<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 2000
REGISTRATION NO. 333-30188
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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)
<TABLE>
<S> <C> <C>
DELAWARE 7375 13-4099684
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
</TABLE>
------------------------
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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<S> <C> <C>
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
</TABLE>
------------------------
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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<PAGE> 2
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 with this registration statement 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 30, 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 NEW
YORK STOCK EXCHANGE 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 & CO. INC. MERRILL LYNCH & CO.
UTENDAHL CAPITAL PARTNERS, L.P. WIT SOUNDVIEW
, 2000
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 7
Special Note Regarding Forward-Looking
Statements.......................... 18
Use of Proceeds....................... 19
Dividend Policy....................... 19
Capitalization........................ 20
Dilution.............................. 21
Selected Financial Data............... 22
Unaudited Pro Forma Consolidated
Condensed Financial Statements...... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 28
Corporate History and
Reorganization...................... 34
Business.............................. 35
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management............................ 50
Certain Relationships and Related
Transactions........................ 55
Principal Stockholders................ 63
Description of Capital Stock and
Partnership Units................... 65
Shares Eligible for Future Sale....... 70
Material United States Federal Tax
Consequences to Non-United States
Holders............................. 71
Underwriters.......................... 74
Legal Matters......................... 78
Experts............................... 78
Where You Can Find More Information... 79
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------
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 indicates, 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., LDIG Music Online, Inc., LDIG Music Online II, Inc.
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 launched in 1994 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 $46.4 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
downloading digital music and purchasing CDs, tickets, and MTV, VH1, SonicNet
and other on-air franchise branded merchandise.
We believe that we have a unique set of strengths in the online music
industry which positions our network of websites to continue to lead this
industry and makes us a powerful value-creating vehicle for music
1
<PAGE> 6
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 possible 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.
------------------------
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.
2
<PAGE> 7
ORGANIZATION
The following sets forth our simplified corporate structure as of the
completion of this offering:
[MTVi CORPORATE STRUCTURE 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.
(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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<S> <C>
Class A common stock offered:
U.S. offering........................... shares
International offering.................. shares
-------------
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)
-------------
-------------
</TABLE>
Estimated net proceeds from
this offering............... $
Use of proceeds............... By MTVi Group: To acquire
partnership units, including the sole general
partnership unit, representing a % equity
interest in the Partnership, or %, if the
underwriters' over-allotment option is
exercised in full.
By the Partnership: For advertising, promoting
and developing its brands and developing
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, other
than distributions by the Partnership to its
partners to cover taxes incurred with respect
to taxable income of the Partnership.
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
- ---------------
(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.
(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.
(3) The number of shares of Class A common stock to be outstanding after the
offering includes 275,000 shares to be issued to the sole shareholder of
Mischief New Media Inc. in exchange for the 275,000 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.
4
<PAGE> 9
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 exchangeable 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 of our Class A and Class B
voting stock.
Proposed New York Stock
Exchange 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 pro forma financial data 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. 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.
<TABLE>
<CAPTION>
PRO FORMA
MTVI GROUP
------------
YEAR
ENDED
YEAR ENDED OR AT DECEMBER 31, DECEMBER 31,
------------------------------- ------------
1997 1998 1999 1999
------- -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.............................................. $ 5,778 $ 8,837 $ 18,247 $ 20,169
Operating income (loss)..................................... (6,933) (11,800) (46,450) (76,083)
Minority interest(1)........................................ -- -- --
Net income (loss)........................................... (4,298) (7,316) (46,392)
Net income (loss) per common share:
Basic and diluted(2)...................................... -- -- -- $
BALANCE SHEET DATA:
Total assets................................................ $ 1,884 $ 7,030 $168,098 $
Total equity................................................ 837 1,720 158,975
</TABLE>
- ------------
(1) Minority interest represents the allocation of approximately % of the
Partnership's net loss to the limited partners of the Partnership.
(2) 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.
6
<PAGE> 11
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 $46.4 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 BE LOWER THAN ANTICIPATED 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. 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,
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<PAGE> 13
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. None of our 1999 advertising
revenues arose from advertisements that appeared on television. 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 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.
WE DEPEND ON A LIMITED NUMBER OF ADVERTISERS, AND THE LOSS OF A SIGNIFICANT
PORTION OF THESE ADVERTISERS COULD ADVERSELY AFFECT OUR ADVERTISING REVENUES
We anticipate that our operating results 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 could adversely affect
our advertising revenues.
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.
Our receipt of advertising revenues may be delayed due to things 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
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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.
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 may 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
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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.
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 use in connection with our licensed services, thus
providing name recognition for our websites. However, 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
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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.
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;
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-- risks of entering markets in which we have no or limited experience;
and
-- potential loss of key employees of acquired organizations.
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 exposed 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.
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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.
STATE, FEDERAL AND FOREIGN LAWS MAY BE APPLICABLE TO OUR CONTESTS AND
SWEEPSTAKES, WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS
State, federal and foreign laws governing lotteries and gambling may be
applicable to our contests and sweepstakes, which could result in 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 SIGNIFICANTLY 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. The amount of these royalties is established
either by law or through negotiation with the owner of the content or with
performing rights 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 significantly. 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.
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 accrue royalties to composers and publishers through these
societies at interim rates, final royalties have not been established. ASCAP and
BMI are seeking royalties ranging from 1.6% to 1.75% of a licensee's revenue
generated from the online performance of songs. The final rates that we will be
obligated to pay 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.
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. Unlike ASCAP and BMI, the Recording
Industry Association of America has not announced a benchmark royalty rate that
it would be seeking for the online performance of recorded music.
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. 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
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as part of the royalty arbitration convened by the Librarian of Congress. 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 using their music in this manner and pay for our past
use. We are currently negotiating with these two record companies regarding the
resolution of these issues.
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.
WE MAY BE LIABLE 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, we could be liable if third persons
were able to penetrate our network security or otherwise misappropriate our
users' personal information or credit card information. We could also be liable
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 expose 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.
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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
this investment was an investment security could result in MTVi Group being an
investment company under the Investment Company Act and require us to register
under, and fulfill 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
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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, 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 issuable upon exercise of 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.
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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.
18
<PAGE> 23
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 a % equity interest in the
Partnership, or % if the underwriters' over-allotment option is
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.
19
<PAGE> 24
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 at an assumed initial public offering price of
$ per share, 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.................................. 158,975 --
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).......... -- --
--------
Total stockholders' equity(5)........................ 158,975 --
-------- ---------- ----------
Total capitalization..................................... $158,989 $ -- $ --
======== ========== ==========
</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 275,000 shares of Class
A common stock to the sole shareholder of Mischief New Media in exchange for
the 275,000 partnership units issued in connection with our acquisition of
Mischief New Media and the employment by us of its sole shareholder.
20
<PAGE> 25
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 discussions and table presented above assume 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.
21
<PAGE> 26
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 in this prospectus 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) (46,450)
Net income (loss).................. (334) (2,070) (4,298) (7,316) (46,392)
BALANCE SHEET DATA:
Total assets....................... $ 15 $ 2,708 $ 1,884 $ 7,030 $168,098
Total equity....................... (26) 2,028 837 1,720 158,975
</TABLE>
22
<PAGE> 27
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.
23
<PAGE> 28
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............... 18,230 4,986 23,216 23,216
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......... 8,539 3,387 11,926 11,926
Depreciation............. 1,163 117 943(2) 2,223 2,223
Amortization of
intangibles and other
assets................. 17,246 4,012 17,295(2) 38,553 38,553
-------- -------- -------- -------- ------- --------
Total costs and
expenses............. 64,697 13,317 18,238 96,252 96,252
-------- -------- -------- -------- ------- --------
Operating income (loss).... (46,450) (12,188) (17,445) (76,083) (76,083)
Loss on write-off of
investment in equity
security................. (3,000) -- -- (3,000) (3,000)
-------- -------- -------- -------- --------
Income (loss) before income
taxes.................... (49,450) (12,188) (17,445) (79,083) (79,083)
Benefit for income taxes... 3,058 -- (3,058)(4) -- --
Minority interest(5)....... -- -- -- (5)
-------- -------- -------- -------- ------- --------
Net income (loss).......... $(46,392) $(12,188) $(20,503) $(79,083) $ $
======== ======== ======== ======== ======= ========
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.
24
<PAGE> 29
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................................. 154,688 -- 154,688
Other assets..................................... 1,087 -- 1,087
-------- --------- --------
$168,098 $ $
======== ========= ========
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)............................. -- 158,975(3) 158,975
Stockholders' Equity:
Common stock................................... -- (3)
Additional paid-in capital..................... -- (3)
(3)
Net equity investment.......................... 158,975 (158,975)(3) --
Accumulated other comprehensive income
(loss)...................................... -- -- --
-------- --------- --------
Total equity................................ 158,975
-------- --------- --------
$168,098 $ $
======== ========= ========
</TABLE>
See notes to unaudited pro forma consolidated condensed financial statements.
25
<PAGE> 30
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 $17,295
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.
26
<PAGE> 31
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 expense, net....................................... (587)
Benefit/(provision) for income taxes........................ --
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 an assumed initial public offering
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 $158,975 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 $158,975 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.
27
<PAGE> 32
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 in this section of the prospectus. 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
28
<PAGE> 33
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, so long as RioPort guarantees 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 has contractually committed to vigorously
promote us on its television networks through advertising, VJ mentions, text on
screen and to provide other support, in exchange 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. MTV
Networks contractually has the right to control its own advertising inventory
and to make final determinations as to the advertising it airs relating to us.
MTV Networks has, however, cooperated with us in MTV Networks' advertising
development and scheduling to accommodate our advertising scheduling needs.
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As a result, MTV Networks controls the timing of when these expenses will be
incurred, which may create fluctuations in our future results of operations.
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 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 99.9
Related party cross promotion expense..................... 29.5 54.5 27.5
Allocated charges from parent............................. 63.2 55.4 79.5
Selling, general and administrative....................... 13.4 12.2 46.8
Depreciation.............................................. 0.4 1.9 6.4
Amortization of intangibles and other assets.............. -- -- 94.5
------ ------ ------
Total costs and expenses............................... 220.0 233.6 354.6
Operating income (loss)..................................... (120.0) (133.6) (254.6)
Loss on write-off of investment in equity security........ -- -- (16.4)
------ ------ ------
Income (loss) before income taxes........................... -- -- (271.0)
Benefit for income taxes.................................. 45.6 50.8 16.8
------ ------ ------
Net income (loss)........................................... (74.4)% (82.8)% (254.2)%
</TABLE>
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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) (46,450)
Net income (loss)........................................... (4,298) (7,316) (46,392)
</TABLE>
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 a full year as compared
to only seven months in 1998.
Total costs and expenses increased 214% to $64.7 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 $7.1 million, personnel costs associated with the creation of
an operations group and expansion of production staff increased $1.4
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 $7.5 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 $17.2 million attributable to the 1999 acquisitions of
Imagine Radio and business of SonicNet.
In June 1998, we received a guaranteed promotion fee from a service
provider in the form of warrants to purchase common stock valued at $3 million.
We have determined that the decline in the fair value of this investment is
other than temporary and, accordingly, have reclassified the loss of $3 million
from the Consolidated Statements of Changes in Equity to the Consolidated
Statements of Operations for the year ended December 31, 1999.
As a result of the factors discussed above, our operating loss increased
294% to $46.5 million for the year ended December 31, 1999 from $11.8 million
for the year ended December 31, 1998, and our net loss increased 536% to $46.4
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
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<PAGE> 36
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:
- Production costs associated with the creation of independent design, news
and creative groups at a cost of $1.1 million, costs associated with
programming and content creation at a cost of $0.9 million and increases
in personnel to support increased production at a cost of $1.1 million;
- 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 $1.2 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.
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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 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.
SEASONALITY
Our advertising revenues are subject to seasonal fluctuations.
Historically, advertisers spend less in the first and third calendar quarters,
and user traffic on online media properties has been lower during the summer and
year-end vacation periods. As a result, we expect our results of operations to
fluctuate throughout the year, which may have a material adverse effect on our
business and financial condition.
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.
On March 3, 2000, the Partnership acquired all of the assets of Mischief
New Media Inc., an online music business, in exchange for the issuance of
250,000 limited partnership units. At that date, the sole shareholder of
Mischief New Media also received 25,000 restricted limited partnership units to
which a two year vesting provision applies based on the sole shareholder's
continued employment with the Partnership. In connection with this offering,
Mischief's New Media sole shareholder will contribute all of the outstanding
shares of Mischief New Media's capital stock, together with his restricted
limited partnership units, to MTVi Group in exchange for 275,000 shares of MTVi
Group's Class A common stock.
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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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 launched in 1994 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
-- Software
</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.
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
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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. 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 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.
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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 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.
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-- 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 four 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, and increase 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 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.
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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.
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
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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. Our agreement with Rioport expires
in October 2001. We believe that there are a number of competing companies
that could adequately provide digital downloading services to us if our
agreement with Rioport is not renewed.
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 thus 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 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
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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.
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
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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 14.5 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.
(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.
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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 media 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. MTV
Networks is not legally obligated to contribute this site to us.
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. The quality of the
sound and picture a viewer of music videos receives from the website versus
television will ultimately depend on equipment quality. Assuming a computer and
television of equal quality, however, the sound and picture quality of music
videos viewed on the website will currently be less clear than those viewed on
television.
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;
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-- artist and programming-driven sponsorships;
-- 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
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which time new customers will need to register and registered customers will
need to enter a username and 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
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.
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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.
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.
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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.
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
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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
infringement actions could be brought against us based upon the content licensed
from third parties. Any such claims or disputes could expose 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.
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 liable if private
information provided to us by our users were misused."
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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.
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. We
are currently negotiating with these two record companies regarding resolution
of these issues. 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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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, Viacom Inc. or Liberty Digital. 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
Elinor Hirschhorn........................ 37 Senior Vice President, Global Business
Development and Strategic Partnerships
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.
Elinor Hirschhorn has served as senior vice president, global business
development and strategic partnerships since 2000. From 1993 to 2000, Ms.
Hirschhorn served in various positions at Viacom and its affiliates, including
senior vice president of business development, MTV Networks; vice president of
corporate development, Viacom; and director of business development, Showtime
Networks Inc. Ms. Hirschhorn has an additional three years of media experience
at Time Inc. and The M Group (Thailand) and worked as an investment banker from
1985 to 1989. Ms. Hirschhorn serves as a director of Fiduciary Trust Company
International and on the advisory board of Toolfarm.com.
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,
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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.
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 served as chairman of the board of Liberty Digital from December 1998 to
September 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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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
The following is a description of the material features of this plan. The
plan is attached as an exhibit to the registration statement of which this
prospectus is a part. The 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.
Prior to this offering, a maximum of 12,000,000 partnership units in the
aggregate may be issued or transferred under the plan, whether reserved for
issuance upon grants of options or granted as restricted awards. Upon the
consummation of this offering, a maximum of 12,000,000 shares of Class A common
stock in the aggregate may be issued or transferred under the plan, whether
reserved for issuance upon grants of
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<PAGE> 57
options or granted as restricted awards. This includes 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.
OPTIONS
Prior to this offering, 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 compensation committee and set forth
in the applicable agreement, no option shall be exercisable 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.
The compensation 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 compensation
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 compensation committee, in shares of Class A
common stock (including the shares of Class A common stock for which
options are outstanding);
-- 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 compensation 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
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 compensation 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 compensation
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.
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RESTRICTED AWARDS
Prior to this offering, 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 covered by a vesting schedule established by the
compensation committee. The compensation 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 compensation 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 compensation
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 compensation
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 which may be awarded 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 compensation 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 compensation 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.
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 compensation committee.
AMENDMENT AND TERMINATION OF THE PLAN
The plan, by its terms, expires on October 1, 2004. The plan may be
terminated and may be altered, amended, suspended or terminated at any time, in
whole or in part, by the compensation committee, except that no alteration or
amendment will be effective without shareholder approval if the compensation
committee determines that such approval is required.
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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 MTVi 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) % equity interest if the underwriters' over-allotment options are
exercised in full.
(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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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 offer 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
controlled by the user, 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, with 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 by purchasing a proportional number of any additional
partnership units sold by the Partnership to Viacom and its affiliates.
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 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, but may be otherwise terminated upon the occurrence of some specified
events.
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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 and cease to beneficially own a majority
of the Class A and Class B common stock 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
in this section of the prospectus 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 by purchasing a proportional number of shares of any additional
capital stock issued by MTVi Group to Viacom and its affiliates 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 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
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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
drag 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 connection with the licensed
services and for goods sold or distributed in connection with the business of
the Partnership.
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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
exhibition of the programming. MTV Networks must reasonably cooperate, but has
no obligation to obtain or negotiate for these rights.
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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, 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 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.
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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.
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
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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 by this
prospectus 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 500,000,000 shares
of Class A common stock, par value $.01 per share, 1,000 shares of Class B
common stock, par value $.01 per share, and 50,000,000 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. 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, but this right may be limited by
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 may be redeemed 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 any series
of these shares, 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 Section 203 of the Delaware General Corporation Law is
applicable to it. 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 of the board of
directors 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. The provisions of Rule 144 under the Securities Act
may provide additional limits to resale. 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 of the
Internal Revenue Code, all as in effect on the date of this prospectus, and all
of which could 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, we cannot assure you 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 of the United States;
-- 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 under 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, United States withholding tax either at a rate of 30%
of the gross amount of the dividend or a lower rate which may be specified by an
applicable tax treaty generally will be applicable to any dividend paid to a
Non-United States Holder of Class A common stock. 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, a branch profits tax at a
rate of 30% or a lower rate which may be specified by an applicable tax treaty
may also be applicable to 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.
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 have to pay 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.
Backup withholding at a rate of 31% may be applicable to dividends paid to
a Non-United States Holder at an address within the United States 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"), backup withholding at a rate of 31% may be applicable to payment
of dividends to Non-United States Holders at an address outside the United
States after December 31, 2000 unless the non-United States Holder satisfies
certification requirements.
Information reporting and backup withholding at a rate of 31% will be
applicable to 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 unless the
holder certifies its non-United States status under penalties of perjury or
otherwise establishes an exemption. Generally, backup withholding will not be
applicable, but information reporting requirements will be applicable, to 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 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 for whom backup withholding is applicable 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 DISCUSSION IN THIS SECTION 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 limited by 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., SoundView Technology
Group, Inc. and Cazenove & Co. 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. .........................
Cazenove & Co. ...........................................
--------
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 before the several underwriters become
obligated to pay for and accept delivery of the shares of Class A common stock
offered by this prospectus, their counsel must approve certain legal matters,
and some other conditions must be satisfied. 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.
Under 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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Under 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 representations and agreements described above
(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 limitations described above do not apply to stabilization
transactions or to certain other transactions specified in the agreement between
U.S. and international underwriters. As used in this section of the prospectus,
"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 of the United States or Canada, 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."
Under 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.
Under 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 of any province
or territory of Canada 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 of any province or territory of Canada 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.
Under 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.
Under 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 of Japan, any of the shares acquired in
connection with the distribution contemplated by this prospectus, 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 of Japan 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,
after various conditions are satisfied, 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 New York Stock Exchange 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
76
<PAGE> 81
-- 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 and/or endorsed by us or any underwriter in its capacity as underwriter
and should not be relied upon by investors.
77
<PAGE> 82
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 may 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 by this prospectus 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.
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 on these consolidated
financial statements appearing elsewhere in this prospectus, and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
78
<PAGE> 83
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 by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules to the registration statement. 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, we refer you to the registration statement and the
exhibits and any schedules filed with the registration statement. 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, we refer you 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 to the registration
statement, 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 to the registration statement.
Except as provided above, 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 must comply with 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
in this site or connected to this site 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.
79
<PAGE> 84
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-41
Consolidated Balance Sheets--at December 31, 1998 and June
30, 1999 (Unaudited)...................................... F-42
Consolidated Statements of Cash Flows--For the Six Months
Ended June 30, 1998 and 1999 (Unaudited).................. F-43
Notes to Consolidated Financial Statements (Unaudited)...... F-44
Report of Independent Accountants........................... F-49
Report of Independent Auditors.............................. F-50
Consolidated Statements of Operations--Years Ended December
31, 1997 and 1998......................................... F-51
Consolidated Balance Sheets--at December 31, 1997 and
1998...................................................... F-52
Consolidated Statements of Changes in Equity--Years Ended
December 31, 1997 and 1998................................ F-53
Consolidated Statements of Cash Flows--Years Ended December
31, 1997 and 1998......................................... F-54
Notes to Consolidated Financial Statements.................. F-55
</TABLE>
F-1
<PAGE> 85
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> 86
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> 87
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. Liberty Digital's interest in the
Partnership may increase and the aggregate interest of the Viacom affiliates in
the Partnership may decrease depending upon the future fair value of the
partnership in accordance with the terms of the partnership agreement. In no
event will Liberty Digital's interest increase nor will the aggregate interest
of the Viacom affiliates decrease by more than 5%.
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
F-4
<PAGE> 88
THE MTVi GROUP, INC.
NOTES TO BALANCE SHEET--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 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. 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> 89
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 28, 2000
F-6
<PAGE> 90
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 18,230
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 8,539
Depreciation.............................................. 26 171 1,163
Amortization of intangibles and other assets.............. -- -- 17,246
------- ------- --------
Total costs and expenses............................... 12,711 20,637 64,697
------- ------- --------
OPERATING INCOME (LOSS)..................................... (6,933) (11,800) (46,450)
Loss on write-off of investment in equity security........ -- -- (3,000)
------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... (6,933) (11,800) (49,450)
Benefit for income taxes.................................. 2,635 4,484 3,058
------- ------- --------
NET INCOME (LOSS)........................................... $(4,298) $(7,316) $(46,392)
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 91
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 --
Intangibles, net............................................ -- 154,688
Other assets................................................ -- 1,087
------ --------
$7,030 $168,098
====== ========
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....................................... 1,975 158,975
Accumulated other comprehensive income (loss)............... (255) --
------ --------
Total equity........................................... 1,720 158,975
------ --------
$7,030 $168,098
====== ========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 92
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)...................... (46,392) $(46,392) (46,392)
Other comprehensive income (loss):
Unrealized loss on equity
security.......................... (2,745) (2,745) (2,745)
Reclassification adjustment for loss
included in net income (loss)..... 3,000 3,000 3,000
-------- --------
Total comprehensive income
(loss)......................... $(46,137)
========
Net contributions from partners........ 203,392 203,392
-------- ------- --------
BALANCE AT DECEMBER 31, 1999............. $158,975 $ -- $158,975
======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 93
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) $(46,392)
Adjustments to reconcile net income (loss) to net cash
flow from operating activities:
Depreciation........................................... 26 171 1,163
Amortization of intangibles and other assets........... -- -- 17,246
Loss on write-off of investment in equity security..... -- -- 3,000
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....................................................... $ -- $ -- $160,020
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> 94
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. Liberty Digital's interest in the Partnership may increase
and the aggregate interest of the Viacom affiliates in the Partnership may
decrease depending upon the future fair value of the partnership in accordance
with the terms of the partnership agreement. In no event will Liberty Digital's
interest increase nor will the aggregate interest of the Viacom affiliates
decrease by more than 5%. 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 pursuant to which 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
F-11
<PAGE> 95
THE MTVi GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
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 $157,000 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
pursuant to which 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 may be adjusted.
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> 96
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 on the Partnership's websites 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, respectively.
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> 97
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
$17,053 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. We have determined that the decline in
the fair value of an investment in equity security is other than temporary and,
accordingly, have reclassified the loss of
F-14
<PAGE> 98
THE MTVi GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
$3 million from the Consolidated Statements of Changes in Equity to the
Consolidated Statements of Operations for the year ended December 31, 1999.
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 $ 38,553
Net income (loss)........................................... $(53,133) $(79,083)
</TABLE>
F-15
<PAGE> 99
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) (46,392)
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............. -- -- 175,000
Distribution of certain of The Box's assets to
MTVN............................................... -- -- (14,980)
------- ------- --------
Balance, end of the year............................. $ 837 $ 1,975 $158,975
======= ======= ========
</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> 100
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> 101
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 in this prospectus.
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> 102
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 as a result
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> 103
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.
F-20
<PAGE> 104
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 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:
<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
F-21
<PAGE> 105
THE MTVi GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
would have decreased by $24 ($14 after tax), $44 ($26 after tax) and $3,933
($3,921 after tax), for the years 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. The Partnership is currently negotiating
with these two record companies regarding resolution of these issues. 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> 106
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> 107
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> 108
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> 109
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, subject to certain future
adjustments, 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, subject to certain future adjustments, 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> 110
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 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.
F-27
<PAGE> 111
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
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 in this prospectus.
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> 112
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 limited by 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> 113
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> 114
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> 115
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> 116
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> 117
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 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.
F-34
<PAGE> 118
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, subject to certain future
adjustments, 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, subject to certain future adjustments, 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> 119
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> 120
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> 121
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 in this
prospectus.
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> 122
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 limited by 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> 123
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 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 liquidity.
F-40
<PAGE> 124
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-41
<PAGE> 125
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-42
<PAGE> 126
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-43
<PAGE> 127
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 in this prospectus.
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, subject to certain future adjustments, 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, subject to certain future adjustments, 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.
F-44
<PAGE> 128
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED 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, 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.
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-45
<PAGE> 129
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 limited by U.S. federal income tax laws.
F-46
<PAGE> 130
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-47
<PAGE> 131
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-48
<PAGE> 132
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-49
<PAGE> 133
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-50
<PAGE> 134
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-51
<PAGE> 135
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-52
<PAGE> 136
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-53
<PAGE> 137
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-54
<PAGE> 138
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, subject to certain future adjustments, 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, subject to
certain future adjustments, 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-55
<PAGE> 139
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-56
<PAGE> 140
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-57
<PAGE> 141
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-58
<PAGE> 142
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-59
<PAGE> 143
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-60
<PAGE> 144
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 limited by 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-61
<PAGE> 145
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, although a new rental
rate may be negotiated, 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-62
<PAGE> 146
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-63
<PAGE> 147
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-64
<PAGE> 148
mtvi group logo
<PAGE> 149
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 30, 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 NEW
YORK STOCK EXCHANGE 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
CAZENOVE & CO. UTENDAHL CAPITAL PARTNERS, L.P. WIT SOUNDVIEW
, 2000
<PAGE> 150
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
New York Stock Exchange 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.
On March 3, 2000, the Partnership acquired all of the assets of Mischief
New Media Inc., an online music business, in exchange for the issuance of
250,000 limited partnership units. At that date, the sole
II-1
<PAGE> 151
shareholder of Mischief New Media also received 25,000 restricted limited
partnership units that are subject to a two year vesting provision based on the
sole shareholder's continued employment with the Partnership. No underwriters,
brokers or other agents were involved with this transaction. These securities
were issued pursuant to an exemption from the registration requirements of the
Securities Act provided by Section 4(2) of the Securities Act. In connection
with this offering, Mischief New Media's sole shareholder will contribute all of
the outstanding shares of Mischief New Media's capital stock, together with his
restricted limited partnership units, to MTVi Group in exchange for 275,000
shares of MTVi Group's Class A common stock
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.
10.15 Contribution Agreement among The MTVi Group, L.P., Mischief
New Media Inc. and Jason Hirschhorn dated March 3, 2000
</TABLE>
II-2
<PAGE> 152
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.16* Interactive Services Agreement between Registrant (as
successor-in-interest to MTV Networks, a division of Viacom
International Inc.) and America Online, Inc. dated as of
September 1, 1998
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.
(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> 153
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 30, 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 30, 2000
- ------------------------------------- and Director (Principal Executive
Nicholas Butterworth Officer)
* Acting Senior Vice President and March 30, 2000
- ------------------------------------- Acting Chief Financial Officer
George S. Smith, Jr. (Principal Financial and Accounting
Officer)
* Chairman of the Board of Directors March 30, 2000
- -------------------------------------
Sumner M. Redstone
* Director March 30, 2000
- -------------------------------------
Philippe P. Dauman
* Director March 30, 2000
- -------------------------------------
Thomas E. Dooley
Director March , 2000
- -------------------------------------
Lee Masters
</TABLE>
* By Nicholas Butterworth, attorney-in-fact.
II-4
<PAGE> 154
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.
</TABLE>
<PAGE> 155
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ------------------------------------------------------------ -------------
<S> <C> <C>
10.15 Contribution Agreement among The MTVi Group, L.P., Mischief
NewMedia Inc. and Jason Hirschhorn dated March 3, 2000
10.16* Interactive Services Agreement between Registrant (as
successor-in-interest to MTV Networks, a division of Viacom
International Inc.) and America Online, Inc. dated as of
September 1, 1998
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.
<PAGE> 1
EXECUTION COPY
CONTRIBUTION AGREEMENT
AMONG
MTVN ONLINE L.P.,
MISCHIEF NEW MEDIA INC.,
AND
JASON HIRSCHHORN
DATED AS OF MARCH 3, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
ARTICLE 1
DEFINITIONS AND CONSTRUCTION
<S> <C>
1.1. Certain Definitions.................................................................................. 1
1.2. Additional Definitions............................................................................... 5
ARTICLE 2
CONTRIBUTION
2.1. Conveyance of Mischief Assets........................................................................ 6
2.2. Limited Assumption of Liabilities and Obligations.................................................... 7
2.3. Non-Assumption of Liabilities........................................................................ 8
2.4. Assumed Contracts.................................................................................... 8
ARTICLE 3
CONDITIONAL CONTRIBUTION TO THE COMPANY BY SHAREHOLDER
3.1. Transfer of Mischief Shares to the Company........................................................... 8
3.2. Mischief Share Closing............................................................................... 9
3.3. Mischief Share Closing Deliveries.................................................................... 9
3.4. Conditions to Mischief Share Closing of MTVNO........................................................ 9
3.5. Conditions to Mischief Share Closing of Shareholder.................................................. 10
3.6. Transfer Restrictions on Company Common Stock........................................................ 10
ARTICLE 4
CONSIDERATION
4.1. Contribution Consideration........................................................................... 12
</TABLE>
i
<PAGE> 3
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF MISCHIEF AND SHAREHOLDER
<TABLE>
<S> <C>
5.1. Due Incorporation; Good Standing..................................................................... 12
5.2. Capitalization; Subsidiaries, Other Interests, etc................................................... 12
5.3. Due Authority; Valid, Binding and Enforceable........................................................ 13
5.4. No Violation of Laws or Agreements................................................................... 13
5.5. Contracts............................................................................................ 13
5.6. Absence of Litigation................................................................................ 14
5.7. Compliance with Laws; Permits; Consents.............................................................. 14
5.8. Acquired Assets; Title; Closing Liability Schedule................................................... 14
5.9. Absence of Certain Changes........................................................................... 15
5.10. Intellectual Property................................................................................ 15
5.11. Year 2000............................................................................................ 17
5.12. Labor; Employee Benefits............................................................................. 17
5.13. Taxes................................................................................................ 17
5.14. No Brokerage......................................................................................... 17
5.15. Disclosure........................................................................................... 17
5.16. Securities Act Matters............................................................................... 17
ARTICLE 6
ADDITIONAL REPRESENTATIONS AND WARRANTIES OF SHAREHOLDER AT MISCHIEF SHARE
CLOSING
6.1. Mischief Share Closing Title......................................................................... 18
6.2. Liabilities.......................................................................................... 18
6.3. Assets............................................................................................... 18
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
6.4. Securities Act Matters............................................................................... 18
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF MTVNO
7.1. Formation; Existence................................................................................. 19
7.2. Due Authority; Valid, Binding and Enforceable........................................................ 19
7.3. No Violation of Laws or Agreements................................................................... 19
7.4. Issuance of Partnership Units and Company Common Stock............................................... 20
7.5. Securities Act Matters............................................................................... 20
ARTICLE 8
COVENANTS
8.1. Partnership Agreement................................................................................ 21
8.2. Employment Agreement................................................................................. 21
8.3. Pledge Agreement..................................................................................... 21
8.4. Conduct of Mischief Business Prior to Mischief Share Closing......................................... 21
8.5. Non-Competition...................................................................................... 21
8.6. Shareholder's Put Right.............................................................................. 22
ARTICLE 9
REGISTRATION RIGHTS
9.1. Demand Rights........................................................................................ 24
9.2. Piggy-Back Rights.................................................................................... 25
9.3. General Registration Provisions...................................................................... 26
ARTICLE 10
SURVIVAL; INDEMNIFICATION
10.1. Survival............................................................................................. 33
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
10.2. Indemnification by Shareholder....................................................................... 33
10.3. Indemnification by MTVNO............................................................................. 34
10.4. Indemnification Procedures........................................................................... 34
10.5. No Contribution from Mischief........................................................................ 35
10.6. Limitations on Indemnification....................................................................... 35
10.7. Exclusive Remedy..................................................................................... 35
ARTICLE 11
MISCELLANEOUS
11.1. Table of Contents; Headings.......................................................................... 36
11.2. Governing Law........................................................................................ 36
11.3. Severability......................................................................................... 36
11.4. Amendments........................................................................................... 36
11.5. Counterparts......................................................................................... 36
11.6. Entire Agreement..................................................................................... 36
11.7. No Presumption....................................................................................... 36
11.8. Parties in Interest; Limitation on Rights of Others.................................................. 36
11.9. Waivers; Remedies.................................................................................... 37
11.10. Further Assurances................................................................................... 37
11.11. Public Announcements................................................................................. 38
11.12. Costs and Expenses................................................................................... 38
11.13. Notices.............................................................................................. 38
11.14. Jurisdiction; Consent to Service of Process.......................................................... 39
11.15. Cooperation for Financial Reporting.................................................................. 40
</TABLE>
iv
<PAGE> 6
CONTRIBUTION AGREEMENT
CONTRIBUTION AGREEMENT, dated as of March 3, 2000, among MTVN Online
L.P., a Delaware limited partnership ("MTVNO"), Mischief New Media Inc., a New
York corporation ("Mischief"), and Jason Hirschhorn ("Shareholder").
Subject to the terms and conditions contained herein, (i) Mischief and
Shareholder desire that Mischief transfer to MTVNO, and MTVNO desires to acquire
from Mischief, substantially all of the assets of Mischief and (ii) upon
consummation of the IPO (as defined below) Shareholder and MTVNO desire to
provide for the transfer of Mischief Shares (as defined below) to the Company
(as defined below).
Simultaneously herewith, Mischief and Shareholder are executing
Amendment No. 2 ("Amendment No. 2") to the Agreement of Limited Partnership
dated as of July 15, 1999 (as such Agreement of Limited Partnership has
heretofore been, is now being, or may in the future be, amended, modified or
supplemented from time to time in accordance with its terms, the "Partnership
Agreement") among 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"), pursuant to which VLLC, Imagine, SonicNet and Box formed MTVNO. A copy
of Amendment No. 2, which, among other things, provides for the admission of
Mischief and Shareholder to MTVNO, is attached hereto as Exhibit A.
Simultaneously herewith, MTVNO and Shareholder are entering into an
employment agreement, dated as of the date hereof (as the same may be amended
from time to time, the "Employment Agreement"), pursuant to which MTVNO will
employ Shareholder. A copy of the Employment Agreement is attached hereto as
Exhibit B.
Simultaneously herewith, Shareholder and Mischief are executing and
delivering to MTVNO a pledge agreement, dated as of the date hereof (the "Pledge
Agreement"), pledging certain equity interests in MTVNO and the Company to
secure the indemnification obligations of Shareholder under this Agreement. A
copy of the Pledge Agreement is attached hereto as Exhibit C.
Accordingly, the parties 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:
<PAGE> 7
2
"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.
"Agreement" means this Contribution Agreement, including all Schedules
and Exhibits hereto, as the same may be amended or modified from time to time.
"Business" has the meaning set forth in the Partnership Agreement.
"Business Day" has the meaning set forth in the Partnership Agreement.
"Closing Liability Schedule" means the schedule attached hereto as
Exhibit D which contains a true, correct and complete list of all outstanding
liabilities of Mischief as of the date of this Agreement.
"Company" means the entity that issues stock to the public in
connection with the IPO, which may include, without limitation, any one of the
following entities: (i) MTVNO, as such entity may exist in partnership form or
in a reorganized, corporate or other form upon contribution of MTVNO's assets
and liabilities; (ii) an entity that is the holding company of the entity
described in clause (i) above; or (iii) an entity that is a Partner in MTVNO.
"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.
"Control" has the meaning set forth in the Partnership Agreement.
"Exchange Agreement" means an exchange agreement to be entered into by
the Company and the Partners providing for the exchange of a specified number
and kind of shares of Company Common Stock for Partnership Units from and after
the IPO as contemplated by the Partnership Agreement.
"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.
"IPO" has the meaning set forth in Amendment No. 2.
"Intellectual Property" means the Intellectual Property Rights
identified in Schedule 5.10, together with all other Intellectual Property
Rights owned, used or held for use in connection with the business of Mischief
as currently conducted.
"Intellectual Property Rights" means (i) all patents, copyrights,
trademarks, service marks, trade identification, trade dress, trade names,
copyrights, trade secrets, know-how, proprietary information (including without
limitation proprietary software algorithms and designs), mask work rights,
database rights, publicity rights, privacy rights and other rights of a
<PAGE> 8
3
similar nature for which legal protection, statutory, common law or otherwise,
may be obtained, in the United States and/or any other country or 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 of 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; (vii)
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.
"knowledge" means, with respect to Mischief, the actual knowledge of
any officer or director of Mischief.
"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 or Software.
"Lien" means any lien, charge, claim, pledge, security interest or
other encumbrance of any kind, except (i) as may exist under federal or state
securities laws, (ii) as created by or resulting from this Agreement or (iii)
for Permitted Liens.
"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).
"Operative Agreements" means this Agreement, the Partnership Agreement
(including Amendment No. 2), the Employment Agreement and the Pledge Agreement.
"Outstanding License" means any License by or to Mischief or to which
Mischief is otherwise a party, or by which Mischief or any of its Intellectual
Property or other property is subject or bound.
"Partner" has the meaning set forth in the Partnership Agreement.
"Partnership Unit" 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.
"Permitted Liens" means (i) Liens for Taxes not yet due and payable,
(ii) materialmen's or mechanic's Liens arising in the ordinary course of
operations which are not delinquent and (iii) such other Liens as would not be
reasonably likely to have a material adverse
<PAGE> 9
4
effect on the business of Mischief; provided, however, in no event, shall
Permitted Liens include Liens against the securities of any party hereto or any
Affiliate of any such party.
"Permitted Transferee" has the meaning set forth in the Partnership
Agreement.
"Person" has the meaning set forth in the Partnership Agreement.
"Pledged Shares" has the meaning set forth in the Pledge Agreement.
"Registrable Shares" means the total number of shares of Company Common
Stock acquired by Shareholder or Mischief, as the case may be, pursuant to
Article 3.
"Software" means any and all (i) computer programs, including any and
all software implementations of algorithms, models and methodologies, whether in
source code or object code; (ii) databases and compilations, including any and
all data and collections of data, whether machine readable or otherwise, (iii)
descriptions, flow-charts and other work product used to design, plan, organize
and develop any of the foregoing and (iv) all documentation, including user
manuals and training materials, relating to any of the foregoing.
"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.
"Viacom" has the meaning set forth in the Partnership Agreement.
"Viacom Inc." has the meaning set forth in the Partnership Agreement.
<PAGE> 10
5
1.2. Additional Definitions.
The following additional terms have the meaning ascribed thereto in the
Section or Schedule indicated below next to such term:
INDEX OF DEFINED TERMS
"Acquired Assets".......................................... Section 2.1(a)
"Amendment No. 2"................................................. Recital
"Assumed Liabilities"......................................... Section 2.2
"Blackout Period".......................................... Section 9.3(b)
"Box"............................................................. Recital
"Common Stock"................................................ Section 3.1
"Company Common Stock"........................................ Section 3.1
"Competing Business".......................................... Section 8.5
"Demand Registration"...................................... Section 9.1(a)
"Domain Name"........................................... Section 2.1(a)(v)
"Employment Agreement"............................................ Recital
"Excluded Assets".......................................... Section 2.1(b)
"Imagine"......................................................... Recital
"Liability"................................................ Section 9.3(i)
"Mischief"....................................................... Preamble
"Mischief Contracts"................................... Section 2.1(a)(vi)
"Mischief Indemnified Parties"............................... Section 10.3
"Mischief Partnership Units".................................. Section 4.1
"Mischief Permits".................................... Section 2.1(a)(vii)
"Mischief Share Closing"...................................... Section 3.2
"Mischief Share Closing Date"................................. Section 3.2
"Mischief Shares"............................................. Section 3.1
"Mischief Stockholder"..................................... Section 9.1(a)
"Mischief Stockholder Group"............................... Section 9.1(a)
"MTVN Online"..................................................... Recital
"MTVNO".......................................................... Preamble
"MTVNO Indemnified Parties".................................. Section 10.2
"Non-Compete Parties"......................................... Section 8.5
"Non-Compete Period".......................................... Section 8.5
"Partnership Agreement"........................................... Recital
"Pledge Agreement"................................................ Recital
"Put Closing".............................................. Section 8.6(b)
"Put Closing Date"......................................... Section 8.6(a)
"Put Notice"............................................... Section 8.6(a)
"Put Purchase Price"....................................... Section 8.6(a)
"Receivables"........................................... Section 2.1(b)(i)
"Registration Statement"................................... Section 9.1(a)
"Restricted Shares"........................................ Section 3.6(b)
"SEC"...................................................... Section 9.1(e)
<PAGE> 11
6
"Securities Act"........................................... Section 9.1(a)
"Shareholder".................................................... Preamble
"SonicNet"........................................................ Recital
"VLLC"............................................................ Recital
"Year 2000 Compliant"..................................... Section 5.11(b)
ARTICLE 2
CONTRIBUTION
2.1. Conveyance of Mischief Assets.
(a) Mischief does hereby convey, grant, bargain, transfer, set
over, contribute, assign and deliver, to MTVNO and its successors and assigns,
forever, all of the assets and businesses that are owned, used or held for use
in connection with Mischief's business (other than the Excluded Assets, as
defined below), wherever such assets and businesses are located and whether such
assets and businesses are real, personal or mixed, tangible or intangible, and
whether or not any of such assets and businesses have any value for accounting
purposes or are carried or reflected on or specifically referred to in
Mischief's books or financial statements, including, without limitation, all of
the following types of assets (but excluding any of the following that
constitute Excluded Assets) (collectively, the "Acquired Assets"):
(i) all tangible assets, including machinery and
equipment, tools, spare parts, office furniture, office equipment, computer
equipment and fixtures, machinery and equipment under order or construction and
all inventories, including finished goods, work-in-progress, administrative and
other supplies on hand, and raw materials;
(ii) all credits, prepaid assets, security deposits and
other deposits, prepaid expenses, deferred charges, advance payments and notes
receivable;
(iii) all Intellectual Property and Software of Mischief;
(iv) all of Mischief's websites, including, but not
limited to, rockontv.com, musicstation.com, musicnewswire.com, showbizwire.com,
CD-clubs.com and eventwire.com, all related proprietary technologies and all
other related assets;
(v) all Internet domain names (each a "Domain Name"),
including each of the Domain Names set forth in Schedule 5.10(h) hereto;
(vi) subject to the provisions of Section 2.4, all
Contracts to which Mischief is a party, including, without limitation, all
Contracts to which Mischief is a party listed in Schedule 5.5 hereto ("Mischief
Contracts");
(vii) all of Mischief's Permits and all pending
applications therefor ("Mischief Permits");
<PAGE> 12
7
(viii) all books, records, ledgers, files, documents
(including originally executed copies of written Mischief Contracts), customer
and supplier lists, correspondence, memoranda, forms, lists, plats,
architectural plans, drawings and specifications, computer programs and related
documentation, documents evidencing Intellectual Property, new product
development materials, creative materials, advertising and promotional
materials, studies, reports, sales and purchase correspondence, photographs,
quality control records and procedures, equipment maintenance records, manuals
and warranty information, research and development files, in each case, whether
in hard copy or magnetic format, in each instance, of Mischief; and
(ix) all rights or choses of Mischief, including third
party warranties and guarantees and all related claims, credits, rights of
recovery and set-off and other similar contractual rights, as to third parties.
In addition, Shareholder does hereby convey, grant, bargain, transfer,
set over, contribute, assign and deliver, to MTVNO and its successors and
assigns, forever, all of the Intellectual Property, Software, Domain Names and
websites that are owned, used or held for use in connection with Mischief's
business and any Intellectual Property Rights therein if and to the extent that
any of the foregoing are held in the name of Shareholder.
(b) Notwithstanding the foregoing, the following assets (the
"Excluded Assets") are not included in the Mischief Assets, and Mischief shall
not contribute to MTVNO and MTVNO shall not accept from Mischief:
(i) cash and cash equivalents and all billed and unbilled
accounts receivable arising on or prior to the date hereof ("Receivables");;
(ii) duplicate copies of all books and records transferred
to Mischief;
(iii) any rights to and under Contracts not assumed by
MTVNO pursuant to Sections 2.2 and 2.4;
(iv) corporate minute books, seals, stock ledgers;
(v) home furnishings;
(vi) all rights of Mischief under this Agreement and the
other Operative Agreements; and
(vii) the items set forth in Schedule 5.8.
2.2. Limited Assumption of Liabilities and Obligations. Mischief
hereby transfers to MTVNO and MTVNO hereby assumes and agrees to perform when
due Mischief's liabilities and obligations under the Mischief Contracts and
Mischief Permits arising exclusively from, and accruing exclusively with respect
to, the period after the date hereof (collectively, the "Assumed Liabilities");
provided, however, that in no event shall MTVNO assume (i) any liability or
obligation under or with respect to any Mischief Contract or Mischief Permit for
any obligation required by the terms thereof to be discharged on or prior to the
date hereof, (ii) any
<PAGE> 13
8
liability or obligation to the extent the existence of which constitutes a
breach of any representation or warranty of Mischief contained in or made
pursuant to this Agreement, (iii) any liability or obligation for Taxes of any
of Mischief or any of its Affiliates or (iv) any liability or obligation arising
out of a breach or default by Mischief on or prior to the date hereof (including
any event occurring on or prior to the date hereof that with the lapse of time
or the giving of notice, or both, would become a breach or default) under any
such Mischief Contract or Mischief Permit.
2.3. Non-Assumption of Liabilities. MTVNO shall not assume or agree
to be bound by, and does not hereby assume or agree to be bound by, any duties,
responsibilities, claims, debts, obligations or liabilities of Mischief (or
which may be asserted against or imposed upon MTVNO as a successor or transferee
of Mischief or as acquiror of the Acquired Assets or otherwise as a matter of
law) of any kind or nature, whether known, unknown, contingent or otherwise,
other than those liabilities and obligations expressly assumed by it pursuant to
Section 2.2 hereof.
2.4. Assumed Contracts. Schedule 2.4 sets forth a list of Mischief
Contracts for which assignment to MTVNO is provided herein and which may not be
assigned or assumed without the consent of another party, and such consent has
not been obtained at or prior to the date hereof. Notwithstanding any provision
contained herein to the contrary, such Mischief Contracts shall not be assigned
to and assumed by MTVNO hereby. Instead, Mischief shall cooperate in any
reasonable arrangement designed to provide for MTVNO the benefits intended to be
assigned to MTVNO under the relevant Mischief Contract, including enforcement of
any and all rights of Mischief against the other party thereto arising out of
the breach or cancellation thereof by such other party or otherwise, and, in
connection with any such Mischief Contract for which MTVNO receives all of the
benefits thereunder, MTVNO shall pay and/or perform the obligations as required
pursuant to such Mischief Contracts but only to the extent such obligations
constitute Assumed Liabilities.
ARTICLE 3
CONDITIONAL CONTRIBUTION TO THE COMPANY
BY SHAREHOLDER
3.1. Transfer of Mischief Shares to the Company. Subject to and
upon the closing of the IPO, and subject to the terms and conditions in this
Agreement, Shareholder shall transfer to the Company, and the Company shall
acquire from Shareholder, all of the outstanding shares of common stock ("Common
Stock"), par value $.01 per share, of Mischief (the "Mischief Shares") in
exchange for that number and kind of shares of the Company's common stock
("Company Common Stock") for which the Mischief Partnership Units issued
pursuant to Section 4.1 and then held by Mischief would be exchangeable pursuant
to the Exchange Agreement; provided, however, that in the event that (i) the
conditions specified in Section 3.4 hereof are not satisfied on the date of the
closing of the IPO and (ii) the Losses known by MTVNO to be indemnifiable by
Shareholder as of the date of the closing of the IPO exceed the value (as
determined in accordance with the provisions of Section 10.6 hereof) of the
Pledged Shares immediately prior to the consummation of the IPO, MTVNO may, in
its sole discretion,
<PAGE> 14
9
elect to require that Mischief instead transfer, or cause to be transferred, and
Mischief hereby agrees to transfer, or cause to be transferred, in such
circumstances, to the Company all of the Mischief Partnership Units issued
pursuant to Section 4.1 in exchange for that number and kind of shares of
Company Common Stock which Shareholder would otherwise have been entitled to
receive for his Mischief Shares; provided, further, that, for the avoidance of
doubt, any Mischief Partnership Units that were originally issued to Mischief
and were subsequently transferred to a Permitted Transferee shall be transferred
to the Company in exchange for Company Common Stock on a pro rata basis in
accordance with the previous proviso.
3.2. Mischief Share Closing. Unless the parties hereto shall agree
in writing upon a different location, time or date, and subject to the terms and
conditions of this Agreement, the closing of the transfer to the Company, and
acquisition by the Company, of the Mischief Shares (or the Mischief Partnership
Units, as the case may be) (the "Mischief Share Closing" ) shall take place at
the offices of MTVNO simultaneously with the closing of the IPO. The term
"Mischief Share Closing Date" means the date and time at which the Mischief
Share Closing occurs.
3.3. Mischief Share Closing Deliveries. Subject to the conditions
set forth in this Agreement, at the Mischief Share Closing:
(a) Shareholder shall deliver to the Company (i) certificates
representing all of the Mischief Shares accompanied by stock powers duly
executed in blank, (ii) evidence of payment of stock transfer taxes, if any,
(iii) corporate minute books, seals, stock ledgers and other documents relating
to Mischief, (iv) instruments evidencing the resignation of each director and
each officer of Mischief and (v) all certificates and other instruments and
documents which are expressly required pursuant to this Agreement and the other
Operative Agreements to be delivered by Shareholder to the Company at the
Mischief Share Closing; and
(b) The Company shall (i) accept and acquire the Mischief Shares
from Shareholder and deliver to Shareholder in exchange for the Mischief Shares
the amount of Company Common Stock required by Section 3.1 above and (ii)
subject to the provisions of the Pledge Agreement, deliver to Shareholder
certificates for such Company Common Stock in Shareholder's name and all other
certificates and other instruments and documents which are expressly required
pursuant to this Agreement and the other Operative Agreements to be delivered
by the Company to Shareholder at the Mischief Share Closing.
Alternatively, if MTVNO is entitled to and makes the election in the first
proviso of Section 3.1, then Mischief shall deliver, or cause to be delivered,
to the Company all of the Mischief Partnership Units, and the Company shall
accept and acquire such Mischief Partnership Units from Mischief, and deliver in
exchange therefor the amount of Company Common Stock required by Section 3.1
above. Mischief shall take all action necessary for the Company to be admitted
as a Partner with respect to such Mischief Partnership Units in substitution for
Mischief or its Permitted Transferees in accordance with the Partnership
Agreement.
3.4. Conditions to Mischief Share Closing of MTVNO. MTVNO's
obligations to consummate the Mischief Share Closing and effect the transactions
contemplated in this
<PAGE> 15
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Article 3 shall be subject to the satisfaction at or prior to the Mischief Share
Closing, or waiver by MTVNO, of each of the following conditions (any of which
may be waived by MTVNO in its sole discretion):
(a) Each of the representations and warranties of Shareholder
contained in Articles 5 and 6 of this Agreement or in any schedule, certificate,
document or instrument relating thereto delivered in connection with this
Agreement shall be true and correct in all material respects on and as of the
date of this Agreement and on and as of the Mischief Share Closing Date, except
for representations and warranties that speak as of a specific date or time
(which need only be true and correct in all material respects as of such date or
time); provided, however, that the failure of any such representation or
warranty to be so true and correct shall not provide a basis for MTVNO not to
consummate the Mischief Share Closing so long as (i) the Losses known by MTVNO
to be indemnifiable by Shareholder as of the date of the closing of the IPO do
not exceed the value (as determined in accordance with the provisions of Section
10.6 hereof) of the Pledged Shares immediately prior to the consummation of the
IPO or (ii) in the event that Losses known by MTVNO to be indemnifiable by
Shareholder as of the date of the closing of the IPO do exceed the value (as
determined in accordance with the provisions of Section 10.6 hereof) of the
Pledged Shares immediately prior to the consummation of the IPO, MTVNO is able
to make the election, and effect the transaction contemplated by, the first
proviso in Section 3.1.
(b) Mischief and Shareholder shall have performed and complied in
all material respects with all covenants and agreements required by this
Agreement to be performed or complied with by Mischief or Shareholder at or
prior to the Mischief Share Closing.
3.5. Conditions to Mischief Share Closing of Shareholder.
Shareholder's obligation to consummate the Mischief Share Closing and effect the
transactions contemplated in this Article 3 is subject to the satisfaction at or
prior to the Mischief Share Closing, or waiver by Shareholder, of all of the
following conditions (any of which may be waived by Shareholder in its sole
discretion):
(a) Each of the representations and warranties of MTVNO contained
in Article 7 of this Agreement or in any schedule, certificate, document or
instrument relating thereto delivered in connection with this Agreement, shall
be true and correct in all material respects on and as of the date of this
Agreement and on and as of the Mischief Share Closing Date, except for
representations and warranties that speak as of a specific date or time (which
need only be true and correct in all material respects as of such date or time).
(b) MTVNO shall have performed and complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by it at or prior to the Mischief Share Closing Date.
3.6. Transfer Restrictions on Company Common Stock.
(a) Each of Shareholder and, in the case of the first proviso in
Section 3.1, Mischief acknowledges and agrees that Company Common Stock acquired
by it pursuant to this
<PAGE> 16
11
Agreement (i) may not be sold, and that they will not directly or indirectly
offer or sell any of such Company Common Stock, other than in compliance with
the Securities Act and all other applicable state or foreign securities Laws and
(ii) will be subject to the "lock-up" requirements of the IPO applicable to
executive officers of the Company as requested by the underwriters, not to
exceed a period of 180 days from the date of the consummation of the IPO.
(b) Without limiting the Shareholder's (or Mischief's) obligations
under this Section 3.6, each of Shareholder and, in the case of the first
proviso in Section 3.1, Mischief acknowledges and agrees that 100,000 shares of
the Company Common Stock (such number of shares of Company Common Stock to be
adjusted to reflect any split, combination or reclassification of Partnership
Units after the date hereof or the exchange ratio of Partnership Units for
Company Common Stock being other than one-to-one) (the "Restricted Shares")
delivered to Shareholder or Mischief, as the case may be, shall be further
restricted as to transfer such that Shareholder or Mischief, as the case may be,
may not, and Shareholder and Mischief agree not to, sell, exchange, assign,
transfer, pledge, hypothecate or otherwise dispose of (including without
limitation, by way of equity swap, hedging, or any other form of derivative
transaction) such shares of Company Common Stock (except as contemplated by the
Pledge Agreement) prior to the expiration of this transfer restriction, which
expires as to one quarter of the Restricted Shares on the date that is
six-months after the date hereof and which expire as to an additional one
quarter of the Restricted Shares at the end of each of the three six-month
periods thereafter (any such expiration to occur, in all cases, whether or not
such Restricted Shares have been issued as of any of the foregoing dates).
(c) In order to put third parties on notice of the provisions of
this Section 3.6, each of Shareholder and, in the case of the first proviso in
Section 3.1, Mischief acknowledges and agrees that the Company Common Stock
delivered pursuant to this Agreement, will contain the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, THE SECURITIES LAWS OF ANY STATE OR OTHER
JURISDICTION WITHIN THE UNITED STATES AND ITS TERRITORIES, POSSESSIONS OR
THE SECURITIES LAWS OF ANY FOREIGN JURISDICTION. NEITHER THESE SECURITIES
NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED, OR OTHERWISE DISPOSED OF IN THE ABSENCE
OF SUCH REGISTRATION OR UNLESS AN OPINION OF COUNSEL SATISFACTORY TO [THE
COMPANY] IS RECEIVED STATING THAT SUCH TRANSACTION IS NOT SUBJECT TO THE
REGISTRATION AND/OR PROSPECTUS DELIVERY REQUIREMENTS OF ANY SUCH
JURISDICTION. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY
NOTIFIED THAT [THE COMPANY] MAY BE RELYING ON THE EXEMPTION FROM THE
PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY SECTION 4(2)
THEREUNDER.
THESE SECURITIES ARE SUBJECT TO THE RESTRICTIONS ON SALE AND TRANSFER SET
FORTH IN SECTION 3.6 OF THAT CERTAIN CONTRIBUTION
<PAGE> 17
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AGREEMENT DATED MARCH 3, 2000, AMONG MTVN ONLINE L.P., MISCHIEF NEW
MEDIA INC. AND JASON HIRSCHHORN, AS IT MAY BE AMENDED FROM TIME TO
TIME. A COPY OF SUCH RESTRICTIONS MAY BE REQUESTED FROM [THE COMPANY].
ARTICLE 4
CONSIDERATION
4.1. Contribution Consideration. MTVNO hereby agrees to issue and,
without duplication, pursuant to paragraph 2 of Amendment No. 2, MTVNO has
issued, and Mischief acknowledges receipt of, 250,000 fully vested, Partnership
Units in MTVNO that are restricted as to transfer as provided in the Partnership
Agreement, as amended by Amendment No. 2, in consideration for the Acquired
Assets and the Assumed Liabilities. Such Partnership Units issued to Mischief
pursuant to this Section 4.1 and any such Partnership Units subsequently
transferred by Mischief to a Permitted Transferee are referred to in this
Agreement as the "Mischief Partnership Units".
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF
MISCHIEF AND SHAREHOLDER
Each of Mischief and Shareholder hereby represents and warrants to
MTVNO as follows:
5.1. Due Incorporation; Good Standing. Mischief is a corporation
duly incorporated, validly existing and in good standing as a corporation under
the laws of the State of New York and has the requisite corporate power and
authority to own, lease and operate its assets and its businesses as currently
conducted.
5.2. Capitalization; Subsidiaries, Other Interests, etc. The
authorized capital stock of Mischief consists of 2000 shares of Common Stock, of
which 100 shares are issued and outstanding and none are held in the treasury of
Mischief. All of the Mischief Shares have been duly authorized, validly issued,
are fully paid and non-assessable, and have not been issued in violation of any
preemptive rights or securities laws. There is no security, option, warrant,
right (including preemptive rights), put, call, subscription, agreement,
commitment, understanding or claim of any nature whatsoever, fixed or
contingent, that directly or indirectly (i) calls for the issuance, sale,
pledge, delivery or other disposition of any securities of Mischief or any
securities convertible into, or other rights to acquire, any securities of
Mischief, (ii) relates to the voting or control of any securities of Mischief or
(iii) obligates Mischief, Shareholder or any of their Affiliates to grant, offer
or enter into any of the foregoing. Shareholder is the sole record and
beneficial owner of all of the outstanding capital stock of Mischief. Mischief
does not own, directly or indirectly, any ownership, equity, profits or voting
interest in any corporation, partnership, limited liability company,
association, trust, joint venture or other entity, and has no agreement, option
or commitment to purchase any such interest.
<PAGE> 18
13
5.3. Due Authority; Valid, Binding and Enforceable.
(a) Each of Mischief and Shareholder has the requisite power and
authority to enter into and perform this Agreement and the other Operative
Agreements to which it or he is a party; the execution, delivery and performance
by each of Mischief and Shareholder of this Agreement and of the other Operative
Agreements to which it or he is a party have been duly authorized by all
required action on its or his part and by its stockholder in the case of
Mischief, and this Agreement and the other Operative Agreements to which each of
Mischief and Shareholder is a party have been duly executed and delivered by it
or him, as the case may be.
(b) This Agreement and the other Operative Agreements to which
each of Mischief and Shareholder is a party are legal, valid and binding
obligations of each of Mischief and Shareholder, enforceable against it or him
in accordance with their respective terms, except as such enforceability may be
limited by bankruptcy, insolvency, fraudulent conveyance, reorganization or
other similar laws affecting the enforcement of creditors' rights generally and
except to the extent that injunctive or other equitable relief is within the
discretion of a court of competent jurisdiction.
5.4. No Violation of Laws or Agreements. The execution, delivery,
and performance by each of Mischief and Shareholder of this Agreement and the
other Operative Agreements to which each is a party and the consummation by each
of Mischief and Shareholder 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 or by-laws of Mischief, 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
businesses or assets of Mischief or give to others any interests or rights
therein under (i) any Mischief Permit, any License of Mischief or any Mischief
Contract, or by which any of the businesses or assets of Mischief may be bound
or affected, (ii) any assets or properties, including Contracts, of Shareholder
to which Shareholder may be bound or affected or (iii) 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
either of Mischief or Shareholder is subject or which is applicable to any of
the businesses or assets of Mischief, except, in any case under this clause (b),
for the consents set forth in Schedule 5.4, or as would not, individually or in
the aggregate, have a material adverse effect on (x) the businesses or assets of
Mischief or (y) the ability of either of Mischief or Shareholder to perform its
obligations under this Agreement and the other Operative Agreements to which it
or he is a party.
5.5. Contracts. Schedule 5.5 sets forth a list of all written, and
a description of all oral, Contracts to which Mischief is a party. Except for
failures to be valid, binding and enforceable and breaches, defaults, events and
disputes which would not, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the businesses and assets of
Mischief, (i) all such Contracts are valid and binding on, and enforceable
against, Mischief, in accordance with their terms, except as such enforceability
may be limited by bankruptcy,
<PAGE> 19
14
insolvency, fraudulent conveyance, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and except to the
extent that injunctive or other equitable relief is within the discretion of a
court of competent jurisdiction and each of such Contracts is, to the knowledge
of Mischief and Shareholder, valid and binding on, and enforceable against the
other parties thereto, except as such enforceability may be limited by
bankruptcy, insolvency, fraudulent conveyance, reorganization or other similar
laws affecting the enforcement of creditors' rights generally and except to the
extent that injunctive or other equitable relief is within the discretion of a
court of competent jurisdiction; (ii) neither Mischief, nor, to the knowledge of
Mischief and Shareholder, 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 Mischief and Shareholder,
any event that, with the giving of notice or the lapse of time or both, would
constitute such a breach or default.
5.6. Absence of Litigation. Except as set forth in Schedule 5.6
hereto, there is no action, suit, investigation, claim, arbitration or
litigation pending or, to the knowledge of Mischief or Shareholder, threatened
in writing against Mischief or its business and operations or Shareholder, at
law or in equity, before or by any arbitrator or Governmental Entity. Neither
Mischief or Shareholder is currently operating under or subject to any order,
award, judgment, writ, decree, determination or injunction of any arbitrator or
Governmental Entity. There is not pending against Mischief or Shareholder any
suit, action or proceeding (i) seeking to restrain or prohibit the consummation
of the transactions contemplated by this Agreement and the other Operative
Agreements, (ii) seeking to prohibit or limit the ownership or operation by
MTVNO of any material portion of the Acquired Assets, or (iii) which otherwise
could reasonably be expected to have a material adverse effect on the business
or assets of Mischief.
5.7. Compliance with Laws; Permits; Consents.
(a) Mischief is in compliance, in all material respects, with all
Laws applicable to its assets and businesses.
(b) Mischief has obtained and holds all Permits necessary in order
to use and operate the Acquired 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 Mischief Permit. Each of Mischief and Shareholder has all
rights necessary and the ability required, if any, to transfer the Mischief
Permits as contemplated by this Agreement and the other Operative Agreements.
(c) Except as set forth in Schedule 5.7(c) hereto, no filing,
consent, waiver, approval or authorization of any Governmental Entity or of any
third party on the part of Mischief is required in connection with the
execution, delivery and performance of this Agreement and the other Operative
Agreements or the consummation of the transactions contemplated hereby or
thereby.
5.8. Acquired Assets; Title; Closing Liability Schedule. Except for
the Excluded Assets, the Acquired Assets constitute all the assets and
businesses that are owned,
<PAGE> 20
15
used or held for use in connection with Mischief's business and include all
assets the use or benefit of which are necessary for the performance of any
Contract to which Mischief is a party and the conduct of the business of
Mischief as now conducted and presently proposed to be conducted. Except as set
forth in Schedule 5.8 hereto, no assets of Shareholder or any of his Affiliates
(other than Mischief) are owned, used or held for use in the conduct of
Mischief's business. Immediately preceding the execution of this Agreement, the
Acquired Assets were owned, leased or licensed by Mischief free and clear of all
Liens. Mischief has, as of the date hereof, hereby conveyed to MTVNO, good and
marketable title to all of the Acquired Assets owned, leased or licensed by
Mischief, free and clear of all Liens. Except as provided in the Closing
Liability Schedule, as of the date of this Agreement, Mischief has no
liabilities or obligations of any nature (whether known or unknown, due or to
become due, absolute, accrued, contingent or otherwise, and whether or not
determined or determinable) and, assuming the performance by MTVNO of its
obligations hereunder in respect of the Assumed Liabilities, there is no
existing condition, situation or set of circumstances which could result in such
a liability or obligation.
5.9. Absence of Certain Changes. Except as set forth in Schedule
5.9 hereto, since September 1, 1999, there has been no (i) material adverse
change in the business, operations, financial condition or operating results of
Mischief or other event or occurrence, whether or not arising in the ordinary
course of business, that individually or in the aggregate has had or is
reasonably likely to have a material adverse effect on the businesses and assets
of Mischief or (ii) change in the general nature of Mischief's business and
operations.
5.10. Intellectual Property.
(a) Schedule 5.10(a)(1) contains a true, accurate and complete
list as of the date hereof of all patents, patent applications, trademark and
service marks and corresponding registrations and applications for registration
thereof, and registered copyrights and applications for registration thereof,
worldwide, as are now owned, used or held for use by Mischief. Schedule
5.10(a)(2) sets forth a true, accurate and complete list as of the date hereof
of all Outstanding Licenses (other than non-negotiated Licenses to Mischief for
off-the-shelf Software having a license fee, in the aggregate for all copies
licensed, of less than $5,000), identifying the other parties thereto and the
subject matter and date thereof, any royalty or other payment obligations, the
term thereof, and any exclusivity obligations. Except as set forth in Schedules
5.10(a)(1) and 5.10(a)(2) hereto, Mischief has sole and exclusive beneficial and
record ownership and legal title of all subject matter owned, leased or licensed
by Mischief set forth therein, free and clear of Liens (including any rights or
claims of present or former employees, consultants, officers and directors of
Mischief or any other Persons) and of any obligations to pay royalties or other
remuneration to any Person. There are no Outstanding Licenses other than as
identified in Schedule 5.10(a)(2), oral or written, and except as may be
specifically stated in Schedule 5.10(a)(2), no Outstanding License requires any
payment of any nature, cash or noncash, or approval from, any past or present
officer, director, shareholder or Affiliate of Mischief.
(b) Mischief has sufficient title, ownership or Licenses of
Intellectual Property Rights (whether or not listed in Schedules 5.10(a)(1) and
5.10(a)(2)) necessary for its business as now conducted and as proposed to be
conducted without any conflict with or infringement of the
<PAGE> 21
16
rights of others except for such conflicts and infringements as would not,
individually or in the aggregate, be reasonably likely to have a material
adverse effect on the business or assets of Mischief and such rights will not be
adversely affected by the execution and delivery of this Agreement or the other
Operative Agreements or the consummation of the transactions contemplated hereby
and thereby.
(c) Mischief has not been and is not now interfering with,
infringing upon, misappropriating, or otherwise in conflict with or violating
any Intellectual Property Rights of other Persons, nor has Mischief or
Shareholder received any communications alleging that Mischief has violated or,
by conducting its business as proposed, would violate any of the Intellectual
Property Rights of any other Person, nor does Mischief or Shareholder have
knowledge, after reasonable investigation, of any basis for the making of any
such allegation except for such interferences, infringements, misappropriations,
conflicts and violations as set forth in Schedule 5.10(c), or as would not,
individually or in the aggregate, be reasonably likely to have a material
adverse effect on the business or assets of Mischief.
(d) Schedule 5.10(d) sets forth a list of all patents relating to
any field of business or proposed business of Mischief as to which Mischief has
either sought an opinion of counsel or been advised that it should seek an
opinion of counsel.
(e) There is not pending, nor to knowledge of Mischief or
Shareholder has there been threatened, any action or proceeding to contest,
oppose, cancel or otherwise challenge the validity, ownership or enforceability
of any of Mischief's Intellectual Property.
(f) Except as set forth in Schedule 5.10(f) hereto, neither
Mischief nor Shareholder has any knowledge that any Person is infringing any of
Mischief's Intellectual Property.
(g) Schedule 5.10(g) hereto sets forth a complete list of all
Domain Names now used by Mischief. All such Domain Names are currently
registered and in good standing, and Mischief is shown on the records of the
registrar thereof as the sole owner thereof. Neither Mischief nor Shareholder
has received any notice or communication stating that any Person is challenging
the right of Mischief to use any such Domain Name.
(h) Except as set forth in Schedule 5.10(h) hereto, Mischief has
the right to use, modify, maintain and enhance all Software used by Mischief and
the right to transfer such Software to MTVNO without the payment of any royalty
or fee. Upon transfer of Mischief's Software to MTVNO, MTVNO will have the right
to use, modify, maintain and enhance such Software and the right to transfer
such Software freely without the payment of any royalty or fee, except as set
forth in Schedule 5.10(h) hereto. Mischief has the application programming
interface for all tools and libraries embedded in the Software of Mischief. All
Software which has been used and which is now being used by Mischief has been
and is being used in compliance with all applicable License requirements, except
as set forth in Schedule 5.10(h) hereto.
<PAGE> 22
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(i) Schedule 5.10(i) hereto sets forth a complete list of all
website design and development work performed by Mischief or Shareholder for
third parties since December 31, 1996, including the name of the third party and
a brief description of the work performed by Mischief or Shareholder.
5.11. Year 2000.
(a) Except as set forth in Schedule 5.11(a) hereto, Mischief has
not experienced any problem resulting from a failure to be Year 2000 Compliant
and believes that its products and its suppliers and vendors are Year 2000
Compliant.
(b) 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 material abnormal ending
scenario, including in relation to dates in and after the Year 2000.
5.12. Labor; Employee Benefits. Mischief has no employees other than
Shareholder and one assistant. Mischief has no 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.
5.13. Taxes. Mischief has timely filed all Tax Returns required to
be filed. All such Tax Returns are complete and accurate in all material
respects. Mischief has paid all Taxes required to be paid by it. No consent
under Section 341(f) of the Internal Revenue Code of 1986, as amended, has been
filed by or with respect to Mischief. Mischief has elected to be an S
corporation for federal, and, to the extent permitted, state and local income
tax purposes as of January 1, 2000.
5.14. No Brokerage. There is no investment banker, broker, finder or
other similar intermediary which has been retained by either Mischief or
Shareholder or is authorized to act on behalf of Mischief or Shareholder or any
Affiliates thereof or any of Mischief's officers and directors who might be
entitled to any fee or commission from MTVNO or any Affiliates thereof, upon
consummation of the transactions contemplated by this Agreement or the other
Operative Agreements.
5.15. Disclosure. Neither this Agreement or the Operative Agreements
nor any representation, warranty or statement made in this Agreement or the
Operative Agreements contain (or will contain) any untrue statement of a
material fact or omits to state (or will omit to state) a material fact
necessary to make the statements herein or therein not misleading.
5.16. Securities Act Matters. Each of Shareholder and Mischief (i)
has had an opportunity to discuss MTVNO's business, management and financial
affairs with MTVNO's
<PAGE> 23
18
management and to conduct a complete business, legal and technical due diligence
to its satisfaction, (ii) has sufficient knowledge and experience in investing
in companies similar to MTVNO in terms of stage of development so as to be able
to evaluate the risks and merits of its investment in MTVNO and (iii) is
financially able to bear the risks thereof. Mischief is acquiring the Mischief
Partnership Units issued pursuant to Section 4.1 of this Agreement for its own
account and not with a view to any distribution thereof in violation of the
Securities Act. Mischief acknowledges and agrees that no public market now
exists for the Mischief Partnership Units (nor has MTVNO made any assurance that
any such market will ever exist) and that the Mischief Partnership Units
acquired by it pursuant to this Agreement have not been and will not be
registered under the Securities Act (or any state or foreign securities Laws)
and may not be reoffered, sold, assigned, transferred, pledged, encumbered, or
otherwise disposed of in the absence of such registration or unless an opinion
of counsel satisfactory to MTVNO is received stating that such transaction is
not subject to the registration and/or prospectus delivery requirements of any
applicable jurisdiction.
ARTICLE 6
ADDITIONAL REPRESENTATIONS AND WARRANTIES OF
SHAREHOLDER AT MISCHIEF SHARE CLOSING
As of the Mischief Share Closing Date, Shareholder hereby represents
and warrants to MTVNO, as follows:
6.1. Mischief Share Closing Title. Shareholder has, and shall
transfer to MTVNO at the Mischief Share Closing, good title to the Mischief
Shares free and clear of any and all Liens. To the extent that MTVNO makes the
election in the first proviso in Section 3.1 hereof, then Mischief and its
Permitted Transferees, who are obligated to participate in the exchange
contemplated thereby, have, and shall transfer to MTVNO at the Mischief Share
Closing, good title to their respective Partnership Units free and clear of any
and all Liens.
6.2. Liabilities. Except for the liabilities and obligations
expressly assumed by MTVNO as indicated in the Closing Liability Schedule,
Mischief has no liabilities or obligations of any nature (whether known or
unknown, due or to become due, absolute, accrued, contingent or otherwise, and
whether or not determined or determinable) other than Tax liabilities resulting
from Mischief owning its Partnership Units (which liabilities shall not be
Assumed Liabilities and shall be paid and indemnified by Shareholder), and,
assuming the performance by MTVNO of its obligations hereunder in respect of the
Assumed Liabilities, there is no existing condition, situation or set of
circumstances which could result in such a liability or obligation.
6.3. Assets. Mischief has no assets other than the Mischief
Partnership Units as contemplated by this Agreement.
6.4. Securities Act Matters. Each of Shareholder and Mischief (i)
has had an opportunity to discuss the Company's business, management and
financial affairs with the Company's management and to conduct a complete
business, legal and technical due diligence to its satisfaction, (ii) has
sufficient knowledge and experience in investing in companies similar to
<PAGE> 24
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the Company in terms of stage of development so as to be able to evaluate the
risks and merits of its investment in the Company and (iii) is financially able
to bear the risks thereof. Shareholder (or, in the case of the first proviso in
Section 3.1 hereof, Mischief) is acquiring the Company Common Stock under this
Agreement for its own account and not with a view to any distribution thereof in
violation of the Securities Act. Shareholder acknowledges and agrees that the
Company Common Stock acquired by him (or, in the case of the first proviso in
Section 3.1 hereof, Mischief) pursuant to this Agreement has not been and,
except as otherwise expressly set forth in this Agreement, will not be
registered under the Securities Act (or any state or foreign securities Laws)
and may not be reoffered, sold, assigned, transferred, pledged, encumbered, or
otherwise disposed of in the absence of such registration or unless an opinion
of counsel satisfactory to the Company is received stating that such transaction
is not subject to the registration and/or prospectus delivery requirements of
any applicable jurisdiction.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF MTVNO
MTVNO hereby represents and warrants to Mischief and Shareholder, as
follows:
7.1. Formation; Existence. MTVNO is a partnership, validly existing
under the laws of the State of Delaware, and has the requisite partnership 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.
7.2. Due Authority; Valid, Binding and Enforceable.
(a) MTVNO has the requisite partnership power and authority to
enter into and perform this Agreement and the other Operative Agreements to
which it is a party; the execution, delivery and performance by it of this
Agreement and of the other Operative Agreements to which it is a party have been
duly authorized by all required partnership action on its part and, if required,
by its partners, and this Agreement and the other Operative Agreements to which
it is a party have been duly executed and delivered by it.
(b) This Agreement and the other Operative Agreements to which it
is a party are legal, valid and binding obligations of MTVNO, enforceable
against it in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally and except to the extent that injunctive or other equitable
relief is within the discretion of a court of competent jurisdiction.
7.3. No Violation of Laws or Agreements. Except for the notice and
preemptive rights under the Partnership Agreement, the execution, delivery, and
performance by MTVNO of this Agreement and the other Operative Agreements to
which it is a party and the consummation by it of the transactions contemplated
hereby and thereby with respect to MTVNO do not and will not, (a) violate,
conflict with or result in the breach of any provision of its certificate of
limited partnership or the Partnership Agreement, or (b) violate, conflict with,
result
<PAGE> 25
20
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 its assets, 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 other
Operative Agreements to which it is a party. Except for the notice and
preemptive rights under the Partnership Agreement, no filing, consent, waiver,
approval or authorization of any Governmental Entity or of any third party on
the part of MTVNO is required in connection with the execution, delivery and
performance of this Agreement and the other Operative Agreements to which it is
a party or the consummation of the transactions contemplated hereby or thereby.
7.4. Issuance of Partnership Units and Company Common Stock. The
issued and outstanding Partnership Units immediately following the execution,
delivery and performance of this Agreement and the other Operative Agreements
are as indicated in Amendment No. 2. The Mischief Partnership Units are free and
clear of all Liens (other than those contemplated by the Operative Agreements)
and have been duly authorized and validly issued and have not been issued in
violation of any preemptive rights or, assuming the representations and
warranties of Shareholder in this Agreement are true and correct, securities
laws. The Company Common Stock will be, when issued at the Mischief Share
Closing, duly authorized, free and clear of all Liens (other than those
contemplated by the Operative Agreements) and will be validly issued, fully paid
and non-assessable, and will not have been issued in violation of any preemptive
rights or, assuming the representations and warranties of Shareholder in this
Agreement are true and correct, securities laws. The Company will be, as of the
date of the consummation of the IPO, a corporation duly incorporated, validly
existing and in good standing as a corporation under the laws of the State of
Delaware and the issuance by the Company of Company Common Stock will not (a)
violate, conflict with or result in the breach of any provision of the
certificate of incorporation or by-laws of the Company, 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 businesses or assets of the
Company or give to others any interests or rights therein under any Contract of
the Company, except in any case under this clause (b) as would not, individually
or in the aggregate, have a material adverse effect on the businesses or assets
of the Company.
7.5. Securities Act Matters. Subject to the terms and conditions of
this Agreement, at the Mischief Share Closing, the Company will acquire the
Mischief Shares under this Agreement for its own account and not with a view to
any distribution thereof in violation of the Securities Act. The Company
acknowledges and agrees that the Mischief Shares acquired pursuant to this
Agreement have not been and will not be registered under the Securities Act (or
<PAGE> 26
21
any state or foreign securities Laws) and may not be reoffered, sold, assigned,
transferred, pledged, encumbered, or otherwise disposed of in the absence of
such registration or an available exemption from such registration requirements.
ARTICLE 8
COVENANTS
8.1. Partnership Agreement. Simultaneously herewith, Mischief,
Shareholder, MTVNO, VLLC, Imagine MTVN Online, SonicNet and Box have executed
and delivered, each to the other, Amendment No. 2, amending the Partnership
Agreement.
8.2. Employment Agreement. Simultaneously herewith, Shareholder
and MTVNO have executed and delivered, each to the other, the Employment
Agreement.
8.3. Pledge Agreement. Simultaneously herewith, Shareholder and
Mischief have executed and delivered to MTVNO the Pledge Agreement.
8.4. Conduct of Mischief Business Prior to Mischief Share Closing.
Except as contemplated in this Agreement, from the date hereof to the Mischief
Share Closing Date, Mischief and Shareholder, as the case may be, will not (i)
carry on any business or operations of any kind whatsoever through Mischief,
except for ministerial actions required to maintain Mischief's corporate
existence and the collection of any Receivables, (ii) amend any of Mischief's
organizational documents, (iii) declare or pay any dividends on or make other
distributions in respect of any of Mischief's capital stock other than cash
dividends, (iv) redeem, repurchase or otherwise acquire, or split, combine or
reclassify, any Mischief Shares, (v) issue, agree to issue, deliver, sell,
award, pledge, dispose of or otherwise encumber or authorize or propose the
issuance, delivery, sale, award, pledge, disposition or other encumbrance of,
any shares of Mischief's capital stock of any class or any securities
convertible into or exchangeable for, or any rights, warrants or options to
acquire, any such shares or convertible or exchangeable securities, (vi) create,
incur or assume any indebtedness for borrowed money, whether or not in the
ordinary course of business, (vii) change any method of accounting or accounting
practice except as required by GAAP as in effect from time to time or (viii)
make any material tax election (other than an S-corporation election and a
change in its fiscal year to December 31) or change in tax accounting of
Mischief. For the avoidance of doubt, from the date hereof, Shareholder agrees
not to sell, exchange, assign, transfer, pledge, hypothecate or otherwise
dispose of any of the Mischief Shares, except to MTVNO. In addition, Shareholder
agrees that immediately prior to the consummation of the Mischief Share Closing
he will cause to be satisfied, and he will assume, all obligations and
liabilities of Mischief.
8.5. Non-Competition. (a) For purposes of this Agreement,
"Non-Compete Parties" means any and all of MTVNO, any subsidiary of MTVNO or
other Affiliate of MTVNO controlled by Viacom, the Company or any of its or
their successors or assigns. Each of Mischief and Shareholder agree that it or
he, as the case may be, shall not, prior to the third anniversary of the date
hereof (the "Non-Compete Period"), directly or indirectly, individually or for,
with or through any other Person (which shall be deemed to include any equity
participation
<PAGE> 27
22
in any other Person), (i) acquire or own in any manner any interest or
investment in (whether as a security holder, creditor or otherwise) any Person
that directly or indirectly owns, operates, manages or distributes a business
that directly competes with the Business (a "Competing Business"), (ii)
participate in, advertise or promote in any manner any Competing Business, or
(iii) be employed by or serve as an employee, manager, agent, officer or
director of, or consultant to, any Person that engages, directly or indirectly,
in a Competing Business, in each case, in any state or other jurisdiction
worldwide in which any Non-Compete Party is engaged in such business; provided,
however, that nothing herein shall be construed to prevent Shareholder from
owning, as an investment, up to 1% of a class of equity securities issued by any
competitor of any Non-Compete Party that is publicly traded and registered under
Section 12 of the Securities and Exchange Act of 1934, as amended; provided,
further, that the provisions of this non-competition agreement shall not apply
to Mischief on and after the Mischief Share Closing Date. The parties intend
that the covenant contained in the preceding sentence shall be construed as a
series of separate covenants, one for each county and city included within each
state or other jurisdiction and, except for geographic coverage, each such
separate covenant shall be deemed identical. The parties agree that the
covenants deemed included in this Section are, taken as a whole, reasonable in
their geographic scope and their duration and no party shall raise any issue of
the reasonableness of the scope or duration of the covenants in any proceeding
to enforce any such covenants. If, in any judicial proceeding, a court shall
refuse to enforce any separate covenant, then the unenforceable covenant shall
be modified in order to make it acceptable to the court and enforced
accordingly, or, if necessary, deemed eliminated to the extent necessary to
permit the remaining separate covenants to be enforced.
(b) For a period of three years after the date hereof, Shareholder
agrees that he shall not, directly or indirectly, for himself or for any other
Person, attempt to employ or enter into any employment, consulting or similar
relationship or arrangement, directly or indirectly, with any employee or former
employee of Mischief or the Non-Compete Parties, unless such employee or former
employee has not been employed by Mischief or the Non-Compete Parties, as the
case may be, for a period of more than six months.
(c) It is acknowledged and agreed by the parties hereto that a
breach by Mischief or Shareholder of any of the covenants contained in this
Section 8.5 will cause irreparable harm and damage to the Non-Compete Parties,
the monetary amount of which may be virtually impossible to ascertain. As a
result, Mischief and Shareholder hereby acknowledge and agree that the
Non-Compete Parties shall be entitled to an injunction from any court of
competent jurisdiction enjoining and restraining any violation of any or all of
the covenants contained in this Section 8.5 by Mischief or Shareholder or any of
its or their Affiliates, either directly or indirectly, and that such right to
injunction shall be cumulative and in addition to whatever other remedies the
Non-Compete Parties may possess.
8.6. Shareholder's Put Right.
(a) In the event that an IPO fails to close by the second
anniversary of the date hereof, at any time during the 60-day period commencing
on such anniversary, Shareholder and Mischief may, by irrevocable written notice
from Shareholder to MTVNO (the "Put Notice"), require MTVNO or an entity
designated by MTVNO to purchase, subject to the provisions of
<PAGE> 28
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Section 8.6(b)(iii) below, all, but not less than all, of both (i) the
Partnership Units owned by Shareholder and any Permitted Transferees of
Shareholder and Mischief and (ii) the Mischief Shares. Any such purchase shall
be effected, for cash, on the date which is the earlier of (x) the 90th day
following the second anniversary of the date hereof, or (y) the 30th day
following MTVNO's receipt of the Put Notice (or, in either case, if not a
Business Day the next following Business Day) (the "Put Closing Date"), and at a
total price for all such Partnership Units and Mischief Shares equal to
$4,700,000 (the "Put Purchase Price"). Mischief and Shareholder shall cause
their respective Permitted Transferees to participate in any such purchase or
sale for no additional consideration. The Put Purchase Price will be allocated
proportionately (in relationship to Partnership Units beneficially owned) among
all of Mischief, Shareholder and any of their Permitted Transferees selling
their Partnership Units and Mischief Shares to MTVNO or its designee upon
exercise of the Put.
(b) If a Put Notice is delivered, then MTVNO and/or its designee
and Mischief, Shareholder and any of their Permitted Transferees shall proceed
with the closing of the purchase (the "Put Closing") as follows:
(i) The Put Closing shall be held at the principal office
of MTVNO on the Put Closing Date, or at such other place or on such other date
as MTVNO shall designate that is a reasonably convenient location to avoid stamp
duty or other transfer taxes to the extent that it is not unlawful to do so.
(ii) At the Put Closing, MTVNO shall purchase (or cause
its designee to purchase) all but not less than all of both the applicable
Partnership Units and the Mischief Shares for the Put Purchase Price, and
against payment of such price in cash, Mischief, Shareholder and each of their
Permitted Transferees, as the case may be, shall deliver all such documents and
instruments as are reasonably necessary to transfer, and shall represent and
warrant to MTVNO that it has transferred, good and marketable title to the
applicable Partnership Units and the Mischief Shares being sold to MTVNO or its
designee, free and clear of all Liens, other than those created by this
Agreement or created by MTVNO.
(iii) The obligation of MTVNO or its designee to proceed
with the Put Closing shall be subject to the satisfaction of the terms and
conditions (with reference to the Mischief Shares portion of the Put Closing) of
Sections 3.3 and 3.4 relating to a transfer of Mischief Shares (substituting the
Put Closing and the Put Closing Date for the references to the Mischief Share
Closing and the Mischief Share Closing Date, respectively); provided, however,
that in the event that (i) the conditions specified in Section 3.4 hereof are
not satisfied on the Put Closing Date and (ii) the Losses known by MTVNO to be
indemnifiable by Shareholder as of the Put Closing Date exceed the value (as
determined in accordance with the provisions of Section 10.6 hereof) of the
Pledged Shares immediately prior to the consummation of the Put Closing, MTVNO
may, in its sole discretion, elect to require that Mischief instead transfer, or
cause to be transferred, and Mischief hereby agrees to transfer, or cause to be
transferred, in such circumstances, to the Company all of the Mischief
Partnership Units issued pursuant to Section 4.1 in exchange for that number and
kind of shares of Company Common Stock which Shareholder would otherwise have
been entitled to receive for his Mischief Shares. The obligation of MTVNO or its
designee to proceed with the Put Closing shall also be conditioned
<PAGE> 29
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upon, and the scheduled Put Closing Date, shall be extended to 10 days following
the last to occur of, the receipt of all material governmental and regulatory
consents, approvals or waivers that may be required in connection with the
purchase and sale of the applicable Partnership Units and the Mischief Shares
(other than any such consent or approval which has, if permitted by law, been
waived by MTVNO or its designee).
ARTICLE 9
REGISTRATION RIGHTS
9.1. Demand Rights.
(a) From and after the first anniversary of the consummation of
the IPO, Shareholder and his Permitted Transferees (each, a "Mischief
Stockholder"), and collectively, the "Mischief Stockholder Group," shall have
the right, upon written notice from Shareholder to the Company and subject to
the provisions of this Article 9, to require the Company to prepare and file as
soon as practicable after receipt of such notice and use its reasonable best
efforts to cause to become effective as soon as practicable thereafter a
registration statement (a "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act" ), with respect to the resale of all
Registrable Shares requested by the Mischief Stockholder Group to be so
registered (a "Demand Registration"); provided, however, that the Company shall
not be required to violate the terms of any "lock-up" or "standstill" provisions
relating to any securities offering by it by which it may be bound by an
underwriter; provided, further, that if the Company determines, in its
reasonable good faith business judgment, that the filing of such Registration
Statement and the offering of Registrable Shares covered thereby would interfere
with or otherwise adversely affect any financing, acquisition, corporate
reorganization or other material transaction or development involving the
Company or any of its Affiliates or require the Company to disclose material
matters regarding itself or such Affiliates that otherwise would not be required
to be disclosed at such time, then the Company may delay the filing of such
Registration Statement for a period of up to sixty days.
(b) Notwithstanding anything to the contrary contained herein, the
Company shall have no obligation to prepare, file and cause to become effective
the Registration Statement if the Company delivers to Shareholder an opinion of
counsel (which counsel may be an employee of MTVNO or its Affiliates) to the
effect that all such Registrable Shares for which registration was requested may
be publicly sold in a single transaction without registration under the
Securities Act pursuant to Rule 144 thereunder. Furthermore, the Company shall
not be obligated to prepare, file and cause to become effective Registration
Statements for more than one such registration pursuant to this Section 9.1.
(c) If the selling Mischief Stockholder Group so elects, it may
cause the public offering or distribution of the Registrable Shares pursuant to
the Demand Registration to be pursuant to a firm commitment underwriting, the
managing underwriter of which shall be a nationally recognized investment
banking firm selected by the Company and approved by Shareholder, such approval
not to be unreasonably withheld. The Company shall enter into the same
underwriting agreement as shall the selling Mischief Stockholder Group,
containing
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representations, warranties, indemnities, and agreements acceptable to the
Company and not substantially different from those customarily made by an issuer
in underwriting agreements with respect to secondary distributions. If (i) the
Demand Registration is for a firm commitment underwritten public offering and
the managing underwriter thereof determines in good faith that the aggregate
number of Registrable Shares to be offered thereby exceeds the total number of
Registrable Shares that may be successfully offered at an estimated initial
price per share to the public that is at least equal to the minimum initial
price per Registrable Share (which shall not be higher than the market price at
the time of designation) to the public that has been designated in writing at
the time of the notice referred to in Section 9.1(a) by the Shareholder, and/or
(ii) the Demand Registration is delayed more than 30 days pursuant to Section
9.3(b) of this Agreement prior to being declared effective, and in either case
no Registrable Shares are sold pursuant to such Demand Registration, then the
selling Mischief Stockholder Group shall withdraw its request for such
registration by giving written notice to the Company to such effect, in which
event, such registration shall not be deemed to have occurred for purposes of
the last sentence of Section 9.1(b).
(d) The selling Mischief Stockholder Group may elect to withdraw
their Registrable Shares from inclusion in a Demand Registration; provided that,
except for a withdrawal pursuant to the last sentence of Section 9.1(c),
notwithstanding such withdrawal, such registration shall be deemed to have
occurred for the purposes of the last sentence of Section 9.1(b).
(e) A Demand Registration shall not be deemed to have been
effected until such registration has been effective (and not subject to any stop
order, injunction or other order or requirement of the Securities and Exchange
Commission ("SEC") or other Governmental Entity for any reason) for a period of
90 days following the date on which such registration was declared effective,
or, if earlier, the date on which all Registrable Shares requested to be
registered thereunder have been sold.
(f) The Company shall have the right, and may grant to any other
Person the right, to include any other Registrable Shares in any Registration
Statement filed pursuant to this Section 9.1.
9.2. Piggy-Back Rights.
(a) From and after the six (6) month anniversary of the
consummation of the IPO until the third anniversary of the consummation of the
IPO, each time that the Company intends to proceed with the actual preparation
and filing of a registration statement under the Securities Act for its own
account in connection with the proposed offer and sale for money of any
securities of the Company (other than a registration statement on Form S-4 or
Form S-8 or any successor to either such form), the Company will give at least
20 days written notice of its election to Shareholder. Upon the written request
of Shareholder to the Company given within 10 days after receipt of any such
notice from the Company, the Company will, except as herein provided, use its
reasonable efforts to cause all Registrable Shares for which Shareholder has
requested registration to be included in such registration statement, all to the
extent requisite to permit the sale or other disposition by the Mischief
Stockholder Group of the Registrable Shares
<PAGE> 31
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to be so registered; provided, however, that (i) nothing herein shall prevent
the Company from, at any time, abandoning or delaying any such registration
initiated by it and thereupon the Company shall have no obligation to complete a
registration for the benefit of the Mischief Stockholder Group; (ii) for
purposes of this sentence, the use by the Company of reasonable efforts shall
not require the Company to reduce the amount or sale price of the securities it
proposes to distribute for its own account; (iii) the Company shall not be
required to violate the terms of any "lock-up" or "standstill" provisions
relating to any securities offering by which it may be bound; (iv) the number of
requests for registration pursuant to this Section 9.2(a) by Shareholder shall
not exceed two; (v) the rights granted under this Section 9.2 shall be equal in
priority to the rights of any other Person now having, or hereafter granted,
similar piggy-back rights with respect to Company Common Stock; and (vi) the
provisions of Section 9.1(b) shall apply equally with respect to the obligation
of MTVNO under this Section 9.2(a). If any registration pursuant to this Section
9.2 shall be underwritten in whole or in part, (A) the Company may require that
the Registrable Shares requested for inclusion pursuant to this Section 9.2 be
included in the underwriting on the same terms and conditions as the Registrable
Shares otherwise being sold through the underwriters and (B) the selling
Mischief Stockholder Group may elect through Shareholder, in writing not less
than fifteen Business Days prior to the effective date of the registration
statement filed in connection with such registration, not to register their
Registrable Shares in connection with such registration. No registration
effected under this Section 9.2 shall relieve the Company of its obligation to
effect the Demand Registration in accordance with Section 9.1.
(b) In connection with a registration under this Section 9.2, the
Company may enter into an underwriting agreement in such customary form as shall
have been negotiated and agreed to by the Company with the underwriter or
underwriters selected for such underwriting by the Company. Notwithstanding any
other provision of this Section 9.2, if in the opinion of the managing
underwriter the inclusion of Registrable Shares owned by the Mischief
Stockholder Group in a registration statement would reduce the amount or sale
price of the other securities to be included in such registration, the Company
may reduce (pro rata with other selling shareholders), to as low as zero, the
number of Registrable Shares to be included by the Mischief Stockholder Group in
the registration and underwriting under this Section 9.2, to the extent
necessary to cause inclusion of such Registrable Shares not to be detrimental to
the registration filed pursuant to this Section 9.2.
9.3. General Registration Provisions.
(a) If and whenever the Company is required by the provisions of
this Article 9 to effect the registration of Registrable Shares owned by the
Mischief Stockholder Group under the Securities Act, the Company will:
(i) subject to the terms and conditions of this Article
9, prepare and file with the SEC a registration statement with respect to such
Registrable Shares, and use its reasonable best efforts to cause such
registration statement to become and remain effective for such period as may be
reasonably necessary to effect the sale of such Registrable Shares, but in no
event longer than 90 days;
<PAGE> 32
27
(ii) prepare and file with the SEC such amendments to such
registration statement and supplements to the prospectus contained therein as
may be necessary to keep such registration statement effective for such period
as may be reasonably necessary to effect the sale of such Registrable Shares,
but in no event longer than 90 days;
(iii) furnish to Shareholder such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as Shareholder may reasonably request in order to
facilitate the public offering of such Registrable Shares;
(iv) prepare and promptly file with the SEC and promptly
notify Shareholder of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omission if, at the time when a prospectus relating to such
Registrable Shares is required to be delivered under the Securities Act, any
event shall have occurred as the result of which any such prospectus or any
other prospectus as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances in which they were made,
not misleading and promptly provide to Shareholder sufficient copies of such
amended or supplemented prospectus so that it can be delivered to the purchasers
of the Registrable Shares as required by the Securities Act and the regulations
thereunder;
(v) advise Shareholder, promptly after it shall receive
notice or obtain knowledge thereof, of the issuance of any stop order by the SEC
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose, promptly use its reasonable
efforts to prevent the issuance of any stop order or to obtain its withdrawal if
such stop order should be issued and promptly notify Shareholder of the
forbearance, lifting or withdrawal of such stop order or proceeding;
(vi) notify Shareholder, (A) when a registration statement
becomes effective, (B) when the filing of a post-effective amendment to a
registration statement or supplement to a prospectus is required, when the same
is filed, and in the case of a post-effective amendment, when the same becomes
effective, and (C) of any request by the SEC for any amendment of or supplement
to a Registration Statement or any prospectus relating thereto or for additional
information;
(vii) cause the Registrable Shares covered by a
Registration Statement to be listed on the principal exchange or exchanges or
qualified for trading on the principal over the counter market on which the
common stock of the Company is then listed or traded upon the sale of such
Registrable Shares pursuant to such Registration Statement;
(viii) furnish to Shareholder and the underwriter, if any,
such number of copies of such registration statement, each amendment and
supplement thereto (in each case including all exhibits thereto and documents
incorporated by reference therein), the prospectus included in such registration
statement (including each preliminary prospectus) and such other documents as
Shareholder or such underwriter may reasonably request in order to facilitate
the disposition of the Registrable Shares; and
<PAGE> 33
28
(ix) furnish to each underwriter, if any, a signed
counterpart of (x) an opinion or opinions of counsel to the Company addressed to
such underwriter on which opinion such underwriter is entitled to rely and (y) a
comfort letter or comfort letters from the Company's independent public
accountants, each in customary form and covering such matters of the type
customarily covered by opinions or comfort letters, as the case may be, the
managing underwriter therefor reasonably requests.
Shareholder, upon receipt of any notice from the Company of the happening of any
event of the kind described in paragraph (iv) or (v) above, will forthwith
discontinue, and cause its Affiliates and the Mischief Stockholder Group to
discontinue, disposition of the Registrable Shares until Shareholder's receipt
of the copies of the supplemented or amended prospectus contemplated by
paragraph (iv) above or until it is advised in writing by the Company that the
use of the prospectus may be resumed and has received copies of any additional
or supplemental filings which are incorporated by reference in the prospectus.
If so directed by the Company, Shareholder will deliver to the Company or
destroy all copies, other than permanent file copies then in the possession of
Shareholder, the Mischief Shareholder Group or their Affiliates, of the
prospectus required to be supplemented or amended.
(b) Notwithstanding anything to the contrary in this Agreement, if
at any time after the filing of a registration statement (i) in the case of any
registration statement for a firm commitment underwritten offering of
Registrable Shares, before it is declared effective by the SEC, or (ii) in the
case of any other registration statement, before or after it is declared
effective by the SEC, the Company determines, in its reasonable good faith
business judgment, that such registration and the offering of Registrable Shares
covered by such registration would interfere with or otherwise adversely affect
any financing, acquisition, corporate reorganization or other material
transaction or development involving the Company or any of its Affiliates or
require the Company to disclose material matters regarding itself or such
Affiliates that otherwise would not be required to be disclosed at such time,
then the Company may require the suspension of the distribution of any
Registrable Shares (a "Blackout Period") by giving notice to Shareholder. Any
such notice need not specify the reasons for such suspension if the Company
determines, in its reasonable good faith business judgment, that doing so would
interfere with or adversely affect such transaction or development or would
result in the disclosure of material nonpublic information. In the event that
such notice is given, then until the Company has determined, in its reasonable
good faith business judgment, that such registration and distribution would no
longer materially interfere with the matters described in the preceding sentence
and has given notice thereof to Shareholder, the Company's obligations under
this Article 9 will be suspended. The Company shall extend the period of time
the Company is required to maintain effective any registration statement
required pursuant to clauses (i) and (ii) of paragraph (a) of this Section 9.3
by a length of time equal to the aggregate length of the Blackout Periods. In
the event of any suspension of a registration pursuant to this Section 9.3(b),
the selling Mischief Stockholder Group shall be entitled to withdraw from such
registration upon written notice to the Company.
(c) The Company's obligations to the Mischief Stockholder Group
under this Article 9 will be conditioned on compliance with the following in
connection with the preparation, filing and use of a Registration Statement:
<PAGE> 34
29
(i) Shareholder, the Mischief Stockholder Group and their
respective Affiliates will cooperate with the Company in connection with the
preparation of the applicable registration statement, and for so long as the
Company is obligated to keep such registration statement effective, Shareholder,
the Mischief Stockholder Group and their respective Affiliates will provide to
the Company, in writing in a timely manner, for use in such registration
statement (and expressly identified in writing as such), all information
regarding Shareholder, the Mischief Stockholder Group and their respective
Affiliates and such other information as may be required by applicable law to
enable the Company to prepare such registration statement and the related
prospectus covering the applicable Registrable Shares owned by the selling
Mischief Stockholder Group and to maintain the currency and effectiveness
thereof, so long as the Company executes a confidentiality agreement in form and
substance reasonably satisfactory to Shareholder in the event any confidential
information is requested by the Company;
(ii) Shareholder, the Mischief Stockholder Group and their
respective Affiliates will permit the Company and its representatives and agents
to examine such documents and records and will supply in a timely manner any
information as they may reasonably request in connection with the offering or
other distribution of Registrable Shares by the Mischief Stockholder Group;
(iii) Shareholder, the Mischief Stockholder Group and their
respective Affiliates will enter into such agreements with the Company and any
broker-dealer or similar securities industry professional containing
representations, warranties, indemnities and agreements as are customarily
entered into and made by a seller of securities and such seller's controlling
shareholders with respect to secondary distributions under similar
circumstances;
(iv) during such time as Shareholder, the Mischief
Stockholder Group and their respective Affiliates may be engaged in a
distribution of the Registrable Shares, Shareholder, the Mischief Stockholder
Group and their respective Affiliates will comply with all applicable laws,
including Regulation M promulgated under the Securities Exchange Act of 1934, as
amended, and, to the extent required by such laws, will, among other things: (A)
not engage in any stabilization activity in connection with the securities of
the Company in contravention of such rules; (B) distribute the Registrable
Shares acquired by it solely in the manner described in the applicable
registration statement; (C) if required by applicable law, rules or regulations,
cause to be furnished to each agent or broker-dealer to or through whom such
Registrable Shares may be offered, or to the offeree if an offer is made
directly by Shareholder, the Mischief Stockholder Group and their respective
Affiliates, such copies of the applicable prospectus (as amended and
supplemented to such date) and documents incorporated by reference therein as
may be required by such agent, broker-dealer or offeree, provided that the
Company shall provide Shareholder with an adequate number of copies thereof; and
(D) not bid for or purchase any securities of the Company; and
(v) on notice from the Company of the happening of any of
the events specified in Section 9.3(a)(iv) or (v), or that, as set forth in
Section 9.3(b), requires the suspension by Shareholder, the Mischief Stockholder
Group and their respective Affiliates of the distribution of any of the
Registrable Shares owned by the Mischief Stockholder Group, then Shareholder,
the Mischief Stockholder Group and their respective Affiliates will cease
offering
<PAGE> 35
30
or distributing the Registrable Shares owned by the Mischief Stockholder Group
until the offering and distribution of the Registrable Shares owned by the
Mischief Stockholder Group may recommence in accordance with the terms hereof
and applicable law.
(d) Except as otherwise provided with respect to registrations
terminated by the Company, the Company shall bear the following fees, costs and
expenses in connection with its obligations under this Article 9: all
registration, filing fees, printing expenses, all internal Company expenses and
the premiums and other costs of policies of insurance against liability arising
out of the public offering. Fees and disbursements of counsel and accountants
for Shareholder, the Mischief Stockholder Group and their respective Affiliates,
underwriting discounts and commissions and transfer taxes for Shareholder, the
Mischief Stockholder Group and their respective Affiliates and other direct
selling expenses incurred by Shareholder, the Mischief Stockholder Group and
their respective Affiliates not expressly included above shall be borne by
Shareholder, the Mischief Stockholder Group and their respective Affiliates.
(e) The Company shall indemnify and hold harmless each selling
Mischief Stockholder, and each Person, if any, who controls a selling Mischief
Stockholder within the meaning of the Securities Act, from and against any and
all claims, losses, damages, liabilities, costs and expenses to which the
selling Mischief Stockholder or any such controlling Person may become subject
under the Securities Act or otherwise, insofar as such claims, losses, damages,
liabilities, costs or expenses arise out of or are based on any untrue statement
or alleged untrue statement of any material fact contained in any registration
statement filed by the Company pursuant to this Article 9 which relates to
Registrable Shares owned by the selling Mischief Stockholder, any prospectus
contained therein or any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, except
insofar as any such claim, loss, damage, liability, costs or expense arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission so made in conformity with information furnished by
Shareholder, the Mischief Stockholder Group and their respective Affiliates or
such controlling Person specifically for inclusion in such registration
statement; provided, however, that the foregoing indemnity is subject to the
condition that, insofar as it relates to any untrue statement or alleged untrue
statement, omission or alleged omission made in a preliminary prospectus but
eliminated or remedied in a prospectus, such indemnity agreement shall not inure
to the benefit of the selling Mischief Stockholder or any Person who controls
the selling Mischief Stockholder if (A) the Company complied with all of its
notification and delivery obligations as provided herein, (B) such claim, loss,
damage, liability, cost or expense relates to the matter so eliminated or
remedied in the final prospectus and (C) the selling Mischief Stockholder or its
Affiliates failed to deliver a copy of the prospectus at or prior to the time
such action is required by the Securities Act; provided, further, that the
foregoing indemnity is also subject to the condition that, insofar as it relates
to any untrue statement or alleged untrue statement, omission or alleged
omission made in a prospectus attributable solely to facts or events which occur
after the effective date of the registration statement, which untrue statement
or alleged untrue statement, omission or alleged omission is eliminated or
completely remedied in an amendment or supplement to the prospectus, such
indemnity agreement shall not inure to the benefit of the selling Mischief
Stockholder or any Person who controls the selling Mischief Stockholder or any
of their
<PAGE> 36
31
Affiliates, if, having previously been furnished by or on behalf of the Company
with copies of the prospectus as so amended or supplemented, in lieu thereof the
selling Mischief Stockholder or its Affiliates delivered the prospectus without
such amendment or supplement.
(f) Shareholder shall indemnify and hold harmless the Company and
any underwriter (as defined in the Securities Act) for the Company, and each
Person, if any, who controls the Company or such underwriter within the meaning
of the Securities Act from and against any claims, losses, damages, liabilities,
costs or expenses to which the Company or any such underwriter or controlling
Person may become subject under the Securities Act or otherwise, insofar as such
claims, losses, damages, liabilities, costs or expenses are caused by any untrue
or alleged untrue statement of any material fact contained in any registration
statement filed by the Company pursuant to this Article 9 which relates to
Registrable Shares owned by any Mischief Stockholder or any of its Affiliates,
any prospectus contained therein or any amendment or supplement thereto, and
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was so
made in reliance upon and in strict conformity with written information
furnished by Shareholder, the Mischief Stockholder Group or their respective
Affiliates specifically for inclusion in such registration statement, prospectus
or amendment or supplement thereto).
(g) Except to the extent otherwise provided in this Section
9.3(g), a party obligated to provide indemnification under Section 9.3(e) or (f)
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. Promptly after receipt by an
indemnified party pursuant to the provisions of paragraphs (e) and (f) of this
Section 9.3 of notice of commencement of any action involving the subject matter
of the foregoing indemnity provisions, such indemnified party will, if a claim
thereof is to be made against the indemnifying party pursuant to the provisions
of said paragraph (e) and (f) promptly notify the indemnifying party of the
commencement thereof, but the omission to so notify the indemnifying party will
not relieve the indemnifying party from any liability which it may have to any
indemnified party, except to the extent that the indemnifying party is
materially prejudiced by the failure to give such prompt notice. If such action
is brought against any indemnified party and it notifies the indemnifying party
of the commencement thereof, the indemnifying party shall have the right to
participate therein, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof so long as
it agrees to accept full responsibility to indemnify and hold harmless the
indemnified party in accordance herewith in respect of such action. After notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party pursuant to the provisions of said paragraph (e) and (f) for
any legal or other expense subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation, 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
<PAGE> 37
32
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 fees of counsel for the
indemnified party shall be for the account of the indemnifying party and the
indemnifying party shall not have the right to direct the defense of such action
on behalf of the indemnified party. The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent but if
settled with such consent, or if there be a final judgment for the plaintiff,
the indemnifying party shall indemnify and hold harmless such 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.
(h) The registration rights granted to the Mischief Stockholder
Group pursuant to this Article 9 are not assignable. Any assignment not
permitted hereunder shall be null and void ab initio.
(i) If the indemnification provided for under Sections 9.3(e) or
(f), as applicable, is unavailable to or insufficient to hold the indemnified
party harmless under such Section in respect of any claim, loss, damage,
liability, cost or expense referred to therein (a "Liability") for any reason
other than as specified therein, then the indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of such claims,
losses, damages, liabilities, costs or expenses (i) in such proportion as is
appropriate to reflect the relative benefits received by the indemnifying party
on the one hand and such indemnified party on the other from the subject
offering or distribution or (ii) if the allocation provided by clause (i) of
this sentence is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
of this sentence but also the relative fault of the indemnifying party on the
one hand and such indemnified party on the other in connection with the
statements or omissions which resulted in such Liability as well as any other
relevant equitable considerations. The relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other hand
shall be deemed to be in the same proportion as the net proceeds of the offering
or other distribution (after deducting expenses) received by the indemnifying
party bears to the net proceeds of the offering or other distribution (after
deducting expenses) received by the indemnified party. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by (or omitted to be supplied
by) the Company or the selling Mischief Stockholder Group, the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission, the relative benefits received by each party from
the sale of the Registrable Shares and any other equitable considerations
appropriate under the circumstances. The amount paid or payable by an
indemnified party as a result of the Liability referred to above in this Section
9.3(i) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of
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33
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(j) Notwithstanding anything herein to the contrary, the parties
agree that the obligations and liability of the selling Mischief Stockholder
Group with respect to any registration in which any Mischief Stockholder
participates pursuant to Section 9.1 or 9.2 whether from indemnification
pursuant to Section 9.3(f), contribution pursuant to Section 9.3(i), or
otherwise shall not in any event exceed, in the aggregate, the amount of net
proceeds received by such selling Mischief Stockholder from the sale of the
Registrable Shares sold by such Mischief Stockholder in such registration.
ARTICLE 10
SURVIVAL; INDEMNIFICATION
10.1. 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 the
assignment and assumption of the Acquired Assets and the Assumed Liabilities and
the Mischief Share Closing (if it occurs) and not be affected in any respect by
any investigation conducted by any party hereto; provided, however, that the
representations and warranties set forth in Articles 5, 6 and 7 will terminate
and expire on the second anniversary of the date hereof. After a representation
and warranty has terminated and expired, no indemnification will or may be
sought pursuant to this Article 10 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 10 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 10.1, no claim presented
in writing for indemnification pursuant to this Article 10 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.
10.2. Indemnification by Shareholder. Shareholder shall indemnify
and hold MTVNO and its partners and their respective shareholders, employees,
officers, directors, agents and Affiliates (and following the Mischief Share
Closing, Mischief)(collectively, the "MTVNO 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, as
of the Mischief Share Closing Date or as of the Put Closing Date of any of the
representations and warranties made by Shareholder in or pursuant to this
Agreement or in any instrument or certificate delivered by Mischief or
Shareholder in accordance herewith;
<PAGE> 39
34
(b) any failure by Mischief or Shareholder to carry out, perform,
satisfy and discharge any of its covenants, agreements, undertakings,
liabilities or obligations under this Agreement; and
(c) any liability or obligation of Mischief which is not included
in the Assumed Liabilities.
10.3. Indemnification by MTVNO. MTVNO shall indemnify and hold
Mischief and its shareholders, employees, officers, directors, agents and
Affiliates (the "Mischief 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, 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 MTVNO in or pursuant to this
Agreement or in any instrument or certificate delivered by it in accordance
herewith;
(b) any failure by MTVNO to carry out, perform, satisfy and
discharge any of its covenants, agreements, undertakings, liabilities or
obligations under this Agreement; and
(c) the Assumed Liabilities (but only to the extent so assumed).
10.4. Indemnification Procedures. Any party asserting a right to
indemnification under Section 10.2 or 10.3 shall so notify in writing the
applicable Person or Persons required hereunder to provide indemnification
pursuant to this Article 10. 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 Article 10
except to the extent that the indemnifying party is materially prejudiced by
such failure. 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
reasonably 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, (y) it agrees to accept full
responsibility indemnify and hold harmless the indemnified party in accordance
herewith in respect of the claim or demand and (z) the indemnifying party has
sufficient financial resources in order to
<PAGE> 40
35
indemnify for the full amount of any potential liability in connection with such
claim. Whether or not the indemnifying party chooses to defend or prosecute such
claim, 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. No party shall settle or permit
the settlement of any such third party claim or action without the prior written
consent of the other party, unless the settlement contains a full release of the
other party from all liabilities or obligations with respect to the related
claim or action.
10.5. No Contribution from Mischief. Notwithstanding anything
contained in this Agreement to the contrary, Shareholder acknowledges and agrees
that it has no right of contribution from or remedy against Mischief as a result
of any indemnification it is required to make under or arising out of a breach
of any warranty or representation relating to Mischief or covenant of Mischief
in this Agreement or in any certificate, document or other instrument delivered
in connection herewith or therewith, and Shareholder hereby releases, waives and
forever discharges any right to indemnification, reimbursement or contribution
that he may have at any time against Mischief arising out of the
representations, warranties, covenants and agreements contained in this
Agreement or in any certificate, document or other instrument delivered in
connection herewith or therewith.
10.6. Limitations on Indemnification . Notwithstanding anything to
the contrary in this Agreement, (i) Shareholder shall not be responsible for any
Losses under Section 10.2(a) and (c), excluding indemnification claims for
Losses arising out of any inaccuracy or breach of the representations and
warranties contained in Section 5.13 or any Losses arising from Mischief's or
Shareholder's failure to satisfy the liabilities set forth on the Closing
Liability Schedule, until the cumulative aggregate amount of such Losses
(excluding any such Losses to the extent recovered by MTVNO from any third party
under any contract with such party or under any applicable insurance policy (net
of any increase in insurance premiums)) exceeds $100,000, and then only to the
extent of such excess, and (ii) no group of indemnifying parties' cumulative
indemnity obligations under any of Sections 10.2(a) and (c), excluding
indemnification claims for Losses arising out of any inaccuracy or breach of the
representations and warranties contained in Sections 5.1, 5.2 and 5.3, shall
exceed $2,500,000. For purposes of this Article 10, Losses shall be determined
on a net after-tax basis. MTVNO agrees that it will first satisfy the
indemnification obligations of Shareholder under this Article 10 by exercising
its rights under, and subject to the terms of, the Pledge Agreement. Each party
hereto agrees that, prior to the IPO, the value of the Pledged Shares for
purposes of satisfaction of Losses pursuant to this Article 10 will be equal to
the greater of (x) $15 per Partnership Unit (adjusted to reflect any split,
combination or reclassification of Partnership Units after the date hereof) and
(y) the fair market value of such Partnership Units as determined in good faith
by the board of directors of the Company.
10.7. Exclusive Remedy. The remedies provided for in this Article 10
shall be the sole remedies, contractual or otherwise, of the indemnified parties
and shall preclude assertion by the indemnified parties of any other rights or
the seeking of any other remedies against the indemnifying parties with respect
to this Agreement and the transactions contemplated hereby; provided, however,
that this sentence shall not limit the rights of the parties
<PAGE> 41
36
hereto to seek specific performance of any provision of this Agreement or the
rights and remedies of the parties under the Pledge Agreement and the Employment
Agreement.
ARTICLE 11
MISCELLANEOUS
11.1. 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.
11.2. 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, without regard to the choice of law rules thereof.
11.3. 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.
11.4. Amendments. This Agreement may be modified or amended only by
a written amendment signed by each party hereto.
11.5. 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.
11.6. Entire Agreement. This Agreement and the other Operative
Agreements contain the entire agreement of the parties with respect to the
subject matter hereof and supersede any and all prior agreement and
understandings, whether written or oral, with respect to the subject matter
hereof.
11.7. 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.
11.8. Parties in Interest; Limitation on Rights of Others. MTVNO may
assign its rights and obligations under this Agreement to one or more Affiliates
of MTVNO; provided, that no such assignment shall relieve MTVNO of its
obligations hereunder and any such assignment shall be approved by Viacom. No
party to this Agreement may assign any of its rights or delegate any of its
obligations under this Agreement except as specifically provided in this Section
11.8. The terms of this Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective heirs, successors (including any
successor to the business
<PAGE> 42
37
of MTVNO) and permitted assigns. Any assignment of rights hereunder in violation
hereof shall be null and void ab initio. Except for the provisions of Article 10
and Section 8.5 hereunder, nothing in this Agreement, whether express or
implied, shall be construed to give any Person (other than the parties hereto
and their heirs, successors (including any successor to the business of MTVNO)
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. MTVNO will cause the Company to perform all of the Company's obligations
hereunder and under the other Operative Agreements. Notwithstanding any
provision herein to the contrary, the Company may assign any of its rights and
obligations, including such rights and obligations under Article 3 hereof,
without the consent of Mischief or Shareholder, to an Affiliate of the Company;
provided, that no such assignment shall relieve MTVNO of its obligations with
respect to the Company hereunder.
11.9. 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.
11.10. Further Assurances. After the date hereof, for no further
consideration, Mischief and Shareholder shall perform all such other acts and
shall execute, acknowledge and deliver all such assignments, transfers, consents
and other documents as MTVNO or its counsel may reasonably request (i) to vest
in MTVNO, and protect MTVNO's right, title and interest in, and enjoyment of,
the business of Mischief and the Acquired Assets or (ii) to carry out the intent
and purposes of this Agreement and give effect to the exercise by MTVNO of its
rights hereunder. In accordance with the foregoing, promptly following the date
of this Agreement, but in no event later than the Mischief Share Closing Date,
Mischief or Shareholder shall provide MTVNO with evidence of satisfaction of the
obligations and liabilities of Mischief indicated on the Closing Liability
Schedule. Furthermore, in order to effectuate the intent of this Section 11.10,
and without limiting any of the provisions hereof, but subject to the provisions
of Section 10.4, Mischief hereby constitutes and appoints MTVNO, its successors
and assigns and each of the officers and employees thereof, its true and lawful
attorneys-in-fact, with full power of substitution, in the name of MTVNO or in
the name of Mischief or otherwise, but for the benefit of MTVNO:
(a) to demand and collect, to endorse and deposit, or to
compromise, settle or release all property of any character and any other items
conveyed, transferred and assigned hereby;
(b) to endorse and deposit checks and drafts and to demand and
collect, compromise, settle or release all claims and rights conveyed,
transferred or assigned hereby;
<PAGE> 43
38
(c) to institute and prosecute all proceedings which any such
attorney-in-fact may deem appropriate in order to collect, assert or enforce any
claim, right, title and interest of Mischief of any kind in or to the Acquired
Assets conveyed, transferred or assigned hereby;
(d) to defend, compromise or settle any and all actions, suits or
proceedings in respect of the Acquired Assets conveyed, transferred and assigned
hereby; and
(e) to undertake any and all other acts or execute any instruments
which any such attorney-in-fact may deem proper in order to provide MTVNO with
the use and benefit of the Acquired Assets conveyed, transferred and assigned
hereby.
Mischief acknowledges that the foregoing powers are coupled with an
interest and may not be revoked in any manner or for any reason. MTVNO shall be
entitled to retain for its own account any amounts collected pursuant to the
foregoing powers, including any amounts payable as interest in respect thereof.
No attorney-in-fact shall bear any liability for any action or failure to act
pursuant hereto, except for such attorney-in-fact's gross negligence or willful
misconduct.
11.11. Public Announcements. No party hereto 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.
11.12. 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 consummated or contemplated hereby;
provided, however, that Shareholder shall be responsible for all such costs and
expenses of Mischief; provided, further, that MTVNO shall be solely responsible
for and shall pay any sales, use, transfer or similar Taxes imposed upon the
conveyance of the Acquired Assets contributed hereby.
11.13. 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 MTVNO:
MTVN Online L.P.
770 Broadway
New York, New York 10003
Fax No.: (212) 846-1735
Attention: Mr. Nicholas Butterworth
with a copy to:
Viacom International Inc.
1515 Broadway
<PAGE> 44
39
New York, New York 10036
Fax No.: (212) 258-6099
Attention: General Counsel
If to Mischief or Shareholder:
Mischief New Media inc.
175 E. 96th Street, Suite 23B
New York, New York 10128
Fax No.: (212) 208-4628
Attention: Mr. Jason Hirschhorn
with a copy to:
Grubman Indursky & Schindler, P.C.
152 W. 57th Street, 31st Floor
New York, New York 10019
Fax No.: (212) 554-0444
Attention: Arthur I. Indursky, Esq.
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.
11.14. 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 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 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
<PAGE> 45
40
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.
(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. Nothing in this Agreement shall affect the right of any party to
serve process in any other manner permitted by law.
11.15. Cooperation for Financial Reporting. At MTVNO's sole cost and
expense, Mischief and Shareholder shall cooperate with MTVNO, or any successor
(including the Company), and shall provide MTVNO, or any successor (including
the Company), access to all relevant financial information, to the extent
reasonably appropriate for MTVNO 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 MTVNO, or any successor (including the
Company), to make a public offering of its securities and to comply with all
financial reporting requirements of applicable law.
<PAGE> 46
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.
MTVN ONLINE L.P.
By: /s/ Michael D. Fricklas
-----------------------------------
Name: Michael D. Fricklas
Title: Sr. Vice President and
Secretary
MISCHIEF NEW MEDIA INC.
By: /s/ Jason Hirschhorn
-----------------------------------
Name: Jason Hirschhorn
Title: President
/s/ Jason Hirschhorn
---------------------------------------
Jason Hirschhorn, in his individual
capacity, as Shareholder
<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 28, 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 29, 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 29, 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 29, 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 29, 2000
