance at December 31, 1996........................ -- $0.00
Granted........................................... 112,720 6.25
Exercised......................................... -- 0.00
Canceled.......................................... -- 0.00
-------
Balance at December 31, 1997........................ 112,720 6.25
Granted........................................... 653,300 6.50
Exercised......................................... (21,400) 6.25
Canceled.......................................... (53,300) 6.39
-------
Balance at December 31, 1998........................ 691,320 4.00
=======
</TABLE>
F-60
<PAGE> 147
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes information concerning currently outstanding
and exercisable stock options of the Company at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
----------------------
REMAINING
CONTRACTUAL EXERCISABLE
EXERCISE PRICE OPTIONS LIFE (YEARS) OPTIONS
-------------- ------- ------------ -----------
<S> <C> <C> <C>
$4.00.... 68,520 8.96 22,544
$4.00.... 622,800 9.04 --
------- ------
691,320 22,544
======= ======
</TABLE>
SHARES ISSUABLE UNDER EXERCISABLE STOCK OPTIONS:
<TABLE>
<S> <C>
December 31, 1997........................................... --
December 31, 1998........................................... 22,544
</TABLE>
OTHER EMPLOYEE BENEFITS
The Company participates in a 401(k) plan covering substantially all
employees which is maintained by TCIM.
NOTE 7--INCOME TAXES
For the period from January 1, 1997 through December 16, 1997, income taxes
consisted entirely of alternative minimum taxes. For the period from December
17, 1997 through December 31, 1998, the calculation of the Company's income tax
benefit/expense and deferred tax asset/liability has been prepared on a separate
return basis as though the Company had filed stand-alone tax returns and in
accordance with a tax sharing agreement with Tele-Communications Inc. As further
discussed below, the Company does not reflect any income tax benefit/expense or
deferred tax asset/liability in the financial statements during this period.
A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate on income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 17, 1997
THROUGH YEAR ENDED
DECEMBER 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Statutory U.S. tax rate...................... 35% 35%
Amortization of goodwill..................... (5) (8)
State and local taxes, net of federal tax
benefit.................................... 2 2
Foreign operations........................... (9) (11)
Valuation allowance.......................... (23) (18)
--- ---
Effective tax rate........................... --% --%
=== ===
</TABLE>
F-61
<PAGE> 148
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Book-tax basis differences in reserves.................... $ 377 $ 386
Employee compensation..................................... 724 757
Net operating loss carryforward........................... 5,327 6,157
Equity interest........................................... 91 1,882
------- -------
Gross deferred tax assets................................... 6,519 9,182
------- -------
Deferred tax liabilities:
Book-tax basis differences in intangibles................. (237) (472)
Book-tax basis differences in fixed assets................ (967) (1,077)
------- -------
Gross deferred liabilities.................................. (1,204) (1,549)
------- -------
Valuation allowance......................................... (5,315) (7,633)
------- -------
Total net deferred tax assets.......................... $ -- $ --
======= =======
</TABLE>
As of December 31, 1997 and December 31, 1998, the Company had net deferred
tax assets of $5,315 and $7,633, respectively. In compliance with a tax sharing
agreement with Tele-Communications Inc., a full valuation allowance has been
provided against the 1997 and 1998 net deferred tax assets, principally
associated with tax benefits of net operating losses for which the Company will
not likely receive any benefit.
For tax purposes, the Company has $14,018 and $16,202 of net operating loss
carryforwards at December 31, 1997 and 1998, respectively. These net operating
loss carryforwards expire between the years 2009 and 2018 and are available to
offset future taxable income. The utilization of the net operating loss
carryforwards may be subject to limitations under U.S. federal income tax laws.
NOTE 8--EQUITY INVESTEE
Summary financial information for the Company's equity investee in Holland
accounted for under the equity method is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1997 1998
---- ----
<S> <C> <C>
Current assets.............................................. $370 $647
Current liabilities......................................... 456 511
Equity, advances and notes payable to shareholders.......... 548 763
Company's share of net assets............................... 502 637
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, DECEMBER 17,
1997 THROUGH 1997 THROUGH YEAR ENDED
DECEMBER 16, DECEMBER 31, DECEMBER 31,
1997 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues........................... $ 589 $ 10 $ 1,185
Net losses............................. (1,161) (85) (1,352)
Company's share of net losses.......... (580) (43) (676)
</TABLE>
F-62
<PAGE> 149
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 9--RELATED PARTY TRANSACTIONS
On September 14, 1995, the Company and Communications Equity Associates,
Inc., ("CEA"), a consulting firm owned by the principal shareholder of the
Company, entered into an international representation agreement, pursuant to
which CEA acted as the Company's exclusive representative for purposes of: (a)
arranging financing for the Company to expand the international distribution of
programming, and (b) assisting the Company in entering into certain foreign
countries. Under the agreement, CEA was paid a fee equal to 5% of the proceeds
from any financing obtained by the Company through CEA's efforts and was
reimbursed for reasonable expenses. In addition, the Company also agreed to pay
CEA from $75 to $175, if the Company consummated a joint venture or affiliation
agreement with a third party in certain specified countries.
In the fourth quarter of 1997, the Company paid CEA $500 for its part in
negotiating the sale of the Company to TCIM (see Note 2).
The Company entered into a lease agreement with Island Trading Company,
Inc. ("Island"), owned by the principal shareholder of the Company, to lease
approximately 16,000 square feet of office space in Miami Beach, Florida for a 7
year period beginning February 1995. Payment of rent commenced on July 15, 1995,
at a base rental of $22.00 per square foot for the first year and increasing to
$39.00 per square foot for the seventh and final year of the lease term. The
base rental does not include certain operating expenses to be paid by the
Company. The Company has the right to renew the lease subject to the negotiation
of a new rental rate, based upon the then-current market rate. The Company
incurred rental expense for this lease totaling approximately $453, $20 and $472
for the period from January 1 through December 16, 1997, the period from
December 17, 1997 through December 31, 1997 and the year ended December 31,
1998, respectively.
Pursuant to program affiliation agreements between the Company and cable
operators affiliated with stockholders, the Company incurred approximately
$1,167 in 1997 for affiliate fees.
On August 4, 1997, the Company exchanged 770,842 shares of common stock
with Suburban TV Co. Inc. for the right to broadcast their programming to
certain new cable subscribers. This transaction was measured and recorded based
on the fair value of the consideration received, or $771, since the Company
believes this is the best indicator of value, and this amount is being amortized
over a seven year period. The fair value of the consideration received was
equivalent to the underlying fair value of the Company's common stock. The
Chairman of the Company also owns a controlling interest in Suburban Cable TV
Co. Inc.
TCIM provided the Company with certain general and administrative services
including insurance, legal, treasury, financial and other corporate functions.
The allocation of expenses was based on a percentage of weighted average funding
provided to the Company by TCIM.
The charges for such services were $60 and $840 for the period from
December 17, 1997 through December 31, 1997 and the year ended December 31,
1998, respectively. Management believes that the methodologies used to allocate
these charges are reasonable, however, these allocations of costs and expenses
do not necessarily indicate the costs and expenses that would have been incurred
by the Company had they been on a stand-alone basis.
In 1998, in addition to the overhead allocation discussed above, TCIM
allocated approximately $564 in interest expense to the Company on advances due
to TCIM.
During 1998, SonicNet, a wholly owned subsidiary of TCIM, designed and
developed an Internet website for the Company. The 1998 Statement of Operations
includes other expenses of $123 related to the work performed by SonicNet.
F-63
<PAGE> 150
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
On October 1, 1998, the Company entered into a one year agreement with
America Online, Inc. ("AOL") and SonicNet whereby AOL provides SonicNet with
anchor tenant distribution within the music subchannel offered on the AOL
Service. As part of this agreement, the Company will provide $450 of in-kind
advertising commitments on behalf of SonicNet. The Company is recording the
revenue from SonicNet ratably over the term of the agreement.
NOTE 10--COMMITMENTS AND CONTINGENCIES
The Company leases its main and regional offices and various office
equipment under several operating lease agreements. Rent expense for office
space and local box installation sites was approximately $1,601, $70 and $1,960
for the period from January 1, 1997 through December 16, 1997, the period from
December 17, 1997 through December 31, 1997 and the year ended December 31,
1998, respectively. At December 31, 1998, future minimum payments under these
non-cancelable leases are as follows:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
1999........................................................ $2,057
2000........................................................ 1,363
2001........................................................ 701
2002........................................................ 33
------
$4,154
======
</TABLE>
The Company has entered into written programming agreements with
approximately 81% of the cable system operators that presently carry the
Company's programming in the United States. Pursuant to such affiliation
agreements entered into prior to 1998, the Company pays cable operators the
greater of a guaranteed minimum monthly fee per subscriber or a specified
percentage of the gross revenues generated by each cable operator's system.
Agreements entered into in 1998, and planned to be offered for new affiliates in
1999 and thereafter, generally do not require any monthly payments to be made to
affiliates. Instead, an upfront launch incentive is paid for a long-term
carriage agreement.
The Company is involved in ordinary and routine litigation incidental to
its business. Management believes that any ultimate liability resulting from
those actions or claims will not have a material adverse effect on the Company's
combined results of operations, financial position or cash flows.
NOTE 11--OPERATIONS BY GEOGRAPHIC AREA
The following table shows revenues and long-lived assets by geographic
area. Transfers between geographic areas were not significant.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
DECEMBER 1, DECEMBER 17,
1997 THROUGH 1997 THROUGH YEAR ENDED
DECEMBER 16, DECEMBER 31, DECEMBER 31,
1997 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
United States........................ $18,605 $715 $21,602
Europe............................... 999 76 2,171
Latin America and other.............. 787 51 2,011
------- ---- -------
Total revenues.................... $20,391 $842 $25,784
======= ==== =======
</TABLE>
F-64
<PAGE> 151
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C> <C>
LONG-LIVED ASSETS, NET
United States.................................. $38,316 $41,934
Europe......................................... 770 882
Latin America and other........................ 562 520
------- -------
Total long-lived assets, net................ $39,648 $43,336
======= =======
</TABLE>
F-65
<PAGE> 152
mtvi group logo
<PAGE> 153
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
[ALTERNATE COVER PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS (Subject to Completion)
Issued March 17, 2000
Shares
mtvi group logo
CLASS A COMMON STOCK
------------------------
THE MTVi GROUP, INC. IS OFFERING SHARES OF ITS CLASS A COMMON STOCK. THIS IS OUR
INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND
$ PER SHARE.
FOLLOWING THIS OFFERING, WE WILL HAVE TWO CLASSES OF AUTHORIZED COMMON STOCK,
CLASS A COMMON STOCK AND CLASS B COMMON STOCK. THE RIGHTS OF THE HOLDERS OF
CLASS A COMMON STOCK AND CLASS B COMMON STOCK ARE IDENTICAL, EXCEPT WITH RESPECT
TO VOTING AND CONVERSION.
------------------------
WE HAVE APPLIED TO HAVE OUR CLASS A COMMON STOCK APPROVED FOR LISTING ON THE
UNDER THE SYMBOL " ."
------------------------
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
-------- ------------- -----------
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total......................................... $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to an additional
shares of our Class A common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2000.
------------------------
MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS INTERNATIONAL LIMITED MERRILL LYNCH INTERNATIONAL
UTENDAHL CAPITAL PARTNERS, L.P. WIT SOUNDVIEW
, 2000
<PAGE> 154
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee........................................ $2,640
NASD filing fee............................................. 1,500
listing fee....................................... *
Blue Sky fees and expenses.................................. *
Attorneys' fees and expenses................................ *
Accountants' fees and expenses.............................. *
Transfer Agent's and Registrar's fees and expenses.......... *
Printing and engraving fees................................. *
Miscellaneous............................................... *
------
Total............................................. *
======
</TABLE>
- ------------
* To be supplied by amendment.
The amounts set forth above are estimates except for the SEC registration
fee and the NASD filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides, in summary,
that directors and officers of Delaware corporations are entitled, under certain
circumstances, to be indemnified against all expenses and liabilities, including
attorneys' fees, incurred by them as a result of suits brought against them in
their capacity as a director or officer, if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
MTVi Group, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful; provided that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to MTVi Group,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, they are fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Any such indemnification may be made by MTVi Group only as authorized in
each specific case upon a determination by the shareholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct.
MTVi Group's certificate of incorporation provides that to the fullest
extent permitted by the laws of the State of Delaware, as the same may be
amended from time to time, a director of MTVi Group shall not be personally
liable to MTVi Group or its stockholders for monetary damages for breach of
fiduciary duty as a director.
MTVi Group's certificate of incorporation and bylaws provide for
indemnification of its directors and officers to the fullest extent permitted by
Delaware law, as the same may be amended from time to time.
In addition, MTVi Group maintains liability insurance for its directors and
officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In February 2000, MTVi Group issued 100 shares of common stock to Viacom in
a private placement. No underwriters, brokers or other agents were involved in
this transaction. These securities were issued pursuant to an exemption from
registration provided by Section 4(2) of the Securities Act.
II-1
<PAGE> 155
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Form of Restated Certificate of Incorporation
3.2* Form of Bylaws
4.1* Form of Class A Common Stock Certificate
4.2* Form of Class B Common Stock Certificate
5.1 Opinion of Shearman & Sterling
10.1 Organization Agreement among Liberty Media Corporation, TCI
Music, Inc., MTV Networks, a division of Viacom
International Inc., MTVN Online Partner I LLC, MTVN Online
Inc., Imagine Radio, Inc., SonicNet, Inc., The Box Worldwide
Inc., VJN LPTV Corp. and MTVN Online L.P. dated as of July
15, 1999
10.2* Amended and Restated Agreement of Limited Partnership of The
MTVi Group, L.P. among MTVN Online Partner I LLC, Imagine
Radio, Inc., SonicNet, Inc. and The Box Worldwide, Inc.
dated as of , 2000
10.3* Form of Exchange Agreement among The MTVi Group, L.P.,
Registrant, as general partner, and its limited partners
10.4* Amended and Restated Parent Agreement and Guaranty among TCI
Music, Inc., MTV Networks, a division of Viacom
International Inc., Liberty Media Corporation, SonicNet
Inc., The Box Worldwide Inc., and The MTVi Group, L.P. dated
as of , 2000
10.5* Stockholders Agreement by and between the stockholders of
Registrant dated as of , 2000
10.6 Trademark License Agreement by and between MTV Networks, a
division of Viacom International Inc. and MTVN Online
Partner I LLC dated as of July 15, 1999
10.7 Programming License Agreement between MTV Networks, a
division of Viacom International Inc. and MTVN Online
Partner I LLC dated as of July 15, 1999
10.8 Promotion Agreement by and between MTV Networks, a division
of Viacom International Inc. and MTVN Online Partner I LLC
dated as of July 15, 1999
10.9 Technology Sharing and License Agreement by and between MTV
Networks and InfoWorks, each a division of Viacom
International Inc., MTVN Online Inc., a subsidiary of Viacom
and MTVN Online Partner I LLC dated as of July 15, 1999
10.10 Mutual Services Agreement between Viacom International Inc.
and MTVN Online L.P. dated as of July 15, 1999
10.11 Database and Software License Agreement by and between MTV
Networks, a division of Viacom International Inc. and MTVN
Online L.P. dated as of July 15, 1999
10.12* Form of Indemnification Agreement to be entered into by
Registrant and MTV Networks, a division of Viacom
International Inc.
10.13* Form of Registration Rights Agreement to be entered into by
Registrant and MTV Networks, a division of Viacom
International Inc.
10.14* Form of Credit Agreement to be entered into by The MTVi
Group, L.P. and Viacom Inc.
21.1 Subsidiaries of Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4* Consent of PricewaterhouseCoopers LLP
23.5 Consent of Ernst & Young LLP
23.6 Consent of Shearman & Sterling (included in Exhibit 5.1)
24.1** Power of Attorney
27.1* Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment.
** Previously filed.
II-2
<PAGE> 156
(b) FINANCIAL STATEMENT SCHEDULES.
The schedules have been omitted because of the absence of circumstances
under which they could be required.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding, is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the U.S. underwriting agreement and the
international underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-3
<PAGE> 157
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in New York,
New York on March 17, 2000.
The MTVi Group, Inc.
By: /s/ NICHOLAS BUTTERWORTH
------------------------------------
Nicholas Butterworth
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- --------------
<S> <C> <C>
/s/ NICHOLAS BUTTERWORTH President, Chief Executive Officer March 17, 2000
- ------------------------------------- and Director (Principal Executive
Nicholas Butterworth Officer)
* Acting Senior Vice President and March 17, 2000
- ------------------------------------- Acting Chief Financial Officer
George S. Smith, Jr. (Principal Financial and Accounting
Officer)
* Chairman of the Board of Directors March 17, 2000
- -------------------------------------
Sumner M. Redstone
* Director March 17, 2000
- -------------------------------------
Philippe P. Dauman
* Director March 17, 2000
- -------------------------------------
Thomas E. Dooley
Director March , 2000
- -------------------------------------
Lee Masters
</TABLE>
* By Nicholas Butterworth, attorney-in-fact.
II-4
<PAGE> 158
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ------------------------------------------------------------ -------------
<S> <C> <C>
1.1* Form of Underwriting Agreement
3.1* Form of Restated Certificate of Incorporation
3.2* Form of Bylaws
4.1* Form of Class A Common Stock Certificate
4.2* Form of Class B Common Stock Certificate
5.1 Opinion of Shearman & Sterling
10.1 Organization Agreement among Liberty Media Corporation, TCI
Music, Inc., MTV Networks, a division of Viacom
International Inc., MTVN Online Partner I LLC, MTVN Online
Inc., Imagine Radio, Inc., SonicNet, Inc., The Box Worldwide
Inc., VJN LPTV Corp. and MTVN Online L.P. dated as of July
15, 1999
10.2* Amended and Restated Agreement of Limited Partnership of The
MTVi Group, L.P. among MTVN Online Partner I LLC, Imagine
Radio, Inc., SonicNet, Inc. and The Box Worldwide, Inc.
dated as of , 2000
10.3* Form of Exchange Agreement among The MTVi Group, L.P.,
Registrant, as general partner, and its limited partners
10.4* Amended and Restated Parent Agreement and Guaranty among TCI
Music, Inc., MTV Networks, a division of Viacom
International Inc., Liberty Media Corporation, SonicNet
Inc., The Box Worldwide Inc., and The MTVi Group, L.P. dated
as of , 2000
10.5* Stockholders Agreement by and between the stockholders of
Registrant dated as of , 2000
10.6 Trademark License Agreement by and between MTV Networks, a
division of Viacom International Inc. and MTVN Online
Partner I LLC dated as of July 15, 1999
10.7 Programming License Agreement between MTV Networks, a
division of Viacom International Inc. and MTVN Online
Partner I LLC dated as of July 15, 1999
10.8 Promotion Agreement by and between MTV Networks, a division
of Viacom International Inc. and MTVN Online Partner I LLC
dated as of July 15, 1999
10.9 Technology Sharing and License Agreement by and between MTV
Networks and InfoWorks, each a division of Viacom
International Inc., MTVN Online Inc., a subsidiary of Viacom
and MTVN Online Partner I LLC dated as of July 15, 1999
10.10 Mutual Services Agreement between Viacom International Inc.
and MTVN Online L.P. dated as of July 15, 1999
10.11 Database and Software License Agreement by and between MTV
Networks, a division of Viacom International Inc. and MTVN
Online L.P. dated as of July 15, 1999
10.12* Form of Indemnification Agreement to be entered into by
Registrant and MTV Networks, a division of Viacom
International Inc.
10.13* Form of Registration Rights Agreement to be entered into by
Registrant and MTV Networks, a division of Viacom
International Inc.
10.14* Form of Credit Agreement to be entered into by The MTVi
Group, L.P. and Viacom Inc.
21.1 Subsidiaries of Registrant
</TABLE>
<PAGE> 159
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ------------------------------------------------------------ -------------
<S> <C> <C>
</TABLE>
<PAGE> 160
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ------------------------------------------------------------ -------------
<S> <C> <C>
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4* Consent of PricewaterhouseCoopers LLP
23.5 Consent of Ernst & Young LLP
23.6 Consent of Shearman & Sterling (included in Exhibit 5.1)
24.1** Power of Attorney
27.1* Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 5.1
S&S DRAFT
[Shearman & Sterling Letterhead]
March [__], 2000
The MTVi Group, Inc.
770 Broadway
New York, NY 10003
Ladies and Gentlemen:
We are acting as counsel for The MTVi Group, Inc., a Delaware
corporation (the "Company"), in connection with the filing by the Company with
the Securities and Exchange Commission of a Registration Statement on Form S-1
(No. 333-30188), as amended (the "Registration Statement"), and the prospectus
contained in the Registration Statement (the "Prospectus"), covering the
registration under the Securities Act of 1933, as amended (the "Act"), of
[_______] shares of the Company's Class A common stock, par value $.01 per
share, to be sold by the Company, plus up to an additional [________] shares of
Class A common stock, to cover over-allotments, to be issued by the Company,
(collectively, the "Shares") as described in the Registration Statement.
In connection with the foregoing, we have examined the originals, or
copies certified or otherwise identified to our satisfaction, of such records,
documents, certificates and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below. In our
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as originals and the conformity with the
originals of all documents submitted to us as copies.
Based upon the foregoing, we are of the opinion that the Shares to be
sold by the Company, upon the filing of a Restated Certificate of Incorporation,
will be duly authorized by the Company when issued and paid for in the manner
and at the price set forth in the Prospectus, will be validly issued, fully paid
and non-assessable.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" contained in the Prospectus. In giving this consent, we do not thereby
concede that we come within the category of persons whose consent is required by
the Act or the general rules and regulations promulgated thereunder.
Very truly yours,
<PAGE> 1
Exhibit 10.1
CONFORMED COPY
ORGANIZATION AGREEMENT
AMONG
LIBERTY MEDIA CORPORATION,
TCI MUSIC, INC.,
MTV NETWORKS, A DIVISION OF VIACOM
INTERNATIONAL INC.,
MTVN ONLINE PARTNER I LLC,
MTVN ONLINE INC.,
IMAGINE RADIO, INC.,
SONICNET, INC.,
THE BOX WORLDWIDE INC.,
VJN LPTV CORP.
AND
MTVN ONLINE L.P.
DATED AS OF JULY 15, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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ARTICLE 1
DEFINITIONS AND CONSTRUCTION
1.1. Certain Definitions................................................................................ 2
1.2. Additional Definitions............................................................................. 9
ARTICLE 2
CLOSING
2.1. Execution and Delivery of Operative Agreements..................................................... 12
2.2. Pre-Closing Capital Contributions and Closing Contributions........................................ 13
2.3. Delivery of Contributions and Partnership Interests................................................ 13
2.4. Delivery of Satellite Services, Inc. Notice........................................................ 14
2.5 Transfer of Domain Names........................................................................... 14
2.6. Transfer of VJN LPTV Assets........................................................................ 14
2.7 Transfer of Equity Interests in Box Italy.......................................................... 15
2.8 No Transfers, Etc.................................................................................. 15
ARTICLE 3
COVENANTS
3.1. Employees.......................................................................................... 15
3.2. Rebates of Launch Fees............................................................................. 18
3.3. Interactive Music Channel.......................................................................... 18
3.4. The Telstra Agreement.............................................................................. 19
3.5. The EMAP Agreements................................................................................ 20
3.6. Box Holland........................................................................................ 20
3.7. Qualifications to Sections 3.4, 3.5 and 3.6........................................................ 21
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
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<S> <C>
3.8. Cooperation for Financial Reporting................................................................ 21
3.9. MTVN Efforts....................................................................................... 22
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE MTVN ENTITIES
4.1. Due Incorporation; Good Standing................................................................... 22
4.2. Due Authority; Valid, Binding and Enforceable...................................................... 22
4.3. No Violation of Laws or Agreements................................................................. 22
4.4. Financial Statements............................................................................... 23
4.5. Contracts.......................................................................................... 23
4.6. No Changes......................................................................................... 24
4.7. No Brokerage....................................................................................... 24
4.8. Absence of Litigation.............................................................................. 25
4.9. No Real Property; Totality and Condition of Assets................................................. 25
4.10. Compliance with Laws; Permits...................................................................... 25
4.11. Contribution of Assets; Operation of Business...................................................... 26
4.12. Absence of Liabilities............................................................................. 26
4.13. Employee Benefits.................................................................................. 27
4.14. Employees.......................................................................................... 28
4.15. Intellectual Property.............................................................................. 28
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF LIBERTY
5.1. Due Incorporation; Good Standing................................................................... 29
5.2. Due Authority; Valid, Binding and Enforceable...................................................... 29
</TABLE>
ii
<PAGE> 4
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
<S> <C>
5.3. No Violation of Laws or Agreements................................................................. 29
5.4. No Solicitation.................................................................................... 30
5.5. AT&T/Liberty Agreement............................................................................. 30
ARTICLE 6
REPRESENTATIONS AND WARRANTIES BY TCI MUSIC,
SONICNET AND BOX
6.1. Due Incorporation; Good Standing................................................................... 30
6.2. Due Authority; Valid, Binding and Enforceable...................................................... 30
6.3. No Violation of Laws or Agreements................................................................. 31
6.4. Subsidiaries....................................................................................... 31
6.5. Financial Statements............................................................................... 32
6.6. Contracts.......................................................................................... 32
6.7. No Changes......................................................................................... 33
6.8. No Brokerage....................................................................................... 33
6.9. Absence of Litigation.............................................................................. 33
6.10. Real Property; Totality and Conditions of Assets................................................... 34
6.11. Environmental...................................................................................... 35
6.12. Contribution of Assets; Operation of Business...................................................... 36
6.13. Compliance with Laws; Permits...................................................................... 36
6.14. Taxes.............................................................................................. 37
6.15. Intellectual Property.............................................................................. 38
6.16 [Intentionally Left Blank]......................................................................... 39
6.17. Absence of Liabilities............................................................................. 39
6.18. Employee Benefits.................................................................................. 39
</TABLE>
iii
<PAGE> 5
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
<S> <C>
6.19. Certain Restrictive Provisions..................................................................... 41
6.20. Employees.......................................................................................... 41
6.21. Agreements......................................................................................... 42
6.22. Year 2000 Compliance............................................................................... 42
ARTICLE 7
SURVIVAL; INDEMNIFICATION
7.1. Survival........................................................................................... 43
7.2. Indemnification by Viacom, Imagine and VLLC........................................................ 43
7.3. Indemnification by TCI Music, SonicNet and Box..................................................... 44
7.4. Indemnification by Liberty......................................................................... 46
7.5. Indemnification by the Partnership................................................................. 46
7.6. Tipping Amount; Limitation on Indemnification...................................................... 47
7.7. Exclusive Remedy................................................................................... 47
7.8. Indemnification Procedures......................................................................... 47
7.9. Subrogation........................................................................................ 48
ARTICLE 8
MISCELLANEOUS
8.1. Table of Contents; Headings........................................................................ 48
8.2. Governing Law...................................................................................... 48
8.3. Severability....................................................................................... 49
8.4. Amendments......................................................................................... 49
8.5. Counterparts....................................................................................... 49
8.6. Entire Agreement................................................................................... 49
8.7. No Presumption..................................................................................... 49
</TABLE>
iv
<PAGE> 6
TABLE OF CONTENTS
(Continued)
<TABLE>
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Page
<S> <C>
8.8. Binding on Viacom.................................................................................. 49
8.9. Parties in Interest; Limitation on Rights of Others................................................ 49
8.10. Waivers; Remedies.................................................................................. 50
8.11. Further Assurances................................................................................. 50
8.12. Public Announcements............................................................................... 50
8.13. Costs and Expenses................................................................................. 50
8.14. Notices............................................................................................ 50
8.15. Jurisdiction; Consent to Service of Process........................................................ 52
8.16 Exceptions to Representations and Warranties....................................................... 52
8.17 Obligations of TCI Music and Liberty............................................................... 53
</TABLE>
v
<PAGE> 7
ORGANIZATION AGREEMENT
ORGANIZATION AGREEMENT, dated as of July 15, 1999, among
Liberty Media Corporation, a Delaware corporation ("Liberty"), TCI Music, Inc.,
a Delaware corporation ("TCI Music "), MTV Networks ("MTVN"), a division of
Viacom International Inc., a Delaware corporation ("Viacom" ), MTVN Online
Partner I LLC, a Delaware limited liability company ("VLLC"), Imagine Radio,
Inc., a California corporation ("Imagine"), MTVN Online Inc., a Delaware
corporation ("MTVN Online"), SonicNet, Inc., a Delaware corporation
("SonicNet"), The Box Worldwide Inc., a Florida corporation ("Box"), VJN LPTV
Corp., a Delaware corporation ("VJN LPTV"), and MTVN Online L.P., a Delaware
limited partnership.
VLLC, Imagine, SonicNet and Box desire to jointly own and
operate the Business (as such term is defined in the Partnership Agreement).
Contemporaneously herewith, VLLC, Imagine, SonicNet and Box
are entering into an Agreement of Limited Partnership dated as of the date
hereof (as such Agreement of Limited Partnership may from time to time be
amended, modified or supplemented in accordance with its terms, the "Partnership
Agreement"), pursuant to which VLLC, Imagine, SonicNet and Box will form MTVN
Online L.P. (as such entity may exist in partnership form or in a reorganized,
corporate or other form, the "Partnership").
In connection with the formation of the Partnership and the
operation of the Business, the parties hereto desire that (a) SonicNet shall
transfer to SonicNet LLC, a Delaware limited liability company whose sole member
is SonicNet ("SonicNet LLC"), pursuant to the SonicNet LLC Contribution
Agreement (as defined below), the SonicNet LLC Assets and the SonicNet LLC
Liabilities (each as defined below), (b) Box shall transfer to The Box Worldwide
LLC, a Delaware limited liability company whose sole member is Box ("Box LLC"),
pursuant to the Box LLC Contribution Agreement (as defined below), the Box LLC
Assets and the Box LLC Liabilities (each as defined below), (c) MTVN shall
transfer to VLLC, pursuant to the MTVN-VLLC Contribution Agreement (as defined
below), the MTVN-VLLC Assets and the MTVN-VLLC Liabilities (each as defined
below), (d) MTVN Online shall transfer to VLLC, pursuant to the MTVN Online
Contribution Agreement (as defined below), the MTVN Online Assets and the MTVN
Online Liabilities (each as defined below), (e) Box shall transfer to MTVN,
pursuant to the Box-MTVN Assignment Agreement (as defined below), the Box
Employment Contracts (as defined below), (f) SonicNet LLC and Box LLC shall
accept the SonicNet LLC Assets and the Box LLC Assets, respectively, and assume
the SonicNet Liabilities and, the Box Liabilities, respectively, (g) VLLC shall
accept the MTVN Online Assets and the MTVN-VLLC Assets and assume the MTVN
Online Liabilities and the MTVN-VLLC Liabilities and (h) MTVN shall accept and
assume the Box Employment Contracts.
In connection with the formation of the Partnership and the
operation of the Business, (a) SonicNet shall contribute to the Partnership,
pursuant to the SonicNet Contribution Agreement (as defined below), all of the
membership interests in SonicNet LLC (the "SonicNet Membership Interests"), in
exchange for which SonicNet shall receive a 8.75% interest in the Partnership as
a Limited Partner (as defined in the Partnership Agreement), (b) Box shall
<PAGE> 8
2
contribute to the Partnership, pursuant to the Box Contribution Agreement (as
defined below), all of the membership interests in Box LLC (the "Box Membership
Interests"), in exchange for which Box shall receive a 1.25% interest in the
Partnership as a Limited Partner, (c) VLLC shall contribute to the Partnership,
pursuant to the VLLC Contribution Agreement (as defined below), the VLLC Assets
and the VLLC Liabilities, in exchange for which VLLC shall receive a 1% interest
in the Partnership as the General Partner (as defined in the Partnership
Agreement) and a 69% interest in the Partnership as a Limited Partner, (d)
Imagine shall contribute to the Partnership, pursuant to the Imagine
Contribution Agreement (as defined below), the Imagine Assets and the Imagine
Liabilities ( each as defined below), in exchange for which Imagine shall
receive a 20% interest in the Partnership as a Limited Partner, and (e) the
Partnership shall accept the SonicNet Membership Interests, the Box Membership
Interests, the VLLC Assets and the Imagine Assets and assume the VLLC
Liabilities and the Imagine Liabilities.
The parties desire to set forth herein the terms and
conditions of the foregoing.
NOW, THEREFORE, in consideration of the premises and other
covenants and conditions contained herein, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS AND CONSTRUCTION
1.1. Certain Definitions. As used in this Agreement, the
following terms shall have the meanings specified below:
"Additional Contributions" means Capital Contributions (as
defined in the Partnership Agreement) made pursuant to Section 3.03(a), (b) or
(c) of the Partnership Agreement.
"Affiliate", when used with respect to a specified Person,
means any other Person that directly, indirectly or through one or more
intermediaries Controls, is Controlled by or is under Common Control with, such
Person. Notwithstanding the foregoing, (i) neither the Partnership nor any
Person Controlled by the Partnership shall be deemed an "Affiliate" of any
Partner or of any Affiliate of a Partner, (ii) no Partner or any Affiliate
thereof shall be deemed to be an "Affiliate" of any other Partner or any
Affiliate thereof solely by virtue of its Partnership Interest (as defined in
the Partnership Agreement), (iii) no Person other than Viacom Inc. and its
Controlled Affiliates shall be deemed to be an Affiliate of Viacom Inc. or any
Controlled Affiliate of Viacom Inc., (iv) no Person other than TCI Music and its
Controlled Affiliates shall be deemed to be an Affiliate of TCI Music or any
Controlled Affiliate of TCI Music and (v) no Person other than Controlled
Affiliates of Liberty (other than TCI Music and its Controlled Affiliates) shall
be deemed to be an Affiliate of Liberty.
"Agreement" means this Organization Agreement, including all
Schedules and Exhibits hereto, as the same may be amended or modified from time
to time.
"AT&T/Liberty Agreement" means the agreement dated March 9,
1999 between Liberty and AT&T Corp. ("AT&T") pursuant to which, among other
things, Liberty has certain
<PAGE> 9
3
rights with respect to certain bandwidth on the AT&T cable systems (the "AT&T
Systems") for interactive television programming (the "Access Provisions").
"Box-MTVN Assignment Agreement" means the Box-MTVN Assignment
Agreement dated as of the date hereof between Box and MTVN.
"Box Contribution Agreement" means the Box Contribution,
Assignment and Assumption Agreement dated as of the date hereof between Box and
the Partnership.
"Box Holland License Agreement" means the License Agreement
dated as of the date hereof between Box LLC and Box.
"Box LLC Assets" means the Box LLC Assets as defined in the
Box-LLC Contribution Agreement.
"Box-LLC Contribution Agreement" means the Box-LLC
Contribution, Assignment and Assumption Agreement dated as of the date hereof
between Box and Box LLC.
"Box LLC Liabilities" means the Box LLC Liabilities as defined
in the Box-LLC Contribution Agreement.
"Box Service" means the programming service currently marketed
by Box.
"Business Day" has the meaning set forth in the Partnership
Agreement.
"Closing Capital Contribution" means with respect to each of
Tune and MTVNS and their respective Affiliates, an amount in cash such that,
after taking into account such amount and the parties' Pre-Closing Capital
Contributions (which shall be deemed to have been contributed as Capital
Contributions to the Partnership), the parties' respective total Capital
Contributions to the Partnership, prior to giving effect to any of the
contributions to be made to the Partnership pursuant to the applicable
Contribution Agreements, reflect their respective percentage Partnership
Interests.
"Contracts" means, with respect to any Person, all contracts,
commitments, agreements and arrangements to which such Person is a party or by
which it is bound.
"Contribution Agreements" means, collectively, the Box-LLC
Contribution Agreement, the SonicNet-LLC Contribution Agreement, the MTVN-VLLC
Contribution Agreement, the Box Contribution Agreement, the Imagine Contribution
Agreement, the SonicNet Contribution Agreement and the VLLC Contribution
Agreement.
"Control" has the meaning set forth in the Partnership
Agreement.
A "Controlled Affiliate" has the meaning set forth in the
Partnership Agreement.
"Database Agreement" has the meaning set forth in the
Partnership Agreement.
<PAGE> 10
4
"ERISA Affiliate" means with respect to any specified Person,
any other Person which is treated as a single employer with such specified
Person under Section 414(b), (c), (m) or (o) of the Code.
"Excluded Tune Assets" shall mean, collectively, (i) the
Agreement dated on or about July 1997 (the "Telstra Agreement") between SonicNet
and Telstra-Multimedia Pty ACN ("Telstra") and any rights to use the Trademarks
in the Territory (as such terms are defined therein) thereunder, (ii) all equity
interests in VJN LPTV and The Box Worldwide-Europe, B.V. ("Box Europe") and all
assets of Box Europe immediately prior to the Closing, including its equity
interest in, Video Jukebox Network Europe, Ltd., The Box Music Network S.L., The
Box Italy, S.R.L. ("Box Italy") and The Box Holland, B.V. ("Box Holland", and
collectively with the other subsidiaries whose equity interests are referred to
in this clause (ii), the "Excluded Subsidiaries"), and all agreements and
undertakings relating to Box Holland (including without limitation the Joint
Venture Agreement dated as of December 14, 1995 by and among The Box
Worldwide-Europe B.V., Quote Beheer BV and Box Holland (the "Box Holland Joint
Venture Agreement") and all agreements annexed thereto or referenced therein,
including, without limitation, the Initial Licensing Agreement between Video
Jukebox Network, Inc. ("VJN") (now known as Box), and Box Holland and the Second
License Agreement between Box and Box Holland (collectively with the Box Holland
Joint Venture Agreement, the "Box Excluded Agreements"), (iii) the IP Rights
Agreement (the "IP Rights Agreement") dated October 30, 1996 by and among VJN,
Video Jukebox Network International Limited and EMAP plc ("EMAP"), (iv) the
Share Purchase Agreement dated October 30, 1996 by and between VJN and EMAP (the
"Share Purchase Agreement," and collectively with the IP Rights Agreement, the
"EMAP Excluded Agreements") and (v) all equipment and transmitter sites used
exclusively in the Stations' operations.
"GAAP" has the meaning set forth in the Partnership Agreement.
"Governmental Entity" means any nation or government, and
state or other political subdivision thereof, and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"Imagine Assets" means the Imagine Assets as defined in the
Imagine Contribution Agreement.
"Imagine Contribution Agreement" means the Imagine
Contribution, Assignment and Assumption Agreement dated as of the date hereof,
between Imagine and the Partnership.
"Imagine Liabilities" means the Imagine Liabilities as defined
in the Imagine Contribution Agreement.
"Intellectual Property" means, with respect to any Person, (i)
all patents, copyrights, trademarks, service marks, trade identification, trade
dress, trade names, copyrights, trade secrets, know-how, proprietary
information, mask work rights, database rights, publicity rights, privacy
rights, and other rights of a similar nature for which legal protection,
statutory, common law, or otherwise may be obtained, in the United States and/or
any other country or
<PAGE> 11
5
jurisdiction; (ii) all pending applications to register or otherwise obtain
legal protection for any of the foregoing; (iii) all rights to make application
in the future to register or otherwise obtain legal protection for any of the
foregoing; (iv) all rights or priority under national laws and international
conventions with respect to any of the foregoing; (v) all continuations,
continuations-in-part, divisions, renewals, extensions, patents of addition,
reexaminations, or reissues of any of the foregoing and all related applications
therefor; (vi) all goodwill associated with any of said trademarks, service
marks, trade identification, trade dress and trade names; and (vii) all rights
to sue with respect to past and future infringements of any of the foregoing,
which are owned, used or held for use by such Person.
"knowledge" means, (i) with respect to TCI Music or MTVN (or
Viacom), the actual knowledge of any executive officer or director of TCI Music
or Viacom, respectively, and (ii) with respect to the other Tune Entities or the
other MTVN Entities, the actual knowledge of any officer or director of such
other Tune Entity or other MTVN Entity, as applicable.
"Laws" means all statutes, codes, ordinances, decrees, rules,
regulations, orders, judgments, decrees, or general principles of common and
civil law and equity, in any case binding on or directly affecting the Person
referred to in the context in which such word is used.
"License" means any option, license, or agreement of any kind
relating to the exercise, use, non-use, registration, enforcement,
non-enforcement or remuneration for any Intellectual Property right.
"Lien" means any lien, charge, claim, pledge, security
interest or other encumbrance of any kind, except as may exist under federal or
state securities laws or except as created by or resulting from this Agreement.
"LMA Agreement" means the Local Marketing Arrangement dated as
of the date hereof between Box LLC and VJN LPTV.
"Loss" means any losses, costs, expenses, damages, Taxes,
penalties, fines, charges, demands, liabilities, obligations and claims of any
kind (including interest, penalties and reasonable attorneys' and consultants'
fees, expenses and disbursements).
"MTVN Assigned Contracts" means, collectively, the Contracts
to be assigned to the Partnership by Imagine and VLLC, respectively, pursuant to
the Imagine Contribution Agreement and the VLLC Contribution Agreement.
"MTVN Benefit Plan" means (i) any "employee benefit plan"
within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), (ii) any other employee benefit plan,
arrangement or policy, including without limitation, any stock option, stock
purchase, stock award, stock appreciation, phantom stock, deferred compensation,
pension, retirement, savings, profit sharing, incentive, bonus, health, life
insurance, cafeteria, flexible spending, dependent care, fringe benefit,
vacation pay, holiday pay, disability, sick pay, workers compensation,
unemployment, severance, employee loan or educational assistance plan,
arrangement or policy, and (iii) any employment, indemnification,
<PAGE> 12
6
consulting, severance or change-in-control agreement, in each case, which is
sponsored or maintained by any of the MTVN Entities or any of their Affiliates,
or to which any of the MTVN Entities or any of their Affiliates contributes or
is required to contribute, on behalf of current or former employees, consultants
or directors of the MTVN Entities or their beneficiaries or dependents, whether
or not written and whether or not created or maintained within or without the
United States.
"MTVN Contribution" means, collectively, the Imagine Assets
and the VLLC Assets.
"MTVN Entities" means, collectively, MTVN, MTVN Online,
Imagine and VLLC.
"MTVN Online Assets" means the MTVN Online Assets as defined
in the MTVN Online Contribution Agreement.
"MTVN Online Contribution Agreement" means the MTVN Online
Contribution, Assignment and Assumption Agreement dated as of the date hereof
between MTVN Online and VLLC.
"MTVN Online Liabilities" means the MTVN Online Liabilities as
defined in the MTVN Online Contribution Agreement.
"MTVN-VLLC Assets" means the MTVN-VLLC Assets as defined in
the MTVN-VLLC Contribution Agreement.
"MTVN-VLLC Contribution Agreement" means the MTVN-VLLC
Contribution, Assignment and Assumption Agreement dated as of the date hereof
between MTVN and VLLC.
"MTVN-VLLC Liabilities" means the MTVN-VLLC Liabilities as
defined in the MTVN-VLLC Contribution Agreement.
"Material Adverse Change Exclusions" means, with respect to
the Tune Entities (A) any loss of subscribers or advertising, provided that TCI
Music and the other Tune Entities have acted in good faith, (B) changes that
occur as a result of the transactions contemplated by the MOU and the
transactions contemplated hereby (including, without limitation, terminations of
affiliation or other agreements as a result of change in control or no
assignment provisions), (C) failure to launch the Box Service in additional
systems as a result of MTVN's failure to consent to the payment of launch fees,
(D) changes that occur as a result of the failure of Box or SonicNet to take any
action which requires MTVN's consent pursuant to the MOU where such consent is
not granted, and (E) changes, if any, disclosed to MTVN prior to May 19, 1999 in
an e-mail sent by Nicholas Butterworth or in a teleconference with Alan McGlade
initiated by Tune and Liberty with MTVN, in each case on May 18, 1999 for such
purpose.
"MOU" means the Letter Agreement dated May 19, 1999 among
Viacom, Liberty and TCI Music.
<PAGE> 13
7
"No Basket Representations" means, with respect to the MTVN
Entities, the representations and warranties contained in Sections 4.7, 4.11(a),
4.11(b), 4.11(c) and 4.11(e) with respect to the Tune Entities, the
representations and warranties contained in Sections 6.8, 6.10(g), 6.12(a),
6.12(b), 6.14, 6.20 and 6.21.
"Outstanding License" means, with respect to any Person, any
material License by or to such Person or to which such Person is otherwise a
party, or by which such Person or any of its Intellectual Property is subject or
bound.
"Parent Agreement" means the Parent Agreement and Guaranty
dated as of the date hereof among TCI Music, MTVN, Box, SonicNet, Liberty and
the Partnership.
"Partner" has the meaning set forth in the Partnership
Agreement.
"Partnership Interest" has the meaning set forth in the
Partnership Agreement.
"Permits" means permits, approvals, orders, consents,
licenses, certificates, franchises and exemptions from, and filings and
registrations with, Governmental Entities.
"Person" has the meaning set forth in the Partnership
Agreement.
"Pre-Closing Capital Contribution" means with respect to each
of MTVN and its Affiliates and TCI Music and its Affiliates, amounts provided by
MTVN and TCI Music (and their respective Affiliates), respectively, from May 19,
1999 to the date hereof in accordance with the MOU, to fund its respective
assets and businesses to be contributed to the Partnership with sufficient
capital to fund operations.
"Programming License Agreement" has the meaning set forth in
the Partnership Agreement.
"Promotion Agreement" has the meaning set forth in the
Partnership Agreement.
"Related Party Agreements" has the meaning set forth in the
Partnership Agreement.
"Services Agreement" has the meaning set forth in the
Partnership Agreement.
"SonicNet Contribution Agreement" means the SonicNet
Contribution, Assignment and Assumption Agreement dated as of the date hereof
between SonicNet and the Partnership.
"SonicNet LLC Assets" means the SonicNet LLC Assets as defined
in the SonicNet-LLC Contribution Agreement.
"SonicNet LLC Liabilities" means the SonicNet LLC Liabilities
as defined in the SonicNet-LLC Contribution Agreement.
<PAGE> 14
8
"SonicNet-LLC Contribution Agreement" means the SonicNet-LLC
Contribution, Assignment and Assumption Agreement dated as of the date hereof
between SonicNet and SonicNet LLC.
"Station" means the low power broadcast television stations
listed on Schedule 2.6 hereof.
"subsidiary" means, with respect to any Person, (i) any
corporation, association, limited liability company or other business entity of
which more than 50% of the total voting power of securities thereof with the
rights to vote to elect a majority of the directors, managers, trustees or
similar officials is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the other subsidiaries of that Person or a
combination thereof and (ii) any partnership in which such Person or any of its
subsidiaries is a general partner and owns 10% or more of the equity interests
therein.
"Taxes" means any and all federal, state, local and foreign
taxes, fees, levies, duties, tariffs, imposts, and other charges of any kind
whatsoever imposed by a Governmental Entity, including, without limitation,
income, payroll, withholding, excise, sales, use, lease, privilege, personal and
other property, use and occupancy, business and occupation, mercantile, real
estate, gross receipts, license, employment, severance, stamp, premium, windfall
profits, social security (or similar unemployment), disability, transfer,
registration, value added, alternative or add-on minimum, estimated, or capital
stock and franchise and other tax of any kind whatsoever, including any
interest, penalty or addition thereto, or additional amounts imposed with
respect thereto, whether disputed or not.
"Tax Return" shall mean any return, declaration, report, claim
for refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"Technology Sharing and License Agreement" has the meaning set
forth in the Partnership Agreement.
"Trademark License Agreement" means the Trademark License
Agreement dated as of the date hereof between MTVN and VLLC.
"Tune Assigned Contracts" means, collectively, the Contracts
to be assigned by SonicNet and Box to SonicNet LLC and Box LLC, respectively,
pursuant to the SonicNet-LLC Contribution Agreement and the Box-LLC Contribution
Agreement, respectively, and the Contracts to which any Tune Subsidiary is a
party.
"Tune Benefit Plan" means (i) any "employee benefit plan"
within the meaning of Section 3(3) of the ERISA, (ii) any other employee benefit
plan, arrangement or policy, including without limitation, any stock option,
stock purchase, stock award, stock appreciation, phantom stock, deferred
compensation, pension, retirement, savings, profit sharing, incentive, bonus,
health, life insurance, cafeteria, flexible spending, dependent care, fringe
benefit, vacation pay, holiday pay, disability, sick pay, workers compensation,
unemployment, severance, employee
<PAGE> 15
9
loan or educational assistance plan, arrangement or policy, and (iii) any
employment, indemnification, consulting, severance or change-in-control
agreement, in each case, which is sponsored or maintained by any of the Tune
Entities or any of their Affiliates, or to which any of the Tune Entities or any
of their Affiliates contributes or is required to contribute, on behalf of
current or former employees, consultants or directors of any of the Tune
Entities or their beneficiaries or dependents, whether or not written and
whether or not created or maintained within or without the United States.
"Tune Contribution" means the SonicNet LLC Assets, the Box LLC
Assets, the SonicNet Membership Interests, the Box Membership Interests and the
business and assets of the Tune Subsidiaries.
"Tune Entities" means, collectively, TCI Music, SonicNet, Box,
VJN LPTV, SonicNet LLC, Box LLC and the Tune Subsidiaries.
"Tune Subsidiary" or "Tune Subsidiaries" means one or more
subsidiaries of SonicNet and Box (other than the Excluded Subsidiaries)
immediately prior to the Closing (including Box LLC and SonicNet LLC), all of
the capital stock or other equity interest of which (other than Box LLC and
SonicNet LLC) shall be contributed to SonicNet LLC or Box LLC, as the case may
be, pursuant to the SonicNet-LLC Contribution Agreement or the Box-LLC
Contribution Agreement, respectively.
"Viacom" has the meaning set forth in the Partnership
Agreement.
"Viacom Inc." has the meaning set forth in the Partnership
Agreement.
"VLLC Assets" means the VLLC Assets as defined in the VLLC
Contribution Agreement.
"VLLC Contribution Agreement" means the VLLC Contribution,
Assignment and Assumption Agreement dated as of the date hereof between VLLC and
the Partnership.
"VLLC Liabilities" means the VLLC Liabilities as defined in
the VLLC Contribution Agreement.
1.2. Additional Definitions.
The following additional terms have the meaning ascribed
thereto in the Section or Schedule indicated below next to such term:
<TABLE>
<CAPTION>
Defined Term Section Defined In
- ------------ ------------------
<S> <C>
"Assigned MTVN Employment Contract" 4.13(e)
"Assigned Tune Employment Contract" 6.18(e)
"AT&T" Definition of AT&T/Liberty Agreement
"AT&T Systems" Definition of AT&T/Liberty Agreement
"Access Provisions" Definition of AT&T/Liberty Agreement
</TABLE>
<PAGE> 16
10
<TABLE>
<CAPTION>
Defined Term Section Defined In
- ------------ ------------------
<S> <C>
"Box" Preamble
"Box Employment Contracts" 3.1(d)
"Box Europe" Definition of Excluded Tune Assets
"Box Excluded Agreements" Definition of Excluded Tune Assets
"Box Holland" Definition of Excluded Tune Assets
"Box Holland Joint Venture Agreement" Definition of Excluded Tune Assets
"Box Italy" Definition of Excluded Tune Assets
"Box LLC" Recitals
"Box Membership Interests" Recitals
"Box-MTVN Employees" 3.1(b)
"Business" Recitals
"Closing" 2.1
"COBRA" 3.1(o)
"Code" 4.13(b)
"Domain Name" 2.5
"EMAP" Definition of Excluded Tune Assets
"EMAP Excluded Agreements" Definition of Excluded Tune Assets
"ERISA" Definition of MTVN Benefit Plan
"Excluded Subsidiaries" Definition of Excluded Tune Assets
"FCC" 6.13(c)
"FCC Licenses" 6.13(c)
"Hazardous Substances" 6.11
"IP Rights Agreement" Definition of Excluded Tune Assets
"Imagine" Preamble
"Indemnified Party" 7.8
"Interactive Music Channel" 3.3
"Liberty" Preamble
"LMA Ruling" 2.6
"MTVN" Preamble
"MTVN Contribution IP" 4.15(a)
"MTVN Financial Statements" 4.4
"MTVN Indemnified Parties" 7.3
"MTVN Online" Recitals
"MTVN Online Interim Balance Sheet" 4.4
"MTVN-Partnership Employees" 3.1(j)
"MTVN Permits" 4.10(b)
"Operative Agreements" 2.1
"Other Party" 7.8(b)
"PBGC" 4.13(b)
"Partnership" Recitals
"Partnership Agreement" Recitals
"Partnership Indemnified Parties" 7.2
"Real Property" 6.10(b)
"Rebates" 3.2
</TABLE>
<PAGE> 17
11
<TABLE>
<CAPTION>
Defined Term Section Defined In
- ------------ ------------------
<S> <C>
"Restrictive Provisions" 6.19
"SSI" 2.4
"Share Purchase Agreement" Definition of Excluded Tune Assets
"SonicNet" Preamble
"SonicNet LLC" Recitals
"SonicNet-LLC Employees" 3.1(a)
"SonicNet Membership Interests" Recitals
"SonicNet Trademarks" 3.4(b)
"TCI Music" Preamble
"Telstra" Definition of Excluded Tune Assets
"Telstra Agreement" Definition of Excluded Tune Assets
"Telstra SonicNet Sites" 3.4(a)
"Tipping Amount" 7.6
"Tune Budget" 6.7
"Tune Financial Statements" 6.5
"Tune Indemnified Parties" 7.2
"Tune Interim Balance Sheet" 6.5
"Tune Permits" 6.13(b)
"Tune Scheduled Intellectual Property" 6.15(b)
"Tune Subsidiary Benefit Plan" 6.18(f)
"VJN" Definition of Excluded Tune Assets
"VJN LPTV" Preamble
"Viacom" Preamble
"VLLC" Preamble
"Year 2000 Compliant" 6.22
</TABLE>
ARTICLE 2
CLOSING
2.1. Execution and Delivery of Operative Agreements. Upon the
execution and delivery of this Agreement (the "Closing"), each of the parties
hereto shall contemporaneously execute and deliver the following applicable
agreements to which it is indicated to be a party (the "Operative Agreements"):
(a) the Partnership Agreement, in the form of Exhibit A
attached hereto;
(b) the Box-MTVN Assignment Agreement, in the form of Exhibit
B attached hereto;
(c) the Box-LLC Contribution Agreement, in the form of Exhibit
C attached hereto;
(d) the SonicNet-LLC Contribution Agreement, in the form of
Exhibit D attached hereto;
<PAGE> 18
12
(e) the MTVN-VLLC Contribution Agreement, in the form of
Exhibit E attached hereto;
(f) the Box Contribution Agreement, in the form of Exhibit F
attached hereto;
(g) the SonicNet Contribution Agreement, in the form of
Exhibit G attached hereto;
(h) the VLLC Contribution Agreement, in the form of Exhibit H
attached hereto;
(i) the Imagine Contribution Agreement, in the form of Exhibit
I attached hereto;
(j) the MTVN Online Contribution Agreement, in the form of
Exhibit J attached hereto;
(k) the Parent Agreement, in the form of Exhibit K attached
hereto;
(l) the Trademark License Agreement, in the form of Exhibit L
attached hereto;
(m) the Promotion Agreement, in the form of Exhibit M attached
hereto;
(n) the Services Agreement, in the form of Exhibit N attached
hereto;
(o) the Programming License Agreement, in the form of Exhibit
O attached hereto;
(p) the Box Holland License Agreement, in the form of Exhibit
P attached hereto;
(q) the Box Holland Promissory Note, in the form of Exhibit Q
attached hereto;
(r) the Technology Sharing and License Agreement, in the form
of Exhibit R hereto;
(s) the LMA Agreement, in the form of Exhibit S attached
hereto and
(t) assignments of lease for each real property lease assigned
pursuant to any of the Contribution Agreements, in the form of Exhibit T
attached thereto.
2.2. Pre-Closing Capital Contributions and Closing
Contributions. Each of MTVN and TCI Music has preliminarily determined in
accordance with the provisions of the MOU the amount of its respective
Pre-Closing Capital Contributions. The estimated amount of MTVN's Pre-Closing
Capital Contributions is, $3,136,460 (of which $2,439,469 is attributable to
VLLC and $696,991 is attributable to Imagine). The estimated amount of TCI
Music's Pre-
<PAGE> 19
13
Closing Capital Contributions is $5,548,000 (of which $3,360,000 is attributable
to Box and $2,188,000 is attributable to SonicNet) all of which amounts are
subject to adjustment by agreement of TCI Music and MTVN within three Business
Days after receipt by MTVN or TCI Music of the other's calculation thereof with
reasonable back-up materials attached. MTVN shall make a Closing Capital
Contribution within three Business Days after MTVN receives such calculation of
TCI Music's Pre-Closing Capital Contribution, which Closing Capital Contribution
shall be calculated on the basis of the formula therefor set forth in the MOU
and shall be deemed to have been made on the Closing Date.
2.3. Delivery of Contributions and Partnership Interests.
(a) (i) Each of SonicNet and Box shall contribute and assign
to SonicNet LLC and Box LLC, respectively, pursuant to their respective
Contribution Agreements, the SonicNet LLC Assets and the Box LLC Assets and
SonicNet LLC and Box LLC shall accept the SonicNet LLC Assets and the Box LLC
Assets, respectively, and assume the SonicNet-LLC Liabilities and the Box-LLC
Liabilities, respectively, (ii) MTVN and MTVN Online shall contribute and assign
to VLLC, pursuant to their respective Contribution Agreements, the MTVN-VLLC
Assets and the MTVN Online Assets, and VLLC shall accept the MTVN-VLLC Assets
and the MTVN Online Assets and assume the MTVN-VLLC Liabilities and the MTVN
Online Liabilities, and (iii) Box shall assign to MTVN, pursuant to the Box-MTVN
Assignment Agreement, and MTVN shall assume, the Box Employment Contracts.
(b) At the Closing, (i) each of Box, SonicNet, Imagine and
VLLC shall contribute and assign to the Partnership, pursuant to their
respective Contribution Agreements, the Box Membership Interests, the SonicNet
Membership Interests, the Imagine Assets and the VLLC Assets, (ii) the
Partnership shall accept the SonicNet Membership Interests, the Box Membership
Interests and the VLLC Assets and the Imagine Assets and assume the Imagine
Liabilities and VLLC Liabilities, all as more particularly described in the
applicable Contribution Agreements; provided, however, that except as expressly
set forth herein, the Partnership shall not assume any liabilities hereunder
except those expressly assumed under the Contribution Agreements to which it is
a party, and (iii) the Partnership shall issue to SonicNet a 8.75% interest in
the Partnership as a Limited Partner, to Box a 1.25% interest in the Partnership
as a Limited Partner, to VLLC a 1% interest in the Partnership as the General
Partner and a 69% interest in the Partnership as a Limited Partner and to
Imagine a 20% interest in the Partnership as a Limited Partner.
2.4. Delivery of Satellite Services, Inc. Notice.
Contemporaneously with the Closing, Liberty and MTVN shall deliver, or cause to
be delivered, written notice to Satellite Services, Inc. ("SSI") notifying SSI
that the Closing has occurred thereby.
2.5 Transfer of Domain Names. At the Closing, with respect to
each of the domain names set forth on Schedule 2.5 hereto (each a "Domain
Name"), MTVN shall cause the Controlled Affiliate set forth on Schedule 2.5
opposite a Domain Name to transfer to the Partnership all of such Controlled
Affiliate's right, title and interest in, to and under such Domain Name.
<PAGE> 20
14
2.6. Transfer of VJN LPTV Assets.
(a) Upon receipt of approval by the FCC for the transfer of
the FCC licenses of VJN LPTV with respect to 75% of the Stations from VJN LPTV
to Box LLC, Box shall promptly cause VJN LPTV to be merged into Box or
liquidated and distributed to Box, and Box shall therefor promptly transfer to
Box LLC, for no consideration, the FCC licenses for such Stations and all assets
related thereto, and thereafter, from time to time, as approved by the FCC for
the transfer of the FCC licenses with respect to any other Stations is received,
Box shall promptly transfer to Box LLC the FCC licenses for such Stations and
all assets related to each such Station. All such transfers shall be made
pursuant to an instrument of conveyance in form and substance reasonably
satisfactory to Box LLC. Each such instrument of conveyance shall contain
representations and warranties and indemnities from the Tune Entities relating
to such FCC licenses and such assets to the same extent as the representations
and warranties and indemnities contained herein. During the period commencing on
the date of this Agreement and terminating as to each Station on the earlier of
(x) the transfer of the applicable FCC licenses and assets with respect to such
Station to Box LLC or (y) the termination of the LMA Agreement with respect to
such Station, Box LLC shall reimburse VJN LPTV or Box, as applicable, for its
reasonable expenses incurred in the ordinary course of business in operating
such Station.
(b) In the event the FCC has denied the applications for
transfer of any license(s) for any of the Stations to Box LLC, or in the event
an LMA Ruling, as defined in the LMA Agreement, as to any Station is received,
Box shall pay to Box LLC $25,000 for each Station which the FCC has denied the
license transfer application or required termination of the LMA Agreement with
respect to. Such payments shall be made by wire transfer of immediately
available funds.
2.7 Transfer of Equity Interests in Box Italy. Box shall use
its reasonable best efforts to obtain all required approvals to transfer, and to
transfer, as promptly as practicable after the Closing, a portion of the equity
interests in Box Italy to Box LLC and a portion of such interests to either the
Partnership or a subsidiary of Box LLC, in such proportions as the Partnership
shall determine, in each case for no consideration and pursuant to an instrument
of conveyance in form and substance reasonably satisfactory to Box LLC and Box,
containing representations, warranties and indemnities from the Tune Entities
relating to such equity interests and to the assets of Box Italy to the same
extent as the representations, warranties contained herein which relate to the
Tune Subsidiaries and their assets. Upon the transfer of such equity interests
in Box Italy to Box LLC and to the Partnership or a subsidiary of Box LLC, TCI
Music shall be deemed to have made a Required Capital Contribution to the
Partnership on behalf of SonicNet and Box in an amount equal to the amount
contributed by TCI Music or its subsidiaries to Box Italy to fund its assets and
businesses with sufficient capital to fund operations in accordance with the
Tune Budget from May 19, 1999 to the date of such transfer and MTVN shall within
five Business Days thereafter, make a Capital Contribution to the Partnership on
behalf of VLLC and Imagine, without the need for any notice or Capital Call, in
an amount equal to nine times the amount deemed to have been contributed by TCI
Music above, which Capital Contribution shall also be deemed to be a Required
Capital Contribution.
<PAGE> 21
15
2.8 No Transfers, Etc. Box shall not, and shall not permit any
of its subsidiaries to, transfer or grant any Liens on any of the stock or other
equity of Box Italy or any of the assets of Box Italy or VJN LPTV, except to the
extent provided for in the liquidation of VJN LPTV or merger of VJN LPTV and Box
referred to in Section 2.6. Box shall cause Box Italy and VJN LPTV to conduct
their operations in the ordinary course (including in accordance with the LMA in
the case of VJN LPTV and including the continuation of the funding of operations
of Box Italy in accordance with the MOU) and to not pay any dividends pending
the contribution of the equity interests in Box Italy and the assets of VJN LPTV
as described in Sections 2.6 and 2.7.
ARTICLE 3
COVENANTS
3.1. Employees.
(a) Schedule 3.1(a) attached hereto sets forth those employees
of SonicNet who will become employees of SonicNet LLC upon consummation of the
Closing (the "SonicNet LLC Employees"). The Partnership shall cause SonicNet LLC
to treat the SonicNet LLC Employees in a fair and equitable manner, consistent
with other employees of the Partnership (including any previously employed by
MTVN).
(b) Schedule 3.1(b) attached hereto sets forth those employees
of Box and its subsidiaries who will become employees of MTVN upon consummation
of the Closing (the "Box-MTVN Employees"). MTVN shall treat the Box-MTVN
Employees in a fair and equitable manner, consistent with other similarly
situated employees of MTVN.
(c) TCI Music, SonicNet and Box shall be responsible for any
liability or obligation arising under any Tune Benefit Plan or as a result of
the employment or termination of employment of employees or former employees of
Box, SonicNet, Box LLC, SonicNet LLC, Box Italy or the Tune Subsidiaries, or the
provision of services or termination of provision of services by directors,
consultants, agents or independent contractors of Box, SonicNet, Box LLC,
SonicNet LLC, Box Italy or the Tune Subsidiaries (including, without limitation,
salaries, bonuses, payroll taxes, severance obligations, contributions to and
benefits under the Tune Benefit Plans and all other employment or service
related claims); provided, however, that none of TCI Music, Liberty, SonicNet or
Box shall assume or otherwise be responsible for (i) any liability or obligation
arising after the date hereof under the Assigned Tune Employment Contracts; (ii)
any liability or obligation arising after the date hereof under any Tune
Subsidiary Benefit Plan with respect to any SonicNet LLC Employee or Box-MTVN
Employee; or (iii) any liability or obligation with respect to the employment or
termination of employment of any SonicNet LLC Employee or Box-MTVN Employee
arising after the date hereof.
(d) With respect to the Box-MTVN Employees, MTVN shall assume
the obligations arising after the date hereof under the employment contracts
listed on Schedule 3.1(d) (the "Box Employment Contracts").
<PAGE> 22
16
(e) Neither the Partnership nor any of its subsidiaries nor
MTVN shall assume any liability or obligation under any employee benefit plan,
policy or arrangement or any employment agreement of TCI Music, Liberty, Box,
SonicNet or any of their Affiliates, except for (i) liabilities or obligations
arising after the date hereof under the Assigned Tune Employment Contracts or
(ii) with respect to any SonicNet LLC Employee or Box-MTVN Employee, liabilities
or obligations arising after the date hereof under any Tune Subsidiary Benefit
Plan.
(f) Box-MTVN and SonicNet LLC Employees shall be permitted to
elect to roll over, in cash and notes representing participant loans, any
distribution received from a tax-qualified 401(k) savings plan maintained by a
Tune Entity to a tax-qualified 401(k) savings plan established or maintained by
any MTVN Entity or the Partnership for the benefit of Box-MTVN or SonicNet LLC
Employees, as the case may be, to the extent permitted by the Code.
(g) With respect to any director, employee, consultant, agent
or independent contractor of any Tune Subsidiary or Box Italy who is not a
SonicNet LLC Employee or a Box-MTVN Employee, and whose employment or services
cannot be completely terminated prior to the consummation of the Closing due to
any applicable Laws, the Partnership or MTVN, as applicable, shall assist in the
termination of such director, employee, consultant, agent or independent
contractor, consistent with such Laws. TCI Music, SonicNet and Box shall be
responsible for all liabilities in connection with the employment or termination
of employment of any such employee or the provision of services or termination
of provision of services by any such director, consultant, agent or independent
contractor, including without limitation salaries, bonuses, payroll taxes,
severance obligations, contributions to and benefits under the Tune Benefit
Plans and all other employment or service related claims, with respect to all
periods whether before or after the Closing, as well as all reasonable legal
fees and expenses of MTVN or the Partnership and its Controlled Affiliates
arising from or incurred on account of any such termination.
(h) Until the second anniversary of the date hereof, neither
Liberty, TCI Music nor any of their Controlled Affiliates will hire any of the
Box-MTVN Employees or any of the employees of the Partnership or its
subsidiaries without the prior consent of MTVN.
(i) Neither Liberty, TCI Music nor any of their Controlled
Affiliates will solicit for employment any of the Box-MTVN Employees or any
employee of the Partnership or any of its subsidiaries for so long as TCI Music
or any of its Affiliates owns an equity interest in the Partnership. The
preceding sentence shall not apply with respect to Nicholas Butterworth to the
extent provided by the letter agreement dated May 19, 1999 among Liberty, TCI
Music and Viacom.
(j) Schedule 3.1(j) attached hereto sets forth a list of those
employees of any MTVN Entity who will become employees of the Partnership upon
the consummation of the Closing ("MTVN-Partnership Employees").
(k) Nothing in this Agreement shall limit the right of the
Partnership to hire additional employees after the Closing.
<PAGE> 23
17
(l) MTVN shall (i) permit each Box-MTVN Employee and his or
her dependents to participate in its employee benefit plans to the same extent
as MTVN's other similarly situated employees and their dependents; (ii) give
each Box-MTVN Employee credit for his or her past service with SonicNet or Box
(and any predecessor employer thereto) for purposes of eligibility to
participate and vesting (but not benefit accrual) under its employee benefit
plans; and (iii) not subject any Box-MTVN Employee to any limitations on
benefits for pre-existing conditions under its group health and disability
plans.
(m) The Partnership shall (i) permit each SonicNet LLC
Employee and his or her dependents to participate in its employee benefit plans
to the same extent as the Partnership's other similarly situated employees and
their dependents; (ii) give each SonicNet LLC Employee credit for his or her
past service with SonicNet or Box (and any predecessor employer thereto) for
purposes of eligibility to participate and vesting (but not benefit accrual)
under its employee benefit plans; and (iii) not subject any SonicNet LLC
Employee to any limitations on benefits for pre-existing conditions under its
group health and disability plans.
(n) TCI Music, SonicNet and Box shall be responsible for any
claims for group health benefits incurred prior to the Closing by SonicNet LLC
Employees or Box-MTVN Employees or their dependents; MTVN shall be responsible
for any claims for group health benefits incurred prior to the Closing by
MTVN-Partnership Employees or their dependents; the Partnership shall be
responsible for any claims for group health benefits incurred on or after the
Closing by SonicNet LLC Employees or MTVN-Partnership Employees or their
dependents; and MTVN shall be responsible for any claims for group health
benefits incurred on or after the Closing by Box-MTVN Employees or their
dependents. For purposes of this paragraph (n), a health care claim shall be
deemed to be incurred when the services giving rise to the claim are performed
and not when the employee is billed for such services or submits a claim for
benefits.
(o) TCI Music, SonicNet and Box shall be responsible for
providing any continuation of group health coverage to SonicNet LLC Employees or
Box-MTVN Employees or their dependents required by Section 4980B of the Code or
Sections 601-608 of ERISA ("COBRA") with respect to any "qualifying event," as
defined in Section 4980B of the Code, which occurs on or prior to the Closing
(including as a result of the transactions contemplated by this Agreement) and
MTVN shall be responsible for providing any continuation of group health
coverage to MTVN-Partnership Employees or their dependents required by COBRA
with respect to a qualifying event which occurs on or prior to the Closing
(including as a result of the transactions contemplated by this Agreement).
(p) TCI Music, SonicNet and Box shall be responsible for
providing any short-term disability benefits payable to any SonicNet LLC
Employee or Box-MTVN Employee with respect to any period prior to the Closing
and for providing any long-term disability benefits payable to any SonicNet LLC
Employee or Box-MTVN Employee who is on short-term disability as of the Closing;
MTVN shall be responsible for providing any short-term disability benefits
payable to any MTVN-Partnership Employee with respect to any period prior to the
Closing and for providing any long-term disability benefits payable to any
MTVN-Partnership Employee who is on a short-term disability as of the Closing;
the Partnership shall be responsible for providing any short-term disability
benefits payable to any SonicNet LLC Employee or
<PAGE> 24
18
MTVN-Partnership Employee with respect to any period after the Closing; and MTVN
shall be responsible for providing any short-term disability benefits payable to
any Box-MTVN Employee with respect to any period after the Closing.
(q) Sections 3.1 (l) through (p) shall not apply to employees
of Box Italy or the Tune Subsidiaries other than SonicNet LLC or Box LLC.
(r) In the event that the Partnership or any of its Affiliates
terminates any employee of The Box Argentina S.A., it shall do so in accordance
with any procedures required by local Laws.
3.2. Rebates of Launch Fees. TCI Music will use its
commercially reasonable efforts to obtain rebates of all launch fees paid to any
cable system to which it or its subsidiaries may be entitled under the
applicable affiliation agreements relating to Box or its subsidiaries
("Rebates") . TCI Music will promptly pay over to the Partnership any Rebates
that it or any of its subsidiaries receive as a result of such efforts or
otherwise.
3.3. Interactive Music Channel. In the event that Liberty
assigns its rights under the Access Provisions to TCI Music in connection with
certain recently-announced proposed transactions between Liberty and TCI Music,
then to the extent that AT&T provides or otherwise enables the functionalities
necessary to provide interactive television applications over the AT&T Systems,
and TCI Music decides to provide an interactive music and music related
transaction channel (an "Interactive Music Channel"), TCI Music agrees to offer
to the Partnership the opportunity to enter into a joint venture with TCI Music
to provide such channel, the terms and conditions of such joint venture to be
subject to the terms of the Access Provisions, as they may be amended, and upon
the formation of such joint venture, the Partnership agrees to offer (which
offer shall remain outstanding for 30 days) to license to such joint venture the
rights to the database being licensed pursuant to the Database License Agreement
on terms no less favorable than those of the Database License Agreement.
Formation of such a joint venture will also be subject to TCI Music and the
Partnership's formulation of a mutually acceptable business plan and to the
execution and delivery of reasonably acceptable definitive documentation
regarding the joint venture. In the event the Partnership and TCI Music do not
enter into such joint venture, neither such Person will have any further
obligation under this Section 3.3, but such failure shall not affect any of TCI
Music's obligations under Section 4.2 of the Parent Agreement. In the event that
Liberty does not assign its rights under the Access Provisions as they may be
amended to TCI Music, Liberty will not be obligated by the terms of this Section
3.3. This Section 3.3 is not intended to obviate any of the obligations of
Liberty, TCI Music or their Controlled Affiliates under the provisions of
Section 4.2 of the Parent Agreement.
3.4. The Telstra Agreement.
(a) During the term (including any renewal term) of the
Telstra Agreement and for six months after termination thereof, the Partnership
shall, and shall cause its Controlled Affiliates to (and, with respect to clause
(i) below, each of the Partners will, and will cause its Affiliates to):
<PAGE> 25
19
(i) comply with the provisions of Section 10
(Confidentiality) of the Telstra Agreement;
(ii) designate and maintain one or more SonicNet
Sites, as defined in the Telstra Agreement, including a World Wide Web site
branded "Addicted to Noise" (the "Telstra SonicNet Sites"), similar in nature to
the currently existing SonicNet Sites with links to the TMPL Site (as defined in
the Telstra Agreement) site and an exclusive feed with respect to the content
developed for the Telstra SonicNet Sites for the TMPL Site similar to the feed
currently provided by the SonicNet Sites;
(iii) grant to SonicNet for it to grant to TMPL (as
defined in the Telstra Agreement) the exclusive license in respect of such
Telstra SonicNet Sites and Software (as defined in the Telstra Agreement)
contemplated by Section 3.1 of the Telstra Agreement, and provide to SonicNet
such services, products, notices and other items that SonicNet may require in
order to comply with all of SonicNet's covenants and obligations set forth in
the Telstra Agreement, and otherwise cooperate with and assist SonicNet in
complying, in a timely manner, with its covenants and obligations under the
Telstra Agreement, including, without limitation, its obligations under Section
6 thereof; and
(iv) refrain from taking any action following the
Closing, and during the term or any renewal by TMPL of the Telstra Agreement,
that would result in or cause a breach by SonicNet of its warranties to TMPL
contained in Section 9.1 of the Telstra Agreement.
(b) SonicNet shall not renew the Telstra Agreement, shall not
transfer any Trademarks (as defined in the Telstra Agreement), which Trademarks
are set forth on Schedule 3.4(b) hereto ("SonicNet Trademarks"), to anyone
(other than TMPL or their successors or assigns, except as consideration or
partial consideration for an early termination of the Telstra Agreement) and
shall not create, incur, permit to exist or have outstanding any Lien on any of
the SonicNet Trademarks. In the event that the Telstra Agreement is terminated
prior to its scheduled expiration, not renewed by Telstra, or if renewed by
Telstra then after the expiration of the renewal term, all of SonicNet's rights
in and to the SonicNet Trademarks in the Territory (as defined in the Telstra
Agreement) , whether registered or unregistered, including the good will
associated therewith, shall, within 10 days after the expiration of the last of
SonicNet's obligations under the Telstra Agreement (including the conclusion of
any period following such termination during which SonicNet's activities in the
Territory are restricted or limited by the Telstra Agreement, be conveyed to
SonicNet LLC, free and clear of all Liens, and SonicNet will make
representations and warranties to SonicNet LLC comparable to those set forth
herein regarding the SonicNet LLC Assets which constitute Intellectual Property,
pursuant to an instrument of conveyance in form and substance reasonably
satisfactory to SonicNet LLC and SonicNet, and thereafter shall be owned
exclusively by SonicNet LLC.
(c) Upon a breach of the Telstra Agreement by any party
thereto other than SonicNet (which breach gives SonicNet the right to terminate
the Telstra Agreement), SonicNet shall immediately, to the extent provided for
in the Telstra Agreement, terminate such Agreement.
<PAGE> 26
20
3.5. The EMAP Agreements. With respect to the IP Rights
Agreement and the Share Purchase Agreement (capitalized terms used in this
Section 3.5 and not otherwise defined in this Section 3.5 or in this Agreement
shall have the meanings assigned to such terms in the EMAP Agreements):
(a) The Partnership shall, and shall cause its Controlled
Affiliates (all at the sole expense of Box) to provide to Box such Business
Information related to Box and access to Books and Records and title deeds of
VJN Video Jukebox Network International Limited in the possession or under the
control of or available to the Partnership as Box may be obligated to provide to
Purchaser pursuant to Section 10 and 11 of the IP Rights Agreement.
(b) The Partnership shall, and shall cause the Partners and
their Affiliates (all at the sole expense of Box) to cooperate with Box as is
necessary to permit Box to comply with all of the covenants and obligations of
VJN pursuant to the IP Rights Agreement, with the same force and effect as if
made by the Partnership, the Partners or such Affiliate, except the covenant of
VJN in Section 6.4 of the IP Rights Agreement.
3.6. Box Holland.
(a) The Partnership shall, from time to time prior to the
first anniversary of the Closing, advance, pursuant to the Box Holland
Promissory Note attached as Exhibit Q hereto, to Box or its applicable
subsidiary such amounts as Box or such subsidiary may request to fund its share
of the Box Holland net cash requirements to the extent required to fund the
operating costs and capital expenditures of Box Holland in accordance with the
projected Business Plan for Box Holland (1998-2001) as previously furnished to
MTVN, but in no event more than $1.3 million in the aggregate; provided,
however, that prior to any such advance, Box certifies that the conditions to
such advance have been satisfied. If the interest in Box Holland of Box's
applicable subsidiary is sold or otherwise disposed of, Box will repay such
advances out of, but only to the extent of, the cash proceeds actually received
by it or its Affiliates from such sale, and otherwise shall have no obligation
or liability with respect to such advances. To the extent such cash proceeds are
sufficient therefor, the amount to be repaid will include simple interest of 6%
per annum.
(b) The Partnership shall, and shall cause its applicable
Controlled Affiliates to, license to Box pursuant to the Box Holland License
Agreement those Intellectual Property rights that they have which are necessary
for Box to comply with its existing licensing obligations to Box Holland as and
to the extent described in the Box Holland License Agreement.
3.7. Qualifications to Sections 3.4, 3.5 and 3.6.
(a) Notwithstanding the provisions of Section 3.4, 3.5 and
3.6, except as set forth in Section 3.6(a) above, the obligations with respect
to the arrangements contemplated in such Sections shall arise only if and to the
extent necessary to enable Box or SonicNet or their respective subsidiaries to
meet their obligations under, and so as not to breach or be in breach of,
<PAGE> 27
21
the Telstra Agreement, the EMAP Agreements or the applicable Box Excluded
Agreement, as the case may be.
(b) TCI Music will, and will cause Box and SonicNet to, use
commercially reasonable efforts to negotiate with the other parties to the
Telstra Agreement and the EMAP Agreements for appropriate amendments to or
terminations of such agreement that would limit or eliminate the obligations of
Box and SonicNet and their applicable subsidiaries thereunder, provided that
none of TCI Music, Box nor SonicNet shall be obligated to make any material
expenditure in order to accomplish the same.
3.8. Cooperation for Financial Reporting. The Tune Entities
shall cooperate with the Partnership, or any successor, and shall provide the
Partnership, or any successor, access to all relevant financial information, to
the extent reasonably appropriate for the Partnership to be able to prepare such
audited financial statements for prior periods for the business conducted by it,
as may be reasonably necessary or appropriate for the Partnership, or any
successor, to make a public offering of its securities and to comply with all
financial reporting requirements of applicable law. Box shall provide the
Partnership with copies of all of its historical audited financial statements
and shall cause its auditors to cooperate with the Partnership in connection
with any required reissuance of any opinion thereon or certification thereof.
The Partnership will reimburse the Tune Entities for all reasonable
out-of-pocket expenses incurred by them in connection with the performance of
their obligations under this Section 3.8.
3.9. MTVN Efforts. MTVN shall use its reasonable best efforts
(without any obligation to pay money in connection therewith) to cause SonicNet
LLC and Box LLC to perform their obligations under Sections 3.4, 3.5 and 3.6 of
this Agreement.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF
THE MTVN ENTITIES
Subject to Section 8.16, the MTVN Entities hereby jointly and
severally represent and warrant to Liberty, TCI Music and the Partnership as
follows:
4.1. Due Incorporation; Good Standing.
(a) Each of MTVN and Imagine is a corporation duly
incorporated, validly existing and in good standing as a corporation under the
laws of the State of Delaware and has the requisite corporate power and
authority to own, lease and operate its assets and its businesses as currently
conducted insofar as they relate to the MTVN Contribution.
(b) VLLC is a limited liability company duly formed, validly
existing and in good standing as a limited liability company under the laws of
the State of Delaware and has the requisite limited liability company power and
authority to own, lease and operate its assets and its businesses as currently
being conducted.
<PAGE> 28
22
4.2. Due Authority; Valid, Binding and Enforceable.
(a) Each of the MTVN Entities has the requisite corporate (or
in the case of VLLC, limited liability company) power and authority to enter
into and perform this Agreement and the Operative Agreements to which it is a
party; the execution, delivery and performance by each of the MTVN Entities of
this Agreement and of the Operative Agreements to which it is a party have been
duly authorized by all required corporate (or in the case of VLLC, limited
liability company), action on its part and, if required, by its stockholder (or
in the case of VLLC, its sole member), and this Agreement and the Operative
Agreements to which each of the MTVN Entities is a party have been duly executed
and delivered by it.
(b) This Agreement and the Operative Agreements to which each
of the MTVN Entities is a party are legal, valid and binding obligations of each
such MTVN Entity, enforceable against it in accordance with their respective
terms, except (i) as such enforceability may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors' rights
generally and (ii) to the extent that equitable remedies, such as injunctive
relief or specific performance, are within the discretion of courts of competent
jurisdiction.
4.3. No Violation of Laws or Agreements. The execution,
delivery, and performance by each of the MTVN Entities of this Agreement and the
Operative Agreements to which each is a party and the consummation by each of
the MTVN Entities of the transactions contemplated hereby and thereby do not and
will not (a) violate, conflict with or result in the breach of any provision of
the certificate of incorporation, by-laws, certificate of formation or operating
agreement (or similar organizational documents with different names) of the
applicable MTVN Entity, or (b) except as set forth on Schedule 4.3(b), violate,
conflict with, result in a breach of, or constitute a default (or an event which
would, with the passage of time or the giving of notice or both, constitute a
default) under, require any consent under, or notice to, or filings with or
result in or permit the termination, amendment, modification, acceleration,
suspension, revocation or cancellation of, or result in the creation or
imposition of any Lien of any nature whatsoever upon any of the Imagine Assets,
the VLLC Assets or the Domain Names or give to others any interests or rights
therein under (i) any MTVN Permit, any MTVN Benefit Plan, any Outstanding
License of an MTVN Entity or any Contract to which any of the MTVN Entities is a
party, or by which any of the Imagine Assets, the VLLC Assets or the Domain
Names may be bound or affected, or (ii) any judgment, injunction, writ, award,
decree, restriction, ruling, or order of any court, arbitrator or other
Governmental Entity or any applicable constitution, or Law, to which any of the
MTVN Entities is subject or which is applicable to any of the Imagine Assets,
the VLLC Assets or the Domain Names, except in any case under this clause (b) as
would not, individually or in the aggregate, have a material adverse effect on
(y) the Imagine Assets, the VLLC Assets or the Domain Names, taken as a whole,
or (z) the ability of any of the MTVN Entities to perform their obligations
under this Agreement and the Operative Agreements to which they are a party.
4.4. Financial Statements. True, correct and complete copies
of (i) the unaudited balance sheet of Imagine as of December 31, 1998 and the
related statement of income for the twelve-month period then ended are attached
hereto as Part A of Schedule 4.4(a), (ii) the unaudited balance sheet of the
MTVN Online Business consisting of MTV.com, VH1.com and
<PAGE> 29
23
Buggles, as of December 31, 1998 and the related statements of income for the
twelve-month period then ended are attached hereto as Part B of Schedule 4.4(a)
and (iii) the unaudited balance sheet of the MTVN Online Business consisting of
MTV.com, VH1.com and Buggles, as of March 31, 1999 and the related statements of
income for the three months then ended are attached hereto as Part C of Schedule
4.4(a) (the "MTVN Online Interim Balance Sheet") (all such financial statements
are referred to herein collectively as the "MTVN Financial Statements"). The
MTVN Financial Statements were prepared in accordance with the books and records
of Imagine and the MTVN Online Business, as applicable, and except as set forth
on Schedule 4.4(b) fairly present in all material respects the financial
condition and results of operations (MTVN Online Business only) of Imagine and
the MTVN Online Business as of the dates and for the periods indicated, in each
case in conformity with GAAP, consistently applied, throughout the periods
specified, except as expressly set forth therein and except that the MTVN
Financial Statements omit footnotes and the MTVN Online Interim Balance Sheet is
subject to normal year-end adjustments which are not, in the aggregate,
material.
4.5. Contracts. Schedule 4.5(a) sets forth a list of all
written, and a description of all oral, Contracts to which (x) Imagine is a
party (other than the Imagine Excluded Contracts, as defined in the Imagine
Contribution Agreement) or (y) VLLC is (or after the contribution to VLLC of the
VLLC Assets will be) a party (all of which Contracts will be contributed to the
Partnership pursuant to the Imagine Contribution Agreement or the VLLC
Contribution Agreement), except for any such Contract providing for payments to
or by Imagine or VLLC, as the case may be, over the remaining term of such
Contracts of no more than $5,000 individually or $50,000 in the aggregate for
all such non-scheduled Contracts. Except as disclosed on Schedule 4.5(b), after
giving effect to the contribution to VLLC of the VLLC Assets (i) all such
Contracts are valid and binding on, and enforceable against, Imagine or VLLC, as
the case may be, in accordance with their terms, except as such enforceability
may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent
conveyance, reorganization or affecting creditors' rights generally and except
to the extent that injunctive or other equitable relief is within the discretion
of a court and each of such Contracts is, to the knowledge of Imagine or VLLC,
as the case may be, valid and binding on, and enforceable against the other
parties thereto, except as such enforceability may be limited by applicable laws
relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or
affecting creditors' rights generally and except to the extent that injunctive
or other equitable relief is within the discretion of a court, (ii) none of
MTVN, Imagine, VLLC, or, to the knowledge of Imagine and VLLC, any other party
to any such Contract is in breach thereof or default thereunder, and (iii) there
does not exist under any provision of any such Contract, to the knowledge of
Imagine and VLLC, any event that, with the giving of notice or the lapse of time
or both, would constitute such a breach or default, except with respect to the
foregoing clauses (i)-(iii) for all such failures to be valid, binding and
enforceable and such breaches, defaults, events and disputes which would not,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on the Imagine Assets and the VLLC Assets, taken as a whole;
provided, however, that any qualification in this Section 4.5 as to knowledge
shall not apply to the extent any other party to a Contract is MTVN or a
Controlled Affiliate of MTVN.
4.6. No Changes. Except as set forth on Schedule 4.6, since
May 19, 1999, each of the MTVN Entities has conducted its respective business
(insofar as it relates to the
<PAGE> 30
24
MTVN Contribution) in a manner which it reasonably believed would further the
Business of the Partnership and which would not interfere with or frustrate the
transactions contemplated by this Agreement and otherwise only in the ordinary
course of business consistent with past practices, and since December 31, 1998,
there has not been: (i) any material adverse change in the businesses
constituting the MTVN Contribution, except for material adverse changes that may
have resulted from the public announcement of the execution of the MOU, or (ii)
any termination of any Contract to which any of Imagine, MTVN (insofar as it
relates to the MTVN Contribution) or VLLC is a party (other than Imagine
Excluded Contracts and Contracts which expire in accordance with their terms and
Contracts to which MTVN and its Controlled Affiliates are the only parties,
except for any such termination which would not, individually or in the
aggregate, reasonably be expected to have a material adverse effect on the
Imagine Assets and the VLLC Assets, taken as a whole.
4.7. No Brokerage. There is no investment banker, broker,
finder or other similar intermediary which has been retained by any MTVN Entity
or is authorized to act on behalf of any MTVN Entity or any Affiliates thereof
or any of their officers and directors who might be entitled to any fee or
commission from Liberty, any of the Tune Entities or any Affiliates thereof, the
Partnership or any of its subsidiaries upon consummation of the transactions
contemplated by this Agreement or the Operative Agreements.
4.8. Absence of Litigation. Except as set forth on Schedule
4.8, there is no action, suit, investigation, claim, arbitration or litigation
pending or, to the knowledge of any MTVN Entity, threatened against any MTVN
Entity or their business and operations insofar as it relates to the Imagine
Assets or the VLLC Assets, at law or in equity, before or by any arbitrator or
Governmental Entity, except for any such actions, suits, investigations, claims,
arbitrations or litigations which would not, individually or in the aggregate,
reasonably be expected to have a material adverse effect on the Imagine Assets
and the VLLC Assets, taken as a whole. No MTVN Entity is currently operating
under or subject to any order, award, judgment, writ, decree, determination or
injunction, in any such case specific to the use by any MTVN Entity of the
Imagine Assets or the VLLC Assets, of any arbitrator or Governmental Entity.
4.9. No Real Property; Totality and Condition of Assets.
(a) Neither Imagine (solely with respect to the Imagine
Assets) nor VLLC, after giving effect to the contribution to VLLC of the VLLC
Assets, owns, leases or has any interest in any real property which are
exclusive to its businesses.
(b) Each of Imagine and VLLC, after giving effect to the
contribution to VLLC of the VLLC Assets, is the sole owner of and has good title
to or a valid leasehold interest in the Imagine Assets and the VLLC Assets,
respectively, free and clear of any Liens, except for and subject only to Liens
listed in Schedule 4.9(b) and those which would not, individually or in the
aggregate be expected to have a material adverse effect on the Imagine Assets
and the VLCC Assets, taken as a whole. The Imagine Assets and the VLLC Assets
are in all material respects in good operating condition and repair in
accordance with normal and customary industry practices for items of comparable
age and use, reasonable wear and tear excepted.
<PAGE> 31
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4.10. Compliance with Laws; Permits.
(a) Each of the MTVN Entities is in compliance, in all
material respects, with all Laws applicable to its use and operation of the
Imagine Assets, the VLLC Asset and the Domain Names.
(b) Each of the MTVN Entities has obtained and holds all
Permits (collectively, the "MTVN Permits") necessary in order to use and operate
the Imagine Assets, the VLLC Assets as currently used and operated, none of
which has been modified or rescinded and all of which were validly issued and
are in full force and effect. No event has occurred and is continuing that
permits, or after notice or lapse of time or both would permit, any modification
or termination of any MTVN Permit. Each of the MTVN Entities has all rights
necessary and the ability required, if any, to transfer the MTVN Permits as
contemplated by this Agreement and the Operative Agreements.
(c) The Domain Names are owned by the MTVN Entities or their
nominees free and clear of all liens.
4.11. Contribution of Assets; Operation of Business.
(a) The MTVN Contribution and the Domain Names consist of all
of the assets and businesses (other than the assets and businesses expressly
excluded therefrom under the Contribution Agreements) owned or controlled by the
MTVN Entities that constitute MTVN's current (or, as of May 19, 1999, planned)
assets and businesses engaged (or to be engaged) in each case exclusively in the
Business, including all assets and businesses used or to be used as of May 19,
1999, in each case, exclusively in connection with the MTV.com, VH1.com and
Imagine Radio businesses and all directly or indirectly wholly-owned
international businesses engaged or to be engaged as of May 19, 1999, in each
case, exclusively in the Business.
(b) MTVN and Imagine have operated the MTVN Contribution since
May 19, 1999 in a manner which they reasonably believe will further the Business
of the Partnership and which will not interfere with or frustrate the
transactions contemplated hereby.
(c) Since May 19, 1999, MTVN has funded and has caused its
subsidiaries to fund the MTVN Contribution with sufficient capital to fund
operations. For purposes of this Section 4.11, such fundings include MTVN's
overhead charged and allocated in the same manner as it will be charged and
allocated to the Partnership after the Closing.
(d) Each of the Controlled Affiliates set forth on Schedule
2.5 has good title to the Domain Name set forth on Schedule 2.5 opposite such
Controlled Affiliate's name, free and clear of any Liens.
(e) The terms and conditions of each of the Trademark License
Agreement, the Programming License Agreement and the Technology Sharing and
License Agreement (each taken as a whole) are no less favorable to the
Partnership than the terms and conditions of similar
<PAGE> 32
26
types of such agreements between and among Viacom and its non wholly-owned
Controlled Affiliates.
4.12. Absence of Liabilities. There are no liabilities or
obligations relating to the MTVN Contribution or the Domain Names other than (i)
the VLLC Liabilities and the Imagine Liabilities being assumed by the
Partnership pursuant to the VLLC and Imagine Contribution Agreements (which,
with respect to periods prior to the Closing, are limited to certain accounts
payable, accrued expenses, prepayments and similar working capital items
reflected in the balance sheet attached as Exhibit A to Schedule 4.12 or of the
same types as such items reflected on such balance sheet which were incurred
since the date thereof in the ordinary course of business and consistent with
past practice and are not in excess of historical amounts for comparable periods
(provided, however, that such liabilities and obligations shall not include
liabilities or obligations relating to any MTVN Benefit Plan) and which, with
respect to periods after the Closing, are limited to liabilities or obligations
arising after, and with respect to the period following, the Closing under the
MTVN Assigned Contracts, other than liabilities under such MTVN Assigned
Contracts which are not being assumed by the Partnership) and (ii) certain
liabilities of VLLC under the Technology License Agreement, the Trademark
License Agreement, the Programming License Agreement and the Promotion
Agreement, which liabilities are not included in the VLLC Liabilities and are
not being assumed by the Partnership.
4.13. Employee Benefits.
(a) Set forth on Schedule 4.13(a) hereto is a complete and
correct list of any MTVN Benefit Plan which covers any MTVN-Partnership
Employee. None of the MTVN Entities nor any of their Affiliates has communicated
to present or former employees of any MTVN Entity or adopted or authorized any
additional material MTVN Benefit Plan or any material change in or termination
of any existing MTVN Benefit Plan.
(b) With respect to any "defined benefit plan", within the
meaning of Section 3(35) of ERISA, maintained or contributed to by any MTVN
Entity or any of their ERISA Affiliates within the last six years: (i) no
liability to the Pension Benefit Guaranty Corporation ("PBGC") has been incurred
(other than for premiums not yet due); (ii) no notice of intent to terminate any
such plan has been filed with the PBGC or distributed to participants and no
amendment terminating any such plan has been adopted which could result in any
liability to the MTVN Entities, the Partnership or the Tune Entities; (iii) no
proceedings to terminate any such plan have been instituted by the PBGC and no
event or condition has occurred which might constitute grounds under Section
4042 of ERISA for the termination of, or the appointment of a trustee to
administer, any such plan; (iv) no "accumulated funding deficiency," within the
meaning of Section 302 of ERISA or Section 412 of the Internal Revenue Code of
1986, as amended (the "Code"), whether or not waived, has been incurred; and (v)
no Lien has arisen under ERISA or the Code, or is likely to arise, on the assets
of any MTVN Entity.
(c) No MTVN Entity has incurred any liability with respect to
any "multiemployer plan," within the meaning of Section 3(37) of ERISA to which
any MTVN Entity or any of their ERISA Affiliates has contributed or been
required to contribute, other than for contributions not yet due.
<PAGE> 33
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(d) No MTVN Entity has any liability, contingent or otherwise,
under Section 4069 or 4212 of ERISA.
(e) With respect to any employment contract which will be
contributed to the Partnership pursuant to the VLLC Contribution Agreement (an
"Assigned MTVN Employment Contract"):
(i) None of the MTVN Entities, nor, to the knowledge
of any of the MTVN Entities, any other party to any Assigned MTVN Employment
Contract is in breach thereof or default thereunder (or would, with the giving
of notice or lapse of time or both, be in breach or default);
(ii) There does not exist under any provision of any
such Assigned MTVN Employment Contract, to the knowledge of the MTVN Entities,
any event that, with the giving of notice or the lapse of time or both, would
constitute such a breach or default;
(iii) Neither the execution of this Agreement nor the
consummation of the transactions contemplated by this Agreement, will (A)
increase the amount of any payments or benefits otherwise payable under any
Assigned MTVN Employment Contract, (B) result in the acceleration of the time of
payment, exercisability, funding or vesting of any such payments or benefits, or
(C) result in any payment (whether severance pay or otherwise) becoming due
under any Assigned MTVN Employment Contract; and
(iv) No payment or series of payments that would
constitute a "parachute payment" (within the meaning of Section 280G of the
Code) has been made or will be made under any Assigned MTVN Employment Contract
in connection with the execution of this Agreement or as a result of the
consummation of the transactions contemplated hereby.
4.14. Employees. Except as set forth on Schedule 4.14 attached
hereto, no employees of any MTVN Entity are represented by a labor union or
other labor organization.
4.15. Intellectual Property.
(a) MTVN has sufficient title and ownership of, and rights to
use, the Intellectual Property included in the MTVN Contribution (other than any
right, title or interest of VLLC under the Trademark License Agreement, the
Partnership Agreement, the Technology Sharing and License Agreement and the
Programming License Agreement) (the "MTVN Contribution IP") in order to
contribute the same as contemplated under this Agreement without any conflict
with or infringement of the rights of others, and such rights will not be
adversely affected by the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby.
(b) Schedule 4.15(b) contains a true, accurate and complete
list as of the date hereof of all Intellectual Property (if any) that
constitutes patents, patent applications, trademark and service marks and
corresponding registrations and applications for registration thereof, and
registered copyrights and corresponding registrations and applications for
registration thereof, as well as Domain Names, included in the MTVN Contribution
IP.
<PAGE> 34
28
(c) Schedule 4.15(c) further sets forth a true, accurate and
complete list as of the date hereof of all Outstanding Licenses of MTVN or its
Affiliates included in the MTVN Contribution IP.
(d) Except as set forth in Schedule 4.15(c), the MTVN Entities
have sole and exclusive beneficial and record ownership, legal title and the
right to use the MTVN Contributed IP, free and clear of Liens and any rights or
claims of present or former employees, consultants, officers and directors of
the any of the MTVN Entities.
(e) The MTVN Entities have not, in connection with the MTVN
Contribution, interfered with, infringed upon, misappropriated, or otherwise
come into conflict with any Intellectual Property of third parties, and are not
presently so interfering, infringing, misappropriating or in conflict therewith,
nor have any of them received any communications alleging that it has infringed
or violated any of the Intellectual Property of any other Person, and (without
limiting any of the other representations and warranties herein), to the
knowledge of the MTVN Entities and any of their respective officers, there is
not any basis for the making of any such allegation.
(f) There is not pending, nor to the MTVN Entities' knowledge,
has there been threatened, any action or proceeding to contest, oppose, cancel
or otherwise challenge the validity, ownership or enforceability of any of the
MTVN Contribution IP.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF LIBERTY
Liberty hereby represents and warrants to the MTVN Entities
and the Partnership, as follows:
5.1. Due Incorporation; Good Standing. Liberty is a
corporation duly incorporated, validly existing and in good standing as a
corporation under the laws of the State of Delaware and has the requisite
corporate power and authority to own, lease and operate its assets and
businesses as currently being conducted, except in any such case as would not
have a material adverse effect on its ability to perform its obligations
hereunder and in the Parent Agreement.
5.2. Due Authority; Valid, Binding and Enforceable.
(a) Liberty has the requisite corporate power and authority to
enter into and perform this Agreement and the Parent Agreement; the execution,
delivery and performance by it of this Agreement and of the Parent Agreement
have been duly authorized by all required corporate action on its part and, if
required, by its stockholders, and this Agreement and the Parent Agreement have
been duly executed and delivered by it.
(b) This Agreement and the Parent Agreement are legal, valid
and binding obligations of Liberty, enforceable against it in accordance with
their respective terms, except (i) as such enforceability may be limited by
bankruptcy, insolvency or other similar laws
<PAGE> 35
29
affecting the enforcement of creditors' rights generally and (ii) to the extent
that equitable remedies, such as injunctive relief or specific performance, are
within the discretion of courts of competent jurisdiction.
5.3. No Violation of Laws or Agreements. The execution,
delivery, and performance by Liberty of this Agreement and the Parent Agreements
and the consummation by it of the transactions contemplated hereby and thereby
with respect to Liberty do not and will not, (a) violate, conflict with or
result in the breach of any provision of its certificate of incorporation, or
by-laws, or (b) violate, conflict with, result in a breach of, or constitute a
default (or an event which would, with the passage of time or the giving of
notice or both, constitute a default) under, require any consent under, or
notice to, or filings with or result in or permit the termination, amendment,
modification, acceleration, suspension, revocation or cancellation of, or result
in the creation or imposition of any Lien of any nature whatsoever upon any of
the SonicNet LLC Assets, the Box LLC Assets, the SonicNet Membership Interests,
the Box Membership Interests or the assets of the Tune Subsidiaries or give to
others any interests or rights therein under (i) any license, plan, Permit or
Contract to which it is a party or (ii) any judgment, injunction, writ, award,
decree, restriction, ruling, or order of any court, arbitrator or Governmental
Entity or any applicable constitution, or Law, to which it is subject with such
exceptions as, individually and in the aggregate, would not have a material
adverse effect on its ability to perform its obligations under this Agreement
and the Parent Agreement.
5.4. No Solicitation. Since May 19, 1999, Liberty has not
hired any Person that is an employee of SonicNet or Box or the Tune
Subsidiaries. Since May 19, 1999, Liberty has not hired any Person who would
otherwise become an employee of the Partnership or any of its subsidiaries.
5.5. AT&T/Liberty Agreement. The copy of the AT&T/Liberty
Agreement attached hereto as Schedule 5.5 is a true and correct copy of such
Agreement.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES BY TCI MUSIC,
SONICNET AND BOX
Subject to Section 8.16, TCI Music, SonicNet and Box hereby
jointly and severally represent and warrant to the MTVN Entities and the
Partnership, as follows:
6.1. Due Incorporation; Good Standing.
(a) Each of TCI Music, SonicNet, Box, the other Tune Entities
and the Tune Subsidiaries is a corporation (or other entity) duly incorporated
(or organized), validly existing and in good standing as a corporation (or such
other entity) under the laws of the state of its incorporation or formation and
each of SonicNet, Box, the other Tune Entities and the Tune Subsidiaries has
previously delivered to MTVN complete and correct copies of its certificate of
incorporation and all amendments thereto to the date hereof and its by-laws, as
currently in effect (or similar organizational documents with different names).
<PAGE> 36
30
(b) Each of SonicNet LLC and Box LLC is a limited liability
company duly formed, validly existing and in good standing as a limited
liability company under the laws of the State of Delaware, has the requisite
limited liability company power and authority to own, lease and operate its
assets and its businesses as currently being conducted and has previously
delivered to MTVN complete and correct copies of its certificate of formation
and all amendments thereto to the date hereof and its operating agreement, as
currently in effect.
6.2. Due Authority; Valid, Binding and Enforceable.
(a) Each of the Tune Entities has the requisite corporate (or
in the case of SonicNet LLC and Box LLC, limited liability company) power and
authority to enter into and perform this Agreement and the Operative Agreements
to which it is a party; the execution, delivery and performance by each of the
Tune Entities of this Agreement and of the Operative Agreements to which it is a
party have been duly authorized by all required corporate (or in the case of
SonicNet LLC and Box LLC, limited liability company) action on its part and by
its stockholders (or in the case of each of SonicNet LLC and Box LLC, its sole
member), and this Agreement and the Operative Agreements to which each of the
Tune Entities is a party have been duly executed and delivered by it.
(b) This Agreement and the Operative Agreements to which each
of the Tune Entities is a party are legal, valid and binding obligations of such
Tune Entity, enforceable against it in accordance with their respective terms,
except (i) as such enforceability may be limited by bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights generally and
(ii) to the extent that equitable remedies, such as injunctive relief or
specific performance, are within the discretion of courts of competent
jurisdiction.
6.3. No Violation of Laws or Agreements. The execution,
delivery, and performance by each of the Tune Entities of this Agreement and the
Operative Agreements to which each is a party and the consummation by each of
the Tune Entities of the transactions contemplated hereby and thereby do not and
will not (a) violate, conflict with or result in the breach of any provision of
the certificate of incorporation, by-laws, certificate of formation or operating
agreement (or similar organizational documents with different names) of the
applicable Tune Entity or (b) except as set forth on Schedule 6.3(b), violate,
conflict with, result in a breach of, or constitute a default (or an event which
would, with the passage of time or the giving of notice or both, constitute a
default) under, require any consent under, or notice to, or filings with or
result in or permit the termination, amendment, modification, acceleration,
suspension, revocation or cancellation of, or result in the creation or
imposition of any Lien of any nature whatsoever upon any of the SonicNet LLC
Assets, the Box LLC Assets, the SonicNet Membership Interests, the Box
Membership Interests, SonicNet LLC, Box LLC or any assets of any Tune Subsidiary
or give to others any interests or rights therein under (i) any Tune Permit, any
Tune Benefit Plan, any Outstanding License of a Tune Entity or any Contract to
which any of the Tune Entities is a party, or by which any of the SonicNet LLC
Assets, the Box LLC Assets, the SonicNet Membership Interests, the Box
Membership Interests, SonicNet LLC, Box LLC or any assets of any Tune Subsidiary
may be bound or affected or (ii) any judgment, injunction, writ, award, decree,
restriction, ruling, or order of any court, arbitrator or other Governmental
Entity or any applicable constitution, or Law, to which any of the Tune Entities
is subject or
<PAGE> 37
31
which is applicable to any of the SonicNet LLC Assets, the Box LLC Assets, the
SonicNet Membership Interests, the Box Membership Interests, SonicNet LLC, Box
LLC or any assets of any Tune Subsidiary, except in any case under this clause
(b) as would not, individually or in the aggregate, have a material adverse
effect on (y) the SonicNet LLC Assets, the Box LLC Assets and the assets of the
Tune Subsidiaries, taken as a whole, or SonicNet LLC and Box LLC, taken as a
whole, or (z) the ability of the Tune Entities to perform their obligations
under this Agreement and the Operative Agreements to which they are a party.
6.4. Subsidiaries. Except for the Excluded Subsidiaries set
forth on Schedule 6.4(a), the only subsidiaries of SonicNet LLC, Box LLC,
SonicNet or Box, as the case may be, are the entities set forth on Schedule
6.4(b). Set forth next to the name of each such Tune Subsidiary identified on
Schedule 6.4(b) is the jurisdiction of incorporation (or other formation) for
such Tune Subsidiary. Except as set forth on Schedule 6.4(b), SonicNet and/or
Box directly or indirectly beneficially own 100% of the outstanding shares of
capital stock or other equity interests of each Tune Subsidiary, free and clear
of all Liens, and all of such shares of capital stock or other equity interests
are duly authorized and validly issued, fully paid and nonassessable and were
not issued in violation of, or subject to, any preemptive or similar rights.
There are no outstanding (x) securities convertible into or exchangeable for any
capital stock of any of the Tune Subsidiaries, (y) options, warrants or other
rights to purchase or subscribe for the capital stock of any of the Tune
Subsidiaries or securities convertible into or exchangeable for the capital
stock of any of the Tune Subsidiaries or (z) contracts, commitments, agreements,
understandings, arrangements, calls or claims of any kind relating to the
issuance of any capital stock of any of the Tune Subsidiaries, any such
convertible or exchangeable securities or any such options, warrants or rights.
Except as set forth in Schedule 6.4(c), neither SonicNet nor Box directly or
indirectly owns any capital stock or other equity interest in any Person other
than the Tune Subsidiaries (excluding the Excluded Subsidiaries).
6.5. Financial Statements. True, correct and complete copies
of the unaudited balance sheet of each of SonicNet and its Tune Subsidiaries and
Box and its Tune Subsidiaries as of December 31, 1998 and the related statements
of income for the twelve-month period then ended are attached hereto as Part A
of Schedule 6.5, and true, correct and complete copies of the unaudited balance
sheet of each of SonicNet and its Tune Subsidiaries and Box and its Tune
Subsidiaries (the "Tune Interim Balance Sheet") at June 30, 1999 and the related
statements of income for the six months then ended are attached hereto as Part B
of Schedule 6.5 (all such financial statements are referred to herein
collectively as the "Tune Financial Statements"). The Tune Financial Statements
were prepared in accordance with the books and records of each of the applicable
Tune Entities and fairly present in all material respects the financial
condition and results of operations of SonicNet and its Tune Subsidiaries and
Box and its Tune Subsidiaries as of the dates and for the periods indicated, in
each case in conformity with GAAP, consistently applied, throughout the periods
specified, except as expressly set forth therein and except that the Tune
Financial Statements may omit footnotes and the Tune Interim Balance Sheet is
subject to normal year-end adjustments which are not, in the aggregate,
material.
6.6. Contracts. Schedule 6.6 sets forth a list of all written,
and a description of all oral, Contracts to which either of SonicNet or Box is a
party, which Contracts will be contributed to SonicNet LLC or Box LLC, as the
case may be, pursuant to the SonicNet-LLC
<PAGE> 38
32
Contribution Agreement or the Box-LLC Contribution Agreement, as the case may
be, or to which any Tune Subsidiary is a party, in each case other than any
Contract which is an Excluded Tune Asset and except for any such Contract
providing for payments to or by any of the Tune Entities, as the case may be,
over the remaining term of such Contracts of no more than $15,000 individually
or $200,000 in the aggregate for all such non-scheduled Contracts. Except as
disclosed on Schedule 6.6, after giving effect to the contribution to SonicNet
LLC and Box LLC, respectively, of the SonicNet LLC Assets and the Box LLC
Assets, (i) all such Contracts are valid and binding on, and enforceable
against, Box LLC, SonicNet LLC or the applicable Tune Subsidiary, as the case
may be, in accordance with their terms, except as such enforceability may be
limited by applicable laws relating to bankruptcy, insolvency, fraudulent
conveyance, reorganization or affecting creditors' rights generally and except
to the extent that injunctive or other equitable relief is within the discretion
of a court and, to the knowledge of the Tune Entities, as the case may be, all
such Contracts are valid and binding on, and enforceable against the other
parties thereto, subject to the terms thereof, except as such enforceability may
be limited by applicable laws relating to bankruptcy, insolvency, fraudulent
conveyance, reorganization or affecting creditors' rights generally and except
to the extent that injunctive or other equitable relief is within the discretion
of a court, (ii) none of the Tune Entities, nor, to the knowledge of any of the
Tune Entities, any other party to any such Contract is in breach thereof or
default thereunder and (iii) there does not exist under any provision of any
such contract, to the knowledge of the Tune Entities, any event that, with the
giving of notice or the lapse of time or both, would constitute such a breach or
default, except with respect to the foregoing clauses (i)-(iii) for all such
failures to be valid, binding and enforceable and such breaches, defaults,
events and disputes which would not, individually or in the aggregate,
reasonably be expected to have a material adverse effect on the SonicNet LLC
Assets, the Box LLC Assets and the assets of the Tune Subsidiaries, taken as a
whole, or SonicNet LLC and Box LLC, taken as a whole. True and complete copies
of all written, and accurate summaries of all oral, Contracts set forth on
Schedule 6.6 have been made available to MTVN.
6.7. No Changes. Except as set forth on Schedule 6.7(a), (A)
since March 31, 1999, each of SonicNet, Box and the Tune Subsidiaries has
conducted its respective business only in the ordinary course of business
consistent with past practice, the MOU and the budget attached hereto as
Schedule 6.7(b) (the "Tune Budget"), and (B) since December 31, 1998 there has
not been: (i) any material adverse change in the financial condition, results of
operations or business of SonicNet, Box or the Tune Subsidiaries, except for (x)
material adverse changes that may have resulted from the public announcement of
the execution of the MOU or (y) Material Adverse Change Exclusions, (ii) any
termination of any Contract (which, solely for purposes of this Section 6.7,
shall mean Contracts identified as if the Closing had occurred on May 19, 1999)
to which any of SonicNet, Box, SonicNet LLC, Box LLC or the other Tune
Subsidiaries is a party (other than Contracts which expire in accordance with
their terms) or (iii) any dividend or other distribution to TCI Music of any
assets of SonicNet or Box, other than any Excluded Tune Asset or Excluded
Subsidiary.
6.8. No Brokerage. There is no investment banker, broker,
finder or other similar intermediary which has been retained by any of the Tune
Entities or is authorized to act on behalf of any of the Tune Entities or any
Affiliates thereof or any of their respective officers and directors who might
be entitled to any fee or commission from any of the MTVN Entities or
<PAGE> 39
33
any Affiliates thereof, the Partnership or any of its subsidiaries upon
consummation of the transactions contemplated by this Agreement or the Operative
Agreements.
6.9. Absence of Litigation. Except as set forth in Schedule
6.9, there is no action, suit, investigation, claim, arbitration or litigation
pending or, to the knowledge of any of the Tune Entities, threatened against any
of the Tune Entities or their business and operations insofar as it relates to
the SonicNet LLC Assets, the Box LLC Assets, the SonicNet Membership Interests,
the Box Membership Interests, Box LLC, SonicNet LLC or the assets of any Tune
Subsidiary, at law or in equity, before or by any arbitrator or Governmental
Entity, except for any such actions, suits, investigations, claims, arbitrations
or litigations which would not, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the SonicNet LLC Assets, the Box
LLC Assets and the assets of the Tune Subsidiaries, taken as a whole, or
SonicNet LLC and Box LLC, taken as a whole. None of the Tune Entities is
currently operating under or subject to any order, award, judgment, writ,
decree, determination or injunction, in any such case specific to the use by any
Tune Entity of the SonicNet LLC Assets, the Box LLC Assets, the SonicNet
Membership Interests, the Box Membership Interests or the assets of any Tune
Subsidiary, of any arbitrator or Governmental Entity (other than the FCC
Licenses and other Permits listed on Schedule 6.13(c)).
6.10. Real Property; Totality and Conditions of Assets.
(a) There is no real property owned by the Tune Entities and
included in the SonicNet LLC Assets and the Box LLC Assets.
(b) Schedule 6.10(b) contains a true and complete list of all
written, and a description of all oral licenses or leases of real property by
the Tune Entities which are included in the SonicNet LLC Assets and the Box LLC
Assets (collectively, the "Real Property").
(c) The Real Property (including all buildings and structures)
is (i) in all material respects adequate for the uses for which it is used by
the Tune Entities, (ii) in compliance with all material restrictions of record
and other recorded Liens, (iii) not the subject of any pending condemnation,
eminent domain or inverse condemnation, and (iv) not the subject of any contract
or other restrictions of any nature whatsoever (recorded or, to the knowledge of
the Tune Entities, unrecorded) other than the leases and licenses pertaining
thereto, as set forth in Schedule 6.10(b), that prevents or limits any Tune
Entities' right to transfer its interest in any such Real Property.
(d) SonicNet LLC, Box LLC and the other Tune Subsidiaries, as
applicable, after giving effect to the transactions contemplated in the Box-LLC
and SonicNet-LLC Contribution Agreements, (i) have good leasehold interests in
the Real Property, free and clear of all Liens other than interests of the
lessors therein, except as disclosed on Schedule 6.10(d), (ii) enjoy peaceful
and quiet possession of each Real Property occupied by it, and (iii) have full
legal and practical access to each Real Property that it occupies, in each case
other than where the failure to have such rights, title or interest would have a
material adverse effect on such Real Property.
<PAGE> 40
34
(e) All leases, licenses or similar agreements relating to any
use or operation by any Tune Entity of any Real Property are identified or
described on Schedule 6.10(b) hereto; true and complete copies or written
descriptions thereof have been made available to MTVN; each Tune Entity which is
a party to any thereof is in compliance in all material respects with the terms
thereof; and all such leases, licenses or similar agreements are in full force
and effect, and no Tune Entity is aware of a default or prospective default
thereunder by any other party thereto, nor has any of them received notice
asserting the existence of any such default; and there are no facts known to any
Tune Entity that would prevent any Real Property from being occupied after the
Closing in substantially the same manner as before, in each case except as set
forth in Schedule 6.10(b).
(f) SonicNet LLC and Box LLC, after giving effect to the
contribution thereto of the SonicNet LLC and Box LLC Assets, and the Tune
Subsidiaries are the sole owners of and have good title to or a valid leasehold
interest in the SonicNet LLC Assets, the Box LLC Assets and the assets of the
Tune Subsidiaries, respectively (other than Real Property), respectively, free
and clear of any Liens, except for and subject only to Liens listed on Schedule
6.6 and those which would not, individually or in the aggregate, be expected to
have a material adverse effect on the SonicNet LLC Assets, the Box LLC Assets
and the assets of the Tune Subsidiaries, taken as a whole, or SonicNet LLC and
Box LLC, taken as a whole. SonicNet and Box are the sole owners of the SonicNet
Membership Interests and the Box Membership Interests, respectively, free and
clear of all Liens. The SonicNet LLC Assets, the Box LLC Assets and the assets
of the Tune Subsidiaries are in all material respects in good operating
condition and repair in accordance with normal and customary industry practices
for items of comparable age and use, reasonable wear and tear excepted.
(g) Box Europe has no material assets other than its equity
interests in Video Jukebox Network Europe, Ltd., the Box Music Network S.L., Box
Italy and Box Holland.
6.11. Environmental. Except in accordance with applicable Law,
none of the Tune Entities has generated, stored, transported, or disposed of any
Hazardous Substances at any real property owned, leased, occupied, or otherwise
held by any Tune Entity (or in which it previously had an interest) and which
are included in the Tune Contribution. There have been no releases of Hazardous
Substances in violation of any applicable Law on any real property owned,
leased, occupied or otherwise held by any of SonicNet, Box or any Tune
Subsidiary (including any Real Property in which any of SonicNet, Box or any
Tune Subsidiary previously had an interest) and which are included in the Tune
Contribution which could have a material adverse effect on the SonicNet LLC
Assets, the Box LLC Assets and the assets of the Tune Subsidiaries, taken as a
whole. To the knowledge of the Tune Entities, there are no underground storage
tanks or, except in accordance with applicable Law, asbestos-containing
materials, at or on any real property owned, leased, occupied, or otherwise held
by any Tune Entity (including any real property in which any of SonicNet, Box or
any Tune Subsidiary previously had an interest) and relating to the SonicNet LLC
Assets, the Box LLC Assets, the SonicNet Membership Interests, the Box
Membership Interests, SonicNet LLC, Box LLC or the other Tune Subsidiaries. No
Tune Entity has received any notice, request for information, order, claim, or
demand from any Governmental Entity with respect to the generation, storage,
release, or removal of any Hazardous Substance or asbestos.
<PAGE> 41
35
For purposes of this Agreement, "Hazardous Substances" means
any toxic, caustic, or otherwise dangerous substance regulated under federal,
state or local environmental statutes, rules, ordinances, or orders, including,
but not limited to (i) "hazardous substance" as defined in 42 U.S.C. Section
9601, (ii) petroleum products, derivatives, byproducts and other hydrocarbons,
and (iii) asbestos or asbestos containing materials.
6.12. Contribution of Assets; Operation of Business.
(a) Except as set forth on Schedule 6.12(a) and except for the
Excluded Tune Assets, the SonicNet LLC Assets and the Box LLC Assets include all
assets owned, used or held for use by SonicNet or Box or their Affiliates which
relate to, or are reasonably necessary for use in connection with their
business, including all of the capital stock of the direct and indirect
subsidiaries of SonicNet and Box which exclusively conduct the international
businesses of SonicNet and Box.
(b) Since May 19, 1999, Tune has and has caused its
subsidiaries to fund the assets and businesses included in the Tune Contribution
with sufficient capital to fund operations in accordance with the Tune Budget.
For purposes of this Section 6.12, such fundings include Tune's overhead charged
and allocated in the same manner as historically charged and allocated to Box
and SonicNet and as reflected in the Tune Budget.
(c) Schedule 6.12(c) sets forth each tangible asset included
in the Tune Contribution with a book value as of June 30, 1999 greater than
$1,000.
6.13. Compliance with Laws; Permits.
(a) Each of the Tune Entities is in compliance in all material
respects with all Laws applicable to its use of the SonicNet LLC Assets and the
Box LLC Assets, as well as all Laws applicable to the SonicNet Membership
Interests, the Box Membership Interests, SonicNet LLC or Box LLC or the other
Tune Subsidiaries.
(b) Each of the Tune Entities has obtained and holds all
Permits (collectively, the "Tune Permits") necessary in order to use and operate
the SonicNet LLC Assets and the Box LLC Assets and the assets of the Tune
Subsidiaries, as currently used and operated, none of which has been modified or
rescinded and all of which were validly issued and are in full force and effect
except such as would not, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the SonicNet LLC Assets and the
Box LLC Assets and the assets of the Tune Subsidiaries, taken as a whole, or
SonicNet LLC and Box LLC, taken as a whole. No event is known by any Tune Entity
to have occurred and be continuing that permits, or after notice or lapse of
time or both would permit, any modification or termination of any material Tune
Permit.
(c) Schedule 6.13(c) sets forth a true and complete list of
all Tune Permits (the "FCC Licenses") held by any of the Tune Entities issued by
the Federal Communications Commission (the "FCC") and relating to the SonicNet
LLC Assets, the Box LLC Assets, the SonicNet Membership Interests, the Box
Membership Interests, SonicNet LLC, Box LLC and the
<PAGE> 42
36
assets of the Tune Subsidiaries and of all other material Permits held by the
Tune Entities and relating to the SonicNet LLC Assets, the Box LLC Assets, the
SonicNet Membership Interests, the Box Membership Interests, SonicNet LLC, Box
LLC and the assets of the Tune Subsidiaries.
(d) The FCC Licenses identified on Schedule 6.13(c) are held
by the Person identified on Schedule 6.13(c) as the licensee of such FCC
License. Schedule 6.13(c) also sets forth the expiration date of each FCC
License. The FCC Licenses are validly issued and in full force and effect.
Except as disclosed on Schedule 6.13(d), (i) no licenses, permits or
authorizations (other than such as are not material) of any Governmental Entity
other than the FCC are required for the operation of the Stations in the manner
as currently conducted, and (ii) such FCC Licenses constitute all of the
licenses and authorizations required under the Communications Act for, and/or
used in the operation of, the Stations as currently operated. Except as
disclosed on Schedule 6.13(d), there is not pending or, to the knowledge of any
of the Tune Entities, threatened any action, suit, investigation, claim,
arbitration or litigation by or before the FCC to revoke, restrict, cancel,
rescind, modify or deny renewal of any of the FCC Licenses, and there is not
issued, outstanding, pending or, to the knowledge of any of the Tune Entities,
threatened by or before the FCC any order to show cause, notice of violation,
notice of apparent liability, notice of forfeiture or complaint against any of
the Tune Entities relative to the FCC. Each of the applicable Tune Entities is
operating in compliance with the terms of the applicable FCC Licenses, the
Communications Act, and the current rules, regulations, and published policies
of the FCC. Complete and correct copies of the FCC Licenses have been made
available to MTVN.
6.14. Taxes. Except as disclosed on Schedule 6.14:
(a) Each of SonicNet LLC, Box LLC and the other Tune
Subsidiaries has timely filed all Tax Returns required to be filed by it. All
such Tax Returns are true, correct and complete.
(b) Each of SonicNet LLC, Box LLC and the other Tune
Subsidiaries has paid all Taxes required to be paid by it other than those which
are subject to a good faith dispute and are not material.
(c) There is no audit, litigation or other proceeding or
proposed or outstanding assessment or deficiency with respect to Taxes pending
or, to the knowledge of any of the Tune Entities, or threatened with respect to
any of SonicNet LLC, Box LLC and the other Tune Subsidiaries.
(d) Each of SonicNet LLC, Box LLC and the other Tune
Subsidiaries has complied with all legal requirements regarding information
reporting and withholding and payment over of Taxes with respect to payments
made to third parties.
(e) None of SonicNet LLC, Box LLC and the other Tune
Subsidiaries is subject to any closing agreement or similar agreement with
respect to Taxes.
<PAGE> 43
37
(f) Each of SonicNet LLC and Box LLC has a single owner and
is, and at all times has been, treated for federal, and, to the extent permitted
by applicable Law, state and local, tax purposes, as disregarded as an entity
separate from its owner.
(g) The classification of each of the Tune Subsidiaries for
U.S. federal income tax purposes (e.g., as a corporation, partnership or
disregarded entity) is set forth in Schedule 6.14(g).
6.15. Intellectual Property.
(a) The Tune Entities (other than TCI Music) have sufficient
title and ownership of, and rights to use, Intellectual Property, including the
Intellectual Property that is the subject matter of Schedule 6.9 (whether by
ownership or License, and whether or not listed in Schedule 6.15 referred to
below), included in the SonicNet LLC Assets or the Box LLC Assets or owned, used
or held for use by any of the Tune Subsidiaries, necessary to conduct their
respective businesses as now conducted and as currently proposed to be conducted
without any conflict with or infringement of the rights of others, and such
rights will not be adversely affected by the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
(b) Schedule 6.15(b) contains a true, accurate and complete
list as of the date hereof of all Intellectual Property that constitutes
patents, patent applications, trademark and service marks and corresponding
registrations and applications for registration thereof, and registered
copyrights and corresponding registrations and applications for registration
thereof, as well as internet domain names, included in the SonicNet LLC or Box
LLC Assets or in which any of the Tune Subsidiaries has any right, title or
interest (the "Tune Scheduled Intellectual Property").
(c) Schedule 6.15(c) further sets forth a true, accurate and
complete list as of the date hereof of all Outstanding Licenses of the Tune
Entities (other than TCI Music), identifying the other parties thereto and the
subject matter and date thereof.
(d) Except as set forth in Schedule 6.15(c), the Tune Entities
(other than TCI Music) have sole and exclusive beneficial and record ownership,
legal title and the right to use of all of their respective Intellectual
Property (whether or not listed in Schedule 6.15(b)), free and clear of Liens
and any rights or claims of present or former employees, consultants, officers
and directors of any of the Tune Entities or any other Persons, and there are no
Outstanding Licenses.
(e) Except as set forth in Schedule 6.15(c), the Tune Entities
have not interfered with, infringed upon, misappropriated, or otherwise come
into conflict with any Intellectual Property of third parties, nor have any of
them received any communications alleging that it has violated or is violating
any of the Intellectual Property of any other Person, and (without limiting any
of the other representations and warranties herein), to the knowledge of the
Tune Entities, there is not any basis for the making of any such allegation.
<PAGE> 44
38
(f) Except as set forth in Schedule 6.15(c), there is not
pending, nor to the Tune Entities' knowledge has there been threatened, any
action or proceeding to contest, oppose, cancel or otherwise challenge the
validity, ownership or enforceability of any of the Intellectual Property of the
Tune Entities included in the Tune Contribution.
(g) To the knowledge of the Tune Entities, none of its
employees or consultants is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of such employee's best efforts to promote the interests
of such Tune Entity, or with each such consultant's performance of its
contractual obligations or other presently contemplated duties to the such Tune
Entity.
6.16 [Intentionally Left Blank]
6.17. Absence of Liabilities. There are no liabilities or
obligations relating to the Box Membership Interests and the SonicNet Membership
Interests other than the Box Assumed Liabilities and the SonicNet Assumed
Liabilities, and SonicNet LLC, Box LLC and the Tune Subsidiaries have no
liabilities or obligations (i) relating to periods prior to the Closing other
than with respect to certain accounts payable, accrued expenses, prepayments and
similar working capital items reflected in the balance sheet attached as Exhibit
A to Schedule 6.17 or of the same types as such items reflected on the balance
sheet which were incurred since the date thereof in the ordinary course of
business and consistent with past practice and are not in excess of historical
amounts for comparable periods (provided, however, that such liabilities and
obligations shall not include liabilities or obligations relating to any Tune
Benefit Plan) or (ii) with respect to periods after the Closing, other than
liabilities or obligations arising after, and with respect to the period
following, the Closing under the Tune Assigned Contracts.
6.18. Employee Benefits.
(a) Set forth on Schedule 6.18 hereto is a complete and
correct list of any Tune Benefit Plan which covers any SonicNet LLC Employee or
Box-MTVN Employee. Except as set forth in Schedule 6.18(a), none of SonicNet,
Box, SonicNet LLC, Box LLC, the Tune Subsidiaries or any of their Affiliates has
communicated to present or former employees of SonicNet, Box, SonicNet LLC, Box
LLC or the Tune Subsidiaries or adopted or authorized any additional material
Tune Benefit Plan or any material change in or termination of any existing Tune
Benefit Plan.
(b) With respect to any "defined benefit plan", within the
meaning of Section 3(35) of ERISA, maintained or contributed to by SonicNet,
Box, SonicNet LLC, Box LLC, any of the Tune Subsidiaries or any of their ERISA
Affiliates within the last six years: (i) no liability to the PBGC has been
incurred (other than for premiums not yet due); (ii) no notice of intent to
terminate any such plan has been filed with the PBGC or distributed to
participants and no amendment terminating any such plan has been adopted which
could result in any liability to the Tune Entities, the Partnership or the MTVN
Entities; (iii) no proceedings to terminate any such plan have been instituted
by the PBGC and no event or condition has occurred which might constitute
grounds under Section 4042 of ERISA for the termination of, or
<PAGE> 45
39
the appointment of a trustee to administer, any such plan; (iv) no "accumulated
funding deficiency," within the meaning of Section 302 of ERISA or Section 412
of the Code, whether or not waived, has been incurred; and (v) no Lien has
arisen under ERISA or the Code, or is likely to arise, on the assets of
SonicNet, Box, SonicNet LLC, Box LLC or any of the Tune Subsidiaries.
(c) Neither SonicNet, Box, SonicNet LLC, Box LLC or any of the
Tune Subsidiaries has incurred any liability with respect to any "multiemployer
plan," within the meaning of Section 3(37) of ERISA to which any Tune Entity or
any of its ERISA Affiliates has contributed or been required to contribute,
other than for contributions not yet due.
(d) Neither SonicNet, Box, SonicNet LLC, Box LLC or any of the
Tune Subsidiaries has any liability, contingent or otherwise, under Section 4069
or 4212 of ERISA.
(e) With respect to any Box Employment Contract or any
employment contract which will be contributed to SonicNet LLC pursuant to the
SonicNet-LLC Contribution Agreement (an "Assigned Tune Employment Contract"):
(i) None of the Tune Entities, nor, to the knowledge
of any of the Tune Entities, any other party to any Assigned Tune Employment
Contract is in breach thereof or default thereunder (or would, with the giving
of notice or lapse of time or both, be in breach or default);
(ii) There does not exist under any provision of any
such Assigned Tune Employment Contract, to the knowledge of the Tune Entities,
any event that, with the giving of notice or the lapse of time or both, would
constitute such a breach or default;
(iii) Neither the execution of this Agreement nor the
consummation of the transactions contemplated by this Agreement, will (A)
increase the amount of any payments or benefits otherwise payable under any
Assigned Tune Employment Contract, (B) result in the acceleration of the time of
payment, exercisability, funding or vesting of any such payments or benefits, or
(C) result in any payment (whether severance pay or otherwise) becoming due
under any Assigned Tune Employment Contract;
(iv) No payment or series of payments that would
constitute a "parachute payment" (within the meaning of Section 280G of the
Code) has been made or will be made under any Assigned Tune Employment Contract
in connection with the execution of this Agreement or as a result of the
consummation of the transactions contemplated hereby; and
(v) True and complete copies of any Assigned Tune
Employment Contract have been provided to MTVN.
(f) With respect to any Tune Benefit Plan which covers only
employees of Box Italy or any Tune Subsidiary other than SonicNet LLC or Box LLC
("Tune Subsidiary Benefit Plan"):
<PAGE> 46
40
(i) All contributions and premium payments required
to have been paid under or with respect to any Tune Subsidiary Benefit Plan have
been timely paid or accrued;
(ii) Each Tune Subsidiary Benefit Plan is and has
been operated and administered in all material respects in accordance with its
terms, the terms of any applicable collective bargaining agreement, and all
applicable Laws;
(iii) There are no actions, suits, or claims (other
than routine claims for benefits in the ordinary course) with respect to any
Tune Subsidiary Benefit Plan pending which could give rise to a material
liability to the Partnership or its subsidiaries, or to the knowledge of any of
the Tune Entities threatened, and none of the Tune Entities has any knowledge of
any facts which could give rise to any such actions, suits or claims (other than
routine claims for benefits in the ordinary course);
(iv) No Tune Subsidiary Benefit Plan is currently
under governmental investigation or audit and, to the knowledge of the Tune
Entities no such investigation or audit is contemplated or under consideration;
(v) Except as provided in Schedule 6.18(f)(v),
neither the execution of this Agreement nor the consummation of the transactions
contemplated by this Agreement, will (i) increase the amount of benefits
otherwise payable under any Tune Subsidiary Benefit Plan, (ii) result in the
acceleration of the time of payment, exercisability, funding or vesting of any
such benefits, or (iii) result in any payment (whether severance pay or
otherwise) becoming due to, or with respect to, any current or former employee
or director of SonicNet, Box, SonicNet LLC, Box LLC or any of the Tune
Subsidiaries; and
(vi) No payment or series of payments that would
constitute a "parachute payment" (within the meaning of Section 280G of the
Code) has been made or will be made by SonicNet, Box, SonicNet LLC, Box LLC or
any of the Tune Subsidiaries, directly or indirectly, to any employee in
connection with the execution of this Agreement or as a result of the
consummation of the transactions contemplated hereby.
(g) Neither the employees of Box Italy nor the employees of
any Tune Subsidiary other than SonicNet LLC or Box LLC are covered by any
employee benefit plan other than a Tune Subsidiary Benefit Plan.
6.19. Certain Restrictive Provisions. Neither the Partnership
nor any of its subsidiaries shall be subject to any non-competition provision,
exclusivity provision, output or requirement contract or right of first refusal
or other similar contractual restrictions on its ability to conduct its business
(collectively, the "Restrictive Provisions") by virtue of the Partnership's
assumption either directly or through a subsidiary of any contract or other
arrangement of SonicNet or Box or any of their subsidiaries or as a result of
the Partnership being a successor to either SonicNet or Box, other than such
Restrictive Provisions as would apply solely to the SonicNet Contribution or the
Box Contribution, as the case may be, and other than those set forth in the
contracts and arrangements disclosed on Schedule 6.19 hereto.
<PAGE> 47
41
6.20. Employees.
(a) Except as set forth on Schedule 6.20(a) attached hereto,
no employees of Box, SonicNet, Box LLC, SonicNet LLC, Box Italy or the other
Tune Subsidiaries are represented by a labor union or other labor organization.
Within the last three years, there have been no strikes, work stoppages or other
material labor disputes involving employees of Box, SonicNet, Box LLC, SonicNet
LLC, Box Italy or any other Tune Subsidiary.
(b) During the period from May 19, 1999 to the Closing,
neither TCI Music nor any of its Controlled Affiliates (other than Box, SonicNet
or its subsidiaries) has hired any person that was an employee of SonicNet or
Box or their subsidiaries at any time during such period.
(c) Since May 19, 1999, neither TCI Music nor any of its
Controlled Affiliates has hired any person who would otherwise become an
employee of the Partnership or any of its subsidiaries upon consummation of the
Closing.
6.21. Agreements. From May 19, 1999 to the date hereof, except
as set forth on Schedule 6.21 and except as MTVN has consented to in writing
(including by e-mail):
(a) neither SonicNet, Box nor any of their subsidiaries has
entered into or renewed any affiliation agreement or amended any of the terms of
any existing affiliation agreement which is part of the Tune Contribution.
(b) neither Box nor any of its subsidiaries has exercised its
option under any existing affiliation agreement to roll out the Box Service onto
any cable or other system, and
(c) neither Box, SonicNet nor any of their subsidiaries has
entered into, renewed or amended any agreement involving any significant
expenditure or obligation which the Partnership or any of its subsidiaries would
be obligated to pay or bear after the date hereof other than as provided in the
Tune Budget.
6.22. Year 2000 Compliance.
(a) The Tune Entities (which, for purposes of this Section
6.22, shall not include TCI Music) believe that their products and their
suppliers and vendors will be Year 2000 Compliant before October 1, 1999,
assuming that the Partnership, after the Closing, will pursue the plans
developed for the assets and businesses included in the Tune Contribution.
(b) The Tune Entities (i) are developing a detailed plan and
timeline for becoming Year 2000 Compliant on a timely basis, and (ii) are
implementing that plan in accordance with that timetable in all material
respects. The Tune Entities reasonably anticipate that they will be Year 2000
Compliant on a timely basis, assuming that the Partnership, after the Closing,
will pursue the plans developed for the assets and businesses included in the
Tune Contribution.
<PAGE> 48
42
(c) As used herein, the term "Year 2000 Compliant" means, with
respect to an entity, that all software in goods produced or sold by, or
utilized by and material to the business operations or financial condition of,
such entity are able to interpret and manipulate data on and involving all
calendar dates correctly and without causing any abnormal ending scenario,
including in relation to dates in and after the Year 2000.
ARTICLE 7
SURVIVAL; INDEMNIFICATION
7.1. Survival. All representations, warranties, covenants and
agreements contained in this Agreement or in any schedule, exhibit, certificate,
agreement, document or statement delivered pursuant hereto shall survive
indefinitely after (and not be affected in any respect by) the Closing and any
investigation conducted by any party hereto; provided, however, that the
representations and warranties set forth in Articles 4, 5 and 6, the schedules
related thereto and in any certificate delivered in connection herewith with
respect to any of those representations and warranties will terminate and expire
on the second anniversary of the Closing Date except as follows: (a) the
representations and warranties which relate expressly or by necessary
implication to Taxes, ERISA or other employment or labor matters (as modified by
the schedules related thereto) will survive until the expiration of the
applicable statutes of limitations (including all periods of extension and
tolling); (b) the representations and warranties which relate expressly or by
necessary implication to the environment or environmental Laws (as modified by
the schedules related thereto) will survive for a period of five years from the
Closing Date; and (c) the representations and warranties set forth in Sections
4.1, 4.2, 5.1, 5.2, 6.1, 6.2, 6.10 (f) (first sentence (only as it relates to
the equity interests in the Tune Subsidiaries) and second sentence only) and
6.10 (g) (as modified by the schedules related thereto) will survive
indefinitely. After a representation and warranty has terminated and expired, no
indemnification will or may be sought pursuant to this Article 7 on the basis of
a breach or inaccuracy of that representation and warranty by any Person who
would have been entitled pursuant to this Article 7 to indemnification on the
basis of a breach or inaccuracy of that representation and warranty prior to its
termination and expiration; provided that in the case of each representation and
warranty that will terminate and expire as provided in this Section 7.1, no
claim presented in writing for indemnification pursuant to this Article 7 on the
basis of a breach or inaccuracy of that representation and warranty prior to its
termination and expiration will be affected in any way by that termination and
expiration.
7.2. Indemnification by Viacom, Imagine and VLLC. The MTVN
Entities shall jointly and severally indemnify and hold Liberty, TCI Music, Box,
SonicNet, and their shareholders, employees, officers, directors and agents
(collectively, the "Tune Indemnified Parties") and the Partnership, the General
Partner, and their respective employees, officers, directors and agents
(collectively, the "Partnership Indemnified Parties"), without duplication,
harmless from and against, and agree promptly to defend any such Indemnified
Party from and reimburse any such Indemnified Party for, any and all Losses
which any such Indemnified Party may suffer or incur, or become subject to,
arising out of or resulting from, without duplication:
<PAGE> 49
43
(a) any breach or inaccuracy as of the date of this Agreement
of any of the representations and warranties made by the MTVN Entities in or
pursuant to this Agreement or the Contribution Agreements or in any instrument
or certificate delivered by any of the MTVN Entities in accordance herewith (it
being understood and agreed that, notwithstanding anything to the contrary
contained in this Agreement, except to the extent provided in Section 8.16, to
determine if there had been an inaccuracy or breach of a representation or
warranty of any of the MTVN Entities and the Losses arising from such inaccuracy
or breach for purposes of this indemnity, such representation and warranty shall
be read as if it were not qualified by materiality, including, without
limitation, qualifications indicating accuracy in all material respects, or
accuracy except to the extent the inaccuracy will not have a material adverse
effect); provided, the MTVN Entities shall not be required to indemnify the Tune
Indemnified Parties or the Partnership Indemnified Parties under this Section
7.2(a) for any Losses arising out of a breach of any of the representations or
warranties contained herein insofar as they relate to (x) the failure to
disclose the need for any consents required in connection with nonassignment or
change of control provisions in connection with the transactions contemplated
hereby or (y) any termination or breach or other effect of the failure to obtain
a waiver or consent in connection with the transactions contemplated hereby; and
provided further that the indemnification under this clause (a), insofar as it
relates to any assets or businesses contributed or to be contributed to the
Partnership or to any liabilities or obligations assumed or to be assumed by the
Partnership pursuant to the applicable Contribution Agreements, shall be for the
benefit only of the Partnership Indemnified Parties and not the Tune Indemnified
Parties.
(b) any failure by any of the MTVN Entities to carry out,
perform, satisfy and discharge any of their respective covenants, agreements,
undertakings, liabilities or obligations under this Agreement and the
Contribution Agreements to which any MTVN Entity is a party; and
(c) any liability or obligation of any MTVN Entity which is
not included in the VLLC Liabilities or the Imagine Liabilities; provided,
however, that the indemnification under this clause (c) shall be for the benefit
only of the Partnership Indemnified Parties and not the Tune Indemnified
Parties.
7.3. Indemnification by TCI Music, SonicNet and Box. TCI
Music, SonicNet and Box shall jointly and severally indemnify and hold the MTVN
Entities and their shareholders, employees, officers, directors and agents
(collectively, the "MTVN Indemnified Parties") and the Partnership Indemnified
Parties, without duplication, harmless from and against, and agree promptly to
defend any such Indemnified Party from and reimburse any such Indemnified Party
for, any and all Losses which any such Indemnified Party may suffer or incur, or
become subject to, arising out of or resulting from, without duplication:
(a) any breach or inaccuracy as of the date of this Agreement
of any of the representations and warranties made by TCI Music, SonicNet or Box
in or pursuant to this Agreement or the Contribution Agreements or in any
instrument or certificate delivered by any of TCI Music, SonicNet or Box in
accordance herewith (it being understood and agreed that, notwithstanding
anything to the contrary contained in this Agreement, except to the extent
provided in Section 8.16, to determine if there had been an inaccuracy or breach
of a
<PAGE> 50
44
representation or warranty of any of TCI Music, SonicNet or Box and the Losses
arising from such inaccuracy or breach for purposes of this indemnity, such
representation and warranty shall be read as if it were not qualified by
materiality, including, without limitation, qualifications indicating accuracy
in all material respects, or accuracy except to the extent the inaccuracy will
not have a material adverse effect); provided, TCI Music, SonicNet and Box shall
not be required to indemnify the MTVN Indemnified Parties or the Partnership
Indemnified Parties under this Section 7.3(a) for any Losses arising out of a
breach of any of the representations or warranties set forth herein insofar as
they relate to (x) the failure to disclose the need for any consents required in
connection with nonassignment or change of control provisions in connection with
the transactions contemplated hereby or (y) any breach or termination or other
effect of the failure to obtain a waiver or consent in connection with the
transactions contemplated hereby; and provided further that the indemnification
under this clause (a), insofar as it relates to any assets or businesses
contributed or to be contributed to the Partnership or to any liabilities or
obligations assumed or to be assumed by the Partnership pursuant to the
applicable Contribution Agreements, shall be for the benefit only of the
Partnership Indemnified Parties and not the MTVN Indemnified Parties.
(b) any failure by any of TCI Music, SonicNet, Box, SonicNet
LLC or Box LLC to carry out, perform, satisfy and discharge any of their
respective covenants, agreements, undertakings, liabilities or obligations under
this Agreement and the Contribution Agreements to which TCI Music, SonicNet,
Box, SonicNet LLC or Box LLC, as the case may be, is a party;
(c) any liability or obligation of TCI Music, SonicNet, Box,
SonicNet LLC, Box LLC and any Tune Subsidiary other than the Box Assumed
Liabilities and the SonicNet Assumed Liabilities and liabilities or obligations
of the Tune Subsidiaries (x) for periods prior to the Closing with respect to
certain accounts payable, accrued expenses, prepayments and similar working
capital items disclosed in the balance sheet attached as Exhibit A to Schedule
6.17 or of the same types as such items reflected on the balance sheet which
were incurred since the date thereof in the ordinary course of business and
consistent with past practice and are not in excess of historical amounts for
comparable periods (but not including liabilities or obligations relating to any
Tune Benefit Plan) and (y) for periods from and after the Closing arising under
the Tune Assigned Contracts; provided, however, that the indemnification under
this clause (c) shall be for the benefit only of the Partnership Indemnified
Parties and not the MTVN Indemnified Parties; and provided further that nothing
contained in the foregoing shall limit the liabilities and obligations of the
Partnership pursuant to Sections 3.4, 3.5 and 3.6 of this Agreement.
(d) any Taxes imposed on any of the Tune Entities attributable
to any taxable period or portion thereof ending on or prior to the Closing; and
(e) any liability or obligation arising under any Tune Benefit
Plan or as a result of the employment or termination of employment of employees
or former employees of Box, SonicNet, Box LLC, SonicNet LLC, Box Italy or the
other Tune Subsidiaries, or the provision of services or termination of
provision of services by directors, consultants, agents or independent
contractors of Box, SonicNet, Box LLC, SonicNet LLC, Box Italy or the other Tune
Subsidiaries (including, without limitation, salaries, bonuses, payroll taxes,
severance obligations, contributions to and benefits under the Tune Benefit
Plans and all other employment
<PAGE> 51
45
or service related claims), excluding (i) any liability or obligation arising
after the Closing under the Assigned Tune Employment Contracts; (ii) any
liability or obligation arising after the Closing under any Tune Subsidiary
Benefit Plan with respect to any SonicNet LLC Employee or Box-MTVN Employee; or
(iii) any liability or obligation with respect to the employment or termination
of employment of any SonicNet LLC Employee or Box-MTVN Employee arising after
the Closing.
7.4. Indemnification by Liberty. Liberty shall indemnify and
hold the MTVN Indemnified Parties and the Partnership Indemnified Parties,
without duplication, harmless from and against, and agree promptly to defend any
such Indemnified Party from and reimburse any such Indemnified Party for, any
and all Losses which any such Indemnified Party may suffer or incur, or become
subject to, arising out of or resulting from, without duplication:
(a) any breach or inaccuracy as of the date of this Agreement
of any of the representations and warranties made by it in or pursuant to this
Agreement or in any instrument or certificate delivered by it in accordance
herewith (it being understood and agreed that, notwithstanding anything to the
contrary contained in this Agreement, to determine if there had been an
inaccuracy or breach of a representation or warranty of Liberty and the Losses
arising from such inaccuracy or breach, for purposes of this indemnity, such
representation and warranty shall be read as if it were not qualified by
materiality, including, without limitation, qualifications indicating accuracy
in all material respects, or accuracy except to the extent the inaccuracy will
not have a material adverse effect);
(b) any failure by Liberty to carry out, perform, satisfy and
discharge any of its covenants, agreements, undertakings, liabilities or
obligations under this Agreement or the Parent Agreement.
7.5. Indemnification by the Partnership. The Partnership shall
indemnify and hold the MTVN Indemnified Parties and the Tune Indemnified Parties
harmless from and against, and agree promptly to defend any such Indemnified
Party from and reimburse any such Indemnified Party for, any and all Losses
which any such Indemnified Party may suffer or incur, or become subject to
(including, with respect to TCI Music, any Losses suffered or incurred by any
affiliated entity under the Irrevocable Standby Letter of Credit dated January
13, 1999 in the amount of $459,000 issued by Bank of America NT & SA for the
benefit of TM Park Avenue Associates), arising out of or resulting from, without
duplication, (a) any failure by the Partnership to carry out, perform, satisfy
and discharge any of its covenants, agreements, undertakings, liabilities or
obligations under this Agreement and the Contribution Agreements to which it is
a party, (b) the VLLC Liabilities and the Imagine Liabilities, (c) the Box LLC
Liabilities and the SonicNet LLC Liabilities, (d) any liabilities which arise
out of a breach or violation of any non-assignment or change of control
provision insofar as such breach or violation resulted from or arose out of
(including as a result of a claim of anticipatory breach of contract) the
consummation of the transactions contemplated hereby, including any failure to
obtain any consent or waiver, and (e) all other liabilities assumed by the
Partnership (but only to the extent so assumed) under any Contribution
Agreements or under any other Contract entered into by or assigned or
contributed to, or to be assigned or contributed to, the Partnership in
connection herewith; provided, however, that the Partnership shall not be
obligated to indemnify
<PAGE> 52
46
any indemnified party with respect to any obligations that relate to pre-Closing
periods (other than those relating to certain accounts payable, accrued
expenses, prepayments and similar working capital items identified on the
balance sheets attached to Schedule 4.12 or 6.17 hereto or of the same types as
such items reflected on the balance sheet which were incurred since the date
thereof in the ordinary course of business and consistent with past practice and
are not in excess of historical amounts for comparable periods) or arise out of
a breach or violation prior to the Closing of any provision (other than a
non-assignment or change in control provision insofar as it relates to the
consummation of the transactions contemplated hereby, for which the Partnership
shall provide indemnity under clause (d) above) of any Contract assigned or
contributed to the Partnership in connection herewith.
7.6. Tipping Amount; Limitation on Indemnification.
Notwithstanding any other provision in this Agreement to the contrary, the MTVN
Entities shall not be obligated to pay any claims for indemnification under
Section 7.2(a), TCI Music, SonicNet and Box shall not be obligated to pay any
claims for indemnification under Section 7.3(a) and Liberty shall not be
obligated to pay any claims for indemnification under Section 7.4(a) (other
than, in each case, any such claim based on a No Basket Representation), unless,
in each case, the total Losses giving rise to such claims under Section 7.2(a),
7.3(a) or 7.4(a), as applicable, exceed $3,000,000 (the "Tipping Amount");
provided that if, in any such case, the aggregate amount of such Losses exceeds
the Tipping Amount, then the applicable indemnifying party shall be obligated to
pay the full amount of such Losses, including the Tipping Amount, except for a
deductible amount of $1,500,000. Notwithstanding anything to the contrary in
this Agreement, no group of indemnifying parties' cumulative indemnity
obligations under any of Sections 7.2(a), 7.3(a) or 7.4(a), excluding
indemnification claims for Losses arising out of any inaccuracy or breach of the
No Basket Representations, shall exceed $150,000,000, it being understood that
an obligation for indemnity under Section 7.2(a), 7.3(a) or 7.4(a), on the one
hand, and any other paragraph of Section 7.2, 7.3 or 7.4, on the other hand,
shall be deemed to be an obligation under Section 7.2(a), 7.3(a) or 7.4(a) for
purposes of the foregoing $150,000,000 limitation, but not for purposes of the
Tipping Amount.
7.7. Exclusive Remedy. The rights and remedies of the parties
hereto under this Article 7 are exclusive and in lieu of any and all other
rights and remedies which the parties hereto may have against the other under
this Agreement or any Contribution Agreement, with respect to (x) the breach or
inaccuracy of any representation or warranty made (or deemed made) by a party
hereto in or pursuant to this Agreement or any Contribution Agreement or (y) any
breach of, or failure to perform or comply with, any covenant or agreement set
forth in this Agreement or in any Contribution Agreement or in any certificate
delivered by it in accordance herewith or therewith; provided, however, that
this sentence shall not limit the rights of the parties hereto to seek specific
performance of any provision of this Agreement or any Contribution Agreement.
7.8. Indemnification Procedures. Any Party asserting a right
to indemnification under Section 7.2, 7.3, 7.4 or 7.5 shall so notify in writing
the applicable Person or Persons required hereunder to provide indemnification
pursuant to this Article 7. The indemnified party's failure to so notify the
indemnifying party of any such matter shall not release the indemnifying party,
in whole or in part, from its obligations to indemnify under this
<PAGE> 53
47
Article 7, except to the extent the indemnified party's failure to so notify
actually prejudices the indemnifying party's ability to defend such action. If
the facts giving rise to such indemnification shall involve any actual or
threatened claim or demand by or against a third party, the indemnifying party
shall be entitled to control the defense or prosecution of such claim or demand
in the name of the indemnified party, with counsel satisfactory to the
indemnified party, if (x) it notifies the indemnified party in writing of its
intention to do so within 20 days of its receipt of such notice, without
prejudice, however, to the right of the indemnified party to participate therein
through counsel of its own choosing, which participation shall be at the
indemnified party's expense unless (i) the indemnified party shall have been
advised by its counsel that use of the same counsel to represent both the
indemnifying party and the indemnified party would present a conflict of
interest (which shall be deemed to include any case where there may be a legal
defense or claim available to the indemnified party which is different from or
additional to those available to the indemnifying party) or (ii) the
indemnifying party shall fail to defend or prosecute in good faith such claim or
demand within a reasonable time, in which case the reasonable fees of counsel
for the indemnified party shall be for the account of indemnifying party and the
indemnifying party shall not have the right to direct the defense of such action
on behalf of the indemnified party, and (y) it agrees to accept full
responsibility indemnify and hold harmless the indemnified party in accordance
herewith in respect of the claim or demand. Whether or not the indemnifying
party chooses to defend or prosecute such claim, the Partnership and the parties
hereto shall cooperate in the prosecution or defense of such claim and shall
furnish such records, information and testimony and attend such conferences,
discovery proceedings, hearings, trials and appeals as may reasonably be
requested in connection therewith. The indemnifying party shall not settle or
permit the settlement of any such third party claim or action in which any
relief other than the payment of money damages is sought against the indemnified
party without the prior written consent of the indemnified party. The
indemnified party shall not settle or permit the settlement of any claim or
action for which it is entitled to indemnification without the prior written
consent of the indemnifying party, unless the indemnifying party shall have
failed to assume the defense thereof after the notice referred to in the first
sentence of this Section 7.8, and in the manner provided above.
7.9. Subrogation. In the event of any indemnification made
pursuant to a third party claim, the indemnifying party shall be subrogated to
the extent of such payment to all of the rights of recovery of the indemnified
party, who shall execute all papers required and shall do everything that may be
necessary to secure such rights, including the execution of such documents
necessary to enable the indemnifying party effectively to bring suit to enforce
such rights.
ARTICLE 8
MISCELLANEOUS
8.1. Table of Contents; Headings. The table of contents and
headings of the Articles, Sections and other subdivisions of this Agreement are
for convenience of reference only and shall not modify, define or limit any of
the terms or provisions of this Agreement.
<PAGE> 54
48
8.2. Governing Law. This Agreement and the rights and
obligations of the parties hereto, and any claims or disputes relating thereto,
shall be governed by and construed under and in accordance with the laws of the
State of New York, excluding the choice of law rules thereof.
8.3. Severability. If any provision of this Agreement shall be
held to be illegal, invalid or unenforceable, that provision will be enforced to
the maximum extent permissible so as to effect the intent of the parties and the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby. If necessary to effect the intent of
the parties, the parties will negotiate in good faith to amend this Agreement to
replace the unenforceable language with enforceable language which as closely as
possible reflects such intent.
8.4. Amendments. This Agreement may be modified or amended
only by a written amendment signed by each party hereto.
8.5. Counterparts. This Agreement may be executed in one or
more counterparts (and all signatures need not be on any one such counterpart),
with all such counterparts together constituting one and the same instrument.
8.6. Entire Agreement. This Agreement contains the entire
agreement of the parties with respect to the subject matter hereof and
supersedes any and all prior agreement and understandings, whether written or
oral, with respect to the subject matter hereof, including the MOU.
8.7. No Presumption. This Agreement shall be construed without
regard to any presumption or rule requiring construction or interpretation
against the party drafting or causing any instrument to be drafted.
8.8. Binding on Viacom. The parties acknowledge that MTVN is a
division of Viacom and that, consequently, Viacom is obligated to perform the
obligations to be paid or performed by MTVN hereunder. Insofar as this Agreement
refers to MTVN in the context of an operating business, it shall refer only to
the operating unit or units of Viacom that on a day-to-day basis operate the
business of MTV: Music Television or VH1 Music First. In addition, the parties
agree that the representations and warranties set forth in Sections 4.1(a),
4.2(a), 4.2(b), 4.3 and 4.7, insofar as they purport to relate to MTVN, relate
to Viacom.
8.9. Parties in Interest; Limitation on Rights of Others. Any
MTVN Entity may assign its rights and obligations under this Agreement to one or
more Affiliates of MTVN which is directly or indirectly wholly-owned (and
including for this purpose Imagine) by Viacom, Inc.; provided that, in
connection with any such assignment, the applicable MTVN Entity executes and
delivers to TCI Music an instrument, in form and substance reasonably
satisfactory to TCI Music, by which such MTVN Entity guarantees the performance
of any such assignee's obligations hereunder. TCI Music may assign any or all of
its rights and obligations under this Agreement to any of its wholly-owned
subsidiaries; provided that, in connection with any such assignment, TCI Music
executes and delivers to MTVN an instrument, in form and
<PAGE> 55
49
substance reasonably satisfactory to MTVN, by which TCI Music guarantees the
performance of any such assignee's obligations hereunder. No party to this
Agreement may assign any of its rights or obligations under this Agreement
except as specifically provided in this Section 8.9. The terms of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. Any assignment of rights hereunder
in violation hereof shall be null and void ab initio. Nothing in this Agreement,
whether express or implied, shall be construed to give any Person (other than
the parties hereto and their successors and permitted assigns) any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
covenants, conditions or provisions contained herein. None of the provisions of
this Agreement shall be for the benefit of or enforceable by any third party
except the provisions of Article 7 shall be enforceable by all Indemnified
Parties.
8.10. Waivers; Remedies. The observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively) by the party or parties entitled to enforce such
term, but any such waiver shall be effective only if in a writing signed by the
party or parties against which such waiver is to be asserted and only in the
specific instance and for the specific purpose for which given. Except as
otherwise provided herein, no failure or delay of any party in exercising any
power or right under this Agreement shall operate as a waiver thereof, nor shall
any single or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such right or power, preclude any other or
further exercise thereof or the exercise of any other right or power.
8.11. Further Assurances. Upon reasonable request from time to
time, each of MTVN and TCI Music and their respective Controlled Affiliates
shall execute and deliver all documents and instruments and do all other acts
that may be reasonably necessary or desirable to carry out the intent and
purposes of this Agreement and give effect to the exercise by a party of its
rights hereunder.
8.12. Public Announcements. No party shall make or shall
permit any of its Affiliates to make any public announcement about the
transactions contemplated by this Agreement without the prior written consent of
the other parties hereto, which consent shall not be unreasonably withheld or
delayed. Notwithstanding any other provision contained herein, any party or
Affiliate of such party may at any time make announcements which are required by
applicable law or the rules of any national stock exchange or stock association
so long as the party or Affiliate so required to make the announcement, promptly
upon learning of such requirement, notifies the other parties of such
requirement and discusses with the other parties in good faith the exact wording
of any such announcement.
8.13. Costs and Expenses. Each party shall be solely
responsible for the payment of its own costs and expenses incurred in connection
with the negotiation and closing of the transactions contemplated hereby. Filing
fees, and sales and transfer taxes in connection with the consummation of the
transactions contemplated hereby will be borne by the Partnership.
8.14. Notices. Except as expressly provided herein, notices
and other communications provided for herein shall be in writing and shall be
delivered by hand or
<PAGE> 56
50
overnight courier service, mailed (certified or registered mail, postage
prepaid, return receipt requested) or sent by facsimile copier of the sending
party, as follows:
If to Viacom, MTVN, Imagine, MTVN Online or VLLC:
MTV Networks
1515 Broadway
New York, New York 10036
Fax No.: (212) 846-1839
Attention: General Counsel
with a copy to:
Viacom International Inc.
1515 Broadway
New York, New York 10036
Fax No.: (212) 258-6069
Attention: General Counsel
If to the Partnership:
MTVN Online L.P.
1515 Broadway
New York, New York 10036
Fax No.: (212) 846-1735
Attention: Mr. Fred Seibert
with a copy to:
Viacom International Inc.
1515 Broadway
New York, New York 10036
Fax No.: (212) 258-6069
Attention: General Counsel
If to Tune, Box, SonicNet, Box USA or VJN LPTV:
TCI Music, Inc.
67 Irving Place North, 4th Floor
New York, New York 10003
Fax No.: (212) 387-8171
Attention: Mr. Lee Masters
If to Liberty:
Liberty Media Corporation
9197 South Peoria Street
Englewood, Colorado 80112
<PAGE> 57
51
Fax No.: 720-875-5448
Attention: Mr. David Koff
or to such other address or attention of such other Person as any party shall
advise the other parties in writing. All notices and other communications given
to a party in accordance with the provisions of this Agreement shall be deemed
to have been given (i) three Business Days after the same are sent by certified
or registered mail, postage prepaid, return receipt requested, (ii) when
delivered by hand or transmitted by fax confirmation unless delivered on a day
which is not a Business Day in which case such notice shall be deemed to have
been given on the next succeeding Business Day or (iii) one Business Day after
the same are sent by a reliable overnight courier service, with acknowledgment
of receipt.
8.15. Jurisdiction; Consent to Service of Process.
(a) Each party hereby irrevocably and unconditionally submits,
for itself and its property, to the exclusive jurisdiction of any New York State
court sitting in the County of New York or any federal court of the United
States of America sitting in the Southern District of New York, and any
appellate court from any such court, in any suit, action or proceeding arising
out of or relating to this Agreement or any Contribution Agreement, or for
recognition or enforcement of any judgment relating hereto. Each party hereby
irrevocably and unconditionally agrees that any suit, action or proceeding
against it by any other party to this Agreement with respect to this Agreement
or any Contribution Agreement shall be instituted only in any New York State
court sitting in the County of New York or any federal court sitting in the
Southern District of New York, as the party instituting such suit, action or
proceeding may elect in its sole discretion. Each party also hereby irrevocably
and unconditionally agrees that a final judgment in any such suit, action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law.
(b) Each party hereby irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any objection which
it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or any Contribution
Agreement in any New York State court sitting in the County of New York or any
federal court sitting in the Southern District of New York, and any appellate
court from any such court. Each party hereby irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the maintenance
of such suit, action or proceeding in any such court and further waives the
right to object, with respect to such suit, action or proceeding, that such
court does not have jurisdiction over such party. Each party hereby irrevocably
waives the right to a jury trial in any suit, action or proceeding arising out
of or related to this Agreement or any Contribution Agreement.
(c) Each party hereby irrevocably and unconditionally consents
to service of process in the manner provided for the giving of notices pursuant
to this Agreement or any Contribution Agreement. Nothing in this Agreement or
any Contribution Agreement shall affect the right of either party to serve
process in any other manner permitted by law.
<PAGE> 58
52
8.16 Exceptions to Representations and Warranties.
Notwithstanding anything herein to the contrary, (i) all representations set
forth in Article 4 hereof shall be deemed to contain an exception for any
nonassignment provisions (including the effect of any failure to obtain a waiver
or consent) triggered in connection with the transactions contemplated hereby,
and (ii) all representations set forth in Article 6 hereof shall be deemed to
contain exceptions (x) with respect to the effect of any nonassignment or change
of control provisions (including the effect of any failure to obtain a waiver or
consent) triggered in connection with the transactions contemplated hereby and
(y) for the effect of the transactions contemplated by the MOU (including,
without limitation, terminations of affiliation agreement as a result of change
in control or nonassignment provisions), failure to launch the Box Service in
additional systems as a result of MTVN's failure to consent to the payment of
launch fees or failure of Box or SonicNet to take any action which requires
MTVN's consent pursuant to the MOU where such consent is not granted.
8.17 Obligations of TCI Music and Liberty. The obligations of
TCI Music and Liberty hereunder are several and not joint.
<PAGE> 59
IN WITNESS WHEREOF, each of the parties has caused this
Agreement to be executed by its respective officers thereunto duly authorized on
the date first above written.
LIBERTY MEDIA CORPORATION
By: /s/ David Koff
------------------------------
Name: David Koff
Title: Sr. Vice President
TCI MUSIC, INC.
By: /s/ David Koff
------------------------------
Name: David Koff
Title: Vice President
VIACOM INTERNATIONAL INC.
By: /s/ Michael D. Fricklas
------------------------------
Name: Michael D. Fricklas
Title: Sr. Vice President
and General Counsel
MTVN ONLINE PARTNER I LLC
By: /s/ David W. Sussman
------------------------------
Name: David W. Sussman
Title: Sr. Vice President,
General Counsel and
Assistant Secretary
IMAGINE RADIO, INC.
By: /s/ David W. Sussman
------------------------------
Name: David W. Sussman
Title: Sr. Vice President,
General Counsel and
Assistant Secretary
<PAGE> 60
MTVN ONLINE INC.
By: /s/ David W. Sussman
------------------------------
Name: David W. Sussman
Title: Sr. Vice President,
General Counsel and
Assistant Secretary
SONICNET, INC.
By: /s/ David Koff
------------------------------
Name: David Koff
Title: Vice President
THE BOX WORLDWIDE, INC.
By: /s/ David Koff
------------------------------
Name: David Koff
Title: Vice President
VJN LPTV CORP.
By: /s/ David Koff
------------------------------
Name: David Koff
Title: Vice President
MTVN ONLINE L.P.
By: MTVN ONLINE PARTNER I LLC,
its General Partner
By: /s/ David W. Sussman
------------------------------
Name: David W. Sussman
Title: Sr. Vice President,
General Counsel and
Assistant Secretary
<PAGE> 1
Exhibit 10.6
CONFORMED COPY
TRADEMARK LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "AGREEMENT") is made and executed
as of July 15, 1999, by and between MTV Networks, a division of Viacom
International Inc., a Delaware corporation with offices at 1515 Broadway, New
York, New York 10036 (referred to herein as "LICENSOR"), and MTVN Online Partner
I LLC, a Delaware limited liability company with offices at 1515 Broadway, New
York, New York 10036 (referred to herein as "LICENSEE").
RECITALS
WHEREAS, the parties desire that Licensor grant to Licensee a
license to use the Licensed Marks (as defined below) upon the terms and
conditions set forth herein;
WHEREAS, simultaneously herewith Licensor and Licensee are
entering into a Programming License Agreement pursuant to which, among other
things, Licensor is granting a license to Licensee to use certain programming
and associated intellectual property rights in the operation of the Business;
WHEREAS, the parties agree in principle that the Licensed
Services (as defined below) shall be the primary vehicle for showcasing the
Licensed Marks and Licensor does not intend to license the Licensed Marks to a
competitive music-themed online service in a manner which would be injurious to
the Licensed Services; and
WHEREAS, immediately after the execution of this Agreement
Licensee shall assign to the Partnership (as defined below) all of Licensee's
rights and obligations under this Agreement and under the Programming License
Agreement;
TERMS AND CONDITIONS
NOW, THEREFORE, in consideration of the foregoing recitals,
the mutual covenants and obligations contained herein and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by each party hereto, Licensor and Licensee hereby agree as
follows:
SECTION 1. DEFINITIONS AND INTERPRETATION
(A) Definitions. For purposes of this Agreement, the following
definitions shall apply:
"ADDITIONAL LICENSED MARKS" shall mean the Marks set forth on
EXHIBIT A-3 hereto.
"AFFILIATE" shall have the meaning set forth in the
Organization Agreement.
"AGENTS" shall have the meaning set forth in Section 9(K)
hereof.
<PAGE> 2
2
"BUSINESS" shall have the meaning set forth in the Partnership
Agreement as of the date of this Agreement.
"BUSINESS DAY" shall have the meaning set forth in the
Partnership Agreement.
"CONFIDENTIAL INFORMATION" shall have the meaning set forth in
Section 9(K) hereof.
"CONTROL" shall have the meaning set forth in the Organization
Agreement.
"CONTROLLED AFFILIATE" shall have the meaning set forth in the
Organization Agreement.
"FORCE MAJEURE PERIOD" shall have the meaning set forth in
Section 9(Q).
"GOVERNMENTAL ENTITY" shall have the meaning set forth in the
Organization Agreement.
"INDEMNIFIED PARTY" shall have the meaning set forth in
Section 5(E).
"INDEMNIFYING PARTY" shall have the meaning set forth in
Section 5(E).
"LICENSED HOUSE MARKS" shall mean the Marks set forth on
EXHIBIT A-2 hereto.
"LICENSED MARKS" shall mean the Licensed QWERT Mark, the
Licensed House Marks, and the Additional Licensed Marks.
"LICENSED QWERT MARK" shall mean the Mark QWERT as set forth
on EXHIBIT A-1 hereto.
"LICENSED SERVICES" shall mean the interactive services of
distributing text, audio and/or video music and music-related and music-themed
services online, and the advertising and promotion of said online distribution
services, all as operated by the Partnership exclusively in the operation of the
Business, but shall not include the manufacture or sale of goods.
"LICENSEE" shall have the meaning set forth in the first
paragraph hereof.
"LICENSOR" shall have the meaning set forth in the first
paragraph hereof.
"MANAGEMENT COMMITTEE" shall have the meaning as set forth in
the Partnership Agreement.
"MARKS" shall mean trademarks, service marks, trade dress and
the good will associated therewith.
"MTV PROGRAMMING" shall have the meaning set forth in the
Programming License Agreement.
"NEWCO STOCKHOLDERS AGREEMENT" shall have the meaning set
forth in the Parent Agreement.
<PAGE> 3
3
"ORGANIZATION AGREEMENT" shall mean the Organization Agreement
of even date herewith among Liberty Media Corporation ("Liberty"), TCI Music,
Inc. ("TCI Music"), Licensor, Licensee, Imagine Radio, Inc. ("Imagine"), MTVN
Online Inc., SonicNet, Inc. ("SonicNet"), The Box Worldwide, Inc. ("Box"), VJN
LPTV Corp., and the Partnership.
"PARENT AGREEMENT" shall have the meaning set forth in the
Organization Agreement.
"PARTNERSHIP" shall mean MTVN Online L.P.
"PARTNERSHIP AGREEMENT" shall mean the Agreement of Limited
Partnership of even date herewith among Licensee, Imagine, SonicNet, and Box.
"PERSON" shall have the meaning set forth in the Organization
Agreement.
"PROGRAMMING LICENSE AGREEMENT" shall mean the Programming
License Agreement of even date herewith between Licensor and Licensee.
"REORGANIZATION" shall have the meaning set forth in the
Parent Agreement and Guaranty of even date herewith among TCI Music, MTVN,
Liberty, Box, SonicNet and the Partnership.
"REPRESENTATIVE" shall have the meaning as set forth in the
Partnership Agreement.
"TERM" The Term of this Agreement shall commence on the date
hereof and, unless earlier terminated pursuant to Section 7 hereof, terminate on
the fiftieth anniversary of the date hereof;
"TERRITORY" shall mean the entire world subject to
modification from time to time in accordance with the provisions of Section 2(B)
hereof.
"TUNE STOCKHOLDER GROUP" shall have the meaning as set forth
in the Partnership Agreement.
"WEBSITE" shall mean a set of one or more web pages related by
links specified by its provider, including at least one web page stored at a
network address controlled by, or assigned by a host to, its provider, which is
provided over the internet.
(B) Scope of Terms. The use of the words defined herein shall
include the plural or singular forms of such terms, and the male, female, or
neutral gender thereof, as appropriate.
(C) Reference Terms. The use of the words "herein", "thereof",
"hereinafter", "hereinabove", and other words of similar import shall be deemed
to refer to this Agreement as a whole, and not to a specific section,
subsection, or paragraph thereof; the word "including" and words of similar
import when used in this Agreement shall mean "including without limitation"
unless otherwise specified.
<PAGE> 4
4
SECTION 2. GRANT; LICENSE FEE
(A) Grant. Licensor hereby grants to Licensee, on a quitclaim
basis, and Licensee accepts, for the Term and within the Territory, subject to
the terms and conditions herein:
(i) the exclusive license to use and, subject to
Licensor's approval which approval shall be exercised in good faith and
shall not be unreasonably withheld, to sublicense the use of, the
Licensed QWERT Mark in connection with the Business, including as a
name of a Website; and
(ii) the exclusive license to use the Additional
Licensed Marks in connection with the Licensed Services, including as
names of Website and including advertising the Licensed Services in any
media, and the exclusive license to use the Additional Licensed Marks
for goods sold or distributed in connection with the Business, each
exercise of such exclusive license to be subject to MTVN's prior
approval in its sole discretion, provided that nothing herein shall
restrict Licensor's ability to use, or to license or otherwise
authorize the use of, the Additional Licensed Marks in any manner with
respect to the excluded businesses listed on the attached Exhibit B;
and
(iii) the non-exclusive license to use the Licensed
House Marks in connection with the Licensed Services. Notwithstanding
the foregoing, Licensee is specifically prohibited from using the
Licensed House Marks in any media other than the Licensed Services,
provided that Licensee may use the Licensed House Marks in advertising
and promotion of the availability on the Licensed Services of
Licensor's programming services.
Notwithstanding the foregoing, Licensee is prohibited from developing or
manufacturing merchandise of any nature bearing the Licensed House Marks or
otherwise applying the Licensed House Marks to any goods or products. Nothing
herein shall restrict Licensor's ability to use the Licensed House Marks, or to
license to third parties the ability to use the Licensed House Marks, in any
manner and in any media whatsoever, including but not limited to use on the
internet, provided that, except in connection with the excluded businesses
listed on Exhibit B, (a) during the first three (3) years of the Term, Licensor
shall not use or license the use of the Licensed House Marks in connection with
any service which if operated by the Partnership would be a Licensed Service,
except for advertising, sponsorship and promotion consistent with past practice,
and (b) thereafter, during the remainder of the Term, Licensor shall not have
the right to use or to license the use of the Licensed House Marks as a domain
name of or to brand or co-brand a service which if operated by the Partnership
would be a Licensed Service. Licensee shall have no right to grant any
sublicense or further license of the Additional Licensed Marks or Licensed House
Marks to any party, provided, however, that Licensee shall have the right to
exercise the licenses granted hereunder through its wholly-owned subsidiaries.
(B) Limitations. Licensor may from time to time notify
Licensee of any country or jurisdiction in which the Licensed Marks, or any of
them, are not to be used in connection with the Business and/or the Licensed
Services because Licensor has reasonably determined that such use may infringe
upon the rights of any Person or is otherwise determined by Licensor in the
exercise of its reasonable judgment to be contrary to any law, in violation of a
court order or materially
<PAGE> 5
5
detrimental to the distinctiveness of, or likely to cause substantial dilution
to, the Licensed Marks. Upon receipt of such notice, Licensor will terminate its
use of the said Licensed Mark or Licensed Marks in connection with the Business
and/or the Licensed Services in such country or jurisdiction. Without limiting
the foregoing, pursuant to Licensor's agreements related to the Tricast/Asia
joint venture referenced in Exhibit B hereto, and for as long as such agreements
are binding on Licensor, Licensee shall have no right to own or operate any
Licensed Service which is targeted to 15 - 24 year old audiences in Asia (as
defined in accordance with the definition of the Asia "Territory" set forth in
paragraph 1 of Schedule 1 to the Parent Agreement) and branded with any of the
following trademarks or service marks: MTV, MTV: MUSIC TELEVISION, MTV: MUSIC
TELEVISION & Design, MTV ONLINE, MTV ONLINE & Design, or MTV.COM.
(C) Reserved Rights. Licensor reserves all rights that are not
specifically granted to Licensee herein, in all media (now known or hereafter
developed), in, with respect to, or related to the Licensed Marks. Licensee
shall not use any Licensed Mark as a part of its corporate or trade name without
the express prior written approval of Licensor.
(D) Contribution to Capital. The license under this Agreement
shall be a royalty-free contribution to capital from Licensor to Licensee.
SECTION 3. USE OF THE LICENSED MARKS
(A) Manner of Use of Licensed Marks. Licensee shall use the
Licensed Marks only in the form and manner prescribed from time to time by
Licensor, and shall not use any other trademark, service mark, symbol, design,
trade name or like indicia in combination with any Licensed Mark without the
express prior written consent of Licensor. No Website operated by Licensee under
the Licensed Marks shall contain a link to any other Website or be operated as a
co-branded Website without the express prior written consent of Licensor. Before
authorizing any link to a Website operated by Licensee under the Licensed Marks
from any other Website, Licensee shall notify Licensor of the proposed link, and
Licensee shall not authorize such link if Licensor promptly notifies Licensee
that in Licensor's opinion, exercised in good faith, there is a reasonable basis
to believe that the proposed link would be detrimental to Licensor. Licensee
acknowledges that it is familiar with the high standards, quality, style and
image of programming produced by Licensor and its Controlled Affiliates and
agrees to use the Licensed Marks in a manner that is consistent with such high
standards, quality, style and image. Licensee shall use the Licensed Marks only
pursuant to the license granted hereby, only in a manner which will ensure no
loss by Licensor of any rights in any of the Licensed Marks, and only in
compliance with such rules, standards, instructions and other requirements as
Licensor may from time to time prescribe. Licensee's right to use the Licensed
Marks is limited to such uses as are expressly authorized hereunder, and any
unauthorized use thereof shall constitute an infringement of Licensor's rights
and a material breach of this Agreement. Licensee acknowledges and agrees that
Licensor's approval of or consent to any specific use of any Licensed Mark does
not constitute approval of or consent to any other use.
(B) Trademark Notices. Each use by Licensee of any Licensed
Mark shall be accompanied by a registration symbol or other trademark symbol as
directed by Licensor. The Website shall contain a statement indicating that
Licensor is the owner of the said Licensed Mark and that Licensee is using said
Licensed Mark solely as an independent licensee.
<PAGE> 6
6
(C) Approvals. Before each use of a Licensed Mark, Licensee
will submit to Licensor for Licensor's prompt approval one sample of the textual
or graphic element or other item showing the use of the Licensed Mark, and
Licensee shall not make any use without the express prior written consent of
Licensor. If Licensor disapproves of any sample, such item shall not be used by
Licensee in any manner. Without limiting any other provision of this Agreement,
day-to-day changes in the content presented with the Licensed Marks shall not be
considered "uses" for purposes of this Section 3(C). Licensor has the continuing
right to reexamine any item using any Licensed Mark or any other use by Licensee
of any Licensed Mark, and Licensor may require Licensee to cease using any such
item or otherwise discontinue or modify such use of any Licensed Mark if
reasonably necessary to conform Licensee's use of the Licensed Mark so as to be
consistent with the current commercial impression for the Licensed Mark then
being maintained by Licensor. In addition, Licensor shall have the right of
final approval with respect to the representation of the Licensed Marks as used
by Licensee, including but not limited to the manner in which the Licensed Marks
are used in association with, and to identify, the Licensed Services and the
Business.
(D) Discontinuance of Specific Uses. Licensee shall not do or
suffer to be done any act or thing which would adversely affect the Licensed
Marks or reduce their value or detract from their reputation. Licensor shall
have the right to request that Licensee immediately cease a particular use of
the Licensed Marks or a particular component or feature of the Licensed Services
if in Licensor's reasonable opinion such use, component or feature would
denigrate or otherwise adversely affect the Licensed Marks or Licensor's
intellectual property rights or the goodwill therein.
(E) Inspections. Licensor's representatives shall have the
right to inspect all facilities utilized by Licensee in connection with
Licensee's use of the Licensed Marks and in connection with the Licensed
Services at any time during normal business hours, on reasonable prior notice.
(F) Copyright and Trademark Ownership. Licensee acknowledges
that Licensor is the owner of all concepts, trademarks and copyrights in
copyrightable subject matter comprised in the Licensed Marks, and Licensee
undertakes to execute any instruments, acknowledgments, assignments or similar
documents Licensor deems reasonably necessary or advisable to confirm or
effectuate Licensor's ownership thereof.
(G) Compliance with Laws. Licensee shall comply with all
applicable laws and regulations and obtain all necessary or appropriate
government approvals and permits pertaining to the use of the Licensed Marks and
the offering and provision of the Licensed Services.
(H) Competing Marks. Licensee agrees that during the Term it
shall not promote or distribute any products or services, or enter into any
contractual relationship with a third party to do same, under any trademark,
service mark, symbol, design, trade name or like indicia which in Licensor's
reasonable opinion is confusingly similar to the Licensed Marks or competitive
with the businesses associated with the Licensed House Marks and/or Additional
Licensed Marks.
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SECTION 4. PROTECTION OF THE LICENSED MARKS
(A) Licensed Marks Exclusive Property of Licensor. Subject
only to the license rights granted to Licensee in this Agreement, Licensee
recognizes and acknowledges Licensor's exclusive ownership and title to the
Licensed Marks and the good will associated therewith. For all purposes of the
relationship between Licensor and Licensee created hereunder, Licensor shall be
deemed to be the sole and exclusive owner of all right, title and interest in
and to the Licensed Marks in all forms and embodiments thereof, subject only to
the specific rights granted to Licensee hereunder. Licensee agrees that its use
of the Licensed Marks, and all associated goodwill generated thereby, inures to
the sole benefit of Licensor in accordance with its rights in those Licensed
Marks. Licensee specifically acknowledges that the rights granted to it pursuant
to this Agreement shall not prevent or prohibit Licensor or any licensee of
Licensor from commercializing or otherwise utilizing (and retaining all profits
from) the Licensed Marks in any endeavor, except for the restrictions expressly
set forth herein.
(B) Licensee Has No Right of Ownership in Licensed Marks.
Nothing contained in this Agreement shall be construed to confer upon Licensee
or to vest in Licensee any right of ownership to the Licensed Marks, and
Licensee shall not, directly or indirectly, register or cause to be registered,
in any country or with any Governmental Entity any trademark, trade name,
service mark or other intellectual property right consisting of or substantially
similar to any of the Licensed Marks.
(C) Licensee Will Not Challenge Licensor's Ownership of Marks.
During the Term and thereafter, Licensee will not, and will not assist any
Person to: (i) challenge the validity or Licensor's ownership of, or right to
license, the Licensed Marks or any registration or application for registration
therefor; (ii) contest the fact that Licensee's rights under this Agreement are
solely those of a Licensee and terminate upon termination or expiration of this
Agreement; and (iii) represent in any manner that it has any title or right to
the ownership, registration or use of the Licensed Marks in any manner except as
set forth in this Agreement.
(D) Additional Registrations. With respect to any country or
jurisdiction in the Territory in which Licensor does not have registration(s) of
a Licensed Mark or Licensed Marks, Licensee may request that Licensor file
application(s) for same. Upon any such request by Licensee from time to time
during the Term, Licensor will, provided that Licensor agrees in its sole
opinion and exclusive discretion that filing such application(s) and obtaining
such registration(s) is necessary and advisable, take reasonable steps to file
such requested application(s) and obtain such registration(s). All costs and
expenses of filing such requested applications and in obtaining and thereafter
maintaining registrations (including, without limitation, the execution of all
necessary registered user or similar agreements) with applicable Governmental
Entities, except as such costs and expenses relate solely to registration or
maintenance of Licensed House Marks, shall be borne solely by Licensee.
(E) Infringements. Licensee shall use its reasonable best
efforts to monitor any infringement of the rights granted hereunder and to
monitor any other unauthorized uses or misuses ("infringements") in the
Territory of any of the Licensed Marks, and shall promptly notify Licensor of
any such infringements it discovers. Licensee agrees to use its reasonable best
efforts and cooperate with Licensor, upon Licensor's request, in terminating
infringements of the Licensed
<PAGE> 8
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Marks and undertakes to furnish any documentary evidence or evidentiary
materials which Licensor may reasonably require for the purpose of terminating
such infringements. In addition, Licensee undertakes to use its reasonable best
efforts to assist and cooperate with Licensor in the prosecution of any
lawsuits, legal actions or other proceedings which, in the opinion of Licensor,
are necessary or advisable to protect the Licensed Marks, including, at
Licensor's request, participating in such proceedings as a party. All costs and
expenses of proceedings to terminate infringements, other than with respect to
infringements relating solely to Licensed House Marks, which in Licensor's
reasonable opinion have or could have an adverse effect on the Business or the
Licensed Services shall be borne by Licensee. The right to protect the Licensed
Marks, as well as the right to determine in all respects the manner of
protection, shall at all times rest exclusively with Licensor.
SECTION 5. REPRESENTATIONS, WARRANTIES AND INDEMNITIES
(A) Licensor's Representations and Warranties. Licensor
represents and warrants that:
(1) Licensor is the owner in the United States of (i)
the Licensed House Marks and the Additional Licensed Marks and (ii)
registrations and/or applications for registration of the Licensed House Marks
and certain of the Additional Licensed Marks filed in the United States Patent
and Trademark Office.
(2) To the best of Licensor's knowledge the Licensed
House Marks and the Additional Licensed Marks are not subject to any security
interests recorded in the United States Patent and Trademark Office.
(B) Licensee's Representations and Warranties. Licensee
represents and warrants that:
(1) Licensee is a limited liability company duly
formed, validly existing and in good standing as a limited liability
company under the laws of the State of Delaware and has the requisite
limited liability company power and authority to own, lease and operate
its assets and its businesses as currently being conducted.
(2) Licensee has the requisite limited liability
company power and authority to enter into and perform this Agreement;
the execution, delivery and performance by Licensee of this Agreement
have been duly authorized by all required limited liability company
action on its part and, if required, by its sole member, and this
Agreement has been duly executed and delivered by it.
(3) This Agreement is a legal, valid and binding
obligation of Licensee enforceable against Licensee in accordance with
its terms.
(4) Licensee shall not make any direct or indirect
use of the Licensed Marks other than as permitted in this Agreement.
(C) Indemnification by Licensee. Licensee hereby indemnifies
and holds Licensor and its Affiliates and the officers, directors, shareholders,
employees and agents of any of the foregoing harmless against any liability,
losses, damages, penalties, claims, actions, suits,
<PAGE> 9
9
judgments or settlements of any nature or kind (including reasonable costs of
investigation, reasonable attorneys', accountants' and expert witnesses' fees,
and reasonable expenses payable to third parties), incurred by any such Person
by reason of Licensee's use of the Licensed Marks in violation of this
Agreement, the untruth of or any breach of Licensee's representations and
warranties contained herein, or any failure by Licensee to perform any agreement
or covenant contained in this Agreement.
(D) Indemnification by Licensor. Licensor hereby indemnifies
Licensee and its Affiliates and the officers, directors, shareholders, employees
and agents of any of the foregoing and holds them harmless against any
liability, losses, damages, penalties, claims, actions, suits, judgments or
settlements of any nature or kind (including reasonable costs of investigation,
reasonable attorneys', accountants' and expert witnesses' fees, and reasonable
expenses payable to third parties) incurred by such Person by reason of the
untruth of or any breach of Licensor's representations and warranties contained
herein, or any failure by Licensor to perform any agreement or covenant
contained in this Agreement.
(E) Notice of Claim.
(i) For purposes of this Section 5(E), any Person
entitled to indemnification under Sections 5(C) or 5(D) shall be known as an
"Indemnified Party" and any Person or entity liable to indemnify an Indemnified
Party shall be known as an "Indemnifying Party". The Indemnified Party shall
notify the Indemnifying Party as soon as practicable after the Indemnified Party
receives notice of or otherwise has actual knowledge of such claim, and shall
provide to the Indemnifying Party as soon thereafter as practicable all
information and documentation necessary to support and verify the claim being
asserted, and the Indemnifying Party shall be given access to all books and
records in the possession or control of the Indemnified Party which the
Indemnifying Party reasonably determines to be related to such claim.
(ii) Promptly after receipt by an Indemnified Party
of notice of the commencement by any Person of any action, suit or proceeding
which might result in the Indemnifying Party becoming obligated to indemnify or
make any other payment to the Indemnified Party under this Section 5(E), the
Indemnified Party shall, if a claim in respect thereof is to be made against the
Indemnifying Party pursuant to this Section 5, notify the Indemnifying Party
promptly in writing of the commencement thereof. The failure of the Indemnified
Party to so notify the Indemnifying Party shall not relieve the Indemnifying
Party from any liability which it may have on account of this indemnification or
otherwise, except to the extent that the Indemnifying Party is materially
prejudiced thereby. The Indemnifying Party shall have the right, within thirty
days after being so notified, to assume the defense (at its expense) of such
action, suit or proceeding with counsel reasonably satisfactory to the
Indemnified Party. In any such action, suit or proceeding the defense of which
the Indemnifying Party shall have so assumed, the Indemnified Party shall have
the right to participate therein and retain its own counsel at its own expense;
provided, however, that such Indemnified Party's counsel shall be retained at
the Indemnifying Party's expense if (A) the Indemnified Party and the
Indemnifying Party so agree or (B) the named parties to any such action, suit or
proceeding (including the impleaded parties) include both the Indemnified Party
and the Indemnifying Party and representation of both the Indemnified Party and
the Indemnifying Party by the same counsel would be inappropriate due to actual
or potential differing interests between them. The Indemnifying Party shall
promptly defend any claim subject to indemnification hereunder, but
<PAGE> 10
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no Indemnifying Party shall settle any claim without the prior approval of the
Indemnified Party, which approval shall not be unreasonably withheld. To the
extent that the settlement of such an action or proceeding, the defense of which
has been assumed by the Indemnifying Party, involves payment of money, the
Indemnifying Party shall have the right, in consultation with the Indemnified
Party, to settle those aspects dealing only with the payment of money.
Notwithstanding the foregoing, in connection with any such defense or settlement
(which defense has been assumed by the Indemnifying Party in accordance with
this clause (iii)), the Indemnifying Party shall not enter into a consent decree
or consent to judgment involving injunctive or other non-monetary relief or
consent to an injunction without the Indemnified Party's written consent, which
consent shall not be unreasonably withheld. The Indemnified Party shall
cooperate, and shall use its reasonable best efforts to cause its employees and
the employees of any of its respective Controlled Affiliates to cooperate with
the Indemnifying Party in the defense of any action, suit or proceeding assumed
by the Indemnifying Party. Notwithstanding any and all of the foregoing, to the
extent that any claim arises out of or is related to the Licensed Marks or any
use of the Licensed Marks, Licensor shall have the sole right to select counsel
for the defense of such claim and to control the defense, settlement or
compromise of such claim.
(iii) Each Indemnifying Party's obligation under this
Section 5(E) shall (A) not affect the other party's right to seek any remedy
upon a default by the Indemnifying Party under this Agreement and (B) survive
the termination for any reason of this Agreement.
SECTION 6. REQUIRED INSURANCE
(A) Liability Insurance. At all times during the term of this
Agreement, Licensee shall provide and maintain at Licensee's sole cost and
expense, general public liability insurance protecting Licensee and Licensor
against claims brought in connection with the Business in an amount not less
than Five Million Dollars ($5,000,000.00) per occurrence, combined single limit,
and designating Licensor as an additional insured.
(B) Certificate of Insurance. A certificate of the policy
required to be provided by Licensee pursuant to Section 6(A) shall be delivered
to Licensor within thirty (30) days after the execution of this Agreement. Said
insurance policy shall be timely renewed, and upon each renewal Licensee shall
deliver a renewal Certificate of Insurance to Licensor prior to the expiration
date of the existing term of the said policy. Should Licensee fail to supply
Licensor with such certificate or renewal certificate within the foregoing time
limits, provided that Licensor has given written notice to Licensee and Licensee
has failed to provide such certificate within ten (10) days after such notice,
Licensor may, in Licensee's name and on Licensee's behalf, provide any such
insurance as to which such certificates are not supplied and Licensor shall be
reimbursed forthwith by Licensee for all sums so expended.
SECTION 7. TERMINATION
(A) Termination by Consent. This Agreement may be terminated
by the mutual written consent of Licensor and Licensee.
(B) Automatic Termination. This Agreement shall terminate
automatically in the event of (i) the termination of the Programming License
Agreement pursuant to the provisions of
<PAGE> 11
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Section 8(d) thereof by reason of a material breach of the Programming License
Agreement by Licensee, or (ii) any insolvency of Licensee, or upon the
appointment of any receiver, administrator, liquidator, or trustee to take
possession of the properties of Licensee or upon the winding-up, sale,
consolidation, merger or any sequestration by governmental authority of
Licensee.
(C) Partial Termination. In the event that (i) any of the
Licensed Marks are determined to be invalid or infringing in any given country
or jurisdiction within the Territory or (ii) Licensor reasonably determines that
the use or continued use of any of the Licensed Marks in any given country or
jurisdiction is contrary to any laws, in violation of a court order or
materially detrimental to Licensor, Licensor shall have the right to terminate
this Agreement as to any such Licensed Mark in such country or jurisdiction upon
notice to Licensee.
(D) Termination for Breach. Licensor shall have the right to
terminate this Agreement, upon thirty days notice to Licensee and the Tune
Stockholders Group, in the event: (a) of the breach of any material provision
hereof by Licensee, including but not limited to the provisions of Sections
2(A), 2(B), 2(C), 3, 4, 5, 9(I), and 9(K), which has remained uncured for thirty
(30) days following notice of such breach from Licensor, or (b) the Business is
abandoned, or otherwise ceases to operate on an ongoing basis or is operated by
Licensee other than under the Licensed Marks for a period of thirty (30) days;
provided, however, that if any such event shall occur and remain uncured after
such initial 30 day cure period, then, if at the time of such breach, Licensor
owned a majority of outstanding equity ownership of Licensee and at such time
the Tune Stockholder Group met the Tune Minimum Condition (as defined in the
Partnership Agreement) then, Licensor shall give further written notice thereof
to the Tune Stockholder Group and Licensee, and Tune shall in accordance with
the provisions of the Partnership Agreement have an additional period of thirty
(30) days to effect such cure and Licensor shall not be entitled to terminate
this Agreement until the conclusion of such additional 30 day cure period.
SECTION 8. EFFECT OF TERMINATION OR EXPIRATION
(A) Immediate Termination. Upon expiration or termination of
this Agreement for any reason, Licensee's right to use the Licensed Marks will
terminate immediately, and this Agreement shall cease except that all
obligations of the parties under this Agreement which accrue or are due with
respect to periods prior to, or as of, such termination or expiration, and all
obligations which expressly survive the expiration or termination of this
Agreement shall continue in full force and effect subsequent to and
notwithstanding the expiration or termination of this Agreement.
(B) Use of Licensed Marks. Upon expiration or termination of
this Agreement for any reason, Licensee shall (i) discontinue immediately all
use of the Licensed Marks, (ii) execute any documents requested by Licensor to
confirm the ownership by Licensor of its right, title and interest in and to any
of the Licensed Marks, (iii) cooperate with Licensor and any of its appointed
agents to inform the appropriate authorities of such termination, and (iv)
destroy all materials that contain, refer to or relate to the Licensed Marks,
whether provided to Licensee by Licensor or created or developed by Licensee or
by any third party. All rights in the Licensed Marks and the goodwill connected
therewith shall remain the property of Licensor upon expiration or termination.
Within forty-five (45) days of expiration or termination Licensee shall provide
Licensor with a
<PAGE> 12
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Certificate of Destruction of all materials that contain, refer to or relate to
the Licensed Marks, whether provided to Licensee by Licensor or created or
developed by Licensee or by any third party.
SECTION 9. GENERAL PROVISIONS
(A) Headings. The headings of the Sections and other
subdivisions of this Agreement are for convenience of reference only and shall
not modify, define or limit any of the terms or provisions of this Agreement.
(B) Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York,
without giving effect to any of its conflicts of law provisions.
(C) Severability. If any provision of this Agreement shall be
held to be illegal, invalid or unenforceable, that provision will be enforced to
the maximum extent permissible so as to effect the intent of the parties and the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby. If necessary to effect the intent of
the parties, the parties will negotiate in good faith to amend this Agreement to
replace the unenforceable language with enforceable language which as closely as
possible reflects such intent.
(D) Amendments. This Agreement may be modified or amended only
by a written amendment signed by each party hereto.
(E) Counterparts. This Agreement may be executed in one or
more counterparts (and all signatures need not be on any one such counterpart),
with all such counterparts together constituting one and the same instrument.
(F) Entire Agreement. This Agreement contains the entire
agreement of the parties with respect to the subject matter hereof and
supersedes any and all prior agreement and understandings, whether written or
oral, with respect to the subject matter hereof, including the letter agreement
dated May 19, 1999 among Viacom International Inc., Liberty, and TCI Music.
(G) No Presumption. This Agreement shall be construed without
regard to any presumption or rule requiring construction or interpretation
against the party drafting or causing any instrument to be drafted.
(H) Consents and Approvals; Waivers; Remedies. All consents
and approvals which may be given under this Agreement shall, as a condition of
their effectiveness, be in writing. The granting by a party hereto of any
consent to or approval of any act requiring consent or approval under the terms
of this Agreement, or the failure on the part of a party to object to any such
action taken without the required consent or approval, shall not be deemed a
waiver by the party whose consent was required of its right to require such
consent or approval for any other act. The observance of any provision of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively) by the party or parties entitled to enforce such
term, but any such waiver shall be effective only if in a writing signed by the
party or parties against which such waiver is to be asserted and only in the
specific instance and for the specific purpose for which given. Except as
otherwise provided herein, no failure or delay of any party in exercising any
power or right under this Agreement shall operate as a waiver thereof, nor shall
any single or partial
<PAGE> 13
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exercise of any such right or power, or any abandonment or discontinuance of
steps to enforce such right or power, preclude any other or further exercise
thereof or the exercise of any other right or power.
(I) Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any party hereto (whether by operation of law or otherwise) without the prior
written consent of the other party hereto except that immediately after the
execution of this Agreement as part of Licensee's initial contribution to the
Partnership, Licensee shall assign all of its rights and obligations hereunder
to the Partnership and the Partnership shall accept and assume the same in
accordance with the terms of the VLLC Contribution, Assignment and Assumption
Agreement dated as of the date hereof between Licensee and the Partnership,
whereupon the Partnership shall be substituted for Licensee in all respects as
fully as if it had been an original party hereto. Upon such assignment and
assumption, Licensee shall be released from all of its obligations hereunder. In
connection with the Reorganization, the Partnership shall assign all of its
rights and obligations hereunder to the corporate successor to all or
substantially all of the Partnership's assets pursuant to an assignment and
assumption agreement in form and substance reasonably satisfactory to Licensor
and such corporate successor shall accept and assume the same. Upon such
assignment and assumption, the Partnership shall be released from all of its
obligations hereunder.
(J) Survival of Covenants. The provisions contained in this
Agreement in Sections 3(F), 4, 5, 8 and 9 shall survive the termination of this
Agreement.
(K) Confidentiality. Licensee and each of its wholly-owned
subsidiaries shall, and shall use its reasonable best efforts to cause its and
their respective officers, directors, employees, attorneys, accountants, and
agents (collectively, "AGENTS") to, keep secret and retain in strictest
confidence any and all Confidential Information, and shall not disclose such
Confidential Information, and shall use its reasonable best efforts to cause its
Agents not to disclose such Confidential Information, to any Person other than
Licensee, its wholly-owned subsidiaries, or their respective Agents, except (i)
for such disclosures as may be required by law or legal process, disclosures to
Licensee's counsel, or disclosures pursuant to any listing agreement with, or
the rules or regulations of, any securities exchange on which securities of
Licensee or any such wholly-owned subsidiary are listed or traded (in which
event Licensee shall so notify Licensor as promptly as practicable (and, if
possible, prior to making such disclosure) and shall seek confidential treatment
of such information) (ii) as may be necessary to establish or enforce its rights
hereunder; and (iii) with the prior written consent of Licensor. For purposes of
this Section 9(K), "CONFIDENTIAL INFORMATION" shall mean (1) the terms of this
Agreement and (2) all business and technical information relating to Licensor's
businesses that is proprietary to Licensor or otherwise not available to the
general public; provided, however, that such Confidential Information shall not
include any information that (a) is or has become generally available to the
public other than as a result of a disclosure by Licensee, its wholly-owned
subsidiaries or its Agents, (b) has been independently developed by Licensee or
a Controlled Affiliate of Licensee or (c) is, or becomes available to Licensee
or a Controlled Affiliate of Licensee on a non-confidential basis from a third
party having no obligation of confidentiality to a party hereto and which has
not itself received such information directly or indirectly in breach of any
obligation of confidentiality.
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(L) Equitable Relief. Licensee acknowledges that the Licensed
Marks are of a unique and original character giving them peculiar value, the
loss of which cannot be compensated in damages in an action at law. Licensee
further agrees and acknowledges that, in addition to all other rights that
Licensor may have, Licensor shall be entitled as a matter of right without
further notice to Licensee, to obtain injunctive and/or other equitable relief,
as the law may allow, against any threatened, potential or actual breach by
Licensee of any of the provisions hereof.
(M) Third Party Beneficiary. For so long as the Tune
Stockholder Group meets the Tune Minimum Condition, TCI Music shall be a third
party beneficiary of Licensor's obligations to the Partnership hereunder insofar
as and only to the extent that it shall be entitled to enforce the Partnership's
rights hereunder in a separate cause of action for the benefit of the
Partnership. The Partnership shall indemnify and hold harmless TCI Music from
and against any costs and expenses (including reasonable attorneys' fees)
incurred by it in pursuing such a cause of action if such cause of action is
resolved in favor of the Partnership and/or TCI Music. Except as set forth in
the first sentence of this Section 10(M), this Agreement is for the sole benefit
of the parties hereto and their respective successors and permitted assigns and
nothing herein, express or implied, is intended to or shall confer upon any
Person other than such parties any legal or equitable right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement.
(N) Further Assurances. Licensee shall assist and cooperate
with Licensor, at Licensor's request and expense, in registering, renewing,
recording or otherwise protecting the Licensed Marks, and shall execute and
deliver any documents, affidavits, user information and other materials
requested by Licensor to be executed and delivered by Licensee in connection
therewith including, without limitation, if Licensor considers it advisable, the
recording of Licensee as a licensee or registered user of any or all of the
Licensed Marks in any jurisdiction with any Governmental Entity or other
authority. Licensee shall execute and deliver any documents submitted to
Licensee by Licensor for this purpose. Likewise, if any such recording is to be
terminated or canceled, Licensee shall execute any documents, affidavits, and
related materials submitted to it by Licensor for this purpose. Without
limitation of the foregoing, both during the Term and after the expiration or
termination of this Agreement, Licensee shall, upon Licensor's request,
acknowledge in writing Licensor's prior exclusive right, title and interest in
and to the Licensed Marks.
(O) Notices. Except as expressly provided herein, notices and
other communications provided for herein shall be in writing and shall be
delivered by hand or overnight courier service, mailed (certified or registered
mail, postage prepaid, return receipt requested) or sent by facsimile copier of
the sending party, as follows:
If to Licensor:
MTV Networks
1515 Broadway
New York, New York 10036
Fax No.: 212-258-8352
Attention: General Counsel
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If to the Licensee:
MTVN Online Partner I L.L.C.
1515 Broadway
New York, New York 10036
Fax No.: 212-846-1735
Attention: Chief Executive Officer
or to such other address or attention of such other Person as any party shall
advise the other parties in writing. All notices and other communications given
to a party in accordance with the provisions of this Agreement shall be deemed
to have been given (i) three Business Days after the same are sent by certified
or registered mail, postage prepaid, return receipt requested, (ii) when
delivered by hand or transmitted by facsimile (confirmation received) unless
delivered on a day which is not a Business Day or after 5:00 p.m., local time,
at the place of receipt, in which case such notice shall be deemed to have been
given on the next succeeding Business Day or (iii) one Business Day after the
same are sent by a reliable overnight courier service, with acknowledgment of
receipt.
(P) Jurisdiction; Venue.
(i) Each party hereby irrevocably and unconditionally
submits, for itself and its property, to the jurisdiction of any New
York State court sitting in the County of New York or any federal court
of the United States of America sitting in the Southern District of New
York, and any appellate court from any such court, in any suit, action
or proceeding arising out of or relating to this Agreement, or for
recognition or enforcement of any judgment relating hereto.
(ii) Each party hereby irrevocably and
unconditionally waives, to the fullest extent it may legally and
effectively do so, any objection which it may now or hereafter have to
the laying of venue of any suit, action or proceeding arising out of or
relating to this Agreement in any New York State court sitting in the
County of New York or any federal court sitting in the Southern
District of New York, and any appellate court from any such court. Each
party hereby irrevocably waives, to the fullest extent permitted by
law, the defense of an inconvenient forum to the maintenance of such
suit, action or proceeding in any such court and further waives the
right to object, with respect to such suit, action or proceeding, that
such court does not have jurisdiction over such party. Each party
hereby irrevocably waives the right to a jury trial in any suit, action
or proceeding arising out of or related to this Agreement.
(Q) Force Majeure. In the event that during the Term, either
party is unable to perform its obligations under this Agreement by reason of
causes beyond its reasonable control including but not limited to civil or
industrial disturbances, acts of God, strikes, floods, natural disasters, riots,
insurrections, embargoes, blockages, restrictions or regulations or orders of
any Governmental Entity, then such non-performance shall not be deemed to be a
breach of this Agreement and shall be deemed excused but only for so long as the
causes of such non-performance shall remain in effect; provided, however, that
the party so affected shall use its reasonable best efforts to avoid or remove
such causes of nonperformance and shall continue performance hereunder with the
utmost dispatch whenever such causes are removed. In the event the force
<PAGE> 16
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majeure event(s) result in the non-performance of this Agreement for a
continuous two-year period (the "Force Majeure Period"), this Agreement shall
then terminate with respect to the jurisdiction(s) in the Territory affected by
such force majeure event(s); provided, however, that such termination shall not
become effective until Licensor has provided Licensee with ten (10) days prior
written notice of such termination. Such notice may be provided to Licensee any
time after the Force Majeure Period.
(R) Binding on Viacom. The parties acknowledge that Licensor
is a division of Viacom and that, consequently, Viacom is obligated to perform
the obligations to be performed by Licensor hereunder. Insofar as this Agreement
refers to Licensor in the context of an operating business, it shall refer only
to the operating unit or units of Viacom that on a day-to-day basis operate the
business of MTV: Music Television or VH1 Music First.
<PAGE> 17
17
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed, effective as of the date first set forth above.
MTV NETWORKS, a division of Viacom
International Inc.
By: /s/ David W. Sussman
----------------------------------------
Name: David W.Sussman
Title: Sr. Vice President, General
Counsel and Assistant Secretary
MTVN ONLINE PARTNER I LLC
By: David W. Sussman
----------------------------------------
Name: David W. Sussman
Title: Sr. Vice President, General
Counsel and Assistant Secretary
<PAGE> 18
EXHIBIT A-1
LICENSED QWERT MARK
QWERT
<PAGE> 19
EXHIBIT A-2
LICENSED HOUSE MARKS
MTV
VH1
MTV: MUSIC TELEVISION
VH1 MUSIC FIRST
VH1 MUSIC FIRST LOGO (EXCLUDING JURISDICTION OF GERMANY)
MTV MUSIC TELEVISION & DESIGN
<PAGE> 20
EXHIBIT A-3
ADDITIONAL LICENSED MARKS
MTV ONLINE
VH1 ONLINE
MTV.COM
VH1.COM
MTV ONLINE & DESIGN
<PAGE> 21
EXHIBIT B
EXCLUDED BUSINESSES
Services provided from time to time by:
1. Tricast/Asia, a joint venture of MTVN or an Affiliate
and Tricast (or its successor) to operate an "MTV"
branded interactive consumer service based on the MTV
Asia television services;
2. MTV Brasil, a joint venture between MTVN or an
Affiliate and Abril S.A. (or its successor) to
operate the MTV Brasil television service and an
internet site based on such service;
3. MTV Russia, a channel licensee to which MTVN has
granted the right to advertise and promote the MTV
Russia channel via any media, including the internet;
4. MTV Australia, a channel licensee, until such time as
it terminates its improper internet site use;
provided, that MTVN shall not materially expand the
scope of rights granted as of the date hereof in
connection with any of the foregoing.
<PAGE> 1
Exhibit 10.7
PROGRAMMING LICENSE AGREEMENT
PROGRAMMING LICENSE AGREEMENT, dated as of July 15, 1999, between MTV
NETWORKS ("MTVN"), a division of VIACOM INTERNATIONAL INC., a Delaware
corporation ("Viacom"), and MTVN ONLINE PARTNER I LLC ("VLLC"), a Delaware
limited liability company.
WITNESSETH:
WHEREAS, MTVN and VLLC desire that MTVN grant to VLLC a license to use
the MTV Programming (as defined below) for use in connection with the Business
(as defined below) upon the terms and conditions set forth herein;
WHEREAS, simultaneously herewith MTVN and VLLC are entering into a
Trademark License Agreement (the "Trademark License Agreement") pursuant to
which, among other things, MTVN is granting a license to VLLC to use certain
trademarks owned by MTVN for use in connection with the Business; and
WHEREAS, the parties agree in principle that the Licensed Services (as
defined below) shall be the primary vehicle for showcasing the MTV Programming
and Licensor does not intend to license the MTV Programming to a competitive
music-themed online service in a manner which would be injurious to the Licensed
Services; and
WHEREAS, immediately after the execution of this Agreement VLLC shall
assign to the Partnership (as defined below) all of VLLC's rights and
obligations under this Agreement and under the Trademark License Agreement;
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
covenants and obligations contained herein and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged by
each party hereto, MTVN and VLLC hereby agree as follows:
SECTION 1. DEFINITIONS
For purposes of this Agreement, the following definitions shall apply:
"Additional MTV Programming" shall mean any programming which
would otherwise satisfy the definition of MTV Programming herein in the
manner and in the territory intended to have been used but for the fact
that use of such programming on and in connection with the Business
would require MTVN or any of its Affiliates other than VLLC to make any
payment on a direct or incremental basis to any Person as a result of
such use thereof.
"Additional Terms" shall have the meaning set forth in Section
2(j).
<PAGE> 2
2
"Affiliate" shall have the meaning set forth in the
Organization Agreement.
"Agent" shall have the meaning set forth in Section 5.
"Business" shall have the meaning set forth in the Partnership
Agreement as of the date of this Agreement.
"Business Day" shall have the meaning set forth in the
Partnership Agreement.
"Confidential Information" shall have the meaning set forth in
Section 5.
"Control" shall have the meaning set forth in the Organization
Agreement.
"Controlled Affiliate" shall have the meaning set forth in the
Organization Agreement.
"Governmental Entity" shall have the meaning set forth in the
Organization Agreement.
"Licensed Services" shall mean the interactive services of
distributing text, audio and/or video music and music-related and
music-themed services online, and the advertising and promotion of said
online distribution services, all as operated by the Partnership
exclusively in the operation of the Business, but shall not include the
manufacture or sale of goods.
"Lien" shall have the meaning set forth in the Organization
Agreement.
"Management Committee" shall have the meaning as set forth in
the Partnership Agreement.
"MTV" shall mean the music television service currently known
as MTV: Music Television as it is distributed and exhibited in the
United States on cable television at the relevant time.
"MTV Materials" shall have the meaning set forth in Section
2(l).
"MTV Programming" shall mean programming and program elements
provided to VLLC by MTVN which was produced in the ordinary course of
the business of, and exhibited on, MTV, VH1 or any similar music-themed
television service which is wholly owned and operated by MTVN or any of
its wholly owned subsidiaries, which music-themed television services
are based on or are spin-offs of MTV or VH1, as such programming and
program elements may be edited or otherwise modified from time to time
by MTVN in its sole and exclusive discretion; provided, however, that
such programming and program elements shall only be considered "MTV
Programming" to the extent that at any given time (i) MTVN owns or
controls the rights necessary to license such programming and program
elements for use in connection with the Licensed Services in the manner
and in the territory in which VLLC intends to use such
<PAGE> 3
3
programming, and (ii) neither MTVN nor any of its Affiliates, including
VLLC, would be required to make any payment on a direct or incremental
basis to any Person as a result of such use thereof.
"Newco Stockholders Agreement" shall have the meaning set
forth in the Parent Agreement.
"Non-MTV Programming" shall have the meaning set forth in
Section 2(c)(iv).
"Opportunity" shall have the meaning set forth in Section
2(n).
"Organization Agreement" means the Organization Agreement of
even date herewith between Liberty Media Corporation ("Liberty"), TCI
Music, Inc. ("TCI Music"), MTVN, VLLC, MTVN Online Inc., Imagine Radio,
Inc. ("Imagine"), SonicNet, Inc. ("SonicNet"), The Box Worldwide, Inc.
("Box"), VJN LPTV Corp., and the Partnership.
"Parent Agreement" shall have the meaning set forth in the
Organization Agreement.
"Partnership" means MTVN Online L.P.
"Partnership Agreement" means the Agreement of Limited
Partnership of even date herewith among VLLC, Imagine, SonicNet, and
Box.
"Person" shall have the meaning set forth in the Organization
Agreement.
"Potential Infringement" shall have the meaning set forth in
Section 2(f).
"Reorganization" shall have the meaning set forth in the
Parent Agreement and Guaranty of even date herewith among TCI Music,
MTVN, Liberty, Box, SonicNet and the Partnership.
"Representative" shall have the meaning as set forth in the
Partnership Agreement.
"Requirement of Law" shall mean as to any Person, the
certificate of incorporation, articles of association, memorandum of
association, by-laws, partnership or joint venture agreement, deed of
trust or other organizational or governing documents of such Person,
and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Entity, in each case
applicable to or binding upon such Person or any of its property or to
which such Person or any of its property is subject.
"Right of First Negotiation" shall have the meaning set forth
in Section 2(n).
"Right of First Refusal" shall have the meaning set forth in
Section 2(n).
<PAGE> 4
4
"Term" The term of this Agreement shall commence on the date
hereof, and unless earlier terminated pursuant to Section 8 hereof,
terminate on the fiftieth anniversary of the date hereof.
"Territory" shall mean the entire world subject to
modification from time to time in accordance with the provisions of
Section 2(c)(v) hereof.
"Trademark License Agreement" means the Trademark License
Agreement of even date herewith entered into between MTVN and VLLC.
"Tune Stockholder Group" shall have the meaning as set forth
in the Partnership Agreement.
"VH1" shall mean the music television service currently known
as VH1 Music First as it is distributed and exhibited in the United
States on cable television at the relevant time.
"VLLC Programming" shall have the meaning set forth in Section
2(n).
SECTION 2. LICENSE GRANT
(a) License Grant. Subject to the terms and conditions of this
Agreement, MTVN hereby grants to VLLC, on a quitclaim basis, a license to
exhibit the MTV Programming in the Territory solely as part of the Licensed
Services during the Term.
(b) Exclusivity. MTVN shall not, except in connection with the
provision of MTV Programming to any of the excluded businesses listed on
Schedule A, (i) during the first three (3) years of the Term, use or license the
use of the MTV Programming in connection with any service which if operated by
the Partnership would be a Licensed Service, except for advertising and
promotion consistent with past practice, and (ii) thereafter, during the period
of the remainder of the Term, authorize the online display of substantial blocks
of MTV Programming in the Territory in connection with any service which if
operated by the Partnership would be a Licensed Service.
(c) VLLC's Obligations.
(i) VLLC shall have no right to edit or alter any of
the MTV Programming in any way without the prior approval of MTVN and
in accordance with such approval. MTVN's decisions regarding such
approval shall be in its sole and exclusive discretion. Other than
pursuant to this Agreement, VLLC shall have no right to use, sell,
license, exhibit or to procure the use, sale, licensing or exhibition
or exploit in any other way all or part of any of the MTV Programming
or any derivative works, remakes, spin-offs or sequels thereof or any
program materials based upon the MTV Programming or any elements or
collection of elements contained therein.
<PAGE> 5
5
(ii) VLLC acknowledges that it is familiar with the
high standards, quality, style and image of programming produced by
MTVN and its Controlled Affiliates and agrees to use the MTV
Programming in a manner that is consistent with such high standards,
quality, style and image and in accordance with the terms of this
Agreement.
(iii) VLLC shall be responsible for securing all
necessary performing rights licenses or other authorizations, including
all costs therefor, necessary for the lawful transmission of the MTV
Programming being licensed to VLLC hereunder. To the extent that any
licenses or other authorizations are required of any Person in order
for VLLC to satisfy its obligation under this provision, VLLC shall
notify MTVN of the need for such rights and MTVN may, at its sole and
exclusive discretion to be exercised in good faith, secure such rights
in its own name at VLLC's expense.
(iv) VLLC may include programming other than MTV
Programming or Additional MTV Programming ("Non-MTV Programming") as
part of the Business operated by it, provided that it does so in a
manner that does not result in a likelihood of confusion regarding the
source of the Non-MTV Programming and the MTV Programming or Additional
MTV Programming.
(v) MTVN may from time to time notify VLLC of any
country or jurisdiction within the Territory in which MTV Programming
or Additional MTV Programming is not to be used in connection with the
Licensed Services because MTVN has determined that such use may
infringe upon the rights of any Person or is otherwise determined by
MTVN in the exercise of its reasonable judgment to be contrary to any
laws, in violation of a court order or likely to cause material
impairment of MTVN's relations with talent, industry or any government.
Upon receipt of such notice VLLC will terminate its use of the MTV
Programming in connection with the Licensed Services in such country or
jurisdiction, in that, if technically feasible and commercially
reasonable, VLLC will block transmission to such country or
jurisdiction, and otherwise will not target any MTV Programming to such
country or jurisdiction (such as by use of advertising or marketing
materials, local language or programming selections tailored to such
country or jurisdiction). Prior to first using any MTV Programming in
connection with the Licensed Services in any country or jurisdiction
within the Territory, VLLC shall give notice to MTVN of its intent to
do so, and VLLC shall not do so if, following such notice to MTVN, VLLC
receives notice from MTVN that such use may infringe upon the rights of
any Person or is otherwise determined by MTVN in the exercise of
reasonable judgment to be likely to cause material impairment of MTVN's
relations with talent, industry or any government. Without limiting the
foregoing, pursuant to MTVN's agreements related to the Tricast/Asia
joint venture referenced in Schedule A, and for as long as such
agreements are binding on MTVN, VLLC shall have no right to own or
operate any Licensed Service which is targeted to 15 - 24 year old
audiences in Asia (as defined in accordance with the definition of the
Asia "territory" set forth in paragraph 1 of Schedule 1 to the Parent
Agreement) and branded with any of the following trademarks or service
marks: MTV, MTV: MUSIC TELEVISION, MTV: MUSIC TELEVISION & Design, MTV
ONLINE, MTV ONLINE & Design, or MTV.COM.
<PAGE> 6
6
(vi) VLLC shall not have the right to display, or
transmit or deliver for display by an end user, any MTV Programming
intended for a single exhibition or viewing of more than ten (10)
minutes in length regardless of whether, in the case of transmission or
delivery in downloadable format, downloadable in a single file or in
multiple files.
(d) Acceptance and Rejection of MTV Programming. MTVN shall,
on an ongoing basis, apprise VLLC as to, and shall be reasonably available to
discuss, the availability of MTV Programming for use by VLLC in accordance with
Section 2(a). In furtherance of the purposes of the parties recited herein, VLLC
will notify MTVN from time to time of any MTV Programming which VLLC selects for
delivery to it for use hereunder and MTVN shall thereafter deliver to VLLC, in
accordance with the provisions of Section 2(l) hereof, the requested MTV
Programming, provided that MTVN will not be required to deliver any programming
or program elements which at the time of MTVN's receipt of such request no
longer meets the definition of MTV Programming as set forth in Section 1 hereof.
(e) Contribution to Capital. The license under this Agreement
shall be a royalty-free contribution to capital from MTVN to VLLC.
(f) Potential Infringement. VLLC shall use its reasonable best
efforts to monitor and to promptly call to MTVN's attention the existence of any
materials which could reasonably be considered to be an infringement of any
element of the MTV Programming (a "Potential Infringement"). In the event of any
Potential Infringement, MTVN shall have the sole right, after consultation with
VLLC in the event such Potential Infringement concerns subject matter within the
Business, to determine whether a proceeding should be brought against any third
parties. In the event that MTVN decides to take action against such third
parties, VLLC agrees to use its reasonable best efforts to cooperate fully with
MTVN to prosecute such action and to furnish any documentary evidence or
evidentiary materials that MTVN may reasonably require, but that MTVN shall have
sole control over such action, including any settlement thereof. In addition,
VLLC undertakes to use its reasonable best efforts to assist and cooperate with
MTVN in the prosecution of any lawsuits, legal actions or other proceedings
which, in the opinion of MTVN, are necessary or advisable to protect the rights
in the MTV Programming; provided, however, that VLLC shall not be required to
incur or pay any costs or expenses (other than de minimis amounts) occasioned by
such cooperation, and shall be reimbursed by MTVN for such expenditures VLLC
does make, including, at MTVN's request, participating in such proceedings as a
party. All damages, profits, penalties, and other consideration or compensation
which may be recovered in connection with such action shall be solely for the
account of MTVN.
(g) Maintenance of Intellectual Property Rights in MTV
Programming.
(i) MTVN shall have the sole right to protect (via
registration, renewal, recordation or otherwise, as applicable) the
intellectual property rights in the MTV Programming throughout the
world. Under no circumstances shall VLLC take any action or permit any
action to be taken to register, renew, record or otherwise protect the
MTV Programming without the prior written consent of MTVN.
<PAGE> 7
7
(ii) VLLC shall assist and cooperate with MTVN, at
MTVN's request and expense, in registering, renewing, recording or
otherwise protecting the MTV Programming, and shall execute and deliver
any documents, affidavits, user information and other materials
requested by MTVN to be executed and delivered, by VLLC in connection
therewith including, without limitation, if MTVN considers it
advisable, the recording of VLLC as a licensee or registered user of
any or all of the MTV Programming in any jurisdiction with any
Governmental Entity or other authority. VLLC shall execute and deliver
any documents submitted to VLLC by MTVN for this purpose. Likewise, if
any such recording is to be terminated or canceled, VLLC shall execute
any documents, affidavits, and related materials submitted to it by
MTVN for this purpose. Without limitation of the foregoing, both during
the Term and after the expiration or termination of this Agreement,
VLLC shall, upon MTVN's request, acknowledge in writing MTVN's (or its
wholly owned subsidiaries') prior exclusive right, title and interest
in and to the MTV Programming.
(iii) VLLC shall not, under any circumstances, either
during the Term or after the expiration or termination of this
Agreement, attempt to register, renew, record or otherwise protect or
use any copyright, trademark, service mark or trade name which is the
same as, which contains or which is substantially similar to any MTV
Programming or any element thereof which is protectable by intellectual
property laws in any way. After the termination of this Agreement, VLLC
shall not falsely hold forth, declare, or in any way suggest that it
has any connection whatsoever with MTVN or any television programming
services produced by MTVN or its Controlled Affiliates, or any element
of the MTV Programming. VLLC further agrees that it will not take any
action that it knows or should know will, or is reasonably likely to,
subject any MTV Programming to ridicule or disrepute. Notwithstanding
the foregoing, VLLC agrees that it will not take any such action that
it knows or should know will, or is reasonably likely to subject Viacom
International, Inc., or any of its Affiliates, to ridicule or disrepute
unless otherwise agreed by MTVN.
(iv) VLLC shall further comply, at VLLC's expense,
with all requirements of the Berne Convention, the Universal Copyright
Convention and any other copyright or similar rights protection laws,
treaties or provisions, as MTVN deems necessary to obtain or maintain
protection of the MTV Programming. To the extent that any filings are
necessary in order for VLLC to satisfy its obligation under this
provision, VLLC shall notify MTVN of the need for such filings and MTVN
may, at its sole and exclusive discretion to be exercised in good
faith, make such filings in its own name at VLLC's expense.
(h) Right of Approval of Materials. VLLC agrees not to use,
procure or permit the use of any MTV Programming until such use has been
approved by MTVN which approval shall not be unreasonably withheld or delayed.
Once the use of MTV Programming has been approved by MTVN, VLLC thereafter may
continue to use such MTV Programming, strictly in accordance with the terms of
the approval granted and without altering in any way such MTV Programming or the
manner in which it is used under this Agreement. Notwithstanding the foregoing,
however, MTVN has the continuing right to reexamine any use of any item of the
<PAGE> 8
8
MTV Programming by VLLC, and may at any time require VLLC to cease using any
such item or otherwise modify such use if reasonably necessary in MTVN's
judgment to avoid infringement, violation of law or court order or material
impairment of MTVN's relations with talent, industry or any government.
(i) VLLC's Reporting. From time to time during the Term, VLLC
shall report to MTVN all information that MTVN may reasonably require regarding
VLLC's use of the MTV Programming.
(j) Additional Terms. VLLC agrees to use the MTV Programming
strictly in accordance with this Agreement, and such standards, specifications
and instructions concerning the manner of presentation or use of MTV Programming
as are issued by MTVN (in writing) to VLLC from time to time (such standards,
specifications and instructions being referred to collectively as the
"Additional Terms"). Each reference herein to this Agreement shall be deemed to
be a reference to the terms of this Agreement as supplemented or modified (i) by
the Additional Terms, as in effect from time to time, and (ii) with respect to
any particular use of any MTV Programming, by the terms of the approval of such
use granted by MTVN pursuant to this Agreement.
(k) Additional MTV Programming. MTVN shall, on an ongoing
basis, apprise VLLC as to, and shall be reasonably available to discuss, the
availability of Additional MTV Programming for use by VLLC. VLLC will notify
MTVN from time to time of any Additional MTV Programming which VLLC would like
to select for delivery to it for use hereunder and MTVN shall thereafter deliver
to VLLC, in accordance with the provisions of Section 2(l) hereof, the requested
Additional MTV Programming, provided that MTVN will not be required to deliver
any programming or program elements which at the time of MTVN's receipt of such
request no longer meets the definition of Additional MTV Programming as set
forth in Section 1 hereof. Notwithstanding the foregoing, (i) MTVN shall not be
required to deliver to VLLC any Additional MTV Programming unless MTVN has
received VLLC's commitment to pay any amounts actually required to be paid to
any Person to obtain the rights necessary to exhibit such Additional MTV
Programming in the manner VLLC intends to exhibit it or to any entity designated
by MTVN promptly after receipt of an invoice therefor, as the case may be; and
(ii) MTVN shall provide reasonable cooperation, but shall have no obligation to
obtain the rights or negotiate with or obtain agreements from any Person to
accept such amounts for the purpose of making Additional MTV Programming
available for VLLC; provided further, that in the event VLLC desires to
negotiate for or obtain any such rights or agreements from a third party, VLLC
and MTVN will consult with one another, and VLLC agrees not to approach any
third party for the purpose of negotiating or obtaining such rights without
first obtaining MTVN's prior written consent, which consent will not be withheld
by MTVN unless it has a good faith business reason for withholding such consent.
To the extent and for the period that MTVN obtains the rights to such
programming and licenses it to VLLC, such Additional MTV Programming shall be
deemed to be MTV Programming for purposes of this Agreement.
<PAGE> 9
9
(l) Delivery of MTV Programming.
(i) MTVN shall use its reasonable efforts to make
available on a timely basis to VLLC any MTV Programming licensed
hereunder, subject to restrictions or constraints imposed by any
Governmental Entity. MTVN shall deliver any MTV Programming to VLLC in
sufficient time for use in accordance with the proposed schedules of
VLLC, provided that MTVN receives a copy of such proposed use schedules
within a reasonable number of days prior to the proposed use of such
MTV Programming. Any materials containing MTV Programming supplied to
VLLC shall be and shall remain at all times the exclusive property of
MTVN and, while in VLLC's possession or responsibility, any loss or
damage shall be at the sole risk of VLLC. VLLC shall take reasonable
precautions to safeguard all materials in its possession that are
specified in this subparagraph and shall use its reasonable efforts to
prevent any theft, unauthorized use, copying or duplication by others
of any materials furnished by MTVN or duplicated by VLLC.
(ii) MTVN shall use its reasonable efforts to deliver
MTV Programming in the format requested by VLLC. Upon the request of
MTVN, VLLC shall reimburse MTVN for the costs of alterations to the
format of MTV Programming which are requested by VLLC.
(iii) VLLC agrees to return all original materials
supplied under this Agreement within a reasonable time period after
their receipt from MTVN, provided that, subject to the immediately
succeeding sentence, VLLC may duplicate and return copies of such
original materials. At MTVN's direction, VLLC shall either (A) return
to MTVN any or all materials supplied under this Agreement within a
reasonable time period after their permitted use, including any copies
or duplicates of any or all such materials (collectively, "MTV
Materials") or (B) within ten (10) days after their permitted use (x)
erase or destroy, as the case may be, such MTV Materials and (y)
deliver to MTVN a certificate of erasure or destruction, as the case
may be, which certificate shall be in a form satisfactory to MTVN.
(iv) All costs including, without limitation, dubbing
costs and transportation costs (including, without limitation, all
taxes, duties, customs charges, second use fees, insurance and
forwarding charges) directly attributable to the delivery of the MTV
Programming by MTVN to VLLC and the return by VLLC to MTVN of any MTV
Materials (including the cost of erasure and certifying same, where
required by MTVN) shall be borne by VLLC. All costs relating to the
conversion of the tapes, disks and other forms of transmission from one
format to another format in connection with the use thereof by VLLC
shall be borne by VLLC. All risk of loss or damages to any MTV
Materials when such MTV Materials are in transit or the custody of VLLC
shall be borne solely by VLLC.
<PAGE> 10
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(m) Reservation of Rights.
(i) MTVN reserves all rights not expressly granted to
VLLC in this Agreement. Without limitation of the foregoing, VLLC shall
have no right to use any MTV Programming, except in such manner and at
such times as are expressly provided in this Agreement. Without
limitation of the foregoing, VLLC shall have no right to use any
trademarks, tradenames or other intellectual property rights of MTVN or
its licensors embodied in the MTV Programming except as part of the MTV
Programming and as expressly licensed pursuant to Section 2(a) hereof
or in the Trademark License Agreement.
(ii) Without limitation of clause (i) above, MTVN
retains all merchandising rights with respect to the MTV Programming.
VLLC acknowledges and agrees that it shall have no right to develop,
manufacture or sell any merchandise of any nature whatsoever
incorporating the MTV Programming, except upon receipt of the prior
written authorization from MTVN.
(iii) The licenses granted herein are nontransferable
and do not include any right to sublicense or grant further licenses
with respect to any MTV Programming, provided, however, that VLLC shall
have the right to exercise the licenses granted hereunder through its
wholly-owned subsidiaries.
(n) VLLC Programming. In the event that VLLC creates
programming or obtains any rights from any Person for the use of any programming
that would allow VLLC to license or sublicense such rights ("VLLC Programming"),
MTVN shall have both the Right of First Negotiation and the Right of First
Refusal with respect to the licensing or sublicensing by VLLC of the VLLC
Programming. For purposes of this Section 2(n), "Right of First Negotiation"
shall mean, with respect to an opportunity of VLLC to license or sublicense
rights in VLLC Programming (the "Opportunity"), the right of MTVN to be the
first Person that VLLC offers the Opportunity to and/or negotiates with
regarding the Opportunity, and includes the obligation of VLLC to negotiate in
good faith for a reasonable period of time with MTVN regarding the Opportunity.
If the parties cannot negotiate terms and conditions in good faith mutually
acceptable to them within thirty (30) days, VLLC shall be free to negotiate with
any other non-affiliated Person with respect to the Opportunity, subject to
MTVN's Right of First Refusal. For purposes of this Section 2(n), "Right of
First Refusal" shall mean, with respect to an Opportunity, the right of MTVN to
be notified of all of the material terms of any bona fide proposed transaction
with any Person (who shall be identified in the notice) regarding the
Opportunity to have the exclusive option for a period of thirty (30) days to
contract with VLLC on the same terms as those described in the notice with
respect to the Opportunity. If MTVN does not exercise such option within such
thirty (30) day period, or sooner expressly rejects such option, VLLC shall
thereupon be free to contract with any non-affiliated Person with respect to the
Opportunity, on terms no less favorable to VLLC than those set forth in the
notice, for a period of ninety (90) days. If VLLC does not so contract with any
non-affiliated Person within such ninety (90) day period, the notice and option
provisions and the foregoing procedures hereof shall again apply with respect to
such Opportunity.
<PAGE> 11
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SECTION 3. COPYRIGHT AND TRADEMARK NOTICES
To the extent that MTV Programming provided to VLLC contains a
copyright/trademark notice, VLLC shall use such MTV Programming without deletion
or alteration of the copyright/trademark notice. No other copyright/trademark
notice whatsoever may be included by VLLC on the MTV Programming unless MTVN has
given VLLC prior written consent thereto, except that in the event that any MTV
Programming provided to VLLC does not contain a copyright/trademark notice, VLLC
shall insure that, one or the other of the following copyright/trademark notices
or a shorter notice as approved by MTVN from time to time appears in the MTV
Programming prior to its use by VLLC:
"(C)Copyright {Insert Year} MTV Networks. All Rights Reserved.
MTV and MTV logos are trademarks of MTV Networks, a division
of Viacom International Inc."
(C)Copyright {Insert Year} MTV Networks. All Rights Reserved.
VH1 Music First and VH1 logos are trademarks of MTV Networks,
a division of Viacom International Inc.
MTVN may, at any time and from time to time, require the addition of a similarly
customary copyright or trademark notice or change the copyright/trademark notice
referred to above and VLLC agrees to act in accordance with such requirements.
SECTION 4. CERTAIN VLLC COVENANTS
(a) Cooperation with MTVN Representatives. VLLC agrees to
provide reasonable access to its facilities to MTVN representatives, to
cooperate fully with the reasonable requests of such representatives and to work
expeditiously and cooperatively with such representatives to resolve promptly
any reasonable concerns of MTVN whatsoever regarding VLLC's fulfillment of its
obligations under this Agreement in order to ensure the protection of all of the
MTV Programming.
(b) Storing and Indexing of all Physical Materials. VLLC
agrees to provide space to store and index all physical materials including, but
not limited to, disks and tapes containing the MTV Programming, and to provide
in connection therewith security facilities and personnel, including a vault or
other security procedures, and including log-in, log-out requirements which, in
each case, are as favorable as those which are provided to any other physical
materials in the possession of VLLC.
(c) Agreements Regarding Intellectual Property Rights in MTV
Programming. VLLC shall not, under any circumstances, either during the Term or
after the expiration or termination of this Agreement, make any claim, institute
any proceeding or launch any attack or suit, in any jurisdiction, with respect
to MTVN's use, ownership, right, title or interest in any MTV Programming or any
intellectual property rights as they are embodied therein, existing during the
Term of this Agreement.
<PAGE> 12
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SECTION 5. CONFIDENTIAL INFORMATION
Each of VLLC and its wholly-owned subsidiaries shall, and
shall use its reasonable best efforts to cause its and their respective
officers, directors, employees, attorneys, accountants, and agents
(collectively, "Agents") to, keep secret and retain in strictest confidence any
and all Confidential Information, and shall not disclose such Confidential
Information, and shall use its reasonable best efforts to cause its Agents not
to disclose such Confidential Information, to any Person other than VLLC, its
wholly-owned subsidiaries, or their respective Agents, except (i) for such
disclosures as may be required by law or legal process, disclosures to VLLC's
counsel, or disclosures pursuant to any listing agreement with, or the rules or
regulations of, any securities exchange on which securities of VLLC or any such
wholly-owned subsidiaries are listed or traded (in which event VLLC shall so
notify MTVN as promptly as practicable (and, if possible, prior to making such
disclosure) and shall seek confidential treatment of such information) (ii) as
may be necessary to establish or enforce its rights hereunder; and (iii) with
the prior written consent of MTVN. For purposes of this Section 5,
"CONFIDENTIAL INFORMATION" shall mean (1) the terms of this
Agreement and (2) all business and technical information relating to MTVN's
businesses that is proprietary to MTVN or otherwise not available to the general
public; provided, however, that such Confidential Information shall not include
any information that (a) is or has become generally available to the public
other than as a result of a disclosure by VLLC, its Controlled Affiliates or its
Agents, (b) has been independently developed by VLLC or a Controlled Affiliate
of VLLC or (c) is, or becomes available to VLLC or a Controlled Affiliate of
VLLC on a non-confidential basis from a third party having no obligation of
confidentiality to a party hereto and which has not itself received such
information directly or indirectly in breach of any obligation of
confidentiality.
SECTION 6. REPRESENTATIONS, WARRANTIES AND INDEMNITIES
(a) MTVN's Representations and Warranties. MTVN represents and
warrants that:
(i) MTVN has the requisite corporate power and
authority to enter into and perform this Agreement; the execution,
delivery and performance by MTVN of this Agreement have been duly
authorized by all required corporate action on its part and, if
required, by its stockholder, and this Agreement has been duly executed
and delivered by it.
(ii) This Agreement is a legal, valid and binding
obligation of MTVN enforceable against MTVN in accordance with its
terms, except (x) as such enforceability may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of
creditors' rights generally and (y) to the extent that equitable
remedies, such as injunctive relief or specific performance, are within
the discretion of courts of competent jurisdiction.
MTVN assumes no liability for infringement of third party intellectual property
rights.
<PAGE> 13
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(b) VLLC's Representations and Warranties. VLLC represents and
warrants that:
(i) VLLC is a limited liability company duly formed,
validly existing and in good standing as a limited liability company
under the laws of the State of Delaware and has the requisite limited
liability company power and authority to own, lease and operate its
assets and its businesses as currently being conducted.
(ii) VLLC has the requisite limited liability company
power and authority to enter into and perform this Agreement; the
execution, delivery and performance by VLLC of this Agreement have been
duly authorized by all required limited liability company action on its
part and, if required, by its sole member, and this Agreement has been
duly executed and delivered by it.
(iii) This Agreement is a legal, valid and binding
obligation of VLLC enforceable against VLLC in accordance with its
terms, except (i) as such enforceability may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of
creditors' rights generally and (ii) to the extent that equitable
remedies, such as injunctive relief or specific performance, are within
the discretion of courts of competent jurisdiction.
(iv) VLLC shall not make any direct or indirect use
of the of any programming provided pursuant to this Agreement other
than as permitted in this Agreement.
(c) Indemnification.
(i) Each party indemnifies and holds the other party
and their respective Affiliates and the officers, directors,
shareholders, employees and agents of any of the foregoing (the
"Indemnified Parties") harmless against any liability, losses, damages,
penalties, claims, actions, suits, judgments or settlements of any
nature or kind (including reasonable costs of investigation, reasonable
attorneys', accountants' and expert witnesses' fees, and reasonable
expenses payable to third parties) incurred by any such Person by
reason of the untruth of or any breach of such party's representations
and warranties contained herein or any failure by such party to perform
any agreement or covenant contained in this Agreement.
(ii) For purposes of this Section 6(c), any Person or
entity liable to indemnify an Indemnified Party shall be known as an
"Indemnifying Party". The Indemnified Party shall notify the
Indemnifying Party as soon as practicable after the Indemnified Party
receives notice of or otherwise has actual knowledge of such claim, and
shall provide to the Indemnifying Party as soon thereafter as
practicable all information and documentation necessary to support and
verify the claim being asserted, and the Indemnifying Party shall be
given access to all books and records in the possession or control of
the Indemnified Party which the Indemnifying Party reasonably
determines to be related to such claim.
<PAGE> 14
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(iii) Promptly after receipt by an Indemnified Party
of notice of the commencement by any Person of any action, suit or
proceeding which might result in the Indemnifying Party becoming
obligated to indemnify or make any other payment to the Indemnified
Party under this Section 6(c), the Indemnified Party shall, if a claim
in respect thereof is to be made against the Indemnifying Party
pursuant to this Section 6, notify the Indemnifying Party promptly in
writing of the commencement thereof. The failure of the Indemnified
Party to so notify the Indemnifying Party shall not relieve the
Indemnifying Party from any liability which it may have on account of
this indemnification or otherwise, except to the extent that the
Indemnifying Party is materially prejudiced thereby. The Indemnifying
Party shall have the right, within thirty days after being so notified,
to assume the defense (at its expense) of such action, suit or
proceeding with counsel reasonably satisfactory to the Indemnified
Party; provided, however, that VLLC, as the Indemnifying Party, shall
have no right to so assume, and MTVN shall have the sole right to so
assume (at the expense of VLLC), the defense of any such action, suit
or proceeding to the extent such action, suit or proceeding relates to
intellectual property rights in the MTV Programming. In any such
action, suit or proceeding the defense of which the Indemnifying Party
shall have so assumed, the Indemnified Party shall have the right to
participate therein and retain its own counsel at its own expense;
provided, however, that such Indemnified Party's counsel shall be
retained at the Indemnifying Party's expense if (A) the Indemnified
Party and the Indemnifying Party so agree or (B) the named parties to
any such action, suit or proceeding (including the impleaded parties)
include both the Indemnified Party and the Indemnifying Party and
representation of both the Indemnified Party and the Indemnifying Party
by the same counsel would be inappropriate due to actual or potential
differing interests between them. The Indemnifying Party shall promptly
defend any claim subject to indemnification hereunder, but no
Indemnifying Party shall settle any claim without the prior approval of
the Indemnified Party, which approval shall not be unreasonably
withheld. To the extent that the settlement of such an action or
proceeding, the defense of which has been assumed by the Indemnifying
Party, involves payment of money, the Indemnifying Party shall have the
right, in consultation with the Indemnified Party, to settle those
aspects dealing only with the payment of money. Notwithstanding the
foregoing, in connection with any such defense or settlement (which
defense has been assumed by the Indemnifying Party in accordance with
this clause (iii)), the Indemnifying Party shall not enter into a
consent decree or consent to judgment involving injunctive or other
non-monetary relief or consent to an injunction without the Indemnified
Party's written consent, which consent shall not be unreasonably
withheld. The Indemnified Party shall cooperate, and shall use its
reasonable best efforts to cause its employees and the employees of any
of their respective wholly owned subsidiaries (in the case of VLLC) or
Controlled Affiliates (in the case of MTVN) to cooperate with the
Indemnifying Party in the defense of any action, suit or proceeding
assumed by the Indemnifying Party. Notwithstanding any and all of the
foregoing, to the extent that any claim arises out of or is related to
the MTV Programming, any intellectual property rights therein, or any
use of the MTV Programming, Licensor shall have the sole right to
select counsel for the defense of such claim and to control the
defense, settlement or compromise of such claim.
<PAGE> 15
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(iv) Each Indemnifying Party's obligation under this
Section 6(c) shall (A) not affect the other party's right to seek any
remedy upon a default by the Indemnifying Party under this Agreement
and (B) survive the termination for any reason of this Agreement.
SECTION 7. REQUIRED INSURANCE
(a) Liability Insurance. At all times during the term of this
Agreement, VLLC shall provide and maintain at VLLC's sole cost and expense,
general public liability insurance protecting VLLC and MTVN against claims
brought in connection with the Business in an amount not less than Five Million
Dollars ($5,000,000.00) per occurrence, combined single limit, and designating
MTVN as an additional insured.
(b) Certificate of Insurance. A certificate of the policy
required to be provided by VLLC pursuant to Section 7(a) shall be delivered to
MTVN within thirty (30) days after the execution of this Agreement. Said
insurance policy shall be timely renewed, and upon each renewal VLLC shall
deliver a renewal Certificate of Insurance to MTVN prior to the expiration date
of the existing term of the said policy. Should VLLC fail to supply MTVN with
such certificate or renewal certificate within the foregoing time limits,
provided that MTVN has given written notice to VLLC and VLLC has failed to
provide such certificate within ten (10) days after such notice, MTVN may, in
VLLC's name and on VLLC's behalf, provide any such insurance as to which such
certificates are not supplied and MTVN shall be reimbursed forthwith by VLLC for
all sums so expended.
SECTION 8. TERMINATION OF AGREEMENT
(a) This Agreement may be terminated by the mutual written
consent of MTVN and the Partnership.
(b) This Agreement shall terminate automatically in the event
of (i) expiration or termination of the Trademark License Agreement for any
reason whatsoever, or (ii) any insolvency of VLLC or its permitted assignee or
upon the appointment of any receiver, administrator, liquidator, or trustee to
take possession of the properties of VLLC or its permitted assignee or upon the
winding-up, sale, consolidation, merger or any sequestration by a Governmental
Entity of VLLC or its permitted assignee.
(c) In the event that the use of any of the MTV Programming is
determined to infringe intellectual property rights of others in any given
country or jurisdiction within the Territory, MTVN shall have the right to
terminate this Agreement as to any such MTV Programming in such country or
jurisdiction upon notice to VLLC.
(d) MTVN may terminate this Agreement in the event of a breach
of any material provision hereof by VLLC, including but not limited to the
provisions of Sections 2, 3, 4, 5, 6, and 10, provided that MTVN has given VLLC
and the Tune Stockholder Group thirty (30) days written notice of such breach,
identified the nature of the breach, and within the thirty
<PAGE> 16
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(30) day notice period VLLC has failed to cure the asserted breach; provided,
however, that if any such event shall occur and remain uncured after such
initial 30 day cure period, then, if at the time of such breach, MTVN owned a
majority of outstanding equity ownership of Licensee and at such time the Tune
Stockholder Group met the Tune Minimum Condition (as defined in the Partnership
Agreement) then, MTVN shall give further written notice thereof to the Tune
Stockholder Group and VLLC, and Tune shall in accordance with the provisions of
the Partnership Agreement have an additional period of thirty (30) days to
effect such cure and MTVN shall not be entitled to terminate this Agreement
until the conclusion of such additional 30 day cure period.
(e) Upon expiration or termination of this Agreement for any
reason, VLLC shall execute any documents requested by MTVN to confirm the
ownership by MTVN or any of its wholly owned subsidiaries of its right, title
and interest in and to any of the MTV Programming, and immediately cease all
uses of the MTV Programming. In addition, VLLC shall deliver as soon as
reasonably practicable following the termination of this Agreement for any
reason (but in any event within thirty (30) days of such termination) as
directed by MTVN, all MTV Materials and all other materials on which the MTV
Programming is used by VLLC, including, without limitation, all tapes, disks or
other forms of transmission, or any copies of all or any part thereof, or shall
certify the destruction of all such materials.
(f) Upon expiration or termination of this Agreement for any
reason, VLLC's right to use the MTV Programming will terminate immediately, and
this Agreement shall cease except that all obligations of the parties under this
Agreement which accrue or are due with respect to periods prior to, or as of,
such termination or expiration, and all obligations which expressly survive the
expiration or termination of this Agreement shall continue in full force and
effect subsequent to and notwithstanding the expiration or termination of this
Agreement.
(g) Upon expiration or termination of this Agreement for any
reason, VLLC shall discontinue immediately all use of the MTV Programming, and
cooperate with MTVN and any of its appointed agents to inform the appropriate
authorities of such termination. All rights in the MTV Programming shall remain
the property of MTVN upon expiration or termination.
SECTION 9. ASSIGNMENT
This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party hereto
(whether by operation of law or otherwise) without the prior written consent of
the other party hereto except that immediately after the execution of this
Agreement as part of VLLC's initial contribution to the Partnership, VLLC shall
assign all of its rights and obligations hereunder to the Partnership and the
Partnership shall accept and assume the same in accordance with the terms of the
VLLC Contribution, Assignment and Assumption Agreement dated as of the date
hereof between VLLC and the Partnership, whereupon the Partnership shall be
substituted for VLLC in all respects as fully as if it had been an original
party hereto. Upon such assignment and assumption, VLLC shall be released from
all of its obligations hereunder. In
<PAGE> 17
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connection with the Reorganization, the Partnership shall assign all of its
rights and obligations hereunder to the corporate successor to all or
substantially all of the Partnership's assets pursuant to an assignment and
assumption agreement in form and substance reasonably satisfactory to MTVN and
such corporate successor shall accept and assume the same. Upon such assignment
and assumption, the Partnership shall be released from all of its obligations
hereunder.
SECTION 10. REMEDIES
(a) VLLC acknowledges that the rights of MTVN hereunder are of
a unique and original character giving them peculiar value, the loss of which
cannot be compensated in damages in an action at law. VLLC further agrees and
acknowledges that, in addition to all other rights that MTVN may have, MTVN
shall be entitled as a matter of right without further notice to VLLC, to obtain
injunctive and/or other equitable relief as may be provided by law against any
threatened, potential or actual breach by VLLC of any of the provisions hereof.
(b) All remedies, rights, undertakings, obligations and
agreements contained in this Agreement shall be cumulative and none thereof
shall be in limitation of any other remedy, right, undertaking, obligation or
agreement of any party.
SECTION 11. ENTIRE AGREEMENT
This Agreement contains the entire agreement of the parties
with respect to the subject matter hereof and supersedes any and all prior
agreement and understandings, whether written or oral, with respect to the
subject matter hereof, including the letter agreement dated May 19, 1999 among
Viacom International Inc., Liberty Media Corporation, and TCI Music, Inc.
SECTION 12. COUNTERPARTS
This Agreement may be executed in one or more counterparts
(and all signatures need not be on any one such counterpart), with all such
counterparts together constituting one and the same instrument.
SECTION 13. GOVERNING LAW
This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of New York, without giving
effect to any of its conflicts of law provisions.
SECTION 14. JURISDICTION; VENUE
(a) Each party hereby irrevocably and unconditionally submits,
for itself and its property, to the jurisdiction of any New York State court
sitting in the County of New York or any federal court of the United States of
America sitting in the Southern District of New York,
<PAGE> 18
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and any appellate court from any such court, in any suit, action or proceeding
arising out of or relating to this Agreement, or for recognition or enforcement
of any judgment relating hereto.
(b) Each party hereby irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any objection which
it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in any New York State
court sitting in the County of New York or any federal court sitting in the
Southern District of New York, and any appellate court from any such court. Each
party hereby irrevocably waives, to the fullest extent permitted by law, the
defense of an inconvenient forum to the maintenance of such suit, action or
proceeding in any such court and further waives the right to object, with
respect to such suit, action or proceeding, that such court does not have
jurisdiction over such party. Each party hereby irrevocably waives the right to
a jury trial in any suit, action or proceeding arising out of or related to this
Agreement.
SECTION 15. NOTICES
Except as expressly provided herein, notices and other
communications provided for herein shall be in writing and shall be delivered by
hand or overnight courier service, mailed (certified or registered mail, postage
prepaid, return receipt requested) or sent by facsimile copier of the sending
party, as follows:
(a) MTVN:
MTV Networks
1515 Broadway
New York, NY 10036-5794
Telecopier No.: 212-258-8352
Attn: General Counsel
(b) VLLC:
MTVN Online Partner I LLC
1515 Broadway
New York, NY 10036
Telecopier No.: 212-846-1735
Attn: Chief Executive Officer
or to such other address or attention of such other Person as any party shall
advise the other party in writing. All notices and other communications given to
a party in accordance with the provisions of this Agreement shall be deemed to
have been given (i) three Business Days after the same are sent by certified or
registered mail, postage prepaid, return receipt requested, (ii) when delivered
by hand or transmitted by facsimile (confirmation received) unless delivered on
a day which is not a Business Day or after 5:00 p.m., local time, at the place
or receipt, in which case such notice shall be deemed to have been given on the
next succeeding Business Day
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or (iii) one Business Day after the same are sent by a reliable overnight
courier service, with acknowledgment of receipt.
SECTION 16. THIRD PARTY BENEFICIARY
For so long as the Tune Stockholder Group meets the Tune Minimum
Condition, TCI Music shall be a third party beneficiary of MTVN's obligations to
the Partnership hereunder insofar as and only to the extent that it shall be
entitled to enforce the Partnership's rights hereunder in a separate cause of
action for the benefit of the Partnership. The Partnership shall indemnify and
hold harmless TCI Music from and against any costs and expenses (including
reasonable attorneys' fees) incurred by it in pursuing such a cause of action if
such cause of action is resolved in favor of the Partnership and/or TCI Music.
Except as set forth in the first sentence of this Section 16, this Agreement is
for the sole benefit of the parties hereto and their respective successors and
permitted assigns and nothing herein, express or implied, is intended to or
shall confer upon any Person other than such parties any legal or equitable
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.
SECTION 17. CONSENTS AND APPROVALS; WAIVERS; REMEDIES
All consents and approvals which may be given under this Agreement
shall, as a condition of their effectiveness, be in writing. The granting by a
party hereto of any consent to or approval of any act requiring consent or
approval under the terms of this Agreement, or the failure on the part of a
party to object to any such action taken without the required consent or
approval, shall not be deemed a waiver by the party whose consent was required
of its right to require such consent or approval for any other act. The
observance of any provision of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively) by the party
or parties entitled to enforce such term, but any such waiver shall be effective
only if in a writing signed by the party or parties against which such waiver is
to be asserted and only in the specific instance and for the specific purpose
for which given. Except as otherwise provided herein, no failure or delay of any
party in exercising any power or right under this Agreement shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuance of steps to enforce such right or
power, preclude any other or further exercise thereof or the exercise of any
other right or power.
SECTION 18. SURVIVAL
The provisions contained in this Agreement in Sections 2(f), 2(g),
4(c), 5, 6, 10, 13, 14, 15, 16, 20 and this Section 18 shall survive the
termination of this Agreement.
SECTION 19. SEVERABILITY
If any provision of this Agreement shall be held to be illegal, invalid
or unenforceable, that provision will be enforced to the maximum extent
permissible so as to effect the intent of the
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parties and the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby. If necessary to
effect the intent of the parties, the parties will negotiate in good faith to
amend this Agreement to replace the unenforceable language with enforceable
language which as closely as possible reflects such intent.
SECTION 20. RULES OF CONSTRUCTION
(a) The definitions in this Agreement shall apply equally to
both the singular and plural forms of the terms defined. Whenever the context
may require, any pronoun shall include the corresponding masculine, feminine and
neuter forms.
(b) The words "include", "includes" and "including" shall be
deemed to be followed by the phrase "without limitation".
(c) The words "herein", "hereof" and "hereunder" and words of
similar import refer to this Agreement (including the Schedules) in its entirety
and not to any part hereof unless the context shall otherwise require. All
references herein to Sections and Schedules shall be deemed references to
Sections of, and Schedules to, this Agreement unless the context shall otherwise
require.
(d) Unless the context shall otherwise require, any references
to any agreement or other instrument or statute or regulation are to it as
amended and supplemented from time to time (and, in the case of a statute or
regulation, to any successor provisions).
(e) Any reference in this Agreement to a "day" or number of
"days" (without the explicit qualification of "Business") shall be interpreted
as a reference to a calendar day or number of calendar days. If any action or
notice is to be taken or given on or by a particular calendar day, and such
calendar day is not a Business Day, then such action or notice shall be deferred
until, or may be taken or given on, the next Business Day.
(f) This Agreement shall be construed without regard to any
presumption or rule requiring construction or interpretation against the party
drafting or causing any instrument to be drafted.
SECTION 21. AMENDMENT
This Agreement may be modified or amended only by a written amendment
signed by each party hereto.
SECTION 22. FORCE MAJEURE
In the event that during the Term, either party is unable to perform
its obligations under this Agreement by reason of causes beyond its reasonable
control including but not limited to civil or industrial disturbances, acts of
God, strikes, floods, natural disasters, riots, insurrections,
<PAGE> 21
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embargoes, blockages, restrictions or regulations or orders of any Governmental
Entity, then such non-performance shall not be deemed to be a breach of this
Agreement and shall be deemed excused but only for so long as the causes of such
non-performance shall remain in effect; provided, however, that the party so
affected shall use its reasonable best efforts to avoid or remove such causes of
nonperformance and shall continue performance hereunder with the utmost dispatch
whenever such causes are removed. In the event the force majeure event(s) result
in the non-performance of this Agreement for a continuous two-year period (the
"Force Majeure Period"), this Agreement shall then terminate with respect to the
jurisdiction(s) in the Territory affected by such force majeure event(s);
provided, however, that such termination shall not become effective until MTVN
has provided VLLC with ten (10) days prior written notice of such termination.
Such notice may be provided to VLLC any time after the Force Majeure Period.
SECTION 23. HEADINGS AND CAPTIONS
The headings of the Sections and other subdivisions of this Agreement
are for convenience of reference only and shall not modify, define or limit any
of the terms or provisions of this Agreement.
SECTION 24. BINDING ON VIACOM
The parties acknowledge that MTVN is a division of Viacom and that,
consequently, Viacom is obligated to perform the obligations to be performed by
MTVN hereunder. Insofar as this Agreement refers to MTVN in the context of an
operating business, it shall refer only to the operating unit or units of Viacom
that on a day-to-day basis operate the business of MTV: Music Television or VH1
Music First.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
MTV NETWORKS, a
division of Viacom
International Inc.
By: /s/ David W. Sussman
-----------------------------------------
Name: David W. Sussman
Title: Sr. Vice President, General
Counsel and Assistant Secretary
MTVN ONLINE PARTNER I LLC
By: /s/ David W. Sussman
-----------------------------------------
Name: David W. Sussman
Title: Sr. Vice President, General
Counsel and Assistant Secretary
<PAGE> 23
SCHEDULE A
EXCLUDED BUSINESSES
Services provided from time to time by:
1. Tricast/Asia, a joint venture of MTVN or an Affiliate
and Tricast (or its successor) to operate an "MTV"
branded interactive consumer service based on the MTV
Asia television services;
2. MTV Brasil, a joint venture between MTVN or an
Affiliate and Abril S.A. (or its successor) to
operate the MTV Brasil television service and an
internet site based on such service;
3. MTV Russia, a channel licensee to which MTVN has
granted the right to advertise and promote the MTV
Russia channel via any media, including the internet;
4. MTV Australia, a channel licensee, until such time as
it terminates its improper internet site use;
provided, that MTVN shall not materially expand the scope of
rights granted as of the date hereof in connection with any of
the foregoing.
<PAGE> 1
Exhibit 10.8
CONFORMED COPY
PROMOTION AGREEMENT
PROMOTION AGREEMENT (the "Agreement") dated as of July 15, 1999 by and
between MTV Networks ("MTVN"), a division of Viacom International Inc.
("Viacom"), a Delaware corporation, and MTVN Online Partner I LLC, a Delaware
limited liability company ("VLLC").
The parties hereto desire to enter into this Agreement whereby, among
other things, MTVN will provide certain promotional support to VLLC. Immediately
after the execution of this Agreement, VLLC shall assign to the Partnership (as
defined below) all of VLLC's rights and obligations under this Agreement other
than its payment obligations under Section 2(b) hereof, pursuant to the VLLC
Contribution, Assignment and Assumption Agreement of even date herewith between
VLLC and the Partnership.
NOW, THEREFORE, in consideration of the premises and other covenants
and conditions contained herein, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the meanings specified below:
"Affiliate" shall have the meaning as set forth in the Partnership
Agreement.
"Business" shall have the meaning set forth in the Agreement of Limited
Partnership (the "Partnership Agreement") of even date herewith among VLLC,
Imagine Radio, Inc. ("Imagine"), a California corporation, SonicNet, Inc.
("SonicNet"), a Delaware corporation and The Box Worldwide, Inc. ("Box"), a
Florida corporation, as in effect on the date of this Agreement.
"Business Day" shall have the meaning set forth in the Partnership
Agreement.
"Control" shall have the meaning set forth in the Partnership
Agreement.
A "Controlled Affiliate" shall have the meaning set forth in the
Partnership Agreement.
"Governmental Entity" shall have the meaning set forth in the
Partnership Agreement.
"Management Committee" shall have the meaning as set forth in the
Partnership Agreement.
"MTVN Stockholder Group" means Viacom Inc. and its wholly-owned
subsidiaries (including, for purposes of this definition, Imagine for so long as
the performance of its obligations under the Partnership Agreement and the
Imagine Contribution, Assignment and Assumption Agreement of even date herewith
between Imagine and the Partnership is guaranteed by Viacom pursuant to the
Parent Agreement (as defined below) or otherwise).
"Parent Agreement" means the Parent Agreement and Guaranty of even date
herewith among TCI Music, Inc. ("TCI Music"), a Delaware corporation, MTVN
Networks ("MTVN"),
<PAGE> 2
2
The Box Worldwide Inc., a Florida corporation (" Box"), SonicNet, Inc., a
Delaware corporation ("SonicNet") Liberty Media Corporation, a Delaware
corporation ("Liberty"), a Delaware corporation, and MTVN Online L.P., Delaware
limited partnership (the "Partnership").
"Partnership" means MTVN Online L.P., a Delaware limited partnership
(as such entity may exist in partnership form or in a reorganized, corporate or
other form).
"Person" shall have the meaning set forth in the Partnership Agreement.
"Reorganization" shall have the meaning set forth in the Parent
Agreement.
"Representative" shall have the meaning as set forth in the Partnership
Agreement.
"Subsidiary" shall have the meaning set forth in the Partnership
Agreement.
"Tune Stockholder Group" shall mean Liberty and its wholly-owned
subsidiaries and TCI Music and its wholly-owned subsidiaries (provided that for
this purpose Liberty Media Group LLC shall be deemed a wholly-owned subsidiary
of Liberty).
2. MTVN Promotion.
(a) During the term of this Agreement, MTVN shall use
reasonable efforts to promote the Business on MTV, VH1 or any other programming
services that MTVN Controls, in a manner calculated to encourage consumers to
visit the websites owned by VLLC or its permitted assign or such permitted
assign's Controlled Affiliates. Such promotion shall be for no consideration
payable by VLLC or its permitted assigns and includes advertising, VJ mentions,
text on screen, web links or other promotional support by MTV, VH1 and any other
programming service that MTVN Controls, in a manner and in amounts to be
determined by MTVN in its sole discretion; provided that such promotion shall be
(x) vigorous, to the extent consistent with MTVN's normal operation of its
businesses other than the Business, and (y) generally consistent in overall
effort with promotions provided by other similarly situated media companies in
relation to the promotion of the internet businesses of their subsidiaries and
Affiliates. During the period commencing on the date hereof until the fifth
anniversary of the date hereof, such promotion shall have an aggregate fair
market value of not less than $100 million, as valued by the CEO of VLLC or its
permitted assign (or if the CEO has a conflict of interest due to arrangements
between the CEO and MTVN, the most senior officer of VLLC or its permitted
assign not so conflicted). For purposes of the foregoing, Mr. Fred Seibert shall
not, for as long as he is CEO of the Partnership, be deemed to have a conflict
of interest so long as no material part of his compensation is directly
dependent on the performance of MTV, VH-1 or any programming service that MTVN
Controls. All promotional services provided by MTVN pursuant to this Section
2(a) shall be in accordance with, and shall not violate, any laws, rules or
regulations of any Governmental Entity, and the provision of such promotional
services shall not violate the rights of any third party.
(b) During the term of this Agreement, VLLC shall pay to MTVN
a promotion fee of $5,000,000 per calendar quarter which amount shall be payable
on the last
<PAGE> 3
3
business day of each calendar quarter and shall be the sole consideration
payable by VLLC for the promotional activities described in Section 2(a).
3. Term. The term of this Agreement shall commence on the date hereof,
and unless earlier terminated pursuant to Section 6 hereof, terminate on the
later of (x) the fifth anniversary of the date hereof or (y) the second
anniversary of the first date that the MTVN Stockholder Group owns in the
aggregate less than 50% of the outstanding equity interests of VLLC or its
permitted assign.
4. VLLC Obligations. VLLC will, at no cost to MTVN, promote the
programming services of MTVN in a reasonable manner requested by MTVN subject to
the approval not to be unreasonably withheld of the CEO of VLLC or its permitted
assign (or if the CEO has a conflict of interest due to arrangements between the
CEO and MTVN, the most senior officer of VLLC or its permitted assign, not so
conflicted. For purposes of the foregoing, Mr. Fred Seibert shall not, for as
long as he is CEO of the Partnership, be deemed to have a conflict of interest
so long as no material part of his compensation is directly dependent on the
performance of MTV, VH-1 or any programming service that MTVN Controls.
5. Indemnification.
(a) Each party shall at all times defend, indemnify and hold
the other party, its Affiliates, officers, directors, agents and employees
harmless from and against any and all liabilities, costs, losses or expenses,
including reasonable attorneys' fees, it or they may incur by reason of any
third-party claim or suit arising solely in connection with (i) such other
party's use of the indemnifying party's material provided to such other party
for promotional purposes pursuant to this Agreement or (ii) such indemnifying
party's gross negligence, willful misconduct or willful breach of this
Agreement; provided, however, that VLLC (or its permitted assign) shall not be
required to indemnify MTVN to the extent such claim arose from an act or
omission of VLLC (or its permitted assign) made at the request of MTVN for
MTVN's sole benefit. Each party agrees to promptly notify the other party in
writing of an indemnifiable claim, but the failure to so notify shall not
relieve an indemnifying party of any liability which it may have to an
indemnified party except to the extent the indemnifying party is materially
prejudiced by the failure to give such prompt notice.
(b) An indemnifying party shall have the right to participate
in and assume the defense of any such third party claim for which
indemnification is sought. The party claiming indemnification shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof but the fees and expenses of such separate counsel shall not be
at the expense of the party against whom indemnification is sought unless (i)
the indemnified party shall have been advised by its counsel that use of the
same counsel to represent both the indemnifying party and the indemnified party
would present a conflict of interest (which shall be deemed to include any case
where there may be a legal defense or claim available to the indemnified party
which is different from or additional to those available to the indemnifying
party), or (ii) the indemnifying party shall fail vigorously to defend or
prosecute such claim or demand within a reasonable time, in which case the
indemnifying party shall not have the right to direct the defense of such action
on behalf of the indemnified party, and the indemnifying party
<PAGE> 4
4
shall pay the reasonable fees and expenses of the indemnified party's counsel.
Except as otherwise provided above, a party obligated to provide indemnification
under Section 5(a) shall reimburse each party entitled to such indemnification
the costs of investigating and defending any claim, loss, damage, liability,
cost or expense giving rise to such indemnification obligation.
(c) An indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent (which consent
shall not be unreasonably withheld), but if settled with such consent, or if
there be a final judgment for the plaintiff, the indemnifying party shall
indemnify and hold harmless the indemnified parties from and against any loss or
liability (to the extent stated above) by reason of such settlement or judgment.
No indemnifying party shall, without the prior written consent of the
indemnifying party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability arising out of such proceeding.
6. Termination.
(a) Either party may terminate this Agreement in the event of
a material breach by the other party, provided that (i) such party has given the
breaching party thirty (30) days written notice of such breach, identified the
nature of the breach, and within such thirty-day cure period the breaching party
has failed to cure the asserted breach and (ii) this Agreement may not be
terminated due to VLLC's failure to make any payment contemplated by Section
2(b). The parties agree that for so long as the MTVN Stockholder Group (x) owns
at least 50.1% of the outstanding equity interests of the Partnership or (y) is
entitled to designate pursuant to the Partnership Agreement a majority of the
Management Committee of the Partnership or, following the Reorganization, a
majority of the Board of Directors of the corporate successor to the
Partnership, MTVN shall not have any right to terminate this Agreement under
this Section 6(a) as a result of or based upon any breach by the Partnership of
this Agreement.
(b) MTVN may terminate this Agreement upon 10 days prior
notice in the event that TCI Music and its subsidiaries cease to own an equity
interest in the Partnership.
(c) By either party upon written notice to the other party if
such other party shall file a petition in bankruptcy or insolvency, or a
petition for reorganization or adjustment of debts or for the appointment of a
receiver or trustee of all as a substantial portion of its property, or shall
make an assignment for the benefit of creditors, or if a petition in bankruptcy
or other petition described in this paragraph is filed against such other party
and shall not be discharged within 60 days thereafter.
7. Notices. Except as expressly provided herein, notices and other
communications provided for herein shall be in writing and shall be delivered by
hand or overnight courier service, mailed (certified or registered mail, postage
prepaid, return receipt requested) or sent by facsimile copier of the sending
party, as follows:
<PAGE> 5
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(a) MTVN: MTV Networks
1515 Broadway
New York, NY 10036
Telecopier No.: (212) 846-1839
Attn: General Counsel
(b) VLLC: MTVN Online Partner I LLC
1515 Broadway
New York, NY 10036
Telecopier No.: (212) 846-1735
Attn: Chief Executive Officer
(c) Partnership: MTVN Online L.P.
1515 Broadway
New York, NY 10036
Telecopier No.: (212) 846-1735
Attn: Mr. Fred Seibert
or to such other address or attention of such other party or Person as any party
shall advise the other party in writing. All notices and other communications
given to a party in accordance with the provisions of this Agreement shall be
deemed to have been given (i) three Business Days after the same are sent by
certified or registered mail, postage prepaid, return receipt requested, (ii)
when delivered by hand or transmitted by facsimile (confirmation received)
unless delivered on a day which is not a Business Day or after 5:00 p.m., local
time, at the place of receipt, in which case such notice shall be deemed to have
been given on the next succeeding Business Day or (iii) one Business Day after
the same are sent by a reliable overnight courier service, with acknowledgment
of receipt.
8. Force Majeure. No failure or omission by a party hereto in the
performance of any of its obligations under this Agreement shall be deemed a
breach of this Agreement nor shall it create any liability, if the same shall
arise from any cause or causes beyond the control of the party, including, but
not limited to, the following, which, for the purpose of this Agreement, shall
be regarded as beyond the control of the party in question: acts of God, acts or
omissions of any government, any rules, regulations, or orders issued by any
Governmental Entity, fire, storm, flood, earthquake, accident, war, rebellion,
insurrection, riot, invasion, strikes and lockouts; provided, however, that the
party so affected shall use its reasonable best efforts to avoid or remove such
causes of nonperformance and shall continue performance hereunder with the
utmost dispatch whenever such causes are removed.
9. Waiver of Default. No consent or waiver, express or implied, by
either party with respect to any breach or default by the other party hereunder
shall be deemed or construed to be a consent or waiver with respect to any other
breach or default by any party of the same provision or any other provision of
this Agreement. No waiver of any provision of this Agreement shall be effective
unless in writing and signed by the party against which enforcement thereof is
to be sought. Failure on the part of a party to complain of any act or failure
to act of the other party or
<PAGE> 6
6
to declare such party in default shall not be deemed or constitute a waiver of
any rights hereunder.
10. Assignment. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any party
hereto (whether by operation of law or otherwise) without the prior written
consent of the other party hereto except that immediately after the execution of
this Agreement as part of VLLC's initial contribution to the Partnership, VLLC
shall assign all of its rights and obligations hereunder (other than its
obligation under Section 2(b)) to the Partnership and the Partnership shall
accept and assume the same in accordance with the terms of the VLLC
Contribution, Assignment and Assumption Agreement dated as of the date hereof
between VLLC and the Partnership, whereupon the Partnership shall be substituted
for VLLC in all respects (other than Section 2(b)) as fully as if it had been an
original party hereto. Upon such assignment and assumption, VLLC shall be
released from all of its obligations hereunder other than under Section 2(b). In
connection with the Reorganization, the Partnership shall assign all of its
rights and obligations hereunder (but not VLLC's obligations under Section 2(b))
to the corporate successor to all or substantially all of the Partnership's
assets pursuant to an assignment and assumption agreement in form and substance
reasonably satisfactory to MTVN and such corporate successor, and such corporate
successor shall accept and assume the same. Upon such assignment and assumption,
the Partnership shall be released from all of its obligations hereunder.
11. Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of New York, without
giving effect to any of its conflicts of law provisions.
12. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts shall have been signed by
each party and delivered to the other party.
13. Headings. The headings of the sections of this Agreement are for
convenience of reference only and shall not modify, define or limit any of the
terms or provisions of this Agreement.
14. Amendment. This Agreement may be modified or amended only by a
written amendment signed by each party hereto.
15. Entire Agreement. The provisions of this Agreement set forth the
entire agreement and understanding between the parties as to the subject matter
hereof and supersede all prior agreements, oral or written, and other
communications between the parties hereto or among the parties to the MOU (as
defined below) relating to the subject matter hereof, including the letter
agreement ("MOU") dated May 19, 1999 among Viacom, Liberty and TCI Music.
<PAGE> 7
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16. No Presumption. This Agreement shall be construed without regard to
any presumption or rule requiring construction or interpretation against the
party drafting or causing any instrument to be drafted.
17. Binding on Viacom. The parties acknowledge that MTVN is a division
of Viacom and that, consequently, Viacom is obligated to perform the obligations
to be paid or performed by MTVN hereunder. Insofar as this Agreement refers to
MTVN in the context of an operating business, including without limitation
throughout Section 2(b), it shall refer only to the operating unit or units of
Viacom that on a day-to-day basis operate the business of MTV: Music Television
or VH1 Music First.
18. Specific Performance. The rights of the parties under this
Agreement are unique and, accordingly, the parties shall have the right, in
addition to such other remedies as may be available to any of them at law or in
equity, to enforce their rights hereunder by actions for specific performance.
19. Third Party Beneficiary. For so long as the Tune Stockholder Group
is entitled to designate a Representative to the Management Committee of the
Partnership pursuant to the Partnership Agreement, TCI Music shall be a third
party beneficiary of MTVN's obligations to the Partnership hereunder insofar as
and only to the extent it relates to the right to enforce on behalf of the
Partnership the Partnership's rights hereunder in a separate cause of action for
the benefit of the Partnership. The Partnership shall indemnify and hold
harmless TCI Music from and against any costs and expenses (including reasonable
attorneys' fees) incurred by it in pursuing such a cause of action if such cause
of action is resolved in favor of the Partnership and TCI Music. Except as set
forth in the first sentence to this Section 19, this Agreement is for the sole
benefit of the parties hereto and their respective successors and permitted
assigns and nothing herein, express or implied, is intended to or shall confer
upon any other Person any legal or equitable right, benefit or remedy of any
nature whatsoever under or by reason of this Agreement.
<PAGE> 8
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by its respective officers thereunto duly authorized on the date first
above written.
VIACOM INTERNATIONAL, INC.
By: /s/ Michael D. Fricklas
------------------------------------
Name: Michael D. Fricklas
Title: Sr. Vice President and
General Counsel
MTVN ONLINE PARTNER I LLC
By: /s/ David W. Sussman
------------------------------------
Manager: David W. Sussman
Title: Sr. Vice President, General
Counsel and
Assistant Secretary
<PAGE> 1
Exhibit 10.9
CONFORMED COPY
TECHNOLOGY SHARING AND LICENSE AGREEMENT
TECHNOLOGY SHARING AND LICENSE AGREEMENT (hereinafter the "AGREEMENT")
dated as of July 15, 1999, by and between MTV Networks ("MTVN") and InfoWorks
("INFOWORKS") each a division of Viacom International Inc., a Delaware
corporation ("VIACOM"), MTVN Online Inc., a subsidiary of Viacom ("MTVNO")
(MTVN, InfoWorks and MTVNO being collectively referred to herein as the
"LICENSOR"), on the one hand, and MTVN Online Partner I LLC, a Delaware limited
liability company ("VLLC") (the "LICENSEE") on the other.
This Agreement is delivered pursuant to the terms of the Organization
Agreement, of even date herewith (the "ORGANIZATION AGREEMENT"), among Liberty
Media Corporation, a Delaware corporation ("LIBERTY"), TCI Music, Inc., a
Delaware corporation ("TUNE"), MTVN, VLLC, MTVN Online Inc., a Delaware
corporation, Imagine Radio, Inc., a Delaware corporation ("IMAGINE"), SonicNet,
Inc., a Delaware corporation ("SONICNET"), The Box Worldwide Inc., a Florida
corporation ("BOX"), VJN LPTV Corp., a Delaware corporation, and MTVN Online
L.P., a Delaware limited partnership (the "PARTNERSHIP").
WHEREAS, the parties desire that Licensor grant to Licensee certain
rights with respect to the Licensed Products and Third Party Products (as such
terms are defined below) necessary for the operation of the Business (as defined
below) upon the terms and conditions set forth herein; and
WHEREAS, immediately after the execution of this Agreement, Licensee
shall assign to the Partnership all of Licensee's rights and obligations under
this Agreement other than its payment obligations under Section 2 (C) hereof;
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
SECTION 1. CERTAIN DEFINITIONS
"AFFILIATE" shall have the meaning set forth in the Organization
Agreement.
"BUSINESS" shall have the meaning set forth in the Partnership
Agreement, as of the date of this Agreement.
"BUSINESS DAY" shall have the meaning set forth in the Partnership
Agreement.
"APPLICATIONS PROGRAMMING INTERFACE" or "API" means the specifications
of a Licensed Product which define the external programming
requirements necessary to interface between that Licensed Product and
other Object Code.
<PAGE> 2
2
"CODE" shall mean Object Code and Source Code.
"CONTRIBUTED BUSINESS" shall mean the business contributed on the date
hereof directly or indirectly by Viacom and its Affiliates to the
Partnership.
"DERIVATIVE WORKS" shall mean all "derivative works" and "compilations"
within the meanings of such terms as defined in the U.S. Copyright Act
(17 U.S.C. Section 101 et seq.).
"DOCUMENTATION" (including its correlative "DOCUMENT") means the
current version of all available manuals and other materials in written
or machine-readable form that are owned as of the date hereof by
Licensor, relating to the methods of use or operation by end users and
operators of the Object Code of the Licensed Products.
"EXCLUDED PRODUCT" shall mean any technology, product or service which
is not owned exclusively by Licensor unless Licensor has the right to
sublicense such technology, product or service to a third party without
the payment of any fees or expenses.
"INTELLECTUAL PROPERTY" shall have the meaning set forth in the
Organization Agreement.
"LICENSED PRODUCTS" means all Subject Products delivered by Licensor to
Licensee during the period specified in Section 3.
"LICENSEE SERVICES" means the services conducted by Licensee
exclusively in the operation of the Business.
"LICENSOR PROPRIETARY OBJECT CODE" means all Object Code which Licensor
owns.
"MANAGEMENT COMMITTEE" shall have the meaning as set forth in the
Partnership Agreement.
"NEWCO STOCKHOLDERS AGREEMENT" shall have the meaning set forth in the
Parent Agreement.
"OBJECT CODE" shall mean (i) machine executable programming
instructions, substantially in binary form, which are intended to be
directly executable by a processor after suitable processing and
linking but without the intervening steps of compilation or assembly,
or (ii) other executable code (e.g., "byte code" and other intermediate
code forms in connection with interpretive languages).
"PARENT AGREEMENT" shall mean the Parent Agreement and Guaranty of even
date herewith among TCI Music, MTVN, Liberty, Box, SonicNet and the
Partnership.
"PARTNERSHIP AGREEMENT" shall mean the Agreement of Limited Partnership
of even date herewith among Licensee, Imagine, SonicNet and Box.
"REORGANIZATION" shall have the meaning set forth in the Parent
Agreement.
<PAGE> 3
3
"PERSON" shall have the meaning set forth in the Organization
Agreement.
"REPRESENTATIVE" shall have the meaning as set forth in the Partnership
Agreement.
"SOURCE CODE" shall mean the human readable form of Code in which
programs have been written and related technical documentation,
including comments internal to such Code and descriptions external to
such Code that are useful for understanding and maintaining said
programs (for example, logic manuals, flow charts and principles of
operation).
"SUBJECT PRODUCTS" means all Licensor Proprietary Object Code
heretofore used in connection with the Contributed Business that is:
(a) necessary and/or appropriate for use in launching and
operating Licensee Services;
(b) embodied in development tools that were used to
develop, create, and enhance Licensed Products for
use in connection with Contributed Business; or
(c) an upgrade, enhancement, or modification to a Third
Party Product created by Licensor, and for which
Licensor has received all necessary rights to license
to Licensee as set forth in this Agreement.
Subject Products exclude: (i) Excluded Product; (ii) all development
tools, regardless of the creator, except those set forth in subsection
(b) above and (iii) Third Party Products or upgrades, enhancements, or
modifications to same, except those set forth in subsection (c) above.
"SUBSIDIARY" shall have the meaning set forth in the Partnership
Agreement.
"THIRD PARTY PRODUCTS" refers to computer software products and related
documentation licensed by Licensor from third parties, used by Licensor
as of the date hereof in connection with the Contributed Business and
available for use by Licensee under the terms of applicable license
agreements, which are necessary or appropriate for use in launching and
operating Licensee Services, including software products and related
documentation readily available in the marketplace pursuant to a
"shrink-wrap" license or similar form license agreement. For the
avoidance of doubt, the term "Third Party Products" shall not include
Licensed Products.
"TUNE STOCKHOLDER GROUP" shall have the meaning as set forth in the
Partnership Agreement.
Any capitalized term which is not specifically defined herein shall
have the meaning given to that term in the Organization Agreement.
<PAGE> 4
4
SECTION 2. LICENSE GRANTS AND FEE
A. Licensed Products. Subject to the terms and conditions of this
Agreement, Licensor hereby grants to Licensee on a quitclaim
basis for the Term, a non-exclusive, non-transferable (except
as set forth in this Agreement) license to use the Licensed
Products, as they exist as of the date hereof, only for the
internal purposes of Licensee and its wholly-owned
Subsidiaries (which purposes shall include operating servers
accessed by end users of the Licensed Services) in the
operation of the Business.
B. Third Party Products. Subject to the terms and conditions of
this Agreement, and subject to the payment of applicable
third-party royalties or fees, if any, for which Licensee
shall be exclusively responsible, Licensor hereby grants to
Licensee the same license rights in respect of Third Party
Products, as they exist as of the date hereof (to the extent
that Licensor is legally entitled to sublicense or extend such
rights to Licensee as of the date hereof), as Licensor has
granted to Licensee in respect of the Licensed Products under
Section 2 (A) above. Licensee acknowledges and agrees that,
with respect to some Third Party Products, the grant to
Licensee of the rights specified in this Section 2 (B) may
require the consent of the owners of such Third Party
Products, and that such grant shall not be effective until
such consent has been obtained. Licensee agrees to comply with
all license and legal requirements that are applicable to it
with respect to Licensee's use of the Third Party Products.
C. License Fee. During the Term of this Agreement, Licensee shall
pay to Licensor a license fee of $10,000 per year which amount
shall be payable on the first business day following the end
of each such year.
D. Documentation. Subject to the terms and conditions of this
Agreement, Licensor hereby grants to Licensee on a quitclaim
basis for the Term, a non-exclusive, non-transferable (except
as expressly provided herein) right to:
(i) use, translate into foreign languages, display, reproduce
and distribute internally only in connection with its use of
the Licensed Products as permitted hereunder any
Documentation, as it exists as of the date hereof, relating to
the Licensed Products; and
(ii) upon receipt of prior written approval from Licensor,
which approval shall not be unreasonably withheld or delayed
(but may be conditioned upon provision of appropriate
nondisclosure undertakings), furnish to providers of services
to Licensee a copy of such Documentation.
E. APIs. Subject to the terms and conditions of this Agreement,
Licensor hereby grants to Licensee on a quitclaim basis for
the Term, a non-exclusive, non-transferable (except as
expressly provided herein) right to use and make copies of the
Application Programming Interfaces, as they exist as of the
date hereof, for the
<PAGE> 5
5
sole purpose of developing software products for use only for
the internal purposes of Licensee (which purposes shall
include developing server software accessed by end users of
the Licensed Services) in the operation of the Business that
access, and/or interface with, such Application Programming
Interfaces.
F. Source Code Availability; Adaptation. Subject to the terms and
conditions of this Agreement:
(i) the licenses granted pursuant to Section 2 (A), (B) and
(E) include the right for Licensee to receive, use or make
copies of the Source Code for the Licensed Products and, to
the extent permitted under applicable agreements, the Third
Party Products.
(ii) The licenses granted pursuant to Sections 2 (A), (B), (D)
and (E) include the right for Licensee to adapt, alter,
modify, translate or otherwise create Derivative Works of the
Licensed Products, the Documentation, and, to such extent as
may be permitted under applicable agreements, the Third Party
Products, each such Derivative Work to be subject to all
restrictions, limitations and conditions of this Agreement
which are applicable to the item from which such Derivative
Work was prepared.
SECTION 3. SELECTION AND DELIVERY
From time to time during the Term, Licensor shall make available to
Licensee reasonable access to the Subject Products. If Licensee is
interested in any Subject Product, then during such period Licensee
shall request such Subject Product in writing in reasonable detail from
Licensor, and Licensor shall deliver the Subject Product for use
hereunder. Once a Subject Product has been delivered to Licensee, then
such Subject Product shall become a Licensed Product. Licensor
disclaims any obligations of maintenance or support with respect to the
Licensed Products and the Third-Party Products. To the extent permitted
by applicable agreements, Licensee may obtain maintenance and support
for the Third Party Products from the respective vendors thereof, at
Licensee's expense.
SECTION 4. INTELLECTUAL PROPERTY
A. Licensed Products Exclusive Property of Licensor. Licensee
recognizes and acknowledges Licensor's exclusive ownership and
title to the Licensed Products and Documentation and all
Intellectual Property therein. For all purposes of the
relationship between Licensor and Licensee created hereunder,
Licensor shall be deemed to be the sole and exclusive owner
thereof, subject only to the specific nonexclusive, terminable
rights granted to Licensee hereunder. Nothing contained in
this Agreement shall be construed to confer upon Licensee or
to vest in Licensee any right of ownership in the Licensed
Products or Documentation or to any Intellectual Property of
Licensor, and Licensee shall not, directly or indirectly,
register or cause to be registered, in any country or with any
governmental
<PAGE> 6
6
authority any Intellectual Property Right in any subject
matter consisting of or substantially similar to any of the
Licensed Products or Documentation. Licensee agrees that all
goodwill resulting from the use by it of the Licensed Products
or Documentation and Intellectual Property therein shall inure
solely to the benefit of Licensor.
B. No Challenge. During the Term and thereafter, Licensee will
not, and will not assist any Person to: (i) challenge the
validity or Licensor's ownership of the Licensed Products or
Documentation or Licensor's Intellectual Property therein;
(ii) contest the fact that Licensee's rights under this
Agreement are solely those of a licensee and terminate upon
termination or expiration of this Agreement; and (iii)
represent in any manner that it has any right in or to the
Licensed Products or Documentation in any manner except as set
forth in this Agreement.
C. Licensee Developments. Title to all Derivative Works based on
the Licensed Products or Documentation which have been created
solely by or for Licensee, shall be the property of Licensee,
subject to Licensor's ownership rights in all preexisting
materials included therein.
D. Proprietary Notices. Licensee agrees not to obfuscate, remove
or alter any of the patent, copyright, trademark, trade
secret, proprietary and other legal notices contained, in or
displayed by the use of, the Licensed Products, Documentation
or Third Party Products. Licensee further agrees to produce,
in each copy of the Licensed Products, Documentation or Third
Party Products that is made by Licensee, such patent,
copyright, trademark, trade secret, proprietary and other
legal notices that are properly included in the Licensed
Products, Documentation or Third Party Products, as provided
by Licensor to Licensee.
E. Compliance with Encryption and Export/Import Laws. Licensee
shall comply, and Licensee shall require all third parties
permitted access to Licensed Products, Documentation or Third
Party Products hereunder to comply, with all of then-current
applicable laws, rules and regulations of the United States
(and any other countries having jurisdiction) relating to the
use of encryption technology and the import and export of
technology, software and technical data, including, but not
limited to, any regulations of the United States Office of
Export Administration, to the extent permitted by applicable
law in the applicable jurisdiction, and of any other
applicable governmental authority, and shall not export or
re-export any technology, software, technical data or the
direct product of such technology, software and technical data
to any proscribed country listed in such applicable laws,
regulations and rules unless properly authorized.
<PAGE> 7
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SECTION 5. TERM
The Term of this Agreement shall commence on the date hereof, and
unless earlier terminated pursuant to Section 6 hereof, terminate on
the fiftieth anniversary of the date hereof.
SECTION 6. TERMINATION
A. Automatic Termination. This Agreement shall terminate
automatically in the event of any insolvency of Licensee, or
upon the appointment of any receiver, administrator,
liquidator, or trustee to take possession of the properties of
Licensee or upon the winding-up, sale, consolidation, merger
or any sequestration by governmental authority of Licensee.
B. Partial Termination. Licensor shall have the right to
terminate this Agreement as to any Licensed Product, Third
Party Product or item of Documentation under the circumstances
set forth in Section 8 (A), upon written notice to Licensee.
C. Termination for Breach. Licensor shall have the right to
terminate this Agreement, upon thirty days notice to Licensee,
in the event (a) of the breach of any material provision
hereof by Licensee which has remained uncured for thirty (30)
days following notice of such breach from Licensor or (b) the
Business is completely discontinued; provided, however, that
if any such event shall occur and remain uncured after such
initial 30 day cure period, then, if at the time of such
breach, Licensor owned a majority of outstanding equity
ownership of Licensee and at such time the Tune Stockholder
Group met the Tune Minimum Condition (as defined in the
Partnership Agreement) then, Licensor shall give further
written notice thereof to the Tune Stockholder Group and
Licensee, and Tune shall in accordance with the provisions of
the Partnership Agreement have an additional period of thirty
(30) days to effect such cure and Licensor shall not be
entitled to terminate this Agreement until the conclusion of
such additional 30 day cure period.
D. Effect of Termination.
(i) Termination of Rights. Upon expiration or termination of
this Agreement for any reason, Licensee's right to use the
Licensed Products, the Documentation and the Third Party
Products will terminate immediately, and this Agreement shall
cease, except that all obligations of the parties under this
Agreement which accrue or are due with respect to periods
prior to, or as of, such termination or expiration, and all
obligations which expressly survive the expiration or
termination of this Agreement shall continue in full force and
effect subsequent to and notwithstanding the expiration or
termination of this Agreement.
(ii) Use of Licensed Products. Upon expiration or termination
of this Agreement for any reason, Licensee shall discontinue
immediately all use of the
<PAGE> 8
8
Licensed Products, the Documentation and the Third Party
Products, cooperate with Licensor and any of its appointed
agents to inform the appropriate authorities of such
termination and destroy all materials that contain, refer to
or relate to the Licensed Products, the Documentation and the
Third Party Products, whether provided to Licensee by Licensor
or created or developed by Licensee or by any third party, or
shall certify the destruction of all such materials, except to
the extent that such materials constitute Licensee
Developments as defined in Section 4 (C) above. All rights in
the Licensed Products and the Documentation shall remain the
property of Licensor upon expiration or termination.
SECTION 7. REPRESENTATIONS WARRANTIES; DISCLAIMER
A. Licensor's Representations and Warranties. Licensor
represents and warrants that to the best of Licensor's
knowledge, Licensor has the right to grant the rights to the
Licensed Products, the Documentation and the Third Party
Products which are granted to Licensee herein. EXCEPT AS
STATED IN THE PRECEDING SENTENCE, THE LICENSED PRODUCTS,
DOCUMENTATION AND THIRD PARTY PRODUCTS ARE PROVIDED TO
LICENSEE "AS IS," AND LICENSOR MAKES NO WARRANTIES OF ANY
KIND, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER INCLUDING,
BUT NOT LIMITED TO, WHETHER THE LICENSED PRODUCTS WILL
FUNCTION IN ACCORDANCE WITH THE DOCUMENTATION OR ANY RESULTS
OBTAINABLE FROM THE USE OF ANY TECHNOLOGY LICENSED TO LICENSEE
UNDER THIS AGREEMENT, AND DISCLAIMS ANY AND ALL EXPRESS OR
IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE OR NONINFRINGEMENT OF THIRD-PARTY
INTELLECTUAL PROPERTY.
B. Licensee's Representations and Warranties. Licensee represents
and warrants that:
(i) Licensee is a limited liability company duly formed,
validly existing and in good standing as a limited liability
company under the laws of the State of Delaware and has the
requisite power and authority to own, lease and operate its
assets and its businesses as currently being conducted.
(ii) Licensee has the requisite power and authority to enter
into and perform this Agreement; the execution, delivery and
performance by Licensee of this Agreement have been duly
authorized by all required action on its part and, if
required, by its sole member, and this Agreement has been duly
executed and delivered by it.
(iii) This Agreement is a legal, valid and binding obligation
of Licensee enforceable against Licensee in accordance with
its terms.
<PAGE> 9
9
(iv) Licensee shall not make any direct or indirect use of the
Licensed Products, Documentation or Third Party Products other
than as permitted in this Agreement.
C. No Right to Extend Warranties. LICENSEE IS NOT AUTHORIZED TO,
AND SHALL NOT MAKE ANY WARRANTY ON BEHALF OF LICENSOR, EXPRESS
OR IMPLIED, TO ANY PERSON CONCERNING THE APPLICATION OF OR THE
RESULTS TO BE OBTAINED WITH THE TECHNOLOGY LICENSED TO
LICENSEE UNDER THIS AGREEMENT.
SECTION 8. INFRINGEMENT
A. Prevention of Infringement of Third-Party Rights. In the event
that the use of any Licensed Product, Documentation or Third
Party Product results, or in Licensor's reasonable opinion is
likely to result, in an infringement or violation of any third
party's Intellectual Property, or a breach of any license
obligation of Licensor with respect to a Third Party Product,
Licensor, at its option, may (i) modify the item in question
so that it avoids any such infringement, (ii) replace the item
in question with an alternative item that avoids such
infringement, violation or breach, or (iii) request return of
the item in question and terminate the license granted herein
with respect thereto, provided, however, that Licensor shall
not be obligated to make any expenditure in connection with
any of the foregoing, and shall in no event have any liability
for any claim of intellectual property infringement or trade
secret misappropriation arising out of Licensee's use of the
Licensed Products, Documentation or Third Party Products
hereunder, or for any claim by Licensee for impairment or loss
of use of the item in question due to any such modification,
replacement or termination.
B. Infringement by Third Parties. Licensee shall promptly notify
Licensor of any infringement of Intellectual Property in the
Licensed Products or Documentation that come to Licensee's
attention. In addition, Licensee undertakes to use its
reasonable best efforts to assist and cooperate with Licensor
in the prosecution of any lawsuits, legal actions or other
proceedings which, in the opinion of Licensor, are necessary
or advisable to protect the Licensed Products or the
Documentation, including, at Licensor's request and expense,
participating in such proceedings as a party; provided,
however, that Licensee shall not be required to incur or pay
any costs or expenses (other than de minimis amounts)
occasioned by such assistance or cooperation, and shall be
reimbursed by Licensee for any such expenditures Licensee does
make. The right to protect the Licensed Products and the
Documentation, as well as the right to determine in all
respects the manner of protection, shall at all times rest
exclusively with Licensor.
<PAGE> 10
10
SECTION 9. INDEMNIFICATION
A. Indemnity by Licensee. Licensee hereby indemnifies Licensor
and its officers, directors, shareholders, employees and
agents of any of the foregoing against all liability, loss,
damage, cost, claim or expense, including reasonable
attorney's fees, incurred by any such Person by reason of
Licensee's use of the Licensed Products, the Documentation or
the Third Party Products (to the extent that such liability
proximately results from the wrongful conduct of Licensee), or
otherwise incurred in the operation of the Business, or by
reason of any breach or untruth of Licensee's representations
and warranties contained herein or any failure by Licensee to
perform any agreement or covenant on its part contained in
this Agreement.
B. Indemnity by Licensor. Licensor hereby indemnifies Licensee
and its officers, directors, shareholders, employees and
agents of any of the foregoing against all liability, loss,
damage, cost, claim or expense, including reasonable
attorney's fees, incurred by any such Person by reason of any
breach or untruth of Licensor's representations and warranties
contained herein or any failure by Licensor to perform any
agreement or covenant on its part contained in this Agreement.
C. Notice of Claim. Whenever any claim shall arise for
indemnification under this Section 9, the party seeking
indemnification hereunder for a claim (the "Indemnitee") shall
notify the party to provide such indemnification (the
"Indemnitor") of the claim and, when known, the facts
constituting the basis for such claim, and shall cooperate
fully in the defense, settlement or compromise of such claim.
The Indemnitee shall have the sole right to select counsel for
the defense of such claim and to control the defense,
settlement or compromise of such claim, as long as, with
respect to a settlement or compromise, such settlement or
compromise involves only the payment of money for which the
Indemnitee is fully indemnified and includes a full
unconditional release of the Indemnitee from all related
liability; provided that if, in the reasonable opinion of
counsel to Indemnitee, there is a conflict or potential
conflict of interest between the Indemnitor, on the one hand,
and the Indemnitee, on the other hand, the Indemnitee shall be
entitled to direct the defense thereof, but only with respect
to such matters so in conflict, and any settlement or
compromise of such matters shall be subject to the prior
written consent of the Indemnitor (which shall not be
unreasonably withheld). The Indemnitor shall have the right to
participate in (but not control) the defense of any such
claim, with its counsel and at its own expense.
Notwithstanding any and all of the foregoing, to the extent
that any claim arises out of or is related to the Licensed
Products or Documentation or any use of thereof, Licensor
shall have the sole right to select counsel for the defense of
such claim and to control the defense, settlement or
compromise of such claim.
<PAGE> 11
11
SECTION 10. GENERAL PROVISIONS
A. Headings. The headings of the Sections and other subdivisions
of this Agreement are for convenience of reference only and
shall not modify, define or limit any of the terms or
provisions of this Agreement.
B. Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the
State of New York, without giving effect to any of its
conflicts of law provisions.
C. Severability. If any provision of this Agreement shall be held
to be illegal, invalid or unenforceable, that provision will
be enforced to the maximum extent permissible so as to effect
the intent of the parties and the validity, legality and
enforceability of the remaining provisions shall not in any
way be affected or impaired thereby. If necessary to effect
the intent of the parties, the parties will negotiate in good
faith to amend this Agreement to replace the unenforceable
language with enforceable language which as closely as
possible reflects such intent.
D. Amendments. This Agreement may be modified or amended only by
a written amendment signed by each party hereto.
E. Counterparts. This Agreement may be executed in one or more
counterparts (and all signatures need not be on any one such
counterpart), with all such counterparts together constituting
one and the same instrument.
F. Entire Agreement. This Agreement contains the entire agreement
of the parties with respect to the subject matter hereof and
supersedes any and all prior agreement and understandings,
whether written or oral, with respect to the subject matter
hereof, including the letter agreement dated May 19, 1999
among Viacom, Liberty, and TCI Music.
G. No Presumption. This Agreement shall be construed without
regard to any presumption or rule requiring construction or
interpretation against the party drafting or causing any
instrument to be drafted.
H. Consents and Approvals; Waivers; Remedies. All consents and
approvals which may be given under this Agreement shall, as a
condition of their effectiveness, be in writing. The granting
by a party hereto of any consent to or approval of any act
requiring consent or approval under the terms of this
Agreement, or the failure on the part of a party to object to
any such action taken without the required consent or
approval, shall not be deemed a waiver by the party whose
consent was required of its right to require such consent or
approval for any other act. The observance of any provision of
this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively)
by the party or parties entitled to enforce such term, but any
such waiver shall be effective only if
<PAGE> 12
12
in a writing signed by the party or parties against which such
waiver is to be asserted and only in the specific instance and
for the specific purpose for which given. Except as otherwise
provided herein, no failure or delay of any party in
exercising any power or right under this Agreement shall
operate as a waiver thereof, nor shall any single or partial
exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such right or power,
preclude any other or further exercise thereof or the exercise
of any other right or power.
I. Assignment. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns,
but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any party hereto
(whether by operation of law or otherwise) without the prior
written consent of the other party hereto except that
immediately after the execution of this Agreement as part of
Licensee's initial contribution to the Partnership, Licensee
shall assign all of its rights and obligations hereunder
(other than its obligation under Section 2 (C)) to the
Partnership and the Partnership shall accept and assume the
same in accordance with the terms of the VLLC Contribution,
Assignment and Assumption Agreement dated as of the date
hereof between Licensee and the Partnership, whereupon the
Partnership shall be substituted for Licensee in all respects
(other than Section 2 (C)) as fully as if it had been an
original party hereto. Upon such assignment and assumption,
Licensee shall be released from all of its obligations
hereunder other than under Section 2 (C). In connection with
the Reorganization, the Partnership shall assign all of its
rights and obligations hereunder to the corporate successor to
all or substantially all of the Partnership's assets pursuant
to an assignment and assumption agreement in form and
substance reasonably satisfactory to Licensor and such
corporate successor shall accept and assume the same. Upon
such assignment and assumption, the Partnership shall be
released from all of its obligations hereunder.
J. Confidentiality. Licensee and its wholly-owned Subsidiaries
shall, and shall use their reasonable best efforts to cause
their respective officers, directors, employees, attorneys,
accountants, contractors and agents (collectively, "AGENTS")
to, keep secret and retain in strictest confidence any and all
Confidential Information; shall not disclose such Confidential
Information, and shall use their reasonable best efforts to
cause their respective Agents not to disclose such
Confidential Information, to any Person other than employees
and Agents of Licensee and said wholly-owned Subsidiaries who
need to know such information in connection with activities
licensed under this Agreement, except (i) for such disclosures
as may be required by law or legal process, disclosures to
Licensee's counsel, or disclosures pursuant to any listing
agreement with, or the rules or regulations of, any securities
exchange on which securities of Licensee or such wholly-owned
Subsidiaries are listed or traded (in which event Licensee
shall so notify Licensor as promptly as practicable (and, if
possible, prior to making such disclosure) and shall seek
confidential treatment of such information); (ii) as may be
necessary to establish or enforce its rights hereunder; or
(iii) with the prior
<PAGE> 13
13
written consent of Licensor; and shall not use such
Confidential Information, and shall use its reasonable best
efforts to cause their respective Agents not to use such
Confidential Information, other than in connection with
activities licensed hereunder. Licensee and such wholly-owned
Subsidiaries further agree to take reasonable steps using at
least the same degree of care that they use to protect their
own software, technology and information of like sensitivity
and importance to the Confidential Information, but no less
than reasonable care, to ensure that such Confidential
Information is not disclosed, distributed or used in violation
of the provisions of this Agreement. For purposes of this
Section 10 (J), "CONFIDENTIAL INFORMATION" shall mean (1) the
terms of this Agreement and (2) all business and technical
information relating to Licensor's businesses, including
without limitation all Object Code, Source Code and
Documentation for the Subject Products and the Licensed
Products, that is proprietary to Licensor or otherwise not
available to the general public; provided, however, that such
Confidential Information shall not include any information
that (a) is or has become generally available to the public
other than as a result of a disclosure by Licensee, said
wholly-owned Subsidiaries or their respective Agents, (b) has
been independently developed by Licensee or said wholly-owned
Subsidiaries, or (c) is, or becomes available to Licensee or
said wholly-owned Subsidiaries on a non-confidential basis
from a third party having no obligation of confidentiality to
a party hereto and which has not itself received such
information directly or indirectly in breach of any such
obligation of confidentiality.
K. Equitable Relief. Licensee acknowledges that the Licensed
Products and Documentation are of a unique and original
character giving them peculiar value, the loss of which cannot
be compensated in damages in an action at law. Licensee
further agrees and acknowledges that, in addition to all other
rights that Licensor may have, Licensor shall be entitled as a
matter of right without further notice to Licensee, to obtain
injunctive and/or other equitable relief as may be provided by
law against any threatened, potential or actual breach by
Licensee of any of the provisions hereof.
L. Third Party Beneficiary. For so long as the Tune Stockholder
Group meets the Tune Minimum Condition, TCI Music shall be a
third party beneficiary of Licensor's obligations to the
Partnership hereunder insofar as and only to the extent that
it shall be entitled to enforce the Partnership's rights
hereunder in a separate cause of action for the benefit of the
Partnership. The Partnership shall indemnify and hold harmless
TCI Music from and against any costs and expenses (including
reasonable attorneys' fees) incurred by it in pursuing such a
cause of action if such cause of action is resolved in favor
of the Partnership and/or TCI Music. Except as set forth in
the first sentence of this Section 10 (L), this Agreement is
for the sole benefit of the parties hereto and their
respective successors and permitted assigns and nothing
herein, express or implied, is intended to or shall confer
upon any Person other than such parties any legal or equitable
right, benefit or remedy of any nature whatsoever under or by
reason of this Agreement.
<PAGE> 14
14
M. Notices. Except as expressly provided herein, notices and
other communications provided for herein shall be in writing
and shall be delivered by hand or overnight courier service,
mailed (certified or registered mail, postage prepaid, return
receipt requested) or sent by facsimile copier of the sending
party, as follows:
If to Licensor:
MTV Networks
1515 Broadway
New York, New York 10036
Telecopier No.: 212-258-8352
Attention: General Counsel
If to the Licensee:
MTVN Online Partner I LLC
1515 Broadway
New York, New York 10036
Telecopier No.: 212-846-1735
Attention: Chief Executive Officer
or to such other address or attention of such other Person as
any party shall advise the other parties in writing. All
notices and other communications given to a party in
accordance with the provisions of this Agreement shall be
deemed to have been given (i) three Business Days after the
same are sent by certified or registered mail, postage
prepaid, return receipt requested, (ii) when delivered by hand
or transmitted by fax (confirmation received) unless delivered
on a day which is not a Business Day or after 5:00 p.m., local
time, at the place of receipt, in which case such notice shall
be deemed to have been given on the next succeeding Business
Day or (iii) one Business Day after the same are sent by a
reliable overnight courier service, with acknowledgment of
receipt.
N. Jurisdiction; Venue.
(i) Each party hereby irrevocably and unconditionally submits,
for itself and its property, to the jurisdiction of any New
York State court sitting in the County of New York or any
federal court of the United States of America sitting in the
Southern District of New York, and any appellate court from
any such court, in any suit, action or proceeding arising out
of or relating to this Agreement, or for recognition or
enforcement of any judgment relating hereto.
(ii) Each party hereby irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so,
any objection which it may now or hereafter have to the laying
of venue of any suit, action or proceeding arising out of or
relating to this Agreement in any New York State court sitting
in the County of New York or any federal court sitting in the
Southern District of New York,
<PAGE> 15
15
and any appellate court from any such court. Each party hereby
irrevocably waives, to the fullest extent permitted by law,
the defense of an inconvenient forum to the maintenance of
such suit, action or proceeding in any such court and further
waives the right to object, with respect to such suit, action
or proceeding, that such court does not have jurisdiction over
such party. Each party hereby irrevocably waives the right to
a jury trial in any suit, action or proceeding arising out of
or related to this Agreement.
O. Force Majeure. No failure or omission by a party hereto in the
performance of any of its obligations under this Agreement
shall be deemed a breach of this Agreement nor shall it create
any liability, if the same shall arise from any cause or
causes beyond the control of the party, including, but not
limited to, the following, which, for the purpose of this
Agreement, shall be regarded as beyond the control of the
party in question: acts of God, acts or omissions of any
government, any rules, regulations, or orders issued by any
Governmental Entity, fire, storm, flood, earthquake, accident,
war, rebellion, insurrection, riot, invasion, strikes and
lockouts; provided, however, that the party so affected shall
use its reasonable best efforts to avoid or remove such causes
of nonperformance and shall continue performance hereunder
with the utmost dispatch whenever such causes are removed.
(P) Binding on Viacom. The parties acknowledge that MTVN and
Infoworks are divisions of Viacom and that, consequently,
Viacom is obligated to perform the obligations to be performed
by MTVN and Infoworks hereunder. Insofar as this Agreement
refers to MTVN or Infoworks in the context of an operating
business, it shall refer only to the operating unit or units
of Viacom that on a day-to-day basis operate the business of
MTV: Music Television or VH1 Music First in the case of MTVN,
and technology services related to music-themed internet sites
in the case of Infoworks.
<PAGE> 16
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed in duplicate counterparts, each of which shall be deemed to
constitute an original, effective as of the date first above written.
INFOWORKS, a division of Viacom International Inc.
By: /s/ Michael D. Fricklas
-------------------------------------------------
Name: Michael D. Fricklas
Title: Sr. Vice President and General Counsel
MTV NETWORKS, a division of Viacom International Inc.
By: /s/ David W. Sussman
-------------------------------------------------
Name: David W. Sussman
Title: Sr. Vice President, General Counsel and
Assistant Secretary
MTVN ONLINE INC.
By: /s/ David W. Sussman
-------------------------------------------------
Name: David W.Sussman
Title: Sr. Vice President, General Counsel and
Assistant Secretary
MTVN ONLINE PARTNER I LLC
By: /s/ David W. Sussman
-------------------------------------------------
Name: David W. Sussman
Manager: Sr. Vice President, General Counsel
and Assistant Secretary
<PAGE> 1
Exhibit 10.10
CONFORMED COPY
MUTUAL SERVICES AGREEMENT
MUTUAL SERVICES AGREEMENT (this "Agreement"), dated as of July 15,
1999, between Viacom International Inc., a Delaware corporation ("VII"), and
MTVN Online L.P., a Delaware limited partnership (as such entity may exist in
partnership form or in a reorganized, corporate or other form, the
"Partnership"). Capitalized terms used herein but not defined herein shall have
the respective meanings assigned to such terms in the Partnership Agreement (as
defined below).
WHEREAS, on the date hereof, Liberty Media Corporation, a Delaware
corporation ("Liberty"), TCI Music, Inc., a Delaware corporation ("TCI Music"),
MTV Networks, a division of VII ("MTVN"), MTVN Online Partner I LLC, a Delaware
limited liability company ("VLLC"), MTVN Online Inc., a Delaware corporation,
Imagine Radio, Inc., a California corporation ("Imagine"), SonicNet, Inc., a
Delaware corporation ("SonicNet"), The Box Worldwide Inc., a Florida corporation
("Box"), VJN LPTV Inc., a Delaware corporation and the Partnership, entered into
an Organization Agreement (the "Organization Agreement"); and
WHEREAS, contemporaneously therewith VLLC, Imagine (together with VLLC,
"MTVNS"), SonicNet and Box (together with SonicNet, "Tune") entered into an
Agreement of Limited Partnership, of even date herewith (the "Partnership
Agreement") whereby Tune and MTVNS formed the Partnership to conduct the
Business as defined in the Partnership Agreement as of the date hereof (the
"Business"); and
WHEREAS, in connection with the formation of the Partnership, VII has
agreed to provide directly or through MTVN, InfoWorks, a division of VII, MTVN
Online Inc., MTV Europe and MTVN Latin America Inc. (collectively "Viacom")
certain administrative, technical, support and other services (the
"Administrative Services") necessary to the operation of the Partnership; and
WHEREAS, Viacom desires that the Partnership provide certain services
described on Schedule II (the "Partnership Services") to certain business units
or divisions of VII listed on Schedule III (the "MTVN Businesses"), and the
Partnership has agreed to provide such services.
WHEREAS, Viacom and the Partnership desire to enter into this Agreement
which sets forth the general terms upon which (i) Viacom shall provide to the
Partnership the Administrative Services requested by the Partnership and (ii)
the Partnership shall provide to the MTVN Businesses the Partnership Services
requested by MTVN (the Partnership Services, the Administrative Services and
Additional Services (as defined below) may be referred to collectively as the
"Services").
NOW, THEREFORE, in consideration of the premises and the mutual
agreements set forth herein, the parties hereto agree as follows:
<PAGE> 2
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1. Provision of Services.
(a) Viacom, at the request of the Partnership, shall provide
the Administrative Services to the Partnership necessary to support the Business
in substantially the same manner and to substantially the same extent that such
services were provided to the businesses included in the MTVN Contribution (the
"Contributed Businesses") prior to the date hereof as adjusted proportionately
to reflect the increased size of the business of the Partnership as a result of
the Tune Contribution. The Administrative Services may include the items set
forth on Schedule I. Viacom shall not be obligated to acquire additional
personnel or resources to provide Administrative Services.
(b) The Partnership shall provide the Partnership Services to
the MTVN Businesses, as such Partnership Services may from time to time be
requested by the applicable MTVN Business; provided, however, that the
Partnership shall not be obligated to acquire additional personnel or resources
to provide Partnership Services.
2. Standard of Performance.
(a) Viacom shall provide the Administrative Services and any
Additional Services in a commercially reasonable manner and with the same level
of care that Viacom performs such services on its own behalf and for other
similarly situated non wholly-owned Controlled Affiliates of Viacom. The
Partnership shall provide the Partnership Services in a commercially reasonable
manner and with the same level of care that the Partnership provides such
services on its own behalf. All Administrative Services and any Additional
Services provided by Viacom and the Partnership shall be in accordance with, and
shall not violate, any laws, rules or regulations of any Governmental Entity,
and the provision of such Administrative Services shall not violate the rights
of any third party.
(b) If the Partnership desires to have Viacom provide any
additional services (collectively, the "Additional Services") arising out of or
relating to the Services, it shall give Viacom prior written notice thereof,
which shall include reasonable details relating to the request. Viacom and the
Partnership shall negotiate in good faith whether such Additional Services shall
be provided (if at all). It is agreed and understood that (i) Viacom shall not
in any event be required to upgrade or expand its infrastructure, facilities or
systems to provide the Additional Services, and (ii) any Additional Services
shall be provided, if at all, on the same terms as Administrative Services are
provided hereunder.
3. Force Majeure; Emergency Situations. In the event that war, fire,
explosion, flood, accident, strike, riot, act or omission of any governmental
authority, act of God, or other contingency beyond the reasonable control of a
party causes cessation or interruption of such party's performance hereunder,
performance by such party, other than an obligation to pay money, shall be
temporarily excused for the period of the disability, without liability,
provided that such party shall have, promptly after it has actual knowledge of
the beginning of any excusable delay, notified the other party of such delay,
the reason therefor, and the probable duration and consequence thereof. The
party so excused shall use commercially reasonable efforts to resume performance
of its obligations hereunder with the least possible delay.
<PAGE> 3
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4. Charges and Payment for Administrative Services.
(a) Fees. The Partnership shall reimburse Viacom for: (i) all
direct costs and expenses without markup incurred in good faith associated with
or related to the provision by Viacom of the Administrative Services and any
Additional Services and (ii) the Partnership's pro rata share of Viacom's
indirect overhead costs common to the Partnership and other businesses of Viacom
related to a particular Administrative Service or Additional Service, each
allocation to be based on the actual usage by the Partnership of such Service.
To the extent any Administrative Services or Additional Service requires the
purchase of equipment such equipment shall be leased to the Partnership under
either a capital or operating lease, whichever is applicable. The Partnership
shall make lease rental payments in accordance with the schedule set forth with
the purchase of said equipment, such schedule to be based on cost and usage of
the equipment. Viacom shall keep true, complete and accurate books of account
containing such particulars as may be necessary for the purpose of calculating
the above costs and shall make such books and records available for inspection
by representatives of the Partnership during normal business hours on reasonable
advance notice.
(b) Each calendar month, Viacom will promptly invoice the
Partnership for the amounts payable pursuant to this Agreement. Payment will be
made by the Partnership promptly after receipt of such invoice, but in no event
more than 30 days after receipt.
5. Charges and Payment for Partnership Services.
(a) Fees. Viacom shall reimburse the Partnership for: (i) all
direct costs and expenses without markup incurred in good faith associated with
or related to the provision by the Partnership of the Partnership Services and
(ii) Viacom's pro rata share of the Partnership's indirect overhead costs common
to Viacom and the Contributed Businesses related to a particular Partnership
Service, each allocation to be based on the actual usage by the applicable MTVN
Business. The Partnership shall keep true, complete and accurate books of
account containing such particulars as may be necessary for the purpose of
calculating the above costs and shall make such books and records available for
inspection by representatives of Viacom during normal business hours on
reasonable advance notice.
(b) Each calendar month, the Partnership will promptly invoice
Viacom for the amounts payable pursuant to this Agreement. Payment will be made
by Viacom promptly after receipt of such invoice, but in no event more than 30
days after receipt.
6. Indemnity.
(a) Each party shall at all times indemnify, defend and hold
the other party, its Affiliates, officers, directors, partners, members or
agents, harmless from and against any and all third party claims, losses, costs,
liabilities, damages and expenses (including reasonable attorneys' fees) of
every kind, nature and description, arising out of either party's gross
negligence or wilful misconduct in the performance of its obligations hereunder.
Each party agrees to promptly notify the other party in writing of any
indemnifiable claim, but the failure to so notify shall not relieve an
indemnifying party of any liability which it may have to an
<PAGE> 4
4
indemnified party except to the extent the indemnifying party is materially
prejudiced by the failure to give such prompt notice.
(b) An indemnifying party shall have the right to participate
in and assume the defense of any such third party claim for which
indemnification is sought. The party claiming indemnification shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof but the fees and expenses of such separate counsel shall not be
at the expense of the party against whom indemnification is sought unless (i)
the indemnified party shall have been advised by its counsel that use of the
same counsel to represent both the indemnifying party and the indemnified party
would present a conflict of interest (which shall be deemed to include any case
where there may be a legal defense or claim available to the indemnified party
which is different from or additional to those available to the indemnifying
party), or (ii) the indemnifying party shall fail vigorously to defend or
prosecute such claim or demand within a reasonable time, in which case the
indemnifying party shall not have the right to direct the defense of such action
on behalf of the indemnified party and the indemnifying party shall pay the
costs and expenses of the indemnified party's counsel. Except to the extent
otherwise provided above in this Section 6, the indemnifying party shall
reimburse each party entitled to indemnification hereunder the costs of
investigating and defending any claim, loss, damage, liability, cost or expense
giving rise to such indemnification obligation.
(c) An indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent (which consent
shall not be unreasonably withheld), but if settled with such consent, or if
there be a final judgment for the plaintiff, the indemnifying party shall
indemnify and hold harmless the indemnified parties from and against any loss or
liability (to the extent stated above) by reason of such settlement or judgment.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened proceeding
in respect of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party, unless
such settlement includes an unconditional release of such indemnified party from
all liability arising out of such proceeding.
7. Limitation of the Parties' Liability.
NO PARTY HERETO MAKES ANY WARRANTY REGARDING THE SERVICES IT
PROVIDES, AND EACH PARTY DISCLAIMS ALL WARRANTIES, INCLUDING THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR ANY PARTICULAR PURPOSE, WITH
RESPECT TO THE SERVICES.
8. Term and Termination. The term of this Agreement shall begin on the
date hereof and shall remain in full force and effect for five years from the
date hereof unless earlier terminated as follows:
(a) By the Chief Executive Officer of the Partnership in whole
or in part with respect to any Administrative Services or Additional Services,
upon thirty (30) days prior written notice to Viacom (the "Administrative
Services Termination Date").
<PAGE> 5
5
(b) By MTVN in whole or in part with respect to any
Partnership Services, upon thirty (30) days prior written notice to the
Partnership (the "Termination Date").
(c) By either party in the event of a material breach by the
other party, provided that such party has given the breaching party thirty (30)
days written notice of such breach, identified the nature of the breach, and
within such thirty-day cure period the breaching party has failed to cure the
asserted breach. The parties agree that for so long as the MTVN Stockholder
Group (i) owns at least 50.1% of the outstanding equity interests of the
Partnership or (ii) at the time of such breach is entitled to designate pursuant
to the Partnership Agreement a majority of the Management Committee of the
Partnership or, following the Reorganization a majority of the Board of
Directors of the corporate successor to the Partnership. MTVN shall not have any
right to terminate this Agreement under this Section 7(c) as a result of or
based upon any breach by the Partnership of this Agreement unless the
Partnership fails to make any payment due to VII hereunder.
(d) By either party upon written notice to the other party if
such other party shall file a petition in bankruptcy or insolvency, or a
petition for reorganization or adjustment of debts or for the appointment of a
receiver or trustee of all or a substantial portion of its property, or shall
make an assignment for the benefit of creditors, or if a petition in bankruptcy
or other petition described in this paragraph is filed against such other party
and shall not be discharged within 60 days thereafter.
9. Notices. Except as expressly provided herein, notices and other
communications provided for herein shall be in writing and shall be delivered by
hand or overnight courier service, mailed (certified or registered mail, postage
prepaid, return receipt requested) or sent by facsimile copies of the sending
party:
(a) VII: Viacom International Inc.
1515 Broadway
New York, NY 10036
Telecopier No.: (212) 258-6069
Attn: General Counsel
(b) the Partnership: MTVN Online L.P.
1515 Broadway
New York, NY 10036
Telecopier No.: (212) 846-1735
Attn: Mr. Fred Seibert
or to such other party or address as a party furnishes to the other in writing.
All notices and other communications given to a party in accordance with the
provisions of this Agreement shall be deemed to have been given (i) three
Business Days after the same are sent by certified or registered mail, postage
prepaid, return receipt requested, (ii) when delivered by hand or transmitted by
facsimile (confirmation received) unless delivered on a day which is not a
Business Day or after 5:00 p.m., local time, at the place or receipt, in which
case such notice
<PAGE> 6
6
shall be deemed to have been given on the next succeeding Business Day or (iii)
one Business Day after the same are sent by a reliable overnight courier
service, with acknowledgment of receipt.
10. Assignment. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any party
hereto (whether by operation of law or otherwise) without the prior written
consent of the other party hereto. In connection with the Reorganization the
Partnership shall assign all of its rights and obligations hereunder to the
corporate successor to all or substantially all of the Partnership's assets
pursuant to an assignment and assumption agreement in form and substance
reasonably satisfactory to VII and such corporate successor shall accept and
assume the same. Upon such assignment and assumption, the Partnership shall be
released from all of the obligations hereunder.
11. Waiver of Default. No consent or waiver, express or implied, by
either party with respect to any breach or default by the other party hereunder
shall be deemed or construed to be a consent or waiver with respect to any other
breach or default by any party of the same provision or any other provision of
this Agreement. No waiver of any provision of this Agreement shall be effective
unless in writing and signed by the party against which enforcement thereof is
to be sought. Failure on the part of a party to complain of any act or failure
to act of the other party or to declare such party in default shall not be
deemed or constitute a waiver of any rights hereunder.
12. Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of New York, without
giving effect to any of its conflicts of law provisions.
13. Counterparts. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
14. Headings. The headings of the sections of this Agreement are
inserted for convenience only and shall not modify, define or limit and the
terms or provisions of this Agreement.
15. Amendment. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
16. No Presumption. This Agreement shall be construed without regard to
any presumption or rule requiring construction or interpretation against the
party drafting or cause any instrument to be drafted.
17. Entire Agreement. This Agreement, including the Schedules hereto
sets forth the entire agreement and understanding of the parties hereto in
respect of the subject matter contained herein, and supersedes all prior
agreements, promises, covenants, arrangements,
<PAGE> 7
7
communications, representations and warranties, whether oral or written, by an
officer, employee or representative of any party hereto, including the letter
agreement dated May 19, 1999 among VII, Liberty and TCI Music.
18. Third Party Beneficiary. For so long as the Tune Stockholder Group
is entitled to designate a Representative to the Management Committee of the
Partnership pursuant to the Partnership Agreement, TCI Music shall be a third
party beneficiary of VII's obligations to the Partnership hereunder insofar as
and only to the extent it relates to the right to enforce on behalf of the
Partnership the Partnership's rights hereunder in a separate cause of action for
the benefit of the Partnership. The Partnership shall indemnify and hold
harmless TCI Music from and against any costs and expenses (including reasonable
attorneys' fees) incurred by it in pursuing such a cause of action if such cause
of action is resolved in favor of the Partnership and TCI Music. Except as set
forth in the first sentence to this Section 17, this Agreement is for the sole
benefit of the parties hereto and their respective successors and permitted
assigns and nothing herein, express or implied, is intended to or shall confer
upon any other Person any legal or equitable right, benefit or remedy of any
nature whatsoever under or by reason of this Agreement.
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date first written above.
VIACOM INTERNATIONAL INC.
By: /s/ Michael D. Fricklas
-----------------------------
Name: Michael D. Fricklas
Title: Sr. Vice President and
General Counsel
MTVN ONLINE L.P.
By: MTVN ONLINE PARTNER I LLC,
its General Partner
By: /s/ David W. Sussman
-----------------------------
Name: David W. Sussman
Title: Sr. Vice President, General
Counsel and Assistant Secretary
<PAGE> 9
SCHEDULE I
DESCRIPTION OF ADMINISTRATIVE SERVICES AND CHARGES
A. SERVICES.
1. Accounts Payable/Purchasing Services. Accounting services with
respect to the following: (A) general accounting
(billing/invoicing, accounts payable services, accounts
receivables management, tracking and payment of rights and
clearances, billing and collection services and maintenance of
general ledgers, monthly close, chart of account and balance
sheet maintenance), (B) cash management and banking services,
including without limitation wire transactions, (C) budget
preparation (including without limitation remote budgets); and
(D) maintenance and operation of purchase order system.
2. Financial and Currency Trading Services. Financial, payroll,
accounting and risk management services required with respect
to the Partnership's operations, including the services of
financial personnel to enable the Partnership to maintain
financial books of account and records, maintain suitable
books and records of control and accounting procedures,
maintain production accounting records.
3. Auditing Services. Auditing services, including internal and
external audits, quality assurance, security, etc.
4. Tax Services. Tax services required with respect to the
Partnership's operations including (i) the preparation and
filing of federal, state and local returns which include the
Partnership and (ii) the payment of taxes shown to be due on
such tax returns.
5. Legal Services. Legal services from internal legal staff for
requested legal matters, including material transactions,
contract negotiation and review, financing arrangements,
intellectual property matters (including domain name
registrations, other filings, prosecutions), labor matters,
real estate matters, ERISA matters, tax matters, regulatory
compliance, governmental relations and lobbying, litigation
(including strategy and oversight) and such other legal
matters as are customarily handled by Viacom's internal legal
staff.
6. Information Services. Information services including (i)
design, construction and installation services for high-end
production graphic and animation workstations, (ii) online
development networks and networking; (iii) hosting and
collocation services including services relating to production
and publishing, encoding, streaming, personalization, site
performance, scheduling, and monitoring (using Viacom's and
third party network hardware, software and related
facilities), (iv) backend development (e.g. HTML, graphics),
(v) maintenance and support services for the Partnership's
computer hardware, software and related facilities, including
messaging, (vi) training and research services for the
Partnership's
<PAGE> 10
employees, (vii) consultation services concerning the
Partnership's information service needs, including preparation
of RFPs, the design and architecture of computer systems and
networks, internet hosting services, the purchase of computer
hardware and software and preparation of documentation and
plans, and (viii) technical quality assurance services.
7. Employee Benefits. To the extent the Partnership and Viacom
Inc. agree, coverage of Partnership employees under one or
more employee benefit plans sponsored or maintained by Viacom
Inc. or an affiliate of Viacom Inc.
8. Human Resource Services. Human resource services including
assistance with (i) recruiting, screening, hiring, review,
evaluation, training, development, orientation, promotion and
termination of Partnership employees including without
limitation production personnel; (ii) the development,
implementation and administration of employment policies and
manuals, the coordination of personnel allocation and
utilization; (iii) the development, implementation and
operation of benefit plans and programs; (iv) compensation
planning and administration, including compensation analysis
and preparation and implementation of merit, incentive and
bonus plans; (iv) monitoring and tracking of employee records.
The Human Resource services relating to benefit plans and
programs may include assistance with benefits planning and
administration, 401K plans, disability programs, enrollment
and re-enrollment. Notwithstanding the foregoing, the
Partnership shall make all decisions regarding (a) the hiring,
promotion, demotion, sanctioning or termination of all
Partnership personnel, (b) compensation, (c) employment
policies, and (d) all other decisions concerning its
personnel.
9. Insurance Services. Provision of usual and necessary business
insurance including property and casualty (including general
liability and workers compensation), and Officers and
Directors Liability Insurance.
10. Facilities Management/Operations Services. Assistance in real
estate services including the negotiation of lease
arrangements (for current and new space), facilities
maintenance and building services, facility renovations and
build-outs, purchasing and installation of furniture,
fixtures, telecommunications services and systems, production
and other equipment; purchase of supplies, provision of
duplication services, mail room and shipping services, courier
services, reprographics, security services and general
oversight of facilities as well as the management and
organization of remote site logistics; provision of office
space.
I-2
<PAGE> 11
11. Creative Services. Creative Services as follows:
Contract management services
Rights and Clearances services
Talent negotiation and union analysis
Access to edit rooms and editing support services (charged
pursuant to the internal rate card)
Access to audio and video processing technologies
Technical/production consulting
Production related, technology demonstrations
12. Other Services. Services related to corporate development,
public relations, including contacts with various news,
consumer and trade publication media and securities analysts;
access to market research and music entertainment news
(including news developed internally and acquired from third
party sources to the extent permitted by such third party
sources), travel and event management, subscription ordering,
etc.
13. International Management Services. Services related to the
management of the international online businesses, including
the management of international Partnership employees.
I-3
<PAGE> 12
SCHEDULE II
DESCRIPTION OF PARTNERSHIP SERVICES AND CHARGES
A. SERVICES.
1) Provide the various programming services owned by Viacom and
operated by MTVN with access to the Partnership's market
research and music entertainment news (including internal and
third party sources, to the extent permitted by such third
party sources) in a manner consistent with the past practices
of the Contributed Businesses.
2) Provide the various programming services owned by Viacom and
operated by MTVN with online production and hosting services
relating to the operation and maintenance of "trade sites"
which provide certain information (provided by the programming
services to the Partnership) to customers and suppliers of
such programming services in a manner consistent with the past
practices of the Contributed Businesses.
3) Provide such services to the MTV Asia online business as
contemplated to be performed as of the date hereof pursuant to
the joint venture agreement of MTVN or an affiliate of MTVN
and Tricast (or its successor) to operate an "MTV" branded
interactive consumer service based on the MTV Asia television
services; provided that MTVN shall not materially expand the
scope of rights that have been granted to such joint venture
as of the date hereof.
<PAGE> 13
SCHEDULE III
SERVICED BUSINESSES
1. MTVN
2. MTV Asia
3. Tricast/Asia
4. MTV Brazil
5. MTV Latin America
6. MTV/VH1 Europe
7. MTV Russia
8. MTV Europe
<PAGE> 1
Exhibit 10.11
DATABASE AND SOFTWARE LICENSE AGREEMENT
AGREEMENT, entered into effective as of July 15, 1999, by and between
MTV Networks ("Licensee"), a division of Viacom International Inc., a Delaware
corporation ("Viacom") and MTVN Online L.P., a Delaware limited partnership (the
"Licensor").
WHEREAS, the parties hereto have entered into an Organization Agreement
of even date herewith with Liberty Media Corporation ("Liberty"), TCI Music,
Inc. ("TCI Music"), MTVN Online Partner I LLC, MTVN Online, Inc., Imagine Radio,
Inc. ("Imagine"), SonicNet, Inc. ("SonicNet"), The Box Worldwide, Inc. ("Box"),
and VJN LPTV Corp. (the "Organization Agreement"); and
WHEREAS, in connection with the Organization Agreement the parties
desire that the Licensor provide a database and related materials to Licensee
upon the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. Certain Definitions. As used in this Agreement, the following terms
shall have the meanings specified below:
"Affiliate" shall have the meaning set forth in the Organization
Agreement.
"Business" shall have the meaning set forth in the Partnership
Agreement.
"Business Day" shall have the meaning set forth in the Partnership
Agreement.
"Control" shall have the meaning set forth in the Organization
Agreement.
"Partnership Agreement" shall mean the Agreement of Limited Partnership
of even date herewith among VLLC, Imagine, SonicNet and Box.
"Person" shall have the meaning set forth in the Organization
Agreement.
"Reorganization" shall have the meaning set forth in the Parent
Agreement and Guaranty of even date herewith among TCI Music, Licensee, Liberty,
Box, SonicNet and Licensor.
2. Grant of License.
(a) Grant. Subject to the terms and conditions of this Agreement,
Licensor hereby grants to Licensee a fully-paid, royalty-free,
non-exclusive right and license (the "License") for the duration of the
Term (as hereinafter defined) to use the following
<PAGE> 2
2
databases (the "Databases"), software and informational materials,
including without limitation any additions, revisions and modifications
made thereto by Licensor and Licensee during the Term (collectively,
the "Licensed Materials"):
(i) Licensor's music database, including all information
collected on the music industry, including without limitation,
titles, artists, composers, concerts, record labels, etc.
(ii) Licensor's digitized music database; and
(iii) Licensor's customer database and related customer data
and demographic information compiled by Licensor; provided,
however, that the grant hereof shall not include any such
customer data to the extent such grant would violate the terms
of any consent granted by the applicable end user, or any
applicable privacy regulations; and provided further that
Licensee shall not be entitled to sell, barter, or otherwise
transfer to a third party (other than Affiliates of Licensee)
such customer information.
The Licensed Materials shall not include any materials to the extent
that inclusion thereof would violate any license agreement from a
third-party hereafter entered into by Licensor; provided, however, that
Licensor shall use its commercially reasonable best efforts to avoid
any such restriction in connection with data or software that it
acquires.
(b) Permitted Use. The Licensed Materials may only be used by Licensee
for purposes of conducting Licensee's business, and Licensee shall have
the right in its sole discretion to sublicense the Licensed Materials
to any person who at the time of the grant of such sublicense is an
Affiliate of Licensee, for use by such sublicensee in connection with
the operation of their respective businesses. Nothing in the License is
intended to permit Licensee or its Affiliates to use the Licensed
Materials for the operation of a business in competition with the
Business as of the date of this Agreement.
(c) Delivery. The Licensed Materials shall be made available to
Licensee at such times and in such format as Licensee may reasonably
request. Licensor shall use its commercially reasonable best efforts to
keep the Licensed Materials current and accurate in all material
respects during the Term. Licensee shall have the right to make
changes, modifications, additions and deletions to the Licensed
Materials subject to any third party license rights. If Licensee makes
any additions, revisions or modifications to the Licensed Materials, it
shall upon request by Licensor, make such additions, revisions or
modifications available to Licensor for its use mutatis mutandis in
accordance with the same terms and conditions as are provided herein.
(d) Third Party Requirements. To the extent any of the Licensed
Materials are provided to Licensor through any agreement with a third
party, Licensor shall furnish Licensee with a copy of such agreement
and Licensee agrees to comply with the terms thereof. Licensee further
agrees to comply with any reasonable restrictions on the use of the
Licensed Materials established by Licensor.
<PAGE> 3
3
3. Term; Termination.
(a) Term. The Term of this Agreement shall commence on the date hereof,
and unless earlier terminated pursuant to subsection (b) hereof,
terminate on the earlier of (i) the fiftieth anniversary of the date
hereof or (ii) the fifth anniversary of the first date that Licensee
and its Affiliates own, in the aggregate, less than twenty-five percent
(25%) of the equity interests in the Partnership.
(b) Termination.
(i) Automatic Termination. This Agreement shall terminate
automatically in the event of any insolvency of Licensee, or
upon the appointment of any receiver, administrator,
liquidator, or trustee to take possession of the properties of
Licensee or upon the winding-up of Licensee, by a Governmental
Entity (as defined in the Organization Agreement).
(ii) Partial Termination. In the event that (i) any of the
Licensed Materials are determined to infringe any third party
owned patent, copyright or other intellectual property right,
or (ii) Licensor reasonably determines that the use or
continued use of any of the Licensed Materials is not legally
permissible, including but not limited to by reason of
conflicts with third party rights in any Database, Licensor
shall have the right to terminate this Agreement as to any
such Licensed Materials to the extent of such determination
upon notice to Licensee.
(iii) Termination for Breach. Licensor shall have the right to
terminate this Agreement, upon thirty days notice to Licensee,
in the event (a) of the breach of any material provision
hereof by Licensee which has remained uncured for thirty (30)
days following notice of such breach from Licensor or (b) the
Business is completely discontinued.
(c) Effect of Termination.
(i) Immediate Termination. Upon expiration or termination of
this Agreement for any reason, Licensee's right to use the
Databases will terminate immediately, and this Agreement shall
cease except that all obligations of the parties under this
Agreement which accrue or are due with respect to periods
prior to, or as of, such termination or expiration, and all
obligations which expressly survive the expiration or
termination of this Agreement shall continue in full force and
effect subsequent to and notwithstanding the expiration or
termination of this Agreement.
(ii) Use of Licensed Materials. Upon expiration or termination
of this Agreement for any reason, Licensee shall discontinue
immediately all use of the Licensed Materials, cooperate with
Licensor and any of its appointed agents to inform the
appropriate authorities of such termination and destroy all
materials that contain, refer to or relate to the Licensed
Materials, whether provided to
<PAGE> 4
4
Licensee by Licensor or created or developed by Licensee or
by any third party. All rights in the Licensed Materials shall
remain the property of Licensor upon expiration or
termination.
4. Non-exclusivity. Nothing in this Agreement is intended to prevent Licensor
from entering into license agreements with others with respect to all or any
part of the Licensed Materials, consistent with subsection 2 (a) above.
5. Limited Warranty. Licensor hereby represents and warrants to Licensee as to
Licensed Materials created after the date hereof ("New Licensed Materials") that
the New Licensed Materials as furnished to Licensee, shall be in the same form
and content as used by Licensor in the Business, and that to its knowledge: (a)
it owns or otherwise has the right to use the New Licensed Materials; (b) it has
the right and power to grant the License to Licensee as provided herein; (c) the
grant of the License to Licensee as provided herein does not require the consent
of any third party; and (d) the New Licensed Materials and their use as
contemplated by this Agreement do not infringe or violate any patent, copyright,
other intellectual property right, right of publicity, right of privacy or
contract right of any third party. EXCEPT AS EXPRESSLY PROVIDED IN THE FOREGOING
SENTENCE, LICENSOR MAKES NO REPRESENTATION OR WARRANTY WHATSOEVER, WHETHER
EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE LICENSED MATERIALS. LICENSOR
MAKES NO REPRESENTATIONS AS TO THE QUANTITY OF NEW LICENSE MATERIALS THAT WILL
BE GENERATED OR AS TO THE FUNCTIONALITY, ACCURACY, OR COMMERCIAL VALUE (IF ANY)
THEREOF. LICENSOR HEREBY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR ANY PARTICULAR PURPOSE. IN NO EVENT SHALL LICENSOR BE LIABLE TO
LICENSEE HEREUNDER FOR ANY CONSEQUENTIAL, PUNITIVE OR INCIDENTAL DAMAGES.
6. Ownership of Licensed Materials. All Licensed Materials, including any
copies, translations or compilations of all or any part thereof, and any
revisions, modifications or additions thereto made by Licensor or Licensee, are
and shall remain the sole exclusive property of Licensor, except for any
revisions, modifications or additions thereto which were made solely by
Licensee, which shall be owned by Licensee, but with respect to which Licensor
shall hereby be granted a non-exclusive, non-transferable license to use for the
Term of this Agreement mutatis mutandis in accordance with the terms and
conditions set forth herein. Licensee shall not seek, apply for, or assert
rights in, registrations for patents, copyrights, or the like covering the New
Licensed Materials.
7. Miscellaneous.
(a) Headings. The headings of the sections and other subdivisions of
this Agreement are for convenience of reference only and shall not
modify, define or limit any of the terms or provisions of this
Agreement.
<PAGE> 5
5
(b) Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of New York,
without giving effect to any of its conflicts of law provisions.
(c) Severability. If any provision of this Agreement shall be held to
be illegal, invalid or unenforceable, that provision will be enforced
to the maximum extent permissible so as to effect the intent of the
parties and the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby. If
necessary to effect the intent of the parties, the parties will
negotiate in good faith to amend this Agreement to replace the
unenforceable language with enforceable language which as closely as
possible reflects such intent.
(d) Amendments. This Agreement may be modified or amended only by a
written amendment signed by each party hereto.
(e) Counterparts. This Agreement may be executed in one or more
counterparts (and all signatures need not be on any one such
counterpart), with all such counterparts together constituting one and
the same instrument.
(f) Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to the subject matter hereof and supersedes
any and all prior agreement and understandings, whether written or
oral, with respect to the subject matter hereof, including the
Memorandum of Understanding dated May 19, 1999 among Viacom, Liberty,
and TCI Music.
(g) No Presumption. This Agreement shall be construed without regard to
any presumption or rule requiring construction or interpretation
against the party drafting or causing any instrument to be drafted.
(h) Consents and Approvals; Waivers; Remedies. All consents and
approvals which may be given under this Agreement shall, as a condition
of their effectiveness, be in writing. The granting by a party hereto
of any consent to or approval of any act requiring consent or approval
under the terms of this Agreement, or the failure on the part of a
party to object to any such action taken without the required consent
or approval, shall not be deemed a waiver by the party whose consent
was required of its right to require such consent or approval for any
other act. The observance of any provision of this Agreement may be
waived (either generally or in a particular instance and either
retroactively or prospectively) by the party or parties entitled to
enforce such term, but any such waiver shall be effective only if in a
writing signed by the party or parties against which such waiver is to
be asserted and only in the specific instance and for the specific
purpose for which given. Except as otherwise provided herein, no
failure or delay of any party in exercising any power or right under
this Agreement shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such right or power, preclude any
other or further exercise thereof or the exercise of any other right or
power.
<PAGE> 6
6
(i) Assignment. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but neither this
Agreement nor any of the rights, interests or obligations hereunder
shall be assigned by any party hereto (whether by operation of law or
otherwise) without the prior written consent of the other party hereto.
In connection with the Reorganization, the Licensor shall assign all of
its rights and obligations hereunder to the corporate successor to all
or substantially all of the Licensor's assets pursuant to an assignment
and assumption agreement in form and substance reasonably satisfactory
to Licensee and such corporate successor shall accept and assume the
same. Upon such assignment and assumption, the Licensor shall be
released from all its obligations hereunder.
(j) Limitation on Rights of Others. Nothing in this Agreement, whether
express or implied, shall be construed to give any Person (other than
the parties hereto and their permitted successors and assigns) any
legal or equitable right, remedy or claim under or in respect of this
Agreement or any covenants, conditions or provisions contained herein.
None of the provisions of this Agreement shall be for the benefit of or
enforceable by any third party.
(k) Notices. Except as expressly provided herein, notices and other
communications provided for herein shall be in writing and shall be
delivered by hand or overnight courier service, mailed (certified or
registered mail, postage prepaid, return receipt requested) or sent by
facsimile copier of the sending party, as follows:
If to Licensee:
MTV Networks
1515 Broadway
New York, New York 10036
Telecopier No.: 212-258-8352
Attention: General Counsel
with a copy to:
Viacom International Inc.
1515 Broadway
New York, New York 10036
Telecopier No.: 212-258-6069
Attention: General Counsel
If to the Licensor:
MTVN Online, L.P.
1515 Broadway
New York, New York 10036
<PAGE> 7
7
Telecopier No.:212-846-1735
Attention: Mr. Fred Seibert
or to such other address or attention of such other Person as any party
shall advise the other parties in writing. All notices and other
communications given to a party in accordance with the provisions of
this Agreement shall be deemed to have been given (i) three Business
Days after the same are sent by certified or registered mail, postage
prepaid, return receipt requested, (ii) when delivered by hand or
transmitted by fax (confirmation received) unless delivered on a day
which is not a Business Day or after 5:00 p.m., local time, at the
place of receipt, in which case such notice shall be deemed to have
been given on the next succeeding Business Day or (iii) one Business
Day after the same are sent by a reliable overnight courier service,
with acknowledgment of receipt.
<PAGE> 8
8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first set forth above.
MTV NETWORKS, a division of
Viacom International, Inc.
By: /s/ David W. Sussman
----------------------------------------
Name: David W. Sussman
Title: Sr. Vice President, General Counsel
and Assistant Secretary
MTVN ONLINE L.P.
By: MTVN Online Partner I LLC, its General Partner
By: /s/ David W. Sussman
----------------------------------------
Name: David W. Sussman
Title: Sr. Vice President, General Counsel and
Assistant Secretary
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
The MTVi Group, L.P., a Delaware limited partnership
Mischief New Media, Inc., a New York corporation*
The Box Worldwide LLC, a Delaware limited liability company
SonicNet LLC, a Delaware limited liability company
- -----------
* Mischief New Media will become a subsidiary of the MTVi Group, Inc.
concurrently with the closing of the offering.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of The
MTVi Group, Inc. of our report on the consolidated financial statements of The
MTVi Group, L.P. at December 31, 1998 and 1999 and for each of the three years
in the period ended December 31, 1999, dated March 13, 2000 which appears in
such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
--------------------------------------
New York, New York
March 16, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of The
MTVi Group, Inc. of our report on the financial statements of SonicNet, Inc. at
December 31, 1997 and 1998 and for each of the two years in the period ended
December 31, 1998, dated January 10, 2000 which appears in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
/s/ PricewaterhouseCoopers LLP
--------------------------------------
New York, New York
March 16, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of The
MTVi Group, Inc. of our report on the consolidated financial statements of The
Box Worldwide, Inc. at December 31, 1997 and 1998 and for the period from
December 17, 1997 to December 31, 1997 and the year ended December 31, 1998,
dated January 10, 2000 which appears in such Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
--------------------------------------
New York, New York
March 16, 2000
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 4, 1998, with respect to the financial
statements of The Box Worldwide, Inc. and subsidiaries (Predecessor) included in
the Registration Statement (Form S-1 No. 333-30188) of The MTVi Group, Inc. for
the registration of its common stock.
/s/ Ernst & Young LLP
--------------------------------------
Miami, Florida
March 16, 2000
