<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE MTVi GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<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>
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THE MTVi GROUP, INC.
770 BROADWAY
NEW YORK, NEW YORK 10003
(212) 654-9000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
NICHOLAS BUTTERWORTH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
THE MTVi GROUP, INC.
770 BROADWAY
NEW YORK, NEW YORK 10003
(212) 654-9000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
MICHAEL D. FRICKLAS
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
VIACOM INC.
1515 BROADWAY
NEW YORK, NEW YORK 10036
(212) 258-6000
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STEPHEN T. GIOVE KENNETH A. LEFKOWITZ DAVID J. GOLDSCHMIDT
SHEARMAN & STERLING HUGHES HUBBARD & REED LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
599 LEXINGTON AVENUE ONE BATTERY PARK PLAZA FOUR TIMES SQUARE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10004 NEW YORK, NEW YORK 10036-6522
(212) 848-4000 (212) 837-6000 (212) 735-3000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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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. [ ]
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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. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Class A Common Stock, $.01 par value....................... $10,000,000 $2,640
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
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 herein and is followed by the alternate front cover page to be used in
the international prospectus. The form of the front cover page of the
international prospectus is labeled "Alternate Cover Page for International
Prospectus." Final forms of each prospectus will be filed with the Securities
and Exchange Commission under Rule 424(b) of the General Rules and Regulations
under the Securities Act of 1933.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS (Subject to Completion)
Issued February 11, 2000
Shares
The MTVi Group, Inc.
CLASS A COMMON STOCK
------------------------
THE MTVi GROUP, INC. IS OFFERING SHARES OF ITS CLASS A COMMON STOCK. THIS IS OUR
INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND
$ PER SHARE.
FOLLOWING THIS OFFERING, WE WILL HAVE TWO CLASSES OF AUTHORIZED COMMON STOCK,
CLASS A COMMON STOCK AND CLASS B COMMON STOCK. THE RIGHTS OF THE HOLDERS OF
CLASS A COMMON STOCK AND CLASS B COMMON STOCK ARE IDENTICAL, EXCEPT WITH RESPECT
TO VOTING AND CONVERSION.
------------------------
WE HAVE APPLIED TO HAVE OUR CLASS A COMMON STOCK APPROVED FOR LISTING ON THE
UNDER THE SYMBOL " ."
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INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
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PRICE $ A SHARE
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
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<S> <C> <C> <C>
Per Share..................................... $ $ $
Total......................................... $ $ $
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We have granted the underwriters the right to purchase up to an additional
shares of our Class A common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2000.
------------------------
MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS & CO. INC. MERRILL LYNCH & CO.
UTENDAHL CAPITAL PARTNERS, L.P. WIT SOUNDVIEW
, 2000
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................... 1
Risk Factors.......................... 7
Special Note Regarding Forward-Looking
Statements.......................... 21
Use of Proceeds....................... 22
Dividend Policy....................... 22
Capitalization........................ 23
Dilution.............................. 24
Selected Financial Data............... 25
Unaudited Pro Forma Consolidated
Condensed Financial Statements...... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 32
Corporate History and
Reorganization...................... 39
Business.............................. 40
</TABLE>
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PAGE
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Management............................ 56
Certain Relationships and Related
Transactions........................ 59
Principal Stockholders................ 67
Description of Capital Stock and
Partnership Units................... 69
Shares Eligible for Future Sale....... 74
Material United States Federal Tax
Consequences to Non-United States
Holders............................. 75
Underwriters.......................... 78
Legal Matters......................... 82
Experts............................... 82
Where You Can Find More Information... 83
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of Class A common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of Class A common stock.
Unless the context otherwise requires, in this prospectus:
-- "MTVi Group" refers to The MTVi Group, Inc.;
-- "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.;
-- "MTV Networks" refers to MTV Networks, a division of Viacom;
-- "Liberty Digital" refers collectively to Liberty Digital Inc.
(formerly known as TCI Music, Inc.), The Box Worldwide, Inc.,
Paradigm Music Ent. Co., and SonicNet, Inc.;
-- "We," "us" and "our" refer collectively to MTVi Group and the
Partnership or either of these, as the case may be.
We have not taken any action to permit a public offering of the shares of
Class A common stock outside the United States or to permit the possession or
distribution of this prospectus outside the United States. Persons outside the
United States who come into possession of this prospectus must inform themselves
about and observe any restrictions relating to the offering of the shares of
Class A common stock and the distribution of this prospectus outside the United
States.
UNTIL , 2000 (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.
------------------------
This preliminary prospectus is subject to completion prior to this
offering. Among other things, this preliminary prospectus describes us, as well
as various related party agreements to be entered into concurrently with this
offering, as we currently expect the same to exist at the time of this offering.
------------------------
Discrepancies in tables in this prospectus between totals and sums of
totals are due to rounding.
------------------------
"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
the Partnership, MTV Networks and other companies. All rights reserved.
<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 content company, with 18 music
website destinations around the world. Through our network of websites, we
deliver to consumers highly personalized music and music-related experiences and
direct connections to a vibrant community of music fans and artists. We were
developed by MTV Networks, a leading global media and entertainment business
that has built its success on creating strong brands and delivering compelling
music content to more than 300 million television homes in 80 countries around
the world. We are positioning our network of websites as multiple branded
gateways with content that targets specific demographic and psychographic
segments and defined music genres. 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 websites lead the online music content 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 addition, MTV Networks has
indicated that it intends to contribute to us prior to completion of this
offering its interests in joint ventures which own three MTV-based websites in
Asia and an MTV-based website in Brazil. In the aggregate, our existing
websites, together with these four additional MTV-based websites, generated more
than 124 million page views in December 1999. Our primary online properties
include:
-- MTV.com--a website that leverages the MTV brand name to target the
13-24 year old audience, and was the #1 music content site in 1999
based on average monthly unique visitors, as reported by Media
Metrix;
-- VH1.com--a website that leverages the VH1 brand name to target the
25-plus age group; and
-- SonicNet.com -- a comprehensive music network, with genre-spanning
content aimed at all ages.
Our websites provide a variety of music-related content and community
features, including:
-- music and artist news, features, reviews, information, interviews and
chats;
-- streaming radio with both user-customized and professionally
programmed formats;
-- live and on-demand webcast performances, selected on-demand music
videos and exclusive video programming;
-- integrated online and on-air chats, polling and programming such as
game shows;
-- audience message boards;
-- coverage of local music scenes; and
-- free e-mail accounts.
We also offer users an array of e-commerce opportunities, including CDs,
digital music downloads, tickets, and MTV, VH1, SonicNet and other on-air
franchise branded merchandise.
1
<PAGE> 6
We believe that we have a unique set of strengths which positions our
network of websites to continue to lead the online music industry and makes us a
powerful value-creating vehicle for music enthusiasts, advertisers and commerce
providers, as well as artists and record companies. We consider our relationship
with MTV Networks to be our most important strength because of the brand
awareness, cross promotion, convergence programming opportunities and expertise
and relationships it affords us. MTV Networks has contractually committed to
vigorously promote us on its television networks through advertising, VJ
mentions, text on screen and other support, for no cash consideration. The value
of this on-air promotion will be at least $100 million, spread over a five-year
period ending July 15, 2004. MTV Networks has indicated that it intends to
provide us with at least an additional $25 million of on-air promotion over this
period. 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.
------------------------
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 Group Flow Chart
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(1) % equity interest and % voting interest if the underwriters'
over-allotment options are exercised in full.
(2) % equity interest and % voting interest if the underwriters'
over-allotment options are exercised in full.
(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
optionholders do not exercise any outstanding options. We refer you to
"Description of Capital Stock and Partnership Units" for a discussion of the
terms of our common stock and partnership units.
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Class A common stock offered:
U.S. offering........................... shares
International offering.................. shares
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Total................................ shares
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Common stock to be outstanding after this
offering:
Class A common stock(1)................. shares(2)
Class B common stock(1)................. shares
-------------
Total common stock................... shares(2)
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Use of proceeds............... By MTVi Group: To acquire
partnership units, including the sole general
partner unit, representing a % equity
interest in the Partnership ( %, if the
underwriters' over-allotment options are
exercised in full).
By the Partnership: For advertising, promotion
and developing its brands and compelling music
content and other general corporate purposes,
including working capital, technology
enhancements, international expansion and
possible complementary acquisitions.
Dividend policy............... We do not expect to pay any cash dividends or
distributions for the foreseeable future.
Voting rights................. The holders of Class A common stock generally
have rights identical to holders of Class B
common stock, except that 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:
-- multiplied by the sum of
(a) the aggregate number of shares
of Class B common stock owned by
such holder and its affiliates and
(b) the aggregate number of
partnership units owned by such
holder and its affiliates; divided
by
-- the number of shares of Class B
common stock owned by such holder.
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(1) Shares of Class B common stock are convertible into shares of Class A common stock at any time
by the holder thereof on a one-for-one basis. Partnership units owned by Viacom affiliates and
Liberty Digital are also exchangeable for shares of Class A common stock at any time on a
one-for-one basis. If, immediately following the offering, Viacom converted its Class B common
stock and its affiliates exchanged all of their partnership units for Class A common stock, and
Liberty Digital exchanged all of its partnership units for Class A common stock, Viacom and its
affiliates would own approximately % of the outstanding Class A common stock ( % if the
underwriters' over-allotment options are exercised in full) and Liberty Digital would own
approximately % of the outstanding Class A common stock ( % if the underwriters'
over-allotment options are exercised in full).
</TABLE>
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(2) Excludes options to purchase shares of Class A common stock granted under our stock option plan.
As of , 2000, options for shares at a weighted average exercise
price of $ per share were outstanding under the stock option plan.
</TABLE>
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<PAGE> 9
With respect to the foregoing calculation, if
shares of Class B common stock are held by two
or more affiliates, then the voting power
attributable to each share of Class B common
stock held by such affiliates shall equal the
total voting power for one share of Class B
common stock determined according to the above
formula divided by the total number of shares
of Class B common stock held by such
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 except
as otherwise required by applicable Delaware
law.
If, immediately following this 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 control % of the voting
power of all shares of our voting stock
(approximately % if the underwriters'
over-allotment options are exercised in full)
and Liberty Digital would control % of the
voting power of all shares of our voting stock
(approximately % if the underwriters'
over-allotment options are exercised in full).
Proposed trading symbol.......
Risk factors.................. You should consider the risks involved in an
investment in our Class A common stock. We
refer you to "Risk Factors."
5
<PAGE> 10
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary financial data 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
unaudited interim financial statements and the accompanying notes included
elsewhere in this prospectus. The summary unaudited pro forma financial data is
derived from, and should be read together with "Unaudited Pro Forma Consolidated
Condensed Financial Statements" and the accompanying notes included elsewhere in
this prospectus. The pro forma data may not necessarily reflect the operating
results or financial position that would have been achieved had the formation of
the Partnership, this offering and all other transactions been completed at the
dates or for the periods indicated or of the results that may be obtained in the
future.
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PRO FORMA
MTVI GROUP(1)
----------------------------
NINE MONTHS YEAR NINE MONTHS
YEAR ENDED OR AT ENDED OR AT ENDED ENDED OR AT
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
---------------------------- ------------------ ------------ -------------
1996 1997 1998 1998 1999 1998 1999
------- ------- -------- ------- -------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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STATEMENT OF OPERATIONS DATA:
Total revenues............................ $ 3,427 $ 5,778 $ 8,837 $ 4,695 $ 10,541 $ 11,483 $ 12,463
Gross profit (loss)....................... 1,302 (778) (847) (65) (1,649) (2,733) (4,713)
Operating income (loss)................... (3,340) (6,933) (11,800) (7,426) (24,410) (53,133) (51,335)
Minority interest(2)...................... N/A N/A N/A N/A N/A
Net income (loss)......................... (2,070) (4,298) (7,316) (4,604) (21,352)
Net income (loss) per common share:
Basic and diluted(3).................... N/A N/A N/A N/A N/A $ $
BALANCE SHEET DATA:
Total assets.............................. $ 2,708 $ 1,884 $ 7,030 N/A $149,700 N/A $
Total equity.............................. 2,028 837 1,720 N/A 141,748 N/A
</TABLE>
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(1) Pro Forma MTVi Group assumes that the formation of the Partnership and this
offering occurred on January 1, 1998 for pro forma statement of operations
data and at September 30, 1999 for pro forma balance sheet data. For
additional information referring to the pro forma adjustments made to our
historical data we refer you to the notes to the "Unaudited Pro Forma
Consolidated Condensed Financial Statements" included elsewhere in this
prospectus.
(2) Minority interest represents the allocation of approximately % of the
Partnership's net loss to the limited partners of the Partnership.
(3) Immediately prior to this offering, MTVi Group will be recapitalized to
provide for Class A common stock and Class B common stock. Pro forma
weighted average shares outstanding reflects the issuance of all shares of
Class B common stock to Viacom and the issuance of the Class A common stock
in this offering, assuming the underwriters have not exercised their
over-allotment options, 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 risks described below
are not the only ones we face. We have only described the risks we consider to
be material. However, there may be additional risks that we view as not material
or of which we are not presently aware that may impair our business operations.
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 AND E-COMMERCE RISKS
THE MARKETS FOR ONLINE MUSIC CONTENT, E-COMMERCE AND ONLINE ADVERTISING ARE NEW
AND UNPROVEN, AND IF THEY DO NOT DEVELOP FURTHER, WE MAY NOT BE ABLE TO
GENERATE SUFFICIENT REVENUE TO OPERATE OUR BUSINESS SUCCESSFULLY
The markets for music content on the Internet, e-commerce and online
advertising are 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 content, 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 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;
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<PAGE> 12
-- online music commerce companies, online record clubs and music
download sites;
-- online music technology companies;
-- 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.
CONCERNS REGARDING INTERNET SECURITY AND ONLINE PAYMENT METHODS COULD HINDER
E-COMMERCE, WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS
A significant barrier to e-commerce and communications over the Internet
has been the need for secure transmission of confidential information.
E-commerce may not increase at the rate we expect unless security concerns are
adequately addressed in a manner which is acceptable to the market. E-commerce
could also decline if any well-publicized compromise of security occurs. If
either of the above occurs, our revenues could be adversely affected. In
addition, we may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by these breaches. Protections
may not be available at a reasonable price or at all.
A portion of our actual and potential users, particularly those below the
age of 18, have limited access to credit cards. Since the most widely adopted
method of online payment is through the use of credit cards, these users'
ability to participate in e-commerce may be limited. If we or our service
providers are not successful in developing alternative online payment methods
for these users, our anticipated e-commerce revenues could be adversely
affected.
IMPOSITION OF SALES AND OTHER TAXES ON E-COMMERCE TRANSACTIONS MIGHT HINDER
E-COMMERCE WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS
States or local governments may seek to impose sales or use tax collection
obligations on out-of-state companies, such as ours, which engage in or
facilitate e-commerce. Various proposals have been made at the state and local
level that would impose additional taxes on the sale of products and services
through the Internet. These proposals, if adopted, could substantially impair
the growth of e-commerce and could hinder our ability to derive revenues and
profits from e-commerce. In addition, we cannot predict whether any foreign
governments will impose laws resulting in adverse tax consequences upon our
business.
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 recently formed. 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
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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 $21.4 million
for the nine months ended September 30, 1999. Since we began our operations, we
have experienced significant operating and net losses. These losses primarily
relate to the expansion and integration of our operations. We intend to continue
to invest heavily in ongoing expansion and integration efforts, including
expenditures for sales and marketing, advertising and promoting our brands,
content development and technology and infrastructure development. As a result,
we expect to continue to incur operating and net losses for the foreseeable
future. Even if we ultimately do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND CAUSE OUR STOCK PRICE TO
DECLINE
Our future operating results are likely to vary significantly from quarter
to quarter due to a variety of factors, many of which are outside of our
control. Factors which may affect our operating results include the following:
-- our ability to attract and retain advertisers;
-- the amount of expenditures for online advertising by businesses
seeking to reach consumers like ours;
-- the announcement or introduction of new websites, services or
products by us or our competitors;
-- the timing and uncertainty of advertising sales cycles;
-- the mix of online advertisements sold;
-- seasonal changes in advertising and e-commerce;
-- the level of Internet and online services usage;
-- the amount of traffic on our websites;
-- the amount and timing of operating costs and capital expenditures
relating to expansion and further development of our business and
infrastructure;
-- technical difficulties or system downtime affecting the Internet
generally or the operation of our network of websites; and
-- general economic conditions, as well as economic conditions specific
to the Internet music industry.
Accordingly, you should not rely on quarter-to-quarter comparisons of our
operating results as an indication of future performance. It is possible that in
some future periods our operating results will be below the expectations of
public market analysts and investors. In this event, the price of our common
stock would likely decline.
RISKS RELATED TO OUR ADVERTISING REVENUES
IF WE DO NOT ADOPT SUCCESSFUL ADVERTISING PRICING MODELS AND INCREASE OUR
ADVERTISING REVENUES, WE MAY NOT BE ABLE TO OPERATE PROFITABLY AND OUR
BUSINESS MAY NOT GROW OR SURVIVE
Our revenues for the foreseeable future will depend substantially on sales
of advertising. Failure to adapt to pricing models that emerge as the industry
standards or to respond to competitive pressures could adversely affect our
advertising revenues and our business may not grow or survive. Since the market
for Internet advertising has recently emerged and a variety of pricing models
have been used, it is difficult to predict which, if any, will emerge as the
industry standards and thus to forecast our advertising revenues. Advertising
revenues accounted for 45% of our total revenues for the nine months ended
September 30, 1999.
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Furthermore, if we do not increase advertising revenues, we may not be able
to operate profitably and our business may not grow or survive. Increasing our
advertising revenues depends upon many factors, including our ability to do the
following:
-- conduct successful selling and marketing efforts aimed at increasing
awareness of our brands among advertisers;
-- enter into and maintain successive short-term agreements or long-term
contracts with advertisers;
-- increase the amount of revenues per advertisement;
-- increase the size of our audience by building a loyal community of
active registered members;
-- accurately measure the size and demographic characteristics of our
audience;
-- target advertisements to appropriate segments of our audience; and
-- make our content available through evolving broadband distribution
channels.
Increasing the size of our audience is critical to selling advertising and
to increasing our revenues. If we cannot increase the size of our audience, then
we may be unable to attract new or retain existing advertisers. To attract and
retain our audience, we must do the following:
-- continue to offer compelling music content;
-- conduct effective marketing campaigns to acquire new users;
-- develop new and maintain existing distribution relationships with
other websites;
-- update and enhance the features of our network of websites;
-- make our content available through broadband distribution channels as
they achieve widespread consumer acceptance;
-- offer targeted, relevant products and services; and
-- increase our financial expenditures on marketing our brand to
increase brand awareness.
Our failure to achieve one or more of the above objectives could adversely
affect our business.
ACCEPTANCE AND EFFECTIVENESS OF ADVERTISING ON THE INTERNET ARE UNPROVEN,
WHICH DISCOURAGES SOME ADVERTISERS FROM ADVERTISING ON OUR WEBSITES
Our future growth is highly dependent on an increase in the use of the
Internet for advertising. If the Internet advertising market fails to develop
further or develops more slowly than we expect, then our growth and operating
results could be adversely affected. The Internet advertising market is new and
rapidly evolving, and we cannot yet gauge the effectiveness of advertising on
the Internet as compared to traditional media. As a result, demand for Internet
advertising is uncertain. Many advertisers have little or no experience using
the Internet for advertising purposes. The adoption of Internet advertising,
particularly by companies that have historically relied upon traditional media
for advertising, requires the acceptance of a new way of conducting business,
exchanging information and advertising products and services. Such advertisers
may find advertising on the Internet to be undesirable or less effective for
promoting their products and services relative to traditional advertising media.
WE DEPEND ON A LIMITED NUMBER OF ADVERTISERS, AND THE LOSS OF A SIGNIFICANT
PORTION OF THESE ADVERTISERS COULD ADVERSELY AFFECT OUR OPERATING RESULTS
DURING A PARTICULAR PERIOD
We anticipate that our operating results in any given period will continue
to depend to a significant extent upon revenues from a small number of
advertisers. Although no single advertiser accounted for more than 10% of
advertising revenues for the nine months ended September 30, 1999, our five
largest advertisers accounted for 28% 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
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amounts of advertising in the future. As a result, our failure to renew such
advertising contracts, to replace advertisers who do not choose to continue
advertising on our network of websites or to sell our expected minimum number of
advertisements during a particular period could adversely affect our operating
results for that period.
SALES CYCLES VARY FOR ADVERTISING AND MAY CAUSE OUR REVENUES FOR ONE OR MORE
QUARTERLY PERIODS TO BE ADVERSELY AFFECTED
The sales cycles for advertising vary significantly. The time between the
date of initial contact with a potential advertiser or sponsor and receipt of a
purchase order may range from as little as six weeks to up to nine months. As a
result, our revenues for one or more quarterly periods may be adversely
affected. 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 operating results for
one or more quarterly periods may be adversely affected.
Advertising revenues are subject to delays over which we have little or no
control, including the following:
-- advertisers' budgetary constraints;
-- internal acceptance reviews by advertisers and their agencies;
-- the timing of completion of advertisements by advertisers; and
-- the possibility of cancellation or delay of projects by advertisers
or sponsors.
TRACKING AND MEASUREMENT STANDARDS FOR ONLINE ADVERTISING ARE EVOLVING AND
CREATE UNCERTAINTY WITH ADVERTISERS WHICH MAY LEAD TO A DECREASE IN
ADVERTISING REVENUES
The absence or insufficiency of online advertising measurement standards
could adversely impact our ability to attract and retain advertisers. There are
currently few well-established online advertising measurement standards, and the
industry may need to standardize these measurements. We cannot assure you that
standardization will occur. In addition, currently available software programs
that track Internet usage and other tracking methodologies are rapidly evolving.
We cannot assure you that the development of such software or other
methodologies will keep pace with our information needs, particularly to support
the growing needs of our internal business requirements and advertising clients.
In addition, if industry standards do develop, we cannot assure you that they
will accurately reflect our user base. Inaccurate data from such sources in any
particular period may cause advertisers not to advertise on our websites.
It is important to our advertisers that we accurately measure the
demographics of our user base and the delivery of advertisements on our network
of websites. We depend on third parties to provide certain of these measurement
services. If they are unable to provide these services in the future, we would
need to perform them ourselves or obtain them from another provider, if
available. This could cause us to incur additional costs or cause interruptions
in our business during the time we are replacing these services. Companies may
choose to not advertise on our network of websites or may pay less for
advertising if they do not perceive our measurements or measurements made by
third parties to be reliable.
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
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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 US
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,
consequently, our business, financial condition and operating results.
IF WE ARE UNABLE TO MAINTAIN AND ESTABLISH QUALITY STRATEGIC RELATIONSHIPS OR
IF OUR EXISTING STRATEGIC RELATIONSHIPS LIMIT OUR ABILITY TO ENTER INTO OTHER
STRATEGIC RELATIONSHIPS, WE MAY NOT BE ABLE TO INCREASE OUR USER BASE AND
MAINTAIN THE QUALITY OF OUR BRANDS WHICH MAY LEAD TO A DECREASE IN CUSTOMERS
AND REVENUES
In an attempt to increase our user base, build brand recognition and
enhance our content, distribution and e-commerce capabilities, we have entered
into strategic relationships with media and Internet-related companies. In
addition, we have entered into strategic relationships with other third parties
and may do so in the future in order to obtain merchandising and fulfillment
services. Because our future success depends to a significant extent upon the
success of these relationships, our failure to maintain or renew them or to
establish and capitalize on new strategic relationships could have an adverse
affect on our business.
In addition, occasionally we enter into agreements with strategic partners
that may prohibit us from entering into similar arrangements with competitors of
our strategic partners. These exclusivity provisions may limit our ability to
enter into favorable arrangements with complementary businesses and thereby
limit our growth. We cannot assure you that we will achieve the strategic
objectives of these relationships or that any party to a strategic relationship
agreement with us will perform its obligations as agreed upon. Many of our
strategic relationships are short-term in nature or may be terminated by either
party on short notice.
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
("ICANN") and the governments of the United States and foreign countries and are
subject to change. The relationship between ICANN policies and government
legislation governing domain names and
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laws protecting trademarks and similar proprietary rights is still developing.
Therefore, we could be unable to prevent third parties from acquiring or using
domain names on an international basis that infringe upon or otherwise decrease
the value of our brands, trademarks and other proprietary rights and make it
difficult for our audiences to reach our international websites.
WE DO NOT OWN THE MTV AND VH1 TRADEMARKS AND ASSOCIATED LOGOS THAT WE USE TO
PROMOTE SOME OF OUR BRANDS AND WE DO NOT HAVE TOTAL CONTROL OVER THEIR USE OR
THE DIRECTION OF SOME OF OUR BRANDS
The MTV and VH1 trademarks and associated logos are owned by MTV Networks
and licensed to us for specific uses. In addition, the agreement pursuant to
which we license these trademarks and logos includes significant restrictions on
our ability to use these trademarks and logos. 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 OPERATING RESULTS
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. Because our
advertising revenue is directly related to the number of advertisements we
deliver to users, any disruption in our ability to serve advertisers could
adversely affect our business and operating results.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE FAIL TO KEEP UP WITH RAPID
TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS
The markets for our products and services are characterized by rapidly
changing technology, evolving industry standards, changes in customer needs,
emerging competition, and frequent new product and service introductions. We may
not succeed in adapting our services to new technologies and industry standards.
In addition, we may not be as successful as our competitors in responding to new
technologies as they emerge.
Our future success will depend, in part, on our ability to:
-- use leading technologies effectively;
-- continue to develop our strategic and technical expertise;
-- enhance our current products and services;
-- develop new products and services that meet changing customer needs;
and
-- influence and respond to emerging industry standards and other
technological changes.
This must be accomplished in a timely and cost-effective manner. We may not
be successful in effectively using new technologies, developing new products or
services or enhancing our existing products or services on a timely basis. These
new technologies or enhancements may not achieve market acceptance. Our pursuit
of necessary technological advances may require substantial time and expense.
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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 required. In addition, slow
response time or system failures could also result from straining the capacity
of our software or hardware due to an increase in the volume of products and
services delivered through our servers. Any serious or prolonged system failure
or repeated system failures or delays would likely adversely affect our
reputation and hence 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
THERE ARE POTENTIAL CONFLICTS OF INTEREST WITH VIACOM BECAUSE VIACOM CONTROLS
US AND OUR BUSINESS OBJECTIVES MAY DIFFER
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."
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WE MAY BE SUBJECT TO A VARIETY OF RISKS IN CONNECTION WITH FUTURE ACQUISITIONS
As part of our business strategy, we expect to review acquisition prospects
that would complement our current content offerings, increase our market share
or otherwise offer growth opportunities. Such acquisitions could cause our
operating results or the price of our common stock to decline. While we have no
current agreements or commitments with respect to any such acquisitions, we may
acquire businesses, products or technologies in the future. Because business
acquisitions typically involve significant amounts of intangible assets, future
operating results may be adversely affected by amortization of intangible assets
acquired. In the event of such future acquisitions or business combinations, we
could do the following:
-- issue equity securities that would dilute current stockholders'
percentage ownership in our business;
-- incur substantial debt; or
-- assume contingent liabilities.
We may be unable to effectively integrate businesses we acquire, and any
such failure could diminish the value of an acquired business or cause
disruptions in our ongoing operations. We cannot assure you that we will be able
to successfully integrate any businesses, products, technologies or personnel
that we might acquire in the future, and our failure to do so could damage our
business. Acquisitions and business combinations entail numerous other
operational risks, including the following:
-- difficulties in the assimilation of acquired operations, technologies
or products;
-- diversion of management's attention from other business concerns;
-- diversion of resources;
-- risks of entering markets in which we have no or limited experience;
and
-- potential loss of key employees of acquired organizations.
LEGAL RISKS AND POTENTIAL LIABILITIES
WE MAY BE UNABLE TO PROTECT INTELLECTUAL PROPERTY RIGHTS, WHICH COULD RESULT IN
THE LOSS OF OUR RIGHTS OR INCREASED COSTS
Copyrighted material that we develop internally, as well as trademarks
relating to our brands and other proprietary rights, are important to our
financial performance and our competitive position. If third parties were to use
or otherwise misappropriate our copyrighted materials, trademarks or other
proprietary rights without our consent or approval, our competitive position
could be adversely affected, or we could become involved in costly litigation to
enforce our rights. We seek to protect our copyrights, trademarks and other
proprietary rights through registrations and other means, but these actions may
be inadequate. We have trademark applications pending in several jurisdictions,
but we cannot guarantee that we will be able to register or use our trademarks
in all jurisdictions in which we presently conduct business or in which we
intend to conduct business. We generally enter into confidentiality or license
agreements with our key employees, consultants and corporate partners, and
generally control access to and distribution of our proprietary information. We
cannot assure you that the steps we have taken will prevent misappropriation of
our proprietary rights, particularly in foreign countries where laws or law
enforcement practices may not protect our proprietary rights as fully as in the
United States. In addition, policing the unauthorized use of our content,
trademarks and other proprietary rights could be very expensive, difficult or
impossible, particularly given the global nature of the Internet.
In order to distribute digital music and video, we must obtain rights from
a variety of third parties. We may not have obtained all rights that may
subsequently be deemed necessary for the performance of music and video
distribution on our websites. We could be subject to liability if we have not
obtained or cannot in the future obtain the required rights from third parties.
In addition, third parties may in the future obtain patents claiming
technologies we presently employ. Third parties may assert trademark, copyright,
patent and other types of infringement or unfair competition claims against us.
If we are forced to defend against any such
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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, our business may be
adversely affected.
If our efforts to enforce our intellectual property rights are unsuccessful
or if claims by third parties against us are successful, we may be required to
alter our content, alter our business practices or pay financial damages. We
cannot assure you that such alteration of content, alteration of business
practices or payment of financial damages will not adversely affect our
business.
GOVERNMENT REGULATION OF THE INTERNET COULD LIMIT OUR GROWTH AND OTHERWISE
ADVERSELY AFFECT OUR BUSINESS
The applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain. In addition,
governmental authorities may seek to further regulate the Internet with respect
to issues such as intellectual property, user privacy, pornography, acceptable
content, e-commerce, taxation, and the pricing, characteristics and quality of
products and services. The application of existing laws or any new legislation
regulating the Internet could inhibit the growth of the Internet and decrease
the acceptance of the Internet as a communications and commercial medium, which
might adversely affect our business. Finally, the global nature of the Internet
could subject us to the laws of a foreign jurisdiction in an unpredictable
manner.
In addition, the growing use of the Internet has burdened the existing
telecommunications infrastructure and has caused interruptions in telephone
service. Telephone carriers have petitioned the government to regulate the
Internet and impose usage fees on Internet service providers. Any regulations of
this type could increase the costs of using the Internet and impede our growth,
which could in turn decrease the demand for our services or otherwise adversely
affect our business.
OUR CONTESTS AND SWEEPSTAKES MAY BE SUBJECT TO STATE, FEDERAL AND FOREIGN LAWS
WHICH COULD ADVERSELY AFFECT OUR OPERATING RESULTS
Our contests and sweepstakes may be subject to state, federal and foreign
laws governing lotteries and gambling, which could subject us to legal liability
or statutory penalties if we fail to comply with these laws, if any. In
addition, if we face restrictions or prohibitions on our ability to offer
contests and sweepstakes in some geographic areas we would lose a significant
method for attracting user traffic to our websites. Reductions in our user
audience would adversely affect our revenues. Costs associated with legal
liabilities or penalties and a loss in revenues would adversely affect our
operating results.
THE COST AND SCOPE OF SOME MUSIC RIGHTS WE USE HAVE NOT BEEN DETERMINED AND
COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS
Changes to the United States copyright law made in 1995 and 1998
established a new right of performers and record companies to receive royalties
from, and in some cases, control, the performance of recorded music over the
Internet. The rate at which royalties will be paid by us and other members of
our industry for performances covered by a "compulsory" license will be
determined by a royalty arbitration convened by the Librarian of Congress or by
negotiation. A compulsory license is one in which the copyright owners must
grant permission for particular uses of their copyrighted works in exchange for
a license fee set by law. We will be required to pay a royalty for past use of
recorded music in addition to future uses.
In addition, composers and publishers of songs are entitled to royalties
when the songs are publicly performed. These royalties are collected by
societies such as ASCAP and BMI. Although we pay royalties to composers and
publishers through these societies at interim rates, final royalties have not
been established. Final rates will be determined either by subsequent
negotiation with the performing rights societies or, failing that, by
proceedings in the federal courts having jurisdiction over ASCAP and BMI to
determine reasonable ASCAP/BMI license fees.
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Some record companies, acting alone and through the Recording Industry
Association of America, assert that some of the customizable features of our
Internet radio business make the music used by that portion of the business
ineligible for the compulsory license. We recently received letters from two
major record companies making these assertions to us regarding some features of
our Internet radio business and demanding that we cease our use of their music
in this manner and pay for our past use. If the views of these record companies
were to prevail, we could not take advantage of the compulsory license and would
need to negotiate individual licenses with each record company. Absent licenses
from the record companies, we would be unable to provide these features to
consumers and could be liable to the record companies for damages, and our
business would be adversely affected. To date, we have not paid license fees to
the record companies because we believe that the features we offer are within
the scope of the compulsory license and the compulsory license fees are being
determined as part of the royalty arbitration convened by the Librarian of
Congress.
If the compulsory license fees or individual license fees we may negotiate
exceed our expectations, our operating results would be adversely affected, and
we may not be able to afford to continue to provide certain types of content
over the Internet. In addition, the negotiation of individual licenses may
require substantial time and resources, which could adversely affect our
operating results. 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.
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 licenses will
demand that we obtain them and pay fees for continued or even prior use.
WE MAY BE SUBJECT TO LIABILITY IF PRIVATE INFORMATION PROVIDED TO US BY OUR
USERS WERE MISUSED
Our privacy policy discloses how we use individually identifiable
information that we collect. This policy is displayed and accessible throughout
our websites. Despite this policy, however, if third persons were able to
penetrate our network security or otherwise misappropriate our users' personal
information or credit card information, we could be subject to liability. We
could also be subject to liability for claims for unauthorized purchases with
credit card information, impersonation or other similar fraud claims, or other
misuses of personal information, such as for unauthorized marketing purposes.
These claims could result in costly and time-consuming litigation.
Congress is considering adopting stricter privacy laws regarding the
collection and use of personal information obtained from individuals when
accessing websites. For example, Congress recently enacted the Children's Online
Privacy Protection Act, which restricts the ability of Internet companies to
collect information on children under the age of 13 without their parents'
consent. In addition, the Federal Trade Commission and state and local
authorities have been investigating Internet companies regarding their use of
personal information under existing laws governing fraudulent and deceptive
practices. Legislative and regulatory initiatives may adversely affect our
ability to collect and use demographic and personal information from users,
which could have an adverse effect on our ability to provide advertisers with
demographic information. The European Union has adopted a directive that imposes
restrictions on the collection and use of personal data. The directive could
impose restrictions that are more stringent than current Internet privacy
standards in the United States. If this directive were applied to us, it could
prevent us from collecting and using data from users in European Union member
countries or subject us to liability for use of information in contravention of
the directive. Other countries have adopted or may adopt similar legislation.
The U.S. government and the European Union are negotiating the provisions of a
"safe harbor" that would permit U.S. companies operating from the United States
to abide by those provisions in lieu of the directive. We could incur additional
expenses if new regulations regarding the use of personal information are
introduced or if government authorities choose to investigate our privacy
practices.
17
<PAGE> 22
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.
INVESTMENT COMPANY ACT CONSIDERATIONS
We do not believe that MTVi Group is an "investment company" under the
Investment Company Act of 1940. Because MTVi Group, as sole general partner,
controls the Partnership, its interest in the Partnership is not an "investment
security" as that term is used in the Investment Company Act. If MTVi Group were
to cease to control the Partnership, its interest in the Partnership could be
deemed an "investment security" for purposes of the Investment Company Act.
Generally, a person is an "investment company" if it owns investment securities
having a value exceeding 40% of the value of its total assets, exclusive of U.S.
government securities and cash items. Following this offering, the sole asset of
MTVi Group will be its equity interest in the Partnership. A determination that
such investment was an investment security could result in MTVi Group being an
investment company under the Investment Company Act and becoming subject to the
registration and other requirements of the Investment Company Act. We intend to
conduct our operations so that MTVi Group is not deemed to be an investment
company under the Investment Company Act. However, if anything were to happen
which would cause MTVi Group to be deemed to be an investment company under the
Investment Company Act, restrictions imposed by the Investment Company Act,
including limitations on MTVi Group's capital structure and its ability to
transact with affiliates, could make it impractical for MTVi Group to continue
its business as currently conducted and could have a material adverse effect on
our business.
RISKS RELATED TO OWNERSHIP OF OUR CLASS A COMMON STOCK
THE PRICE OF OUR CLASS A COMMON STOCK IS LIKELY TO BE VOLATILE AND MAY
FLUCTUATE SIGNIFICANTLY FOLLOWING THE OFFERING, AND YOU COULD LOSE ALL OR PART
OF YOUR INVESTMENT AS A RESULT
We, Viacom and the underwriters will negotiate to determine the initial
public offering price. You may not be able to resell your shares at or above the
initial public offering price due to a variety of factors. These factors, some
or all of which are beyond our control, include:
-- actual or anticipated fluctuations in our operating results;
-- changes in expectations as to our future financial performance or
changes in financial estimates of securities analysts;
-- success of our operating and growth strategies;
-- operating and stock price performance of other comparable companies;
and
-- realization of any of the risks described in these Risk Factors.
The market prices of the securities of Internet-related companies have been
especially volatile and these securities may be overvalued. As a result, the
market price of our Class A common stock is likely to be subject
18
<PAGE> 23
to wide fluctuations. If our revenues do not grow or grow more slowly than we
anticipate, or if operating or capital expenditures exceed our expectations and
cannot be adjusted accordingly, or if some other event adversely affects us, the
market price of our Class A common stock could decline. In addition, if the
market for Internet-related stocks or the stock market in general experiences a
loss in investor confidence or otherwise falls, the market price of our Class A
common stock could fall for reasons unrelated to our business, operating results
and financial condition. In the past, companies that have experienced volatility
in the market price of their stock have been the subject of securities class
action litigation. If we were to become the subject of securities class action
litigation, it could result in substantial costs and a diversion of management's
attention and resources.
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 the offering, Viacom and
its affiliates will own all of the issued and outstanding Class B common stock
and approximately % of the outstanding partnership units. Accordingly,
following the closing of the offering, Viacom and its affiliates will own less
than % of the outstanding common stock but will control approximately
% of the voting power of all shares of our voting stock.
Because Viacom has the ability to control us, it has the power to act
without taking the best interests of our company into consideration. For
example, Viacom will continue to control decisions with respect to:
-- the direction and policies of our company, including the election and
removal of directors;
-- mergers or other business combinations involving us;
-- the acquisition or disposition of assets by us;
-- future issuances of our common stock or other securities;
-- the incurrence of debt by us;
-- the payment of dividends, if any, on our common stock; and
-- amendments to our certificate of incorporation and bylaws.
Any of these provisions could be used by Viacom for its own advantage to
the detriment of our other stockholders and our company. This in turn may have
an adverse effect on the price of our Class A common stock.
THE HOLDING COMPANY STRUCTURE MAY NEGATIVELY AFFECT OUR ABILITY TO COVER TAX
LIABILITIES AND OUR OPERATING RESULTS
We are a holding company, the sole asset of which is our equity interest in
the Partnership. We have no independent means of generating revenues. As a
partner of the Partnership, we will incur income taxes on our proportionate
share of any net taxable income of the Partnership. We intend to cause the
Partnership to distribute cash to its partners in amounts sufficient to cover
their tax liabilities, if any. To the extent we need funds to pay such taxes or
for any other purpose and the Partnership is unable to provide such funds, it
could adversely affect our business or operating results.
INVESTORS IN OUR CLASS A COMMON STOCK WILL EXPERIENCE DILUTION AND INVESTORS
MAY NOT REALIZE THEIR ENTIRE INVESTMENT
Based upon the estimated initial public offering price of $ per share,
purchasers of Class A common stock offered by this prospectus will (assuming the
exchange of all outstanding partnership units and the conversion of all
outstanding shares of Class B common stock into shares of Class A common stock)
experience an immediate and substantial dilution in net tangible book value of
$ per share of Class A
19
<PAGE> 24
common stock purchased. To the extent outstanding options to purchase Class A
common stock are exercised, there may be further dilution.
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,
subject to 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.
In addition, the shares subject to outstanding options and shares
reserved for future issuance under our stock option plan are not available for
sale for 180 days from the date of this prospectus.
20
<PAGE> 25
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. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. 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.
21
<PAGE> 26
USE OF PROCEEDS
We estimate that our net proceeds from the sale of shares of
Class A common stock in this offering are to be approximately $ million,
assuming an initial offering price of $ per share and after deducting
underwriting discounts and commissions and estimated offering expenses. If the
underwriters exercise their over-allotment options in full, we estimate our net
proceeds will be $ million.
MTVi Group plans to use the net proceeds for the following purpose:
-- to acquire partnership units in the Partnership, including the sole
general partnership unit, representing an approximate % equity
interest in the Partnership ( % if the underwriters' over-allotment
options are exercised in full). The price of the partnership units
MTVi Group acquires will equal the net proceeds from the sale of the
shares of Class A common stock in this offering.
The 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.
Management of the Partnership will have broad discretion in allocating the
net proceeds of this offering. 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 prove profitable for us. 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.
22
<PAGE> 27
CAPITALIZATION
The following table sets forth as of September 30, 1999:
(1) the cash and cash equivalents and capitalization of the
Partnership;
(2) the cash and cash equivalents and capitalization of MTVi Group;
and
(3) the pro forma cash and cash equivalents and capitalization of MTVi
Group and the Partnership on a consolidated basis to reflect the
issuance and sale of shares of Class A common stock in this
offering, and deducting the underwriting discounts and commissions
and estimated offering expenses, the receipt of the estimated net
proceeds from this offering and the purchase by MTVi Group of
partnership units.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
-----------------------------------------
PARTNERSHIP MTVI GROUP PRO FORMA(1)
----------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents..................... $ 119 $ $
======== ========== ==========
Long-term capital lease obligations........... $ 33 $ $
Minority interest(2).......................... --
Stockholders' equity:
Net equity investment....................... 143,737
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; 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(3)(4)... --
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)................................... (1,989)
--------
Total stockholders' equity(4)............ 141,748
-------- ---------- ----------
Total capitalization.......................... $141,781 $ $
======== ========== ==========
</TABLE>
- ---------------
(1) We refer you to the "Unaudited Pro Forma Consolidated Condensed Financial
Statements" included elsewhere in this prospectus.
(2) Minority interest represents the limited partnership units owned by Viacom
affiliates and Liberty Digital.
(3) 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."
(4) 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.
23
<PAGE> 28
DILUTION
The following table illustrates the dilution in pro forma net tangible book
value (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 ,
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 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. The following table assumes no exercise of the
underwriters' over-allotment options.
<TABLE>
<CAPTION>
TOTAL CASH
PARTNERSHIP INTERESTS CONSIDERATION AVERAGE
---------------------- -------------------- PRICE PER
UNITS PERCENT AMOUNT PERCENT PARTNERSHIP UNIT
--------- --------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Existing partners............ % $ % $
MTVi Group...................
-------- -------- -------- --------
Total.............. % $ %
======== ======== ======== ========
</TABLE>
The foregoing discussions and table assumes no exercise of any stock
options outstanding. At , 2000, there were options outstanding to
purchase shares of Class A common stock at a weighted-average exercise
price of $ per share. To the extent that any of these options are
exercised, there will 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.
24
<PAGE> 29
SELECTED FINANCIAL DATA
The selected financial data 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
unaudited interim financial statements and the accompanying notes included
elsewhere in this prospectus. The financial information herein may not
necessarily reflect our results of operations or financial position in the
future or what the results of operations or financial position would have been
had we been a separate, stand-alone entity during the periods presented.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
OR AT
YEAR ENDED OR AT DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
----- ------ ------- ------- -------- ------- --------
(IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Advertising.................... $ -- $ -- $ 551 $ 1,751 $ 3,538 $ 1,102 $ 4,752
Promotional.................... 240 1,000 -- -- 2,766 1,184 5,056
Distribution................... -- -- 2,876 4,027 2,533 2,409 733
----- ------ ------- ------- -------- ------- --------
Total revenues.............. 240 1,000 3,427 5,778 8,837 4,695 10,541
Gross profit (loss).............. 34 771 1,302 (778) (847) (65) (1,649)
Operating income (loss).......... (257) (539) (3,340) (6,933) (11,800) (7,426) (24,410)
Net income (loss)................ (159) (334) (2,070) (4,298) (7,316) (4,604) (21,352)
BALANCE SHEET DATA:
Total assets..................... $ 3 $ 15 $ 2,708 $ 1,884 $ 7,030 $149,700
Total equity..................... (5) (26) 2,028 837 1,720 141,748
</TABLE>
25
<PAGE> 30
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 September 30,
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 businesses of SonicNet, Inc. and The Box Worldwide, Inc., as
described in note 2 to these unaudited pro forma consolidated condensed
financial statements, and this offering, had occurred on January 1, 1998.
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 businesses of SonicNet and The Box and
this offering been consummated on January 1, 1998, 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 MTVN Online Music,
the predecessor to the Partnership, for the three-year-period ended
or at December 31, 1998 and the related notes;
-- the unaudited interim consolidated financial statements of the
Partnership and its predecessor for the period ending or at September
30, 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.
26
<PAGE> 31
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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, ACQUISITION FOR OFFERING AS
PARTNERSHIP 1999 ADJUSTMENTS ACQUISITIONS ADJUSTMENTS ADJUSTED(1)
----------- ------------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $ 10,541 $ 1,129 $ 793(2) $ 12,463 $ $ 12,463
Cost of production............. 12,190 4,986 17,176 17,176
-------- -------- -------- -------- ------- --------
Gross profit (loss).............. (1,649) (3,857) 793 (4,713) (4,713)
-------- -------- -------- -------- ------- --------
Other operating expenses:
Related party cross promotion
expense...................... 3,006 -- 3,006 3,006
Allocated charges from
parent....................... 6,749 815 7,564 7,564
Selling, general and
administrative............... 4,963 3,387 8,350 8,350
Depreciation................... 531 117 943(2) 1,591 1,591
Amortization of intangibles.... 7,512 4,012 14,587(2) 26,111 26,111
-------- -------- -------- -------- ------- --------
Total other operating
expenses................... 22,761 8,331 15,530 46,622 46,622
-------- -------- -------- -------- ------- --------
Operating income (loss).......... (24,410) (12,188) (14,737) (51,335) (51,335)
Benefit for income taxes......... 3,058 (3,058)(4) -- --
Minority interest(5)............. -- -- -- (5)
-------- -------- -------- -------- ------- --------
Net income (loss)................ $(21,352) $(12,188) $(17,795) $(51,335) $ $
======== ======== ======== ======== ======= ========
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.
27
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------ -----------------------------------------------------------
PARTNERSHIP MTVI GROUP
ACQUISITION AS ADJUSTED FOR OFFERING AS
MTVN ONLINE SONICNET ADJUSTMENTS ACQUISITIONS ADJUSTMENTS ADJUSTED(1)
----------- ---------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $ 8,837 $ 1,554 $ 1,057(2) $ 11,483 $ $ 11,483
35(2)
Cost of production............. 9,684 4,086 446 14,216 14,216
-------- -------- -------- -------- ------- --------
Gross profit (loss).............. (847) (2,532) 646 (2,733) (2,733)
-------- -------- -------- -------- ------- --------
Other operating expenses:
Related party cross promotion
expense..................... 4,812 -- 4,812 4,812
Allocated charges from
parent...................... 4,892 805 5,697 5,697
Selling, general and
administrative.............. 1,078 3,686 312(2) 5,076 5,076
Depreciation................... 171 127 1,257(2) 1,555 1,555
Amortization of intangibles.... -- 3,913 29,347(2) 33,260 33,260
-------- -------- -------- -------- ------- --------
Total other operating
expenses.................. 10,953 8,531 30,916 50,400 50,400
Operating income (loss).......... (11,800) (11,063) (30,270) (53,133) (53,133)
Benefit for income taxes......... 4,484 -- (4,484)(4) -- --
Minority interest(5)............. -- -- -- -- (5)
-------- -------- -------- -------- ------- --------
Net income (loss)................ $ (7,316) $(11,063) $(34,754) $(53,133) $ $
======== ======== ======== ======== ======= ========
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.
28
<PAGE> 33
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEETS
AT SEPTEMBER 30, 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...................... $ 119 $ (3) $
Receivables, net............................... 3,690 -- 3,690
Other current assets........................... 32 -- 32
-------- --------- --------
Total current assets........................ 3,841
Property and equipment, net...................... 4,343 -- 4,343
Intangibles, net................................. 139,314 -- 139,314
Other assets..................................... 2,202 -- 2,202
-------- --------- --------
$149,700 $ $
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current
liabilities................................. $ 6,165 $ -- $ 6,165
Deferred revenue............................... 1,754 -- 1,754
-------- --------- --------
Total current liabilities................... 7,919 -- 7,919
-------- --------- --------
Capital lease obligations........................ 33 -- 33
Minority interest(5)............................. -- 143,737(3) 143,737
Stockholders' Equity:
Common stock................................... -- (3)
Additional paid-in capital..................... -- (3)
(3)
Net equity investment.......................... 143,737 (143,737)(3) --
Accumulated other comprehensive income
(loss)...................................... (1,989) -- (1,989)
-------- --------- --------
Total equity................................ 141,748
-------- --------- --------
$149,700 $ $
======== ========= ========
</TABLE>
See notes to unaudited pro forma consolidated condensed financial statements.
29
<PAGE> 34
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 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 our 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
will own limited partnership units. The accompanying pro forma balance sheet at
September 30, 1999 assumes this offering occurred on September 30, 1999. The
accompanying pro forma statements of operations for the year ended December 31,
1998 and the nine months ended September 30, 1999 assume that the formation of
the Partnership and this offering occurred on January 1, 1998.
2. ACQUISITIONS
On July 15, 1999, as described in Note 1, Liberty Digital contributed to
the Partnership substantially all of its SonicNet and The Box businesses 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 nine months ended September 30, 1999 from
the date of acquisition. Imagine Radio's historical revenues of $35, production
cost of $446, and selling, general and administrative expense of $312 for the
year ended December 31, 1998 have been reflected as acquisition adjustments in
the accompanying pro forma statement of operations for the year ended December
31, 1998.
The purchase method of accounting has been used in the preparation of the
accompanying unaudited pro forma financial statements for SonicNet, The Box and
Imagine Radio acquisitions. The purchase consideration is allocated to tangible
and identifiable intangible assets acquired and liabilities assumed based on
their respective fair values, with the excess purchase consideration being
allocated to goodwill. Pro forma adjustments to amortization expense of $14,587
for the nine months ended September 30, 1999 and $29,347 for the year ended
December 31, 1998 represent additional amortization of purchase goodwill
assuming the above mentioned acquisitions occurred on January 1, 1998.
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 whereby MTV Networks licenses from
the Partnership, for a fee, the use of substantially all of The Box business'
intellectual property rights, technology and subscriber base. Property and
equipment and launch incentive fees related to MTV Network's use of The Box
business' assets under the agreement have been recorded as assets of the
Partnership and will be 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 historical statements of operations. Acquisition adjustments to revenues and
depreciation expense of $793 and $943, respectively, for the nine months ended
September 30, 1999, and $1,057 and $1,257, respectively, for the year ended
December 31, 1998, reflect the license fee revenues and depreciation of the
capitalized assets assuming the agreement was signed January 1, 1998.
3. INITIAL PUBLIC OFFERING
The pro forma adjustments to cash in the pro forma balance sheet as of
September 30, 1999, reflect the sale of shares of the Company's
Class A common stock offered hereby at the price of $
30
<PAGE> 35
NOTES TO THE MTVi GROUP INC. UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
per share. The total proceeds from the offering are reduced by $ million for
estimated offering expenses.
The pro forma adjustment to net equity investment of $143,737 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 and $4,484 for the nine months ended
September 30, 1999 and the year ended December 31, 1998, respectively, 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 $143,737 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.
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<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the notes to those financial statements
included elsewhere in this prospectus. The following discussion contains
forward-looking statements that involve risks and uncertainties. The statements
are based on current expectations and actual results could differ materially
from those discussed herein. Factors that could cause or contribute to the
differences are discussed in "Risk Factors" and elsewhere in this prospectus.
See also "Special Note Regarding Forward-Looking Statements."
OVERVIEW
We are the world's leading Internet music content company, with 18 music
website destinations around the world. Through our MTV.com, VH1.com and
SonicNet.com network of websites, we deliver to consumers highly personalized
music and music-related experiences and direct connections to a vibrant
community of music fans and artists. We were developed by MTV Networks, a
leading global media and entertainment business that has built its success on
creating strong brands and delivering compelling music content to more than 300
million television homes in 80 countries around the world. Our relationship with
MTV Networks provides us with extensive cross promotion and content creation
opportunities, and we believe this uniquely positions our websites to provide
consumers with an on-air/online convergent experience. We are positioning our
network of websites as multiple branded gateways with content that targets
specific demographic and psychographic segments and defined music genres.
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 acquisitions 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. As a
result of the license and distribution agreement between the Partnership and MTV
Networks described below, substantially all of the results of the business of
The Box are not reflected in our results of operations. We are amortizing the
excess of the purchase price of the businesses of Imagine Radio and SonicNet
over the useful life of these assets, which is generally five years.
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 herein 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 increased
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. In the first nine months of 1999, advertising
represented 45% of our total revenues. In this period, no single advertiser
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<PAGE> 37
represented more than 10% of advertising revenues. Currently, we employ a direct
sales force of 11 people in New York, San Francisco, Chicago and Los Angeles and
intend to expand this staff.
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 committed 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
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 and AOL, for on-air co-branded keyword
mentions and closing tag advertisements that appear on the MTV and VH1
television networks along with our advertisements, as well as online promotion.
For the first nine months of 1999, promotional revenues represented 48% of our
total revenues.
Distribution. Distribution revenues include revenues from our syndication
of information, news and other original content to third parties, primarily
America Online, Inc. 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 first nine months of 1999, distribution revenues
represented 7% 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, Inc. 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, Inc.
We have an agreement with RioPort Inc., which provides an MTVi-branded
digital download platform that includes all download tools and software and
supports all commonly used digital audio formats such as MP3 and Audible. Under
this two-year exclusive agreement, we share revenues from digital download
purchases, subject to RioPort guaranteeing payment of certain minimum revenues
to us over the term of the agreement. These revenues are not dependent upon the
volume of downloads completed or the revenues related to such downloads. As part
of this agreement, we received a minority equity interest in RioPort. We began
offering digital downloads in December 1999.
In January 2000, under a revenue-sharing agreement, we began selling
concert tickets on MTV.com 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
Cost of Production. Cost of production consists primarily of (1) the
expenses required to create, design, produce, program, develop and maintain our
websites, (2) the personnel-related expenses needed to support such production
and (3) the technology-related expenses necessary to develop and maintain the
underlying infrastructure.
Related Party Cross Promotion Expense. Related party cross promotion
expense represents expenses associated with the on-air advertising we receive
from MTV Networks. MTV Networks promotes us during live or produced programming
with advertising, VJ mentions, text on screen and other support.
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<PAGE> 38
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 fixed
assets. Fixed assets 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. Amortization of intangibles is 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, 1996, 1997 and 1998 and the nine months ended September 30,
1998 and 1999, expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ----------------
1996 1997 1998 1998 1999
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Advertising.................................. 16.1% 30.3% 40.0% 23.5% 45.1%
Promotional.................................. -- -- 31.3 25.2 48.0
Distribution................................. 83.9 69.7 28.7 51.3 6.9
----- ------ ------ ------ ------
Total revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of production........................... 62.0 113.5 109.6 101.4 115.7
----- ------ ------ ------ ------
Gross profit (loss)............................ 38.0 (13.5) (9.6) (1.4) (15.7)
Other operating expenses:
Related party cross promotion expense........ 26.4 29.5 54.5 61.5 28.5
Allocated charges from parent................ 101.4 63.2 55.4 83.6 64.0
Selling, general and administrative.......... 7.7 13.4 12.2 9.6 47.1
Depreciation................................. -- 0.4 1.9 2.1 5.0
Amortization of intangibles.................. -- -- -- -- 71.3
----- ------ ------ ------ ------
Total other operating expenses............ 135.5 106.5 124.0 156.8 215.9
Operating income (loss)........................ (97.5) (120.0) (133.6) (158.2) (231.6)
Benefit for income taxes..................... 37.1 45.6 50.8 60.1 29.0
----- ------ ------ ------ ------
Net income (loss).............................. (60.4)% (74.4)% (82.8)% (98.1)% (202.6)%
</TABLE>
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<PAGE> 39
The following table sets forth a summary of our results of operations for
the years ended December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1996 1997 1998 1998 1999
------- ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues............................... $ 3,427 $ 5,778 $ 8,837 $ 4,695 $ 10,541
Gross profit (loss).................... 1,302 (778) (847) (65) (1,649)
Operating income (loss)................ (3,340) (6,933) (11,800) (7,426) (24,410)
Net income (loss)...................... (2,070) (4,298) (7,316) (4,604) (21,352)
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
Revenues increased 125% to $10.5 million for the nine months ended
September 30, 1999 from $4.7 million for the nine months ended September 30,
1998, resulting from increases in advertising revenues and promotional revenues,
offset slightly by a decrease in distribution revenues. Advertising revenues
rose primarily due to a substantial increase in the volume of advertising
transactions and due to the acquisition in 1999 of Imagine Radio and SonicNet,
which accounted for combined advertising revenues of $1.0 million for the nine
months ended September 30, 1999. Distribution revenue decreased as a result of
changes in terms of agreements with AOL which reflect a shift in the allocation
of revenue from distribution to promotion under the agreement. This decrease in
distribution revenue was more than offset by an increase in promotional revenue
under the revised terms of the AOL agreements. Promotional revenues also
increased due to our CDnow agreement being in effect for the full nine months
ended September 30, 1999 as compared to only three months during the nine month
period ended September 30, 1998.
Cost of production increased 156% to $12.2 million for the nine months
ended September 30, 1999 from $4.8 million for the nine months ended September
30, 1998 primarily due to the creation of independent technology and operations
groups, increases in costs associated with production, programming and content
and the increases in personnel to support increased production.
Gross loss increased to $1.6 million for the nine months ended September
30, 1999 from $65,000 for the nine months ended September 30, 1998, due to the
factors discussed above.
Total other operating expenses increased 209% to $22.8 million for the nine
months ended September 30, 1999 from $7.4 million for the nine months ended
September 30, 1998. This increase is generally due to our growth through
acquisitions, internal growth of our existing websites and the resulting
increase in the personnel needed to staff and support this growth. Specifically:
- Related party cross promotion expense increased as a result of an
increase in the level of on-air promotional activity.
- Allocated charges from parent increased primarily due to increases in
personnel and our overall growth.
- Selling, general and administrative expense increased primarily due to
the creation of an independent executive team, sales group and support
organization.
- Depreciation and amortization of intangibles expense increased primarily
due to the growth of our business and goodwill amortization attributable
to the 1999 acquisitions of Imagine Radio and substantially all of the
businesses of SonicNet.
As a result of the factors discussed above, our operating loss increased
229% to $24.4 million for the nine months ended September 30, 1999 from $7.4
million for the nine months ended September 30, 1998, and our net loss increased
364% to $21.4 million for the nine months ended September 30, 1999 from $4.6
million for the nine months ended September 30, 1998.
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<PAGE> 40
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues increased 53% to $8.8 million for the year ended December 31, 1998
from $5.8 million for the year ended December 31, 1997, as a result of increases
in advertising and promotional revenues, offset by a decrease in distribution
revenues from the prior year. Advertising revenues rose 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. The decrease in distribution revenues is
due to the shift in the allocation of revenue from distribution to promotion
under the AOL agreements. The increase in promotional revenue for 1998 reflects
the revenue shift under the AOL agreements and also reflects an agreement with
CDnow.
Cost of production increased 48% to $9.7 million for the year ended
December 31, 1998 from $6.6 million for the year ended December 31, 1997,
primarily due to the creation of independent design, news and creative groups,
increases in costs associated with production, programming and content and the
increases in personnel to support increased production.
Gross loss increased to $847,000 for the year ended December 31, 1998 from
$778,000 for the year ended December 31, 1997, due to the factors discussed
above.
Total other operating expenses increased 78% to $11.0 million for the year
ended December 31, 1998 from $6.2 million for the year ended December 31, 1997.
This increase is generally due to the following:
- Related party cross promotion expense increased as a result of an
increase in the level of on-air promotional activity.
- Allocated charges from parent increased primarily due to increases in
personnel and our overall growth.
- Selling, general and administrative expense increased 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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues increased 69% to $5.8 million for the year ended December 31, 1997
from $3.4 million for 1996. Increases in advertising revenues were due primarily
to a substantial increase in the volume of advertising transactions. In
addition, distribution revenues increased due to renewed distribution agreements
with AOL resulting in increased licensing fees.
Cost of production increased 209% to $6.6 million for the year ended
December 31, 1997 from $2.1 million for the year ended December 31, 1996,
primarily due to the creation of independent production, programming and content
groups and increases in personnel to support increased production.
Gross profit decreased to a loss of $778,000 for the year ended December
31, 1997 from a profit of $1.3 million for the year ended December 31, 1996, due
to the factors discussed above.
Total other operating expenses increased 33% to $6.2 million for the year
ended December 31, 1997 from $4.6 million for the year ended December 31, 1996.
This increase is generally due to the following:
- Related party cross promotion expense increased as a result of an
increase in the level of on-air promotional activity.
- Allocated charges from parent increased primarily due to increases in
personnel and our overall growth.
- Selling, general and administrative expense increased primarily due to
the creation of a shared executive team and support organization with MTV
Networks.
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<PAGE> 41
As a result of the factors discussed above, our operating loss increased
108% to $6.9 million for the year ended December 31, 1997 from $3.3 million for
the year ended December 31, 1996, and our net loss increased 108% to $4.3
million for the year ended December 31, 1997 from $2.1 million for the year
ended December 31, 1996.
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 $10.7 million for the nine
months ended September 30, 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 in investing activities was $16.0 million for the nine months
ended September 30, 1999, $593,000 for the year ended December 31, 1998 and
$173,000 for the year ended December 31, 1997. Net cash used in investing
activities for each of these periods consisted of: the acquisition of Imagine
Radio for $14.5 million for the nine months ended September 30, 1999, and
capital expenditures, primarily computer equipment and systems, totaling $1.5
million for the nine months ended September 30, 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 $26.9 million for the nine
months ended September 30, 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 September 30, 1999, we had $119,000 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 September 30, 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.
We currently anticipate that the net proceeds from this offering, together
with our cash, cash equivalents, credit facility 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. Any additional financings, if needed, might not
be available on reasonable terms, or at all. 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. We refer you to
"Certain Relationships and Related Transactions -- Credit Agreement with Viacom
Inc." for a description of our credit facility.
YEAR 2000 COMPLIANCE
OVERVIEW
The widespread use of computer programs that rely on two-digit dates to
perform computations and decision-making functions may have caused computer
systems to malfunction prior to or in the year 2000 ("Y2K") and may have lead to
significant business delays and disruptions in the U.S. and internationally. We
have completed our program to identify and mitigate Y2K risks. To date, we have
not encountered any
37
<PAGE> 42
disruptions related to the Y2K 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 Y2K compliance and that
of our suppliers and vendors. Nevertheless, based on the actions described
above, we do not expect to encounter any significant disruptions in the future.
CONTINGENCY PLAN
As part of the Y2K program, testing and review of each application,
infrastructure item and business partners occurred, and we evaluated the need
for contingency plans. Because the systems have been found to be Y2K compliant,
a contingency plan has not been deemed necessary. However, we will continue to
devote the necessary resources to monitor any possible disruptions caused by the
Y2K issue.
COSTS
Y2K 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 Y2K program is
not material to our results of operations, financial position or liquidity.
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<PAGE> 43
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. Concurrently 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 Viacom affiliates and Liberty
Digital owning limited partnership units in the Partnership.
In connection with the offering, MTVi Group will issue
shares of Class A common stock offered hereby to the public and will immediately
thereafter take the net proceeds received therefrom and contribute them to the
Partnership in exchange for limited partnership units in the
Partnership. Immediately subsequent to the offering, the Partnership will be
owned approximately % by Viacom affiliates, % by Liberty Digital and % by
MTVi Group. As a result of its ownership of all shares of Class B
common stock of MTVi Group, together with the ownership by Viacom affiliates of
partnership units as described above, Viacom and its affiliates will
beneficially control % of the voting power of all of the voting stock of MTVi
Group and will control both MTVi Group and the Partnership. See "Description of
Capital Stock and Partnership Units."
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<PAGE> 44
BUSINESS
OVERVIEW
We are the world's leading Internet music content company, with 18 music
website destinations around the world. Through our MTV.com, VH1.com and
SonicNet.com network of websites, we deliver to consumers highly personalized
music and music-related experiences and direct connections to a vibrant
community of music fans and artists. We were developed by MTV Networks, a
leading global media and entertainment business that has built its success on
creating strong brands and delivering compelling music content to more than 300
million television homes in 80 countries around the world. Our relationship with
MTV Networks provides us with extensive cross promotion and content creation
opportunities, and we believe uniquely positions our websites to provide
consumers with an on-air/online convergent experience. We are positioning our
network of websites as multiple branded gateways with content that targets
specific demographic and psychographic segments and defined music genres. By
amassing these consumers, we believe that we are a powerful value-creating
vehicle for music enthusiasts, advertisers and commerce providers, as well as
artists and record companies.
Our network of websites offers a music-focused mix of content, community
and commerce. Within our network of websites, visitors can experience:
<TABLE>
<S> <C>
CONTENT SPANNING ALL GENRES
- --------------------------------
-- Music news and features
-- Artist information and
interviews
-- Streaming radio with both
user-customized and
professionally programmed
formats
-- Live and on-demand webcast
performances
-- Selected on-demand music
videos and exclusive video
programming
-- Album reviews
-- Tour information
-- Online music search engines
and links to music-related
websites worldwide
COMMUNITY FEATURES
- --------------------------------
-- Integrated online and
on-air chats
-- Polling
-- Programming such as game
shows
-- Audience message boards
-- Coverage of local music
scenes
-- Free e-mail accounts
E-COMMERCE
- --------------------------------
-- CDs
-- Digital music downloads
-- Tickets
-- MTV, VH1, SonicNet and
other on-air franchise
branded merchandise
-- Auctions
</TABLE>
We also plan selectively to syndicate elements of our offerings to third
parties, including content aggregators and other entities seeking music-oriented
programming, such as radio services.
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 content category, based upon consolidated reach among
U.S. Internet users, according to Media Metrix research. Although unmeasured by
syndicated research services, our network of websites also generates substantial
traffic from international markets. In the aggregate, our websites, together
with the Asian and Brazilian MTV-based websites the interests in which MTV
Networks proposes to contribute to us prior to completion of this offering,
generated more than 124 million page views in December 1999. MTV.com was the #1
music content website in 1999 based on average monthly unique visitors, as
reported by Media Metrix. In addition, MTV.com has been ranked the #1 site among
all News/Information/Entertainment sites in the 12-17 demographic for nine of
the last 12 months, according to Media Metrix.
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INDUSTRY BACKGROUND
THE MUSIC INDUSTRY
Music is one of the leading forms of entertainment and plays a major role
in the everyday lives of people around the world. The Recording Industry
Association of America reports that listening to music is one of the most
popular entertainment pastimes, with nearly nine out of 10 adults accompanying
their leisure activities with music. According to the Radio Advertising Bureau,
95% of U.S. persons aged 12 and over listen to radio on a weekly basis and,
according to the Soundata Consumer Panel, almost half of all U.S. households
include at least one person who purchased three or more CDs or cassettes over a
six month period. Because of its worldwide scope, music is a multi-billion
dollar industry. In 1998, according to the International Federation of the
Phonographic Industry, worldwide music shipments of recorded music amounted to
$38.7 billion and, according to the Recording Industry Association of America,
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, International Data Corporation projects the number of worldwide
Internet users to grow from more than 159 million at the end of 1998 to more
than 510 million by the end of 2003.
We believe that the music marketplace is particularly well suited for
online activity, because of the relatively finite capacity in conventional media
outlets, and increasing specialization in consumer music preferences. By
creating a new level of access and personalization, the Internet is changing the
ways in which music is created, distributed and consumed. For example, on the
Internet, music enthusiasts can access a wide range of content that is not
limited by local radio playlists, retail shelf space, or major label artist
rosters. The Internet also provides access to tools and enabling technology that
empower consumers with greater access to their music through a variety of
Internet-based applications that allow consumers to remix music in real time,
vote online to determine the popularity of unsigned bands or write reviews of
music and artists.
Artists find the Internet a powerful tool, as it lowers entry barriers to a
business that has traditionally been controlled by the record labels that
finance the expensive processes of production, manufacturing, promotion and
distribution. As artists begin to use the Internet to communicate more directly
with fans worldwide, online music platforms with strong brands will be well
positioned to attract consumers. In addition, the community aspects of the
Internet provide a forum for artists to drive consumer interest by interacting
directly with their fans and reaping the benefits of listener feedback.
The Internet presents new opportunities for music commerce by providing
users with an efficient way to access, store and play back content on demand
through computers and portable devices. The digitization of music content
eliminates many of the costs associated with the manufacturing, distribution and
retailing of music. Further, as the Secured Digital Music Initiative is
implemented to establish a formal standard to effect the secure and authorized
downloading of music files, traditional record labels will make more music
available in digital form, broadening the range of music that is available to
consumers in an efficient manner. Unlike some other product categories, music
lends itself well to online sampling before purchase. The online environment
also allows consumers to access a greater amount of product and artist
information than is available through traditional retail channels. The delivery
of entertainment content over the Internet will also become increasingly
compelling for audiences as broadband Internet connections become more common.
High-speed access will heighten the quality of audio and particularly video on
the Internet, creating richer environments for users and more interactive
options for advertisers. Forrester Research, Inc. projects domestic sales of
recorded music over the Internet to increase to $4.3 billion in 2004 from
approximately $848 million in
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1999. An estimated 50 million individuals will be capable of downloading and
playing digital music by the end of 1999. Forrester Research projects that the
music industry will generate $1.1 billion of digital download revenues in 2004,
representing 25% of the $4.3 billion projected total domestic online music
revenues.
OUR COMPETITIVE ADVANTAGES
We believe that Internet users are drawn to those websites that offer the
most attractive branded entertainment, community and e-commerce experiences. For
the music consumer, this means websites that contain the broadest range of music
content and that offer the user the opportunity to develop closer relationships
with music artists and the technology that puts the user in control of the
entertainment and e-commerce experiences.
We believe that we have the following strengths that position our network
of websites to continue to lead the online music industry:
RELATIONSHIP WITH MTV NETWORKS
We were developed by MTV Networks, a leading global media and entertainment
business that reaches more than 300 million television homes worldwide through
its MTV, VH1 and other music-themed television services. MTV is the largest
cable television network worldwide and was the number one cable network for 12-
24 year olds in the U.S. in 1999. VH1 is the second most widely distributed
music network worldwide. We benefit from our continuing relationship with MTV
Networks through:
Brand Awareness. We have a long-term, royalty-free license for the "MTV"
and "VH1" brands and trademarks from MTV Networks for use in connection
with our licensed services. MTV and VH1 are among the most recognizable
brands in the music industry and represent leadership and innovation in
music programming and content. We believe that this provides significant
name recognition for our MTV.com and VH1.com websites and allows Internet
users to associate these websites with the look and quality of the
programming content of MTV and VH1. As a result, unlike other music
websites, we can focus more of our resources on developing content and
site functionality and fewer resources on brand development.
Cross Promotion. MTV Networks has contractually committed to vigorously
promote us on its television networks through advertising, VJ mentions,
text on screen and other support, for no cash consideration. The value of
this on-air promotion will be at least $100 million, spread over a
five-year period ending July 15, 2004. MTV Networks has indicated that it
intends to provide us with at least an additional $25 million of on-air
promotion over this period. 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:
-- webRIOT, a live, simultaneous television and online game show that
allows Internet users to play along with the on-air program;
-- simultaneous on-air/online auctions, such as MTV.com's Cool Crap
and Real World Garage Sale and VH1.com's Rock Collectors;
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-- 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 content market. We believe
that the combination of our content, community features and e-commerce
opportunities makes our network of websites the ultimate destination for music
enthusiasts. Our content incorporates live and on-demand music performances,
music videos, music news and artist information for a wide range of music
genres, including all types of rock music, R&B, soul, dance, rap, hip-hop,
country, classical and jazz. Our community features allow audiences to share
music experiences with direct connections between music fans and artists through
chat rooms, themed message boards and e-mail. In addition, our websites
incorporate tools and technologies that permit users to create highly
personalized experiences. For example, with Radio SonicNet, users can enjoy a
high-quality streaming audio experience featuring professionally and artist
preprogrammed radio stations. In addition, users can create personalized
Internet radio stations that reflect their own unique tastes by mixing and
matching music from 75 different genres. VH1.com's Roadie is a character that
allows users to personalize their VH1.com experience, send pages to friends and
keep track of music information. MTV.com offers city-by-city coverage of local
music scenes, providing users with information on band and venue reviews,
features and news. We believe that these features, along with e-commerce
opportunities, such as music and merchandise purchases and digital music
downloads, create significant value for customers, thereby increasing the length
of time users spend on our websites and the number of repeat visits by users.
INTERNATIONAL REACH
We 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.
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
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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 which has
won various awards 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. 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 Networks' franchises such as Total Request Live and Behind the
Music. Our current e-commerce offerings also include auctions and event
tickets. 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. We intend to use this
platform to offer users the ability to download music on all of our websites
through secure and authorized transactions. We also obtain digital music for
download from artists and record labels.
Content Syndication. We currently license elements of our original content
and that of MTV Networks to third-party websites and intend to continue to
do so in the future. For example, we currently license
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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.
Business-to-Business Opportunities. We are pursuing opportunities to offer
third parties music-oriented solutions based on our technologies. For
example, we intend to use our Radio SonicNet platform to allow other website
operators 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 leading core technology
platforms to support our brands, business and creative goals, while establishing
ourselves as a key source for music services and functionality to a wide range
of third parties. We intend to use these platforms to further integrate our
network of websites and strategic partners, and thereby leverage 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 STRATEGIC RELATIONSHIPS
We have entered into several strategic 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 Digital owns a
significant stake in the Partnership and has an agreement not to compete with
our business through July 2002, subject to some exceptions. Our relationship
with RioPort provides us with the technology to support digital downloads of
music from our websites. MTV Networks has a relationship with Tricast, (BVI)
Ltd., a leading Asian Internet content provider, with whom it has developed
three MTV-based websites in Asia, and a relationship with Abril S.A., a leading
Brazilian media company, with whom it has developed an MTV-based website in
Brazil. MTV Networks has indicated that it intends to contribute to us, prior to
completion of this offering, its interests in the joint ventures with Tricast
and Abril which own these Asian and Brazilian MTV-based websites. We intend to
pursue further strategic relationships, ventures and acquisitions to support our
network of websites. In the United States, we expect that these arrangements
will be primarily for the purpose of enhancing our content, e-commerce
initiatives and technological capabilities. Internationally, we also expect to
support our roll-out of additional websites by entering into various types of
strategic 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 content website in 1999 based on
average monthly unique visitors, as reported by Media Metrix. The site has also
been ranked the #1 site among all News/ Information/Entertainment properties in
the 12-17 demographic for nine of the last 12 months, according to
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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 and Japan in the year 2000.
VH1.COM
Launched in 1995, VH1.com targets music fans in the 25-plus age range and
reflects VH1's "Music First" positioning, core values and franchises in the
online space. 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.
SONICNET.COM
Launched in 1994, SonicNet.com targets music lovers of all ages with
entertainment and information from all 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, the website features
SonicNet.com news, record reviews, live events and e-commerce opportunities.
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.
Radio SonicNet aggregates best-in-class brands and affiliate programming to
provide in-depth coverage of specific music genres, which will benefit users and
advertisers. 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.
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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 addition, MTV Networks has indicated that it
intends to contribute to us, prior to completion of this offering, its interests
in joint ventures that own three MTV-based websites in Asia and an MTV-based
website in Brazil. In December 1999, our existing international websites,
together with these Asian and Brazilian MTV-based websites, generated more than
26 million page views outside the United States. The following table provides
information regarding our international websites and the Asian and Brazilian
MTV-based websites that MTV Networks has indicated it will contribute to us:
<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
Brazil........................... MTV www.mtv.com.br Joint venture with
Abril(2)
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, prior to
completion of this offering, its interest in these joint ventures. For more
information, see "--Key Strategic Relationships."
We also plan to launch MTV-branded Internet sites through joint ventures in
India and Japan in the year 2000.
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.
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Streamland.com. Streamland allows music fans to watch over 1,000
full-length music videos free and on demand. Users can create personalized
playlists and can browse videos by style or search by artist.
Thebox.com. Thebox.com is a website that provides music video previews and
enables viewers to interact through an online chat service and bulletin boards
about music videos and their favorite artists. In addition, Thebox.com is a
venue for viewers of MTV Networks' The Box Music Network, a 24-hour, interactive
all-music basic cable channel which airs specific videos selected by consumers,
to make online requests for specific videos they want to be aired on The Box.
Cinemachine.com. Cinemachine is a movie review search engine that presents
listings of the latest movie reviews for films of all genres, including new
releases, classic films, Hollywood blockbusters and independent features.
Cinemachine gathers hundreds of movie reviews in one convenient listing for
users and makes weekly recommendations on new films.
ADVERTISING AND SPONSORSHIPS
We intend to expand advertising sales, which currently consist of banner
ads and sponsorships, to include rich media ads and business-to-business
sponsorship opportunities. We believe we have a competitive advantage in
advertising sales as a result of our:
-- well-known brand names;
-- attractive demographics in key segments;
-- unique rich media platform and programming;
-- artist and programming-driven sponsorships;
-- 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 on-air
sales force of MTV and VH1. Our online sales force has a strong working
relationship with MTV Networks' worldwide on-air sales force, which provides us
with a source for advertiser leads. However, 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, whereby 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
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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
short-term 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 currently under development. We believe that by combining online and
on-air promotion of our entertainment programming events with our targeted
audience database, we have created a significant commerce asset.
In addition, we are in the process of building a proprietary ordering
system that is designed to facilitate convenient online purchasing of
pre-recorded music and merchandise. Customers will be able to add items to their
"shopping cart" while using our websites. At any time, customers will be able to
securely "checkout," at which time new customers will need to register and
registered customers will need to enter a username and 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 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, whereby 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.
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We currently offer or intend to offer the following products and services
to consumers through our websites:
<TABLE>
<CAPTION>
PRODUCT LAUNCH DATE* STRATEGIC PARTNER DESCRIPTION
- ------- ------------ ----------------- -----------
<S> <C> <C> <C>
CDs..................... June 1998 CDnow (U.S.), Boxman Currently offered in the
(U.K.), CIM (Brazil) and United States through
others CDnow (until 2001) with
private-label
"boutiques" for MTV.com
and VH1.com
Franchise and Artist
Merchandise........... December 1999 WhatsHotNow 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
</TABLE>
- ---------------
*Represents launch date of initial offering in the applicable product category.
BUSINESS TO BUSINESS SERVICES
CONTENT SYNDICATION
We have been providing content to third-party websites since the MTV area
was first launched on AOL in 1994. In addition to AOL, we currently provide
content to companies such as Yahoo!, Real Networks and Apple Quicktime, among
others, typically in exchange for an annual license fee, a share of advertising
and e-commerce revenues or equity.
PLATFORM SERVICES AND OTHER BUSINESS TO BUSINESS OFFERINGS
We are currently negotiating agreements to license our technologies to
other websites. For example, we plan to 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. We expect that the first licensing arrangement of
this type will be implemented in the first quarter of 2000. 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 number 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
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<PAGE> 55
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. 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.
KEY STRATEGIC RELATIONSHIPS
In addition to our unique and significant relationship with MTV Networks,
we have established a number of key relationships that have enhanced the traffic
and strategic growth of our network of websites.
RIOPORT
In October 1999, we entered into a two-year licensing and services
agreement with RioPort, Inc. RioPort is a software and technology company that
provides digital audio downloading services and tools for the Internet, with
capability to support all commonly used digital audio formats such as MP3,
Audible and Windows Media Audio. Under our agreement, RioPort developed an
MTV-branded version of its digital audio downloading platform and acts as our
exclusive provider of software and back-end services for digital audio downloads
offered across our U.S. websites. RioPort also provided us with equity and cash
consideration in exchange for exclusivity and co-branding on our websites.
LIBERTY DIGITAL
In connection with the formation of the Partnership, Liberty Digital
received limited partnership units in the Partnership and, together with its
parent company, Liberty Media Corporation, agreed not to compete with our
business through July 2002, subject to some exceptions. See "Certain
Relationships and Related Transactions--Transactions Establishing the
Partnership" for a more complete description of Liberty Digital's non-compete
agreement. Liberty Digital is a subsidiary of Liberty Media Corporation and a
part 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!.
TRICAST
In December 1998, MTV Networks and Tricast entered into a 10-year joint
venture to operate an interactive consumer service under the "MTV Asia online"
brand. This joint venture will have the exclusive right to develop and operate
MTV Asia websites, including mtvasia.com, mtvchinese.com and mtvkorea.co.kr.
Tricast owns a 51% interest in the joint venture and MTV Networks owns a 49%
interest, but Tricast is obligated to fund 100% of the capital contributions
that have been approved by the venture's board of directors. MTV Networks has a
limited option to increase its stake to over 50% if the joint venture has two
consecutive quarters of operating profit. MTV Networks has indicated that it
intends to contribute to us prior to the completion of this offering its
interest in this joint venture. Pursuant to the joint venture, we will receive
guaranteed royalties in exchange for trademark license rights being granted to
the venture.
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<PAGE> 56
ABRIL
In August 1996, MTV Networks and Abril entered into a 35-year joint venture
to operate a music television channel and music content website targeted to the
Brazilian market under the MTV brand. Abril owns a 50% interest in the joint
venture and MTV Networks owns a 50% interest. MTV Networks is negotiating with
Abril regarding the structure of this joint venture and MTV Networks'
contribution to us, prior to completion of this offering, of MTV Networks'
interest in the online business of this joint venture.
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 will be supported by a core set of technology
platforms managed by our personnel and composed of internally developed
applications and systems as well as third-party tools, systems and services.
The central database back-end architecture for our websites as well as for
affiliate websites is a fully load-balanced, fault-tolerant, and highly scalable
architecture based on Microsoft SQL Server 7.0 and Dell Computer Clustering
Services. All database content is stored on clustered hardware systems so that
if any one system fails, its counterpart immediately and automatically picks up
and continues to deliver that data. In addition, user data is partitioned across
multiple database systems so that as usage increases, addition of new clusters
to handle the load is trivial. This architecture has been developed with
high-level support from Microsoft and Dell Computer, with whom we maintain a
continued consulting relationship.
Features and content of the central database back-end architecture include:
-- a single unified repository for all user sign-up, login, preference
data and behavioral user data;
-- a centralized music information library including artist information,
discographies, bios, news, reviews, concert listings and search data
for related sites;
-- on-air schedules and associations with music data for both MTV/VH1
and other television entities; and
-- links to third parties for e-commerce and downloadable music.
The unified architecture for streaming and downloadable media supporting
our websites and third-party affiliates is a scalable, redundant architecture
based on Sun Microsystems and Dell Computer hardware, Microsoft Windows Media
and Real Networks streaming software, and internally developed publishing, music
programming, and systems management tools. The architecture also integrates
InterVu, iBeam, and Apple (as well as some other hosting services) to provide
additional streaming capacity and fail-over capability beyond our internal
systems.
COMPETITION
Competition among media and Internet companies pursuing online consumers is
intense. The number of sites offering music content and related features has
increased dramatically, and will likely continue to increase due to the
Internet's low entry barriers. Rivalry for consumers' attention and leisure
time, and the associated commerce expenditures and advertising dollars will
therefore become increasingly difficult to capture for all industry
participants.
We compete for audiences, consumers, advertisers and artist relationships
with:
-- music-focused online services, including but not limited to, Launch
Media, ARTISTdirect, Tunes.com, GetMusic.com, MP3.com and Emusic;
-- leading News/Information/Entertainment online sites such as Sony
Online and Warner Bros. Online;
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<PAGE> 57
-- 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 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. In other cases, we use content without a license because
we do not believe a license is required; however, this area of law is uncertain.
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
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employees, consultants and corporate partners, and generally control access to
and distribution of our proprietary information. We cannot assure you that the
steps we have taken will prevent misappropriation of our proprietary rights,
particularly in foreign countries where laws or enforcement practices may not
protect our proprietary rights as fully as in the United States. In addition, we
rely on MTV Networks to protect intellectual property rights we license from
them, most importantly, the "MTV" and "VH1" trademarks. If third parties were to
use or otherwise misappropriate our copyrighted materials, trademarks or other
proprietary rights without our consent or approval, our competitive position
could be harmed, or we could become involved in litigation to enforce our
rights. It is also possible that we could become subject to infringement actions
based upon the content licensed from third parties. Any such claims or disputes
could subject us to costly litigation and the diversion of our financial
resources and technical and management personnel. Further, if our efforts to
enforce our intellectual property rights are unsuccessful or if claims by third
parties against us are successful, we may be required to change our trademarks,
alter the content and pay financial damages. We cannot assure you that such
changes of trademarks, alteration of content or payment of financial damages
will not adversely affect our business.
For a discussion of the arrangements pursuant to which we license the MTV
trademarks and associated logos, see "Certain Relationships and Related
Transactions--License Agreements."
REGULATION
In the United States and abroad there is an increasing number of laws and
regulations pertaining to the Internet, including laws or regulations relating
to the offering of digital music, user privacy, liability for information
retrieved from or transmitted over the Internet, online content regulation,
taxation and domain name registration. Moreover, the applicability to the
Internet of existing laws governing issues such as intellectual property
ownership and infringement, copyright, patent, trademark, trade secret,
obscenity, libel employment and personal privacy is uncertain and developing.
PRIVACY CONCERNS
Legislatures and government agencies have adopted and are considering
adopting additional laws and regulations restricting the collection and use of
personal information obtained from individuals when accessing websites, which
could limit our ability to use our databases to e-mail our users and otherwise
generate revenue. We refer you to "Risk Factors--We may be subject to liability
if private information provided to us by our users were misused."
INTERNET TAXATION
A number of 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. We refer you to "Risk
Factors--Imposition of sales and other taxes on e-commerce transactions might
hinder e-commerce which could adversely affect our operating results."
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."
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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 107,000 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 April 1999, MTV Networks received a civil investigative demand from the
Department of Justice, Antitrust Division, requesting information about certain
of MTV Networks' operations, focusing principally on exclusivity provisions in
its arrangements with record labels for the licensing of music videos. The
Department of Justice has requested additional information from MTV Networks and
Liberty Media Corporation regarding the formation of the Partnership and other
operations of MTV Networks. We, Liberty Media Corporation and MTV Networks have
been cooperating with the investigation. Although we cannot provide any
assurances, we do not expect that the investigation will result in a material
adverse effect on our business, financial condition or results of operations.
In January 2000, we received letters from two major record companies
asserting that some of the features of our Internet radio business make the use
of their music ineligible for a compulsory license under applicable U.S.
copyright law. One of those letters also asserts that we are streaming
full-length music videos without authorization. These letters demand that we
cease our use of their music in these manners and pay for our past use. We
believe that the uses of their music in connection with the features of our
Internet music business is within the scope of the compulsory license and that
the compulsory license fees will be determined as part of a royalty arbitration
convened by the Librarian of Congress. We also believe that use of the videos is
authorized by the terms of our existing agreement with that record company.
Although we cannot provide any assurances, we do not expect that these
assertions will result in a material adverse effect on our business, financial
condition or results of operations.
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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.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Nicholas Butterworth..................... 32 President, Chief Executive Officer and
Director
Fred Graver.............................. 45 Senior Vice President, VH1.com and
Interim General Manager, SonicNet.com
Alex Maghen.............................. 32 Senior Vice President, Chief Technology
Officer
Peggy Mansfield.......................... 37 Senior Vice President, Advertising Sales
Sumner M. Redstone....................... 76 Chairman of the Board
Philippe P. Dauman....................... 45 Director
Thomas E. Dooley......................... 43 Director
Lee Masters.............................. 48 Director
</TABLE>
EXECUTIVE OFFICERS
Nicholas Butterworth has served as our president and chief executive
officer since 1999 and was appointed as one of our directors in February 2000.
From 1994 to 1999, Mr. Butterworth served in a variety of positions at SonicNet,
the award-winning Internet music service, including president from 1996 to 1999,
editor-in-chief from 1996 to 1998 and creative director from 1994 to 1996.
SIGNIFICANT EMPLOYEES
Fred Graver has served as senior vice president of VH1.com and interim
general manager of SonicNet.com since 1999. Mr. Graver served as an executive
producer for Disney and ABC Cable for its convergence programming since 1995. He
created a variety of television and Web interactive experiences including
ZoogDisney and the Disney Imagineer's "Telefusion" project. Mr. Graver has an
additional 15 years of experience in entertainment as a writer and producer for
"Late Night with David Letterman," as a writer for both "In Living Color" and
"Cheers" and began his career as an editor at National Lampoon.
Alex Maghen has served as senior vice president, chief technology officer
of MTVi Group since 1999. From 1995 to 1999, Mr. Maghen served in various
positions for MTV Networks including vice president of Online & Interactive
Technology and vice president of Production and Technology for Nickelodeon
Online. Mr. Maghen has an additional five years of experience serving as
director of Content Software Development for AT&T's interactive television
projects.
Peggy Mansfield has served as senior vice president, advertising sales for
MTVi Group since 1999. From 1994 to 1999, Ms. Mansfield served as vice president
and publisher of Nickelodeon MediaWorks. Prior to that, Ms. Mansfield served as
advertising director of the Walt Disney Company's Disney Adventures magazine.
Ms. Mansfield has an additional seven years of experience in advertising,
serving in other senior advertising positions at The New York Times Magazine
Group and Earnshaw Publications.
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.
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<PAGE> 61
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. 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.
Lee Masters was appointed as one of our directors in February 2000. Mr.
Masters has served as chairman of the board of Liberty Digital since January
1999 and was appointed president and chief executive officer of Liberty Digital
in June 1999. From January 1999 to September 1999, Mr. Masters also served as a
director and president and chief executive officer of a subsidiary of Liberty
Media Corporation. From 1990 to 1998, Mr. Masters served as president and chief
executive officer of E! Entertainment Television. From 1986 to 1989, he served
as executive vice president and general manager of MTV Networks. Mr. Masters'
legal name is Jarl Mohn. Mr. Masters also serves as a director of NewStar Media,
Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to or immediately following the consummation of this offering, we
will establish an audit committee of the board of directors which will consist
solely of three or more independent directors. In addition, we will adopt an
audit committee charter. The audit committee will review, act on and report to
the board of directors with respect to various auditing and accounting matters,
including the selection of our auditors, the scope of the annual audits, fees to
be paid to the auditors, the performance of our independent auditors and our
accounting practices.
Prior to or immediately following the consummation of this offering, we
will establish a compensation committee of the board of directors which will
consist of at least two independent directors. The compensation committee will
determine the salaries and incentive compensation of our officers and provide
recommendations for the salaries and incentive compensation of our other
employees and consultants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1999, MTVi Group did not have a compensation committee or any
other committee serving a similar function. Decisions as to the compensation of
our executive officers were made by the Viacom Inc. Senior Compensation
Committee or the compensation committee of the management committee of the
Partnership.
COMPENSATION OF OUR DIRECTORS
We intend to compensate non-employee directors for their services as
directors, but have not yet determined the amount of compensation. All of our
directors will be reimbursed for their expenses for each board and committee
meeting attended.
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<PAGE> 62
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>
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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
ORGANIZATION AGREEMENT
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 the 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:
[THE MTV I GROUP, INC. FLOW CHART]
- ------------
(1) % equity interest and % voting interest if the underwriters'
over-allotment options are exercised in full.
(2) % equity interest and % voting interest if the underwriters'
over-allotment options are exercised in full.
(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.
(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.
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.
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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 interactive television channels and, if Liberty Digital
determines to provide an interactive music channel, it will offer the
Partnership the opportunity to enter into a joint venture with Liberty Digital
to provide such a channel. In connection with such a joint venture, the
Partnership would offer the joint venture a license to use the Partnership's
music database, digitized music database and customer database on terms no less
favorable than those of the Database and Software License Agreement described
below.
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
On July 15, 1999, MTVN Online Partner, Imagine Radio, SonicNet, Inc. and
The Box Worldwide entered into the Agreement of Limited Partnership, which
agreement will be amended and restated by the parties and MTVi Group
concurrently with this offering.
Under the amended and restated agreement of limited partnership, the
business of the Partnership is to develop, operate, manage, market, promote,
distribute and license text, audio and/or video music, music-related and
music-themed services online and to engage in related activities, including
e-commerce applications and consumer oriented commercial transactions. The
business of the Partnership includes services intended principally to be
delivered to Internet "browsers" or software with "browser functionality," even
if operating through a set-top box or television set and/or are used to deliver
video clips or video programs. The terms "browsers" and "browser functionality"
refer to software consisting of or containing a graphical user interface which
provides the capability for the user to exercise substantial control over the
selection, timing, sequence and configuration of content being viewed, when such
software is used to view content that has been specifically adapted to be
subject to user control, and is not intended to be viewed in a linear,
sequential manner. The business of the Partnership is not intended to include
businesses that are substantially similar to the businesses traditionally
conducted by television, cable and satellite television program services. The
Partnership may elect to expand the scope of its business, but if it does so,
the noncompetition and other covenants described under "Amended and Restated
Parent Agreement" and "License Agreements" will apply only to the business
described above.
MTVi Group, as general partner, manages the Partnership and appoints such
officers as it chooses.
Partnership units are freely transferable by the parties, subject to the
following exceptions:
-- If Viacom and its affiliates decide to transfer units in the
Partnership, they must comply with the Stockholders Agreement,
described below, which provides Liberty Digital with customary tag
along rights in some circumstances.
-- Viacom and its affiliates have a customary right of first offer,
pursuant to which Liberty Digital may transfer any or all of their
units in the Partnership so long as they first allow Viacom and its
affiliates to make an offer to purchase such partnership units.
Liberty Digital has a limited preemptive right, pursuant to which it may
maintain its percentage interest in the Partnership relative to that of Viacom
and its affiliates (other than MTVi Group) by purchasing a proportional number
of any additional partnership units sold by the Partnership to Viacom and its
affiliates (other than MTVi Group).
Under an exchange agreement, holders of limited partnership units (other
than MTVi Group) may exchange partnership units for shares of Class A common
stock in MTVi Group on a one-for-one basis. See "Description of Capital Stock
and Partnership Units--Partnership Units." If MTVi Group issues additional
stock, other than in an exchange of partnership units, MTVi Group must
contribute to the Partnership the consideration received for such additional
stock. MTVi Group will receive, in exchange, additional limited partnership
units.
The Partnership will continue indefinitely at the discretion of the general
partner, subject to customary termination 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. 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, subject to
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 and its affiliates owns less than the equivalent of
5% of the shares of MTVi Group, are in material default of provisions of the
agreements described herein or have 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 the Liberty Digital and its affiliates own the
equivalent of at least 5% of the shares of MTVi Group, are not in material
default and have not transferred part of their partnership units in violation of
the Partnership Agreement, they will vote for one director of MTVi Group
nominated by Liberty Digital and its affiliates. They have also agreed that, so
long as the same requirements are met, Liberty Digital and its affiliates will
have limited preemptive rights, which will provide them the ability to maintain
their percentage interest in MTVi Group relative to that of Viacom and its
affiliates (other than MTVi Group) by purchasing a proportional number of shares
of any additional capital stock issued by MTVi Group to Viacom and its
affiliates (other than MTVi Group) other than in exchange for partnership units
or pursuant to some employee stock plans.
Viacom and its affiliates have a customary 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 customary 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 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, 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 would permit the purchaser to cast a
majority of the votes that might be cast in an election of directors of MTVi
Group, Viacom and its affiliates may require Liberty Digital and its affiliates
to sell the same percentage of stock held by them in MTVi Group.
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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 to which the shares are subject, 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. Given the
assignment of these agreements 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.
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
in the specified trademarks to the extent MTV Networks had any rights in the
specified trademarks, without making any representations or warranties as to
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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 provide reasonable cooperation,
but has no obligation, to obtain or negotiate for these rights.
The license granted under this agreement is not exclusive, but until July
15, 2002, MTV Networks cannot use or license to a third party the exhibition of
programming and program elements produced by MTV and VH1 in connection with
activities which, if operated by the Partnership, would be licensed services,
except for advertising or promotion consistent with past practice. For the
remainder of the term, MTV Networks cannot authorize the online display by a
third party of substantial blocks of programming and program elements produced
by MTV and VH1 in connection with activities which, if operated by the
Partnership, would be licensed services.
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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. MTV Networks has indicated that it intends to provide us with
additional promotion having a fair market value of $25 million over this five
year period.
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, although non-payment
of the promotion fee cannot be grounds for termination. However, so long as
Viacom Inc. and its wholly owned subsidiaries, including Imagine Radio, own a
majority of the interests in the Partnership or the right to designate a
majority of the management committee of the Partnership, MTV Networks cannot
terminate this agreement solely for breach by the Partnership of this agreement.
MTV Networks can terminate this agreement upon 10 days' prior notice if Liberty
Digital and its subsidiaries cease to own any equity interests in the
Partnership.
TECHNOLOGY SHARING AND LICENSE AGREEMENT
Under this agreement, MTV Networks, InfoWorks, also a division of Viacom,
and MTVN Online granted to the Partnership, on a quitclaim basis, a
non-exclusive, non-transferable (subject to some exceptions) 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, subject to the payment of royalties and
fees to, and receipt of the consent of, the third-party licensors, to license
computer software products and related documentation licensed by MTV Networks,
InfoWorks and MTVN Online from third-party licensors in connection with the
businesses contributed by Viacom to the Partnership.
This agreement terminates automatically on July 15, 2049. This agreement
also automatically terminates upon a bankruptcy or liquidation event of the
Partnership. This agreement may be terminated earlier by MTV Networks, InfoWorks
and MTVN Online with notice (1) on continuing default by the Partnership and (2)
upon continuing abandonment by the Partnership of the online music business. The
Box Worldwide and SonicNet, Inc. have the right to cure either event in clauses
(1) and (2) if MTV Networks, InfoWorks and MTVN Online own a majority of the
outstanding equity in the Partnership and Liberty Digital and its wholly
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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 to various programming services owned by Viacom and operated by MTV
Networks access to market research and music entertainment news, as well as
online production and hosting services. 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 purposes 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 and Viacom will enter into a
registration rights agreement which requires us upon requests by Viacom, from
time to time, 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 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. Subject to specified
limitations, the
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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 and Viacom will enter into an
indemnification agreement pursuant to which we and Viacom will agree to
indemnify each other and we and Viacom will agree 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.
On , 2000, the Partnership entered into a $200 million credit
agreement with Viacom Inc. as the lender. The agreement provides that the
Partnership can borrow up to $200 million on a revolving basis until the
maturity date of , 2002. 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 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.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the 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.......
Sumner 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, subject to community property laws where applicable.
Shares of Class A common stock subject to options that are currently
exercisable or exercisable within 60 days of the date of this prospectus are
deemed to be outstanding and to be beneficially owned by the person holding
such options for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Includes shares of Class A common stock issuable upon exercise
of options exercisable within 60 days following the date of this prospectus.
Excludes shares of Class A common stock issuable upon exercise
of options, which options are not exercisable within 60 days following the
date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of Class A common stock offered hereby for
employees and directors of MTVi Group and business associates and related
persons of MTVi Group 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 subject to 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 thereof and are
qualified by reference to the certificate of incorporation and the by-laws,
copies of which have been filed with the Commission as exhibits to MTVi Group's
registration statement, of which this prospectus forms a part.
The authorized capital stock of MTVi Group consists of
shares of Class A common stock, par value $.01 per share,
shares of Class B common stock, par value $.01 per share, and
shares of preferred stock, par value $.01 per share.
COMMON STOCK
As of the completion of the offering, there will be shares
of Class A common stock issued and outstanding excluding shares to be issued if
underwriters exercise their over-allotment option. In addition, there will be
shares of Class B common stock issued and outstanding and
beneficially held of record by Viacom.
VOTING RIGHTS. The holders of Class A common stock and Class B common
stock generally have identical rights, except each holder of Class A common
stock is entitled to one vote per share and each holder of Class B common stock
is entitled to the number of votes per share equal to: (1) ,
multiplied by the sum of (a) the aggregate number of shares of Class B common
stock owned by such holder and (b) the aggregate number of partnership units
beneficially owned by such holder and its affiliates; divided by (2) the number
of shares of Class B common stock owned by such holder and its affiliates. With
respect to the foregoing calculation, if shares of Class B common stock are held
by two or more affiliates, then the voting power attributable to each share of
Class B common stock held by such affiliates shall equal the total voting power
for one share of Class B common stock determined according to the above formula
divided by the total number of shares of Class B common stock held by such
affiliates. 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, subject to any voting rights granted to
holders of any preferred stock. Except as otherwise provided by law, and subject
to any voting rights granted to holders of any outstanding preferred stock,
amendments to the certificate of incorporation must be approved by at least a
majority of the combined voting power of all of Class A common stock and Class B
common stock, voting together as a single class. However, amendments to the
certificate of incorporation that would alter or change the powers, preferences
or special rights of Class A common stock or Class B common stock so as to
affect them adversely also must be approved by at least a majority of the votes
entitled to be cast by the holders of the shares affected by the amendment,
voting as a separate class. Notwithstanding the foregoing, any amendment to MTVi
Group's certificate of incorporation to increase or decrease the authorized
shares of any class shall be approved upon the affirmative vote of the holders
of a majority of the common stock, voting together as a single class. Holders of
a majority of the combined voting power of Class B common stock may, without a
vote of the holders of Class A common stock, approve a merger of the Partnership
into MTVi Group.
DIVIDENDS. Holders of Class A common stock and Class B common stock will
share ratably (based on the number of shares of common stock held) in any
dividend declared by the board of directors, subject to any preferential rights
of any outstanding preferred stock. Dividends consisting of shares of Class A
common stock and Class B common stock may be paid only as follows: (1) shares of
Class A common stock may be paid only to holders of shares of Class A common
stock, and shares of Class B common stock may be paid only to holders of Class B
common stock; and (2) shares shall be paid proportionally with respect to each
outstanding share of Class A common stock and Class B common stock. MTVi Group
may not subdivide or combine shares of either class of common stock without at
the same time proportionally subdividing or combining shares of the other class.
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CONVERSION OF CLASS B COMMON STOCK. Each share of Class B common stock is
convertible at the option of the holder thereof 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 and
their affiliates falls below 15% of the number of outstanding shares of Class A
common stock, assuming conversion of all outstanding Class B common stock and
exchange of all outstanding partnership units, then all outstanding shares of
Class B common stock shall automatically convert into Class A common stock.
OTHER RIGHTS. In the event of any merger or consolidation of MTVi Group
with or into another company in connection with which shares of common stock are
converted into or exchangeable for shares of stock, other securities or
property, including cash, all holders of common stock, regardless of class, will
be entitled to receive the same kind and amount of shares of stock and other
securities and property, including cash.
On liquidation, dissolution or winding up of MTVi Group, after payment in
full of the amounts required to be paid to holders of preferred stock, if any,
all holders of common stock, regardless of class, are entitled to share ratably
in any assets available for distribution to holders of shares of common stock.
No shares of any class of common stock are subject to redemption or have
preemptive rights to purchase additional shares of common stock, except for the
limited preemptive right held by Liberty Digital, as described in "Certain
Relationships and Related Transactions."
Upon consummation of the offering, all the outstanding shares of Class A
common stock and Class B common stock will be legally issued, fully paid and
nonassessable.
PREFERRED STOCK
Upon the closing of the offering, the board of directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of million shares of preferred stock in one or
more series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each such series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designations of such series. Upon the closing of the
offering, there will be no shares of preferred stock outstanding. MTVi Group has
no present plans to issue any shares of preferred stock. We refer you to
"--Anti-Takeover Effects of Some of the Provisions of Our Certificate of
Incorporation and Bylaws and Section 203 of the Delaware General Corporation
Law."
OPTIONS
As of , 2000, options to purchase a total of
shares, the option shares, of Class A common stock were outstanding,
of which are subject to 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 that may be subject to
the granting of options under the 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;
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-- 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.
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, notwithstanding 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 the foregoing provision.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW. MTVi Group is a
Delaware corporation and subject to Section 203 of the Delaware General
Corporation Law. Generally, Section 203 prohibits a publicly held Delaware
company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the time such stockholder became
an interested stockholder unless, as described below, specified conditions are
satisfied. Thus, it may make acquisition of control of our company more
difficult. The prohibitions in Section 203 of the Delaware General Corporation
Law do not apply if:
-- prior to the time the stockholder became an interested stockholder,
the board of directors of the corporation approved either the
business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
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-- 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
-- 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 will be
subject 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
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-- 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;
shall be void or voidable solely because:
-- Viacom, any non-MTVi Group-related subsidiary or other similar entity
of Viacom or any related entity, or any of their or our directors or
officers are parties to the contract or transaction; or
-- any of those directors or officers is present at or participates in
the meeting of the board of directors or committee thereof that
authorizes the contract or transaction.
PARTNERSHIP UNITS
Interests in the Partnership are represented by partnership units.
Immediately following the offering, there will be partnership units issued
and outstanding, of which will be owned by Viacom affiliates, of which
will be owned by Liberty Digital, and of which will be owned by MTVi Group.
The number of outstanding partnership units owned by MTVi Group will at all
times equal the number of shares of outstanding Class A common stock. The net
cash proceeds received by MTVi Group from any issuance of shares of Class A
common stock, including with regard to the exercise of options issued under the
incentive plan, shall be concurrently transferred to the Partnership in exchange
for partnership units equal in number to such number of shares of Class A common
stock issued by MTVi Group.
Pursuant to the terms of an exchange agreement, entered into concurrently
with this offering, by MTVi Group and the partners of the Partnership, each
partnership unit not owned by MTVi Group is exchangeable for one share of Class
A common stock at any time by the holder thereof. 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. For a more complete explanation of these 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
.
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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, subject to 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; (2) an additional will be eligible for
sale within 60 days following the completion of the offering; and (3) an
additional will become eligible for resale 180 days following the
completion of the offering, in each case, subject to Rule 144 under the
Securities Act. The balance of shares issuable upon exercise of options relate
to options which are not scheduled to vest within 180 days following the
completion of the offering. The sale of a substantial number of shares of common
stock, or the perception that such sales could occur, could adversely affect
prevailing market prices for Class A common stock. In addition, any such sale or
perception could make it more difficult for MTVi Group to sell equity securities
or equity-related securities in the future at a time and price that MTVi Group
deems appropriate. We refer you to "Risk Factors -- Future sales of shares by
existing stockholders or holders of partnership units who exchange such units
for shares of our Class A common stock could negatively affect our stock price,"
"Principal Stockholders," "Description of Capital Stock and Partnership Units"
and "Underwriters."
It is anticipated that a Registration Statement on Form S-8 covering Class
A common stock that may be issued pursuant to the options granted under our
stock option plan will be filed promptly after the completion of the offering.
The shares of Class A common stock issued pursuant to the Form S-8 registration
statement generally may be resold in the public market without restriction or
limitation, except in the case of affiliates of MTVi Group who generally may
only resell such shares in accordance with the provisions of Rule 144, other
than the holding period requirement.
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MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a discussion of the material United States federal income
and estate tax consequences of the ownership and disposition of Class A common
stock applicable to Non-United States Holders of such Class A common stock. For
the purpose of this discussion, a "Non-United States Holder" is any holder that
for United States federal income tax purposes is not a "United States person,"
as defined below. This discussion does not address all aspects of United States
federal income and estate taxation that may be relevant in light of such
Non-United States Holder's particular facts and circumstances, such as being a
U.S. expatriate, and does not address any tax consequences arising under the
laws of any state, local or non-United States taxing jurisdiction. Furthermore,
the following discussion is based on current provisions of the Internal Revenue
Code of 1986, as amended, and administrative and judicial interpretations
thereof, all as in effect on the date hereof, and all of which are subject to
change, possibly with retroactive effect. We have not and will not seek a ruling
from the Internal Revenue Service with respect to the United States federal
income and estate tax consequences described below, and as a result, there can
be no assurance that the Internal Revenue Service will not disagree with or
challenge any of the conclusions set forth in this discussion. For purposes of
this discussion, the term "United States person" means:
-- a citizen or resident of the United States;
-- a corporation, partnership, or other entity created or organized in
the United States or under the laws of the United States or of any
political subdivision thereof;
-- an estate whose income is included in gross income for United States
federal income tax purposes regardless of its source; or
-- a trust whose administration is subject to the primary supervision of
a United States court and which has one or more United States persons
who have the authority to control all substantial decisions of the
trust.
DIVIDENDS
If we pay a dividend, any dividend paid to a Non-United States Holder of
Class A common stock generally will be subject to United States withholding tax
either at a rate of 30% of the gross amount of the dividend or such lower rate
as may be specified by an applicable tax treaty. Dividends received by a Non-
United States Holder which are effectively connected with a United States trade
or business conducted by such Non-United States Holder are exempt from such
withholding tax. However, such effectively connected dividends, net of some
types of deductions and credits, are taxed at the same graduated rates
applicable to United States persons.
In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business of the corporate Non-United States Holder may also be
subject to a branch profits tax at a rate of 30% or such lower rate as may be
specified by an applicable tax treaty.
A Non-United States Holder of Class A common stock that is eligible for a
reduced rate of withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the Internal Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his shares of Class A common stock unless:
-- such gain is effectively connected with a United States trade or
business of such Non-United States Holder, which gain, in the case of
a corporate Non-United States Holder, must also be taken into account
for branch profits tax purposes;
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-- the Non-United States Holder is an individual who holds such shares
of Class A common stock as a capital asset within the meaning of
section 1221 of the Internal Revenue Code of 1986, as amended, and
who is present in the United States for a period or periods
aggregating 183 days or more during the calendar year in which such
sale or disposition occurs and some other conditions are met; or
-- we are or have been a "United States real property holding
corporation" for federal income tax purposes at any time within the
shorter of the five-year period preceding such disposition or such
holder's holding period.
We have determined that we are not and do not believe that we will become a
"United States real property holding corporation" for United States federal
income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we must report annually to the Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any, of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or other agreements, the Internal Revenue Service may make its reports
available to tax authorities in the recipient's country of residence.
Dividends paid to a Non-United States Holder at an address within the
United States may be subject to backup withholding at a rate of 31% if the
Non-United States Holder fails to establish that it is entitled to an exemption
or to provide a correct taxpayer identification number and other information to
the payer. Backup withholding will generally not apply to dividends paid to
Non-United States Holders at an address outside the United States on or prior to
December 31, 2000 unless the payer has knowledge that the payee is a United
States person. Under recently finalized Treasury Regulations regarding
withholding and information reporting (we refer to these regulations as the "New
Regulations"), payment of dividends to Non-United States Holders at an address
outside the United States after December 31, 2000 may be subject to backup
withholding at a rate of 31% unless such non-United States Holder satisfies
certification requirements.
The payment of the proceeds of the disposition of shares of Class A common
stock to or through the United States office of a broker is subject to
information reporting and backup withholding at a rate of 31% unless the holder
certifies its non-United States status under penalties of perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a Non-United States Holder of Class A common stock outside the
United States to or through a foreign office of a broker will not be subject to
backup withholding but will be subject to information reporting requirements if
the broker is:
-- a United States person;
-- a "controlled foreign corporation" for United States tax purposes; or
-- a foreign person 50% or more of whose gross income for specified
periods is from the conduct of a United States trade or business
unless such broker has documentary evidence in its files of the
holder's non-United States status and some conditions are met or the
holder otherwise establishes an exemption.
Under the New Regulations backup withholding may apply to any payment made
after December 31, 2000 which the broker is required to report if such broker
has actual knowledge that the payee is a United States person.
In general, the New Regulations do not significantly alter the substantive
withholding and information reporting requirements but would alter the
procedures for claiming benefits of an income tax treaty and change the
certification procedures relating to the receipt by intermediaries of payments
on behalf of the beneficial owner of shares of Class A common stock. Non-United
States Holders should consult their tax advisors regarding the effect, if any,
of the New Regulations on an investment in Class A common stock. The New
Regulations are generally effective for payments made after December 31, 2000.
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Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
ESTATE TAX
An individual Non-United States Holder who owns Class A common stock at the
time of his death or had made some types of lifetime transfers of an interest in
Class A common stock will be required to include the value of such shares of
Class A common stock in such holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF CLASS A
COMMON STOCK BY NON-UNITED STATES HOLDERS. ACCORDINGLY, INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE INCOME TAX CONSEQUENCES OF
THE OWNERSHIP AND DISPOSITION OF SHARES OF CLASS A COMMON STOCK, INCLUDING THE
APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING
JURISDICTION.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus the U.S. underwriters named below,
for whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston
Corporation, Bear, Stearns & Co. Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Utendahl Capital Partners, L.P. and SoundView Technology Group,
Inc. are acting as U.S. representatives, and the international underwriters
named below for whom Morgan Stanley & Co. International Limited, Credit Suisse
First Boston (Europe) Limited, Bear, Stearns International Limited, Merrill
Lynch International, Utendahl Capital Partners, L.P. and SoundView Technology
Group, Inc. are acting as international representatives, have severally agreed
to purchase, and MTVi Group has agreed to sell to them, severally, the number of
shares indicated below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.........................
Credit Suisse First Boston Corporation....................
Bear, Stearns & Co. Inc. .................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated........
Utendahl Capital Partners, L.P. ..........................
SoundView Technology Group, Inc. .........................
--------
Subtotal.............................................
--------
International Underwriters:
Morgan Stanley & Co. International Limited................
Credit Suisse First Boston (Europe) Limited...............
Bear, Stearns International Limited.......................
Merrill Lynch International...............................
Utendahl Capital Partners, L.P. ..........................
SoundView Technology Group, Inc. .........................
--------
Subtotal.............................................
--------
Total.............................................
========
</TABLE>
The U.S. underwriters and the international underwriters, and the U.S.
representatives and the international representatives, are collectively referred
to as the "underwriters" and the "representatives," respectively. The
underwriters are offering the shares of Class A common stock subject to their
acceptance of the shares from MTVi Group and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of Class A common stock offered by
this prospectus are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The underwriters are obligated to take
and pay for all of the shares of Class A common stock offered by this prospectus
if any shares are taken. However, the underwriters are not required to take or
pay for the shares covered by the underwriters over-allotment option described
below.
Pursuant to the agreement between U.S. and international underwriters, each
U.S. underwriter has represented and agreed that, with certain exceptions:
-- it is not purchasing any shares for the account of anyone other than
a United States or Canadian person (as defined below); and
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-- 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.
Pursuant to the agreement between U.S. and international underwriters, each
international underwriter has represented and agreed that, with certain
exceptions:
-- it is not purchasing any shares for the account of any United States
or Canadian person; and
-- it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the
shares in the United States or Canada or to any United States or
Canadian person.
With respect to any underwriter that is a U.S. underwriter and an
international underwriter, the foregoing representations and agreements (1) made
by it in its capacity as a U.S. underwriter apply only to it in its capacity as
a U.S. underwriter and (2) made by it in its capacity as an international
underwriter apply only to it in its capacity as an international underwriter.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the agreement between U.S. and
international underwriters. As used herein, "United States or Canadian person"
means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof, other than a branch located outside the United States and Canada of any
United States or Canadian person, and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian person. All
shares of Class A common stock to be purchased by the underwriters under the
underwriting agreement are referred to in this prospectus as the "shares."
Pursuant to the agreement between U.S. and international underwriters,
sales may be made between the U.S. underwriters and international underwriters
of any number of shares as may be mutually agreed. The per share price of any
shares sold shall be the public offering price set forth on the cover page of
this prospectus, in United States dollars, less an amount not greater than the
per share amount of the concession to dealers set forth below.
Pursuant to the agreement between U.S. and international underwriters, each
U.S. underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
underwriter has further agreed to send to any dealer who purchases from it any
of the shares a notice stating in substance that, by purchasing such shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the agreement between U.S. and international underwriters, each
international underwriter has represented and agreed that:
-- it has not offered or sold and, prior to the date six months after
the closing date for the sale of the shares to the international
underwriters, will not offer or sell, any shares to persons in the
United Kingdom except to persons whose ordinary activities involve
them in acquiring, holding, managing or disposing of investments, as
principal or agent, for the purposes of their businesses or otherwise
in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995;
79
<PAGE> 84
-- 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
-- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the
offering of the shares to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 (as amended) or is a person
to whom such document may otherwise lawfully be issued or passed on.
Pursuant to the agreement between U.S. and international underwriters, each
international underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese international underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
international underwriter has further agreed to send to any dealer who purchases
from it any of the shares a notice stating in substance that, by purchasing such
shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such shares, directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales to
Japanese international underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law, and that
such dealer will send to any other dealer to whom it sells any of such shares a
notice containing substantially the same statement as is contained in this
sentence.
The underwriters initially propose to offer part of the shares of Class A
common stock directly to the public at the public offering price set forth on
the cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public
offering price. Any underwriter may allow, and such dealers may reallow, a
concession not in excess of $ a share to other underwriters or to
certain dealers. After the initial offering of the shares of Class A common
stock, the offering price and other selling terms may from time to time be
varied by the representatives.
MTVi Group has granted to the U.S. underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to an aggregate of
additional shares of Class A common stock at the public offering price
listed on the cover page of this prospectus, less underwriting discounts and
commissions. The U.S. underwriters may exercise this option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Class A common stock offered by this prospectus. To
the extent the option is exercised, each U.S. underwriter will become obligated,
subject to certain conditions, to purchase about the same percentage of the
additional shares of Class A common stock as the number listed next to the U.S.
underwriter's name in the preceding table bears to the total number of shares of
Class A common stock listed next to the names of all U.S. underwriters in the
preceding table. If the U.S. underwriters' option is exercised in full, the
total price to the public would be $ , the total underwriters'
discounts and commissions would be $ and total proceeds to MTVi Group
would be $ .
The underwriters have informed MTVi Group that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A common stock offered by them.
We have applied to have our Class A common stock approved for listing on
the under the symbol " ."
Each of Viacom, Liberty Digital and MTVi Group and the directors, executive
officers and certain other stockholders of MTVi Group has agreed that, without
the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the
underwriters, it will not, during the period ending 180 days after the date of
this prospectus:
-- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose
of,
80
<PAGE> 85
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock; or
-- 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.
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.
81
<PAGE> 86
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.
DIRECTED SHARE PROGRAM
At our request, some of the underwriters have reserved for sale, at the
initial public offering price, shares of Class A common stock for
directors, officers, employees and business associates and related persons of
MTVi Group. The number of shares available of Class A common stock for sale to
the general public will be reduced to the extent these individuals purchase the
reserved shares. Any reserved shares that are not purchased in the directed
share program will be offered by the underwriters to the general public on the
same basis as the other shares offered in this prospectus. We have agreed to
indemnify those underwriters against some liabilities and expenses, including
liabilities under the Securities Act, in connection with the sales of shares
under the directed share program.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for Class A common
stock. The initial public offering price will be determined by negotiations
between us and Viacom, on the one hand, and the U.S. representatives, on the
other. Among the factors to be considered in determining the initial public
offering price will be the future prospects of MTVi Group and its industry in
general, sales, earnings and certain other financial and operating information
of MTVi Group in recent periods, and the price-earnings ratios, price-sales
ratios, market prices of securities and certain financial and operating
information of companies engaged in activities similar to those of MTVi Group.
The estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
LEGAL MATTERS
Some legal matters with respect to the validity of the shares of common
stock offered hereby will be passed upon for us by Shearman & Sterling, and for
the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP and Hughes Hubbard
& Reed LLP. Hughes Hubbard & Reed LLP has provided legal services to us, Viacom
and our respective affiliates from time to time for which they have received
customary fees and expenses.
EXPERTS
The combined financial statements of MTV Online Music as of December 31,
1997 and 1998 and for each of the three years in the period 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 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.
82
<PAGE> 87
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 thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement, as amended, on Form
S-1 under the Securities Act with respect to the shares of our Class A common
stock offered hereby. This prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules thereto.
Some items are omitted in accordance with the rules and regulations of the SEC.
For further information about us and our Class A common stock, reference is made
to the registration statement and the exhibits and any schedules filed
therewith. Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance, if such contract or document is filed as an exhibit, reference is made
to the copy of such contract or other documents filed as an exhibit to the
registration statement, each statement being qualified in all respects by such
reference. A copy of the registration statement, including the exhibits and
schedules thereto, may be read and copied at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices
at Seven World Trade Center, New York, New York 10048 and 500 West Madison
Street, Chicago, Illinois 60661. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site at http://www.sec.gov, from which
interested persons can electronically access the registration statement,
including the exhibits and any schedules thereto.
Subject to the foregoing, you should rely only on the information contained
in this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. The information
contained in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of Class A
common stock.
As a result of this offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also maintain our U.S.
Internet site at http://www.mtvigroup.com. Our U.S. Internet site and the
information contained therein or connected thereto shall not be deemed to be
incorporated into this prospectus or the registration statement of which it
forms a part.
83
<PAGE> 88
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE MTVi GROUP, L.P.
Consolidated Statements of Operations--For the Nine Months
Ended September 30, 1998 and 1999 (Unaudited)............. F-2
Consolidated Balance Sheets--at December 31, 1998 and
September 30, 1999 (Unaudited)............................ F-3
Consolidated Statements of Cash Flows--For the Nine Months
Ended September 30, 1998 and 1999 (Unaudited)............. F-4
Notes to Consolidated Financial Statements (Unaudited)...... F-5
MTVN ONLINE MUSIC
Report of Independent Accountants........................... F-11
Combined Statements of Operations--Years Ended December 31,
1996, 1997 and 1998....................................... F-12
Combined Balance Sheets--at December 31, 1997 and 1998...... F-13
Combined Statements of Changes in Equity--Years Ended
December 31, 1996, 1997 and 1998.......................... F-14
Combined Statements of Cash Flows--Years Ended December 31,
1996, 1997 and 1998....................................... F-15
Notes to Combined Financial Statements...................... F-16
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 Combined 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> 89
THE MTVi GROUP, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------------------------
1998 1999
---- ----
<S> <C> <C>
REVENUES
Advertising............................................... $ 1,102 $ 4,752
Promotional............................................... 1,184 5,056
Distribution.............................................. 2,409 733
------------- ---------------
Total revenues......................................... 4,695 10,541
Cost of production........................................ 4,760 12,190
------------- ---------------
GROSS PROFIT (LOSS)......................................... (65) (1,649)
------------- ---------------
OTHER OPERATING EXPENSES
Related party cross promotion expense..................... 2,887 3,006
Allocated charges from parent............................. 3,924 6,749
Selling, general and administrative....................... 451 4,963
Depreciation.............................................. 99 531
Amortization of intangibles............................... -- 7,512
------------- ---------------
Total other operating expenses......................... 7,361 22,761
------------- ---------------
OPERATING INCOME (LOSS)..................................... (7,426) (24,410)
Benefit for income taxes.................................. 2,822 3,058
------------- ---------------
NET INCOME (LOSS)........................................... $ (4,604) $ (21,352)
============= ===============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 90
THE MTVi GROUP, L.P.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ 119
Accounts receivable, less allowances of $77 (1998) and
$203 (1999)............................................ 3,380 3,690
Other current assets...................................... -- 32
Deferred income taxes..................................... 332 --
------ --------
Total current assets................................... 3,712 3,841
Property and equipment, net................................. 573 4,343
Investment in equity security............................... 2,745 1,011
Intangibles, net............................................ -- 139,314
Other assets................................................ -- 1,191
------ --------
$7,030 $149,700
====== ========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable.......................................... $ 303 $ 627
Accrued compensation...................................... 585 1,911
Deferred revenue.......................................... 3,609 1,754
Other accrued liabilities................................. 813 3,627
------ --------
Total current liabilities.............................. 5,310 7,919
------ --------
Capital lease obligations................................... -- 33
Contingencies (Note 6)
Net equity investment....................................... 1,975 143,737
Accumulated other comprehensive income (loss)............... (255) (1,989)
------ --------
Total equity........................................... 1,720 141,748
------ --------
$7,030 $149,700
====== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 91
THE MTVi GROUP, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1998 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $ (4,604) $ (21,352)
Adjustments to reconcile net income (loss) to net cash
flow from operating activities:
Depreciation........................................... 99 531
Amortization of intangibles............................ -- 7,512
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable, net........ 189 (310)
Decrease (increase) in other current assets............ 485 (32)
(Increase) decrease in deferred income taxes........... (30) 332
Decrease in other assets............................... -- (16)
Increase (decrease) in accounts payable................ (302) 324
Increase in accrued compensation....................... 104 1,326
Decrease in deferred revenue........................... (388) (1,855)
Increase in other accrued liabilities.................. 268 2,792
------------- ---------------
NET CASH FLOWS USED FOR OPERATING ACTIVITIES................ (4,179) (10,748)
------------- ---------------
INVESTING ACTIVITIES:
Capital expenditures...................................... (438) (1,539)
Acquisition of Imagine Radio.............................. -- (14,480)
------------- ---------------
NET CASH FLOW USED FOR INVESTING ACTIVITIES................. (438) (16,019)
------------- ---------------
FINANCING ACTIVITIES:
Contribution of capital by Viacom, net.................... 4,617 26,886
------------- ---------------
NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES.............. 4,617 26,886
------------- ---------------
Net increase in cash and cash equivalents................... -- 119
Cash and cash equivalents at beginning of period............ -- --
------------- ---------------
Cash and cash equivalents at end of period.................. $ -- $ 119
============= ===============
NON CASH INVESTING ACTIVITIES:
Acquisition of The Box Worldwide, Inc. and SonicNet, Inc.,
net....................................................... $ -- $ 136,228
Investment in equity security............................... $ 3,000 $ --
NON CASH FINANCING ACTIVITIES:
Equipment acquired under capital leases..................... $ -- $ 55
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 92
THE MTVi GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The interim consolidated financial statements and related notes of the
business and operations of MTVN Online Music (renamed The MTVi Group, L.P. (the
"Partnership") on July 15, 1999 and referred to individually and collectively
with MTVN Online Music as the "Company") for the nine months ended September 30,
1998 and 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 and reflect the
historical results of operations for the nine months ended September 30, 1998
and 1999 and the historical financial position at September 30, 1999.
In the opinion of management, the interim consolidated financial statements
include all recurring adjustments and normal accruals necessary to present
fairly the Company's results of operations and financial position for the dates
and periods presented. For all periods presented, certain expenses reflected in
the consolidated financial statements include allocations of corporate expenses
from Viacom Inc. ("Viacom") and MTV Networks ("MTVN"), a unit of Viacom. All
such costs and expenses have been deemed to have been paid by the Company to
Viacom and MTVN in the period in which the costs and expenses were recorded.
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 consolidated financial statements may not necessarily reflect
the results of operations, financial position, changes in equity and cash flows
of the Company in the future or what the results of operations, financial
position, changes in equity or cash flows would have been if the Company had
been a separate, stand-alone entity during the periods presented. Results for
interim periods are not necessarily indicative of the results to be expected
during the remainder of the current year or for any future period. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto of the Company for the three years ended
December 31, 1998.
On February 4, 1999, MTVN acquired 100% of the capital stock of Imagine
Radio, Inc. ("Imagine Radio"), an Internet broadcaster, for $14,480. The
acquisition was accounted for as a purchase; therefore, the results of
operations of Imagine Radio are 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 amortized on a straight-line basis over five years.
On July 15, 1999, MTVN acquired from Liberty Digital (formerly known as TCI
Music, Inc.) substantially all of the businesses of SonicNet, Inc. ("SonicNet")
and The Box Worldwide, Inc. ("The Box") in exchange for a 10% interest in the
Partnership. 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, and certain related wholly owned international online
operations in exchange for an aggregate 10% limited partnership interest.
Additionally, Viacom and Liberty Digital 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 Company. To the
extent that the Partnership requires funds in excess of these capital
contributions, Viacom intends to make intercompany loans to the Partnership
until a planned initial public offering is completed.
Also, the Partnership and MTVN entered into a license and distribution
agreement wherein MTVN will pay a license fee for the use of the intellectual
property rights, technology and subscriber base of The Box business. The license
agreement between the Partnership and MTVN, 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
F-5
<PAGE> 93
THE MTVi GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
approximately 80% of the fair value of these assets, or approximately $15,000.
The remaining assets of The Box business on the Partnership's financial
statements, which are being used to facilitate the license and distribution
agreement with MTVN, are being amortized over three years on a straight-line
basis consistent with the intended term of the license and distribution
agreement.
The acquisition of SonicNet was accounted for as a purchase; therefore, the
results of operations of SonicNet are included in the financial statements as of
July 15, 1999. The excess of the purchase price of approximately $132,000 over
the fair value of the net assets acquired is 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 October 1, 1999, the Partnership reserved approximately 2.75 million
units for option grants to employees.
On February 11, 2000, the Company will file a registration statement with
the Securities and Exchange Commission for the sale of shares of its
Class A Common Stock (the "Offering"). The Company 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.
REVENUE RECOGNITION
Revenues are generated from the sale of advertising on the Company's
websites and from distribution and promotional agreements.
Advertising revenue is recognized ratably during the period in which the
advertising is displayed, provided that no significant 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,
F-6
<PAGE> 94
THE MTVi GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
the Company defers recognition of the corresponding revenue until the guaranteed
impressions are attained. The Company 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. Sponsorship arrangements
generally range from one to six months in length. To the extent that committed
obligations under sponsorship agreements are not met, revenue recognition is
deferred until the obligations are met.
Distribution revenue represents fees paid to the Company by Internet
service providers for a license to use, market, license, store, distribute,
display, communicate, perform, transmit and promote domestically the Company's
website and the licensed content contained therein during the term of the
agreement with the service provider. Distribution revenue is therefore
recognized ratably over the term of the agreement, based upon both parties
meeting the agreement terms. Distribution revenue also includes license fees
attributable to a license and distribution agreement entered into which granted
MTVN the use of The Box business' intellectual property rights, technology and
subscriber base.
Promotional revenue represents fees and equity received by the Company 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 4, the
MTVN Music Channels promote the Company during live or produced programming and
in on-air advertisements promoting the MTVN Music Channel's own on-air content.
The Company earns promotional revenue from third parties by concurrently
mentioning (for a fee) the third parties during the Company's own on-air keyword
mention and closing tag promotion. Promotional revenue is recognized ratably in
the period in which the promotion is aired, provided that no significant Company
obligations remain.
COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998 the Company 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 Company during the periods presented. Total comprehensive
loss for the nine months ended September 30, 1998 and 1999 was $4,750 and
$23,086, respectively.
NOTE 3--NET EQUITY INVESTMENT
Viacom funds the working capital requirements of the Company based upon a
centralized cash management system. Viacom's net equity investment includes
accumulated equity as well as any contributions of capital resulting from cash
transfers and other intercompany activity. The Company historically has not been
charged interest on intercompany balances.
F-7
<PAGE> 95
THE MTVi GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
An analysis of the net equity investment activity is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Balance, beginning of period............................ $ 837 $ 1,975
Net income (loss)....................................... (7,316) (21,352)
Cash advances, net...................................... 3,234 5,709
Benefit for income taxes................................ (4,484) (3,058)
Allocated charges from parent, net...................... 4,892 6,749
Cross promotional on-air advertising.................... 4,812 3,006
Acquisition of Imagine Radio............................ -- 14,480
Acquisition of SonicNet and The Box, net................ -- 136,228
------- --------
Balance, end of period.................................. $ 1,975 $143,737
======= ========
</TABLE>
NOTE 4--RELATED PARTY TRANSACTIONS
The Company receives cross promotional on-air advertising from the MTVN
Music Channels during live or produced programming with keyword mentions,
closing tags, custom promotions and generic promotions. The expense to the
Company for such cross promotional on-air advertising was $2,887 and $3,006, for
the nine months ended September 30, 1998 and 1999, respectively. As discussed
more fully in Note 2, the Company 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.
Viacom and MTVN provide the Company 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 Company based upon the average
of certain specified ratios of revenues and headcount. The charges for such
services were $3,924 and $6,749 for the nine months ended September 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 or will
be incurred by the Company on a stand-alone basis.
The Company participates in Viacom's noncontributory defined benefit
pension plan and 401(k) savings plan. Retirement benefits are based principally
on years of service and salary. The Company was charged $66 and $173 for pension
and 401(k) savings plan expenses for the nine months ended September 30, 1998
and 1999, respectively, and such amounts are included in selling, general and
administrative expenses. The related pension liability was approximately $167
and $213 at December 31, 1998 and September 30, 1999, respectively. Viacom also
provides other employee benefits to the Company's employees, including certain
postemployment benefits, medical, dental, life and disability insurance costs.
Management believes that the methodologies used to allocate pension and other
employee benefit charges to the Company are reasonable.
On July 15, 1999, the Company and Viacom entered into a mutual services
agreement whereby Viacom will provide the partnership administrative services,
including cash management, accounting, financial, legal, auditing, information,
insurance and tax services, as well as employee benefit plan and insurance
administration. The fee for these services, which is subject to adjustment,
approximates Viacom's cost of providing the services and is included as part of
the allocated charges from Viacom for 1999.
F-8
<PAGE> 96
THE MTVi GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 5--INCOME TAXES
Prior to July 15, 1999, the Company was included in the consolidated
federal, state and local income tax returns filed by Viacom. The income tax
benefit and deferred tax assets reflected in the financial statements have been
prepared as if such benefits were computed on a separate return basis. The tax
losses generated by the Company prior to July 15, 1999 have been utilized by
Viacom to reduce its combined taxable income. These amounts have been reflected
in the Net equity investment through July 15, 1999.
Effective July 16, 1999, the Company is a partnership, a nontaxable entity
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 September 30,
1999, as these taxes are the responsibility of the partners.
Components of the income tax benefit are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1999
------ ------
<S> <C> <C>
Current:
Federal................................................... $2,416 $2,501
State and local........................................... 334 346
Deferred.................................................. 72 211
------ ------
$2,822 $3,058
====== ======
</TABLE>
A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate on the income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1999
---- ----
<S> <C> <C>
Statutory U.S. tax rate..................................... 35% 35%
Goodwill amortization....................................... -- (5)
State and local taxes, net of federal tax benefit........... 3_ 3_
-- --
Effective tax rate.......................................... 38% 33%
== ==
</TABLE>
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
1998 1999
--------------- ----------------
<S> <C> <C>
Deferred tax assets:
Pension expense............................... $ 64 $--
Book-tax basis differences in reserves........ 274 --
---- --
Total deferred tax assets....................... 338 --
Deferred tax liabilities:
Book-tax basis differences in fixed assets.... (6) --
---- --
Total deferred tax liabilities.................. (6) --
Valuation allowance............................. -- --
---- --
Total net deferred tax assets................. $332 $--
==== ==
</TABLE>
F-9
<PAGE> 97
THE MTVi GROUP, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 6--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"). If the Company is required
to pay a license royalty rate on a retroactive basis in excess of accrued
amounts as a result of negotiations with ASCAP, BMI or RIAA, no assurance can be
given that such outcome will not have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.
In April 1999, MTVN received a civil investigative demand from the
Department of Justice, Antitrust Division, requesting information about certain
of MTVN's operations, focusing principally on exclusivity provisions in its
arrangements with record labels for the licensing of music videos. The
Department of Justice has requested additional information from MTVN and Liberty
Media Corporation regarding the formation of the Partnership and other
operations of MTVN. The Partnership, Liberty Media Corporation and MTVN have
been cooperating with the investigation. Although the Partnership cannot provide
any assurances, the Partnership does not expect that the investigation will
result in a material adverse effect on our business, financial condition or
results of operations.
In January 2000, MTVN received letters from two major record companies
asserting that some of the features of the Partnership's Internet radio business
make the use of the record companies' music ineligible for a compulsory license
under applicable U.S. copyright law. One of those letters also asserts that the
Partnership is streaming full-length music videos without authorization. These
letters demand that the Partnership cease its use of their music in these
manners and pay for the Partnership's past use. The Partnership believes that
the uses of the record companies' music in connection with the features of the
Partnership's Internet music business is within the scope of the compulsory
license and that the compulsory license fees will be determined as part of a
royalty arbitration convened by the Librarian of Congress. The Partnership also
believes that use of the videos is authorized by the terms of the existing
agreement with that record company. Although the Partnership cannot provide any
assurances, the Partnership does not expect that these assertions will result in
a material adverse effect on the business, financial condition or results of
operations.
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-10
<PAGE> 98
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Viacom Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of changes in equity and of cash flows
present fairly, in all material respects, the financial position of MTVN Online
Music, as defined in Note 1, at December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three 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-11
<PAGE> 99
MTVN ONLINE MUSIC
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
REVENUES
Advertising............................................... $ 551 $ 1,751 $ 3,538
Distribution.............................................. 2,876 4,027 2,533
Promotional............................................... -- -- 2,766
------- ------- --------
Total revenues......................................... 3,427 5,778 8,837
Cost of production........................................ 2,125 6,556 9,684
------- ------- --------
GROSS PROFIT (LOSS)......................................... 1,302 (778) (847)
------- ------- --------
OTHER OPERATING EXPENSES
Related party cross promotion expense..................... 904 1,704 4,812
Allocated charges from parent............................. 3,474 3,653 4,892
Selling, general and administrative....................... 264 772 1,078
Depreciation.............................................. -- 26 171
------- ------- --------
Total other operating expenses......................... 4,642 6,155 10,953
------- ------- --------
OPERATING INCOME (LOSS)..................................... (3,340) (6,933) (11,800)
Benefit for income taxes.................................. 1,270 2,635 4,484
------- ------- --------
NET INCOME (LOSS)........................................... $(2,070) $(4,298) $ (7,316)
======= ======= ========
</TABLE>
See notes to combined financial statements.
F-12
<PAGE> 100
MTVN ONLINE MUSIC
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, less allowances of $57 (1997) and $77
(1998)................................................. $1,061 $3,380
Deferred income taxes..................................... 187 332
Other current assets...................................... 485 --
------ ------
Total current assets................................... 1,733 3,712
Property and equipment, net................................. 151 573
Investment in equity security............................... -- 2,745
------ ------
$1,884 $7,030
====== ======
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable.......................................... $ 327 $ 303
Accrued compensation...................................... 219 585
Deferred revenue.......................................... 55 3,609
Other accrued liabilities................................. 446 813
------ ------
Total current liabilities.............................. 1,047 5,310
------ ------
Contingencies (Note 8)
Viacom's net equity investment.............................. 837 1,975
Accumulated other comprehensive income (loss)............... -- (255)
------ ------
Total equity........................................... 837 1,720
------ ------
$1,884 $7,030
====== ======
</TABLE>
See notes to combined financial statements.
F-13
<PAGE> 101
MTVN ONLINE MUSIC
COMBINED STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
VIACOM'S OTHER
NET COMPREHENSIVE COMPREHENSIVE
EQUITY INCOME INCOME TOTAL
INVESTMENT (LOSS) (LOSS) EQUITY
---------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996............... $ (26) $ (26)
Net income (loss)...................... (2,070) $(2,070) (2,070)
=======
Net receipts from Viacom............... 4,124 4,124
------- -------
BALANCE AT DECEMBER 31, 1996............. 2,028 2,028
Net income (loss)...................... (4,298) $(4,298) (4,298)
=======
Net receipts 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 receipts from Viacom............... 8,454 8,454
------- ----- -------
BALANCE AT DECEMBER 31, 1998............. $ 1,975 $(255) $ 1,720
======= ===== =======
</TABLE>
See notes to combined financial statements.
F-14
<PAGE> 102
MTVN ONLINE MUSIC
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $(2,070) $(4,298) $(7,316)
Adjustments to reconcile net income (loss) to net cash
flow from operating activities:
Depreciation........................................... -- 26 171
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable, net........ (1,353) 292 (2,319)
(Increase) decrease in other current assets............ (1,278) 793 485
Increase in deferred income taxes...................... (57) (115) (145)
Increase (decrease) in accounts payable................ 21 306 (24)
Increase (decrease) in accrued compensation............ 306 (87) 366
Increase (decrease) in deferred revenue................ 139 (84) 554
Increase in other accrued liabilities.................. 172 233 367
------- ------- -------
NET CASH FLOW USED FOR OPERATING ACTIVITIES................. (4,120) (2,934) (7,861)
------- ------- -------
INVESTING ACTIVITIES:
Capital expenditures...................................... (4) (173) (593)
------- ------- -------
NET CASH FLOW USED FOR INVESTING ACTIVITIES................. (4) (173) (593)
------- ------- -------
FINANCING ACTIVITIES:
Contribution of capital by Viacom, net.................... 4,124 3,107 8,454
------- ------- -------
NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES.............. 4,124 3,107 8,454
------- ------- -------
Net increase (decrease) in cash............................. -- -- --
Cash at beginning of year................................... -- -- --
------- ------- -------
Cash at end of year......................................... $ -- $ -- $ --
======= ======= =======
NON CASH INVESTING ACTIVITIES:
Investment in equity security............................... $ -- $ -- $ 3,000
</TABLE>
See notes to combined financial statements.
F-15
<PAGE> 103
MTVN ONLINE MUSIC
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
MTVN Online Music (the "Company") consists of the assets and businesses
used in connection with the MTV.com and VH1.com businesses, and certain of their
related wholly owned international online operations, which are wholly owned by
MTV Networks ("MTVN"), a unit of Viacom Inc. ("Viacom"). The Company develops,
operates, manages, markets, promotes and distributes music, music-related and/or
music-themed services online. The accompanying combined financial statements are
presented on a carve-out basis and reflect the combined historical results of
operations, financial position, changes in equity and cash flows of the Company.
For all periods presented, certain expenses reflected in the combined
financial statements include allocations of corporate expenses from Viacom and
MTVN. All such costs and expenses have been deemed to have been paid by the
Company to Viacom and MTVN in the period in which the costs and expenses were
recorded. 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 combined financial statements may not necessarily
reflect the results of operations, financial position, changes in equity and
cash flows of the Company in the future or what the results of operations,
financial position, changes in equity or cash flows would have been if the
Company had been a separate, stand-alone entity during the periods presented.
NOTE 2--SUBSEQUENT EVENTS
On February 4, 1999, MTVN acquired 100% of the capital stock of Imagine
Radio, Inc. ("Imagine Radio"), an Internet broadcaster, for $14,480. The
acquisition of Imagine Radio was accounted for as a purchase; therefore, the
results of operations of Imagine Radio will be 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 will be amortized on a straight-line basis
over five years.
On July 15, 1999, MTVN acquired from Liberty Digital (formerly known as TCI
Music, Inc.) substantially all of the businesses of SonicNet, Inc. ("SonicNet")
and The Box Worldwide, Inc. ("The Box") in exchange for a 10% interest in a
partnership formed by MTVN and Liberty Digital and certain of their affiliates
MTVN Online L.P. (the "Partnership"). 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, and certain related wholly owned
international online operations in exchange for an aggregate 10% limited
partnership interest. Additionally, Viacom and Liberty Digital have agreed in
connection with the formation of the Partnership to make capital contributions
to the Partnership of up to $90,000 and $10,000, respectively. The obligation to
make capital contributions terminates on the closing of an initial public
offering by the Company. To the extent that the Partnership requires funds in
excess of these capital contributions, Viacom intends to make intercompany loans
to the Partnership until a planned initial public offering is completed.
Also, the Partnership and MTVN entered into a license and distribution
agreement wherein MTVN will pay a license fee for the use of the intellectual
property rights, technology and subscriber base of The Box business. The license
agreement between MTVN and the Partnership, which includes an option to purchase
these assets in three years for $1,000, is considered a transfer of the
substantial economic benefit of the assets of The Box business to MTVN. As such,
this transaction will be 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
F-16
<PAGE> 104
MTVN ONLINE MUSIC
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS)
distribution agreement with MTVN, will be amortized over three years on a
straight-line basis consistent with the intended term of the license and
distribution agreement.
The acquisition of SonicNet will be accounted for as a purchase; therefore,
the results of operations of SonicNet will be included in the financial
statement as of July 15, 1999. The excess of the purchase price of approximately
$132,000 over the fair value of the net assets acquired will be 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.
The Partnership and Viacom have entered into a mutual services agreement
whereby Viacom will provide the partnership administrative services including
cash management, accounting, financial, legal, auditing, information, insurance
and tax services as well as employee benefit plan and insurance administration.
The fee for these services will approximate Viacom's cost of providing the
services and will be subject to adjustment.
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.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of the Company and
certain of its wholly owned international operations. Investments of 20% or less
are accounted for under the cost method. All significant intercompany
transactions have been eliminated.
REVENUE RECOGNITION
Revenues are generated from the sale of advertising on the Company's
websites and from distribution and promotional agreements.
Advertising revenue is recognized ratably during the period in which the
advertising is displayed, provided that no significant 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. The Company
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.
Sponsorship arrangements generally range from one to six months in length. To
the extent that committed obligations under sponsorship agreements are not met,
revenue recognition is deferred until the obligations are met.
Distribution revenue represents fees paid to the Company by Internet
service providers for a license to use, market, license, store, distribute,
display, communicate, perform, transmit and promote domestically the Company's
website and the licensed content contained therein during the term of the
agreement with the service provider. Distribution revenue is therefore
recognized ratably over the term of the agreement, based upon both parties
meeting the agreement terms. Distribution revenue also includes the license fee
attributable
F-17
<PAGE> 105
MTVN ONLINE MUSIC
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS)
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 represents fees and equity received by the Company 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 Company during live or produced programming and
in on-air advertisements promoting the MTVN Music Channel's own on-air content.
The Company earns promotional revenue from third parties by concurrently
mentioning (for a fee) the third parties during the Company's own on-air keyword
mention and closing tag promotions. Promotional revenue is recognized ratably in
the period in which the promotion is aired, provided that no significant Company
obligations remain.
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, and such losses
have been within management's expectations. The Company sells advertising to
customers in several industries.
Accounts receivable are stated net of allowances for doubtful accounts of
$57 and $77 in 1997 and 1998, respectively. One and two customers accounted for
49% and 64% of total accounts receivable at December 31, 1997 and 1998,
respectively. One, one and two customers accounted for 84%, 70% and 60% of
revenues for the years ended December 31, 1996, 1997 and 1998, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is primarily comprised of
computer and audiovisual equipment. 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.
Balances of major classes of assets and accumulated depreciation are as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1997 1998
---- ----
<S> <C> <C>
Computer equipment.......................................... $143 $679
Audio visual equipment...................................... 34 91
---- ----
Total..................................................... 177 770
Less accumulated depreciation............................... (26) (197)
---- ----
Property and equipment, net................................. $151 $573
==== ====
</TABLE>
DEFERRED REVENUE
Deferred revenue primarily represents the unearned revenue associated with
the CDNow, Inc. warrants, received by the Company in conjunction with an
advertising and promotion agreement dated May 18, 1998 between the Company and
CDnow, Inc. The warrants will vest annually over the three years of the
agreement term and the revenue is recognized ratably over the term of the
agreement.
F-18
<PAGE> 106
MTVN ONLINE MUSIC
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses its long-lived assets (i.e., property and equipment)
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 Company 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
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 1996, 1997 and 1998, no
financial instruments were held or issued for trading purposes. The investment
in CDNow, Inc. 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.
COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998 the Company 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 Company 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 Company does not
anticipate 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 fiscal years
beginning after December 15, 1998. The Company's capitalization policy falls
within the guidelines of SOP 98-5.
F-19
<PAGE> 107
MTVN ONLINE MUSIC
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS)
NOTE 4--VIACOM'S NET EQUITY INVESTMENT
Viacom funds the working capital requirements of the Company based upon a
centralized cash management system. Viacom's 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
Company interest on intercompany balances.
An analysis of Viacom's net equity investment activity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of the year........................ $ (26) $ 2,028 $ 837
Net loss.............................................. (2,070) (4,298) (7,316)
Contributions of capital, net......................... 1,016 385 3,234
Benefit for income taxes.............................. (1,270) (2,635) (4,484)
Allocated charges from Viacom and MTVN................ 3,474 3,653 4,892
Cross promotional on-air advertising.................. 904 1,704 4,812
------- ------- -------
Balance, end of the year.............................. $ 2,028 $ 837 $ 1,975
======= ======= =======
</TABLE>
NOTE 5--RELATED PARTY TRANSACTIONS
The Company receives cross promotional on-air advertising from the MTVN
Music Channels whereby the MTVN Music Channels promote the Company during live
or produced programming with keyword mentions, closing tags, custom promotions
and generic promotions. The expense to the Company for such cross promotional
on-air advertising was approximately $904 (1996), $1,704 (1997) and $4,812
(1998). As discussed more fully in Note 3, the Company 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.
Viacom and MTVN provide the Company 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 Company based upon the average
of certain specified ratios of revenues and headcount. The charges for such
services were $3,474 (1996), $3,653 (1997) and $4,892 (1998). 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 Company on a
stand-alone basis.
Viacom has a noncontributory defined benefit pension plan covering
substantially all of its employees, including the employees of the Company
during 1996, 1997 and 1998. 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 Company and has charged the Company for pension and
401(k) savings plan expenses of approximately $74 (1996), $53 (1997) and $92
(1998). The related pension liability was approximately $54, $96 and $167 at
December 31, 1996, 1997 and 1998, respectively. Viacom also provides other
employee benefits to the Company's employees, including certain postemployment
benefits, medical, dental, life and disability insurance costs. The costs of
providing such benefits to the Company have been considered in the corporate
overhead allocation charge reflected in the Company's combined financial
statements. Management believes that the methodologies used to allocate pension
and other employee benefit charges to the Company are reasonable.
F-20
<PAGE> 108
MTVN ONLINE MUSIC
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS)
The Company, through the normal course of business, is involved in other
transactions with companies owned by or affiliated with Viacom, and all such
transactions did not have a material impact on the results of operations,
financial position, changes in equity or cash flows presented herein.
NOTE 6--INCOME TAXES
The Company has been included in the consolidated federal, state and local
income tax returns filed by Viacom. The Company's income tax benefit and net
deferred tax assets reflected in the combined financial statements have been
prepared as if such benefits were computed on a separate return basis. The tax
losses generated by the Company have been utilized by Viacom to reduce its
consolidated taxable income. Viacom reimbursed the Company for the benefit of
using its net operating loss, which has been reflected in Viacom's net equity
investment.
Components of the income tax benefit are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................ $1,048 $2,232 $3,812
State and local........................................ 145 309 527
Deferred................................................. 77 94 145
------ ------ ------
$1,270 $2,635 $4,484
====== ====== ======
</TABLE>
A reconciliation of the U.S. Federal statutory tax rate to the Company's
effective tax rate on the income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. tax rate................................... 35% 35% 35%
State and local taxes, net of federal tax benefit......... 3% 3% 3%
-- -- --
Effective tax rate........................................ 38% 38% 38%
== == ==
</TABLE>
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Pension expense........................................... $21 $ 36 $ 64
Book-tax basis differences in reserves.................... 72 155 274
--- ---- ----
Total deferred tax assets................................... 93 191 338
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............................. $93 $187 $332
=== ==== ====
</TABLE>
F-21
<PAGE> 109
MTVN ONLINE MUSIC
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS)
NOTE 7--STOCK COMPENSATION
During 1996, 1997 and 1998, the Company did not have a separate long-term
incentive plan. On October 1, 1999, the Partnership reserved approximately 2.75
million units for option grants to employees. During 1996, 1997 and 1998, Viacom
granted stock options to employees of the Company under Viacom's Long Term Stock
Incentive Plan (the "Stock Plan"). Options granted under the Stock Plan to
employees of the Company expire ten years from the date of grant. Options issued
in 1996, 1997 and 1998 under the Stock Plan vest annually, beginning one year
after the date of grant, at the rate of 33%, 25% and 33%, respectively.
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). In accordance with the
provisions of SFAS 123, the Company applies Accounting Principles Board Opinion
25, "Accounting for Stock Issued to Employees," and the related interpretations
in accounting for the Stock Plan and, accordingly, does not recognize
compensation expense for the Stock Plan because Viacom typically does not issue
options having exercise prices below the market value at the date of grant. Had
compensation expense for all Stock Plan awards been recorded based upon the fair
value at the date of grant in a manner consistent with the methodology
prescribed by SFAS 123, the Company's combined pre-tax loss would have increased
by an additional $5 ($3 after tax), $24 ($15 after tax) and $45 ($28 after tax)
in 1996, 1997 and 1998, respectively. These pro forma effects may not be
representative of future compensation expense amounts, as the estimated fair
value of stock options on the date of grant is amortized to expense over the
vesting period, and additional options may be granted in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model which incorporates the following
assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Expected dividend yield..................................... -- -- --
Expected stock price volatility............................. 32.50% 31.74% 32.76%
Risk-free interest rate..................................... 6.19% 6.04% 5.43%
Expected life of options (years)............................ 6.0 6.0 6.0
</TABLE>
The weighted-average fair value of each option as of the grant date was
$8.14, $6.58 and $12.97 in 1996, 1997 and 1998, respectively. As of December 31,
1998 there were 37,000 options outstanding with a weighted average exercise
price of $17.33.
NOTE 8--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"). If the Company is required
to pay a license royalty rate on a retroactive basis in excess of accrued
amounts as a result of negotiations with ASCAP, BMI, or RIAA, no assurance can
be given that such outcome will not have a material adverse effect on the
Company's combined results of operations, financial position or cash flows.
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.
F-22
<PAGE> 110
SONICNET, INC.
STATEMENT 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
Cost of production........................................ 1,724 4,986
------- --------
GROSS PROFIT (LOSS)......................................... (1,170) (3,857)
------- --------
OTHER OPERATING EXPENSES
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 other operating expenses......................... 3,826 8,331
------- --------
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> 111
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
Intangibles, 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> 112
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
======= ========
NON CASH INVESTING ACTIVITIES:
Incremental revaluation of SonicNet's assets (Note 1)....... $ -- $ 37,173
NON CASH FINANCING ACTIVITIES:
Equipment acquired under capital leases..................... $ -- $ 11
</TABLE>
See notes to financial statements.
F-25
<PAGE> 113
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 deemed to have been paid by the
Company to the Parent in the period in which the costs and expenses were
recorded. 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, MTV Networks ("MTVN"), a unit of Viacom Inc. ("Viacom"),
acquired from Liberty Digital (formerly known as TCI Music, Inc.) substantially
all of the businesses of the Company and The Box Worldwide, Inc. ("The Box") in
exchange for an aggregate 10% limited partnership interest in MTVN Online L.P.
(the "Partnership") formed by MTVN 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 of their related wholly owned international online
operations in exchange for an aggregate 90% general and limited partnership
interest in the Partnership. Liberty Digital contributed, among other assets,
substantially all of the businesses of the Company, The Box, and certain related
wholly owned international online operations to the Partnership.
F-26
<PAGE> 114
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
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.
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.
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.
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.
F-27
<PAGE> 115
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
The Company, through the normal course of business, is involved in other
transactions with companies owned by or affiliated with TCIM, and such
transactions, except those previously disclosed, did not have a material impact
on the financial position or results of operations presented herein.
NOTE 6--INCOME TAXES
The calculation of the Company's income tax benefit for the six months
ended June 30, 1998 and deferred tax assets at June 30, 1998 and at December 31,
1998 has been prepared on a separate return basis as though the Company had
filed stand-alone tax returns and in accordance with a tax sharing agreement
with Tele-Communications, Inc. As further discussed below, the Company does not
reflect any income tax benefit or deferred tax assets in the financial
statements for the six months ended June 30, 1998 and the year ended December
31, 1998.
The calculation of the Company's income tax benefit for the six months
ended June 30, 1999 and deferred tax assets at June 30, 1999 has been prepared
on a separate return basis as though the Company had filed stand-alone tax
returns and in accordance with a tax sharing agreement with AT&T Corp. As
further discussed below, the Company does not reflect any income tax benefit or
deferred tax assets in the financial statements for the six months ended and at
June 30, 1999.
A reconciliation of the U.S. Federal statutory tax rate to the Company's
effective tax rate on income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1998 1999
---- ----
<S> <C> <C>
Statutory U.S. tax rate..................................... 35% 35%
Amortization of goodwill.................................... (14) (12)
State and local taxes, net of federal tax benefit........... 2 2
Valuation allowance......................................... (23) (25)
--- ---
Effective tax rate.......................................... --% --%
=== ===
</TABLE>
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>
F-28
<PAGE> 116
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
At December 31, 1998 and June 30, 1999, the Company had net deferred tax
assets of $4,371 and $7,375, respectively. In compliance with tax sharing
agreements with Tele-Communications Inc. and AT&T Corp., a full valuation
allowance has been provided against the net deferred tax assets at December 31,
1998 and June 30, 1999, respectively, principally associated with the tax
benefits of net operating losses for which the Company will not likely receive
any benefit.
The Company has $8,908 and $17,975 of net operating loss carryforwards for
the six months ended June 30, 1998 and 1999, respectively. These net operating
loss carryforwards expire between the years 2009 and 2018 and are available to
offset future taxable income. The utilization of the net operating loss
carryforwards may be subject to limitations under U.S. federal income tax laws.
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company accrues music rights royalties payable to American Society of
Composers, Authors, and Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI"), and
Recording Industry Association of America ("RIAA"). If the Company is required
to pay a license royalty rate on a retroactive basis in excess of accrued
amounts as a result of negotiations with ASCAP, BMI or RIAA, no assurance can be
given that such outcome will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
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> 117
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> 118
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
Cost of production........................................ 1,702 4,086
------- --------
GROSS PROFIT (LOSS)....................................... (952) (2,532)
------- --------
OTHER OPERATING EXPENSES
Allocated charges from parent............................. 630 805
Selling, general and administrative....................... 1,225 3,686
Depreciation.............................................. 52 127
Amortization of intangibles............................... 180 3,913
------- --------
Total other operating expenses......................... 2,087 8,531
------- --------
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> 119
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> 120
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
======= ========
NON CASH 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 $ --
NON CASH FINANCING ACTIVITIES:
Equipment acquired under capital leases................... $ 23 $ --
</TABLE>
See notes to financial statements.
F-33
<PAGE> 121
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 deemed
to have been paid by the Company to the Parent in the period in which the costs
and expenses were recorded. Management believes that the foregoing allocations
were made on a reasonable basis; however, the allocations of costs and expenses
do not necessarily indicate the costs that would have been or will be incurred
by the Company on a stand-alone basis. Also, the financial statements may not
necessarily reflect the financial position, results of operations and cash flows
of the Company in the future or what the financial position, results of
operations or cash flows would have been if the Company had been a separate,
stand-alone company during the periods presented.
F-34
<PAGE> 122
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE 2--SUBSEQUENT EVENTS
On July 15, 1999, MTV Networks ("MTVN"), a unit of Viacom Inc. ("Viacom"),
acquired from Liberty Digital (formerly known as TCI Music, Inc.) substantially
all of the businesses of the Company and The Box Worldwide, Inc. ("The Box") in
exchange for a 10% interest in MTVN Online L.P. (the "Partnership") formed by
MTVN and Liberty Digital and certain of their affiliates. MTVN contributed to
the Partnership substantially all of its Internet music businesses' assets
including its MTV.com, VH1.com and Imagine Radio businesses, and certain related
wholly owned international online operations, in exchange for an aggregate 90%
general and limited partnership interest in the Partnership. Liberty Digital
contributed, among other assets, substantially all of the businesses of the
Company, The Box and certain related wholly owned international online
operations to 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.
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>
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.
F-35
<PAGE> 123
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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> 124
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> 125
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
allocation of expenses was based upon management's estimate of executives' time
and effort incurred related to the Company, and TCIM's allocation of expenses
was based on a percentage of weighted average funding provided to the Company.
The charges for such services were $630 and $420 for 1997 and 1998,
respectively. Management believes that the methodologies used to allocate these
charges are reasonable, however, these allocations of costs and expenses do not
necessarily indicate the costs and expenses that would have been incurred by the
Company had they been on a stand-alone basis. See Note 7 for a discussion of
employee benefit costs charged to the Company by TCIM.
In 1998, in addition to the overhead allocation discussed above, TCIM
allocated approximately $385 in interest expense to the Company on advances due
to TCIM. No interest charge was allocated on advances due to Paradigm in 1997.
The Company, through the normal course of business, is involved in other
transactions with companies owned by or affiliated with Paradigm or TCIM, and
such transactions except those previously disclosed did not have a material
impact on the financial position or results of operations presented herein.
NOTE 6--INCOME TAXES
The calculation of the Company's income tax benefit/expense and deferred
tax asset/liability has been prepared on a separate return basis as though the
Company had filed stand-alone tax returns and in accordance with the tax sharing
agreements with Paradigm and Tele-Communications Inc. As further discussed
below, the Company does not reflect any income tax benefit or deferred tax
asset/liability in the financial statements.
A reconciliation of the U.S. Federal statutory tax rate to the Company's
effective tax rate on income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Statutory U.S. tax rate..................................... 35% 35%
Amortization of goodwill.................................... (2) (12)
State and local taxes, net of federal tax benefit........... 3 2
Valuation allowance......................................... (36) (25)
--- ---
Effective tax rate.......................................... --% --%
=== ===
</TABLE>
F-38
<PAGE> 126
SONICNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Employee compensation..................................... $ -- $ 21
Net operating loss carryforward........................... 2,308 4,854
------- -------
Gross deferred tax assets................................... 2,308 4,875
Deferred tax liabilities:
Deferred income........................................... (457) (457)
Book-tax basis differences in fixed assets................ (58) (47)
------- -------
Gross deferred tax liabilities.............................. (515) (504)
Valuation allowance......................................... (1,793) (4,371)
------- -------
Total net deferred tax assets.......................... $ -- $ --
======= =======
</TABLE>
At December 31, 1997 and December 31, 1998, the Company had net deferred
tax assets of $1,793 and $4,371, respectively. In compliance with a tax sharing
agreement with Tele-Communications Inc., a full valuation allowance has been
provided against the 1997 and 1998 net deferred tax assets, principally
associated with the tax benefits of net operating losses for which the Company
will not likely receive any benefit.
The Company has $6,073 and $12,773 of net operating loss carryforwards at
the year ended December 31, 1997 and December 31, 1998, respectively. These net
operating loss carryforwards expire between the years 2009 and 2018 and are
available to offset future taxable income. The utilization of the net operating
loss carryforwards may be subject to limitations under U.S. federal income tax
laws.
NOTE 7--OTHER EMPLOYEE BENEFITS
STOCK COMPENSATION
During 1998, TCIM granted stock options with tandem stock appreciation
rights ("SARs") to employees of the Company under the TCIM 1997 Stock Incentive
Plan (the "Stock Plan"). Options granted under the Stock Plan expire ten years
from the date of grant. Options issued under the Stock Plan vest annually in 20%
cumulative increments.
On December 11, 1998, TCIM re-priced the stock options with tandem SARs at
$4.00 for all grants to its employees.
The Stock Plan provides for variable grants of equity-based interests
pursuant to awards of SAR's and for subsequent payments of cash based on their
appreciation in value over stated periods of time. Accordingly, the Company has
recognized compensation expense of $54 in 1998. The calculation of compensation
expense was based on the excess of the market price over the option price,
adjusted for the December 11, 1998 re-pricing, in accordance with the vesting
schedule.
F-39
<PAGE> 127
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"). If the Company is required
to pay a license royalty rate on a retroactive basis in excess of accrued
amounts as a result of negotiations with ASCAP, BMI or RIAA, no assurance can be
given that such outcome will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.
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> 128
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1999
------- --------
<S> <C> <C>
REVENUES
Advertising revenues...................................... $ 6,022 $ 6,901
Viewer revenues, net...................................... 5,164 6,320
Other revenues............................................ 296 203
------- --------
Total revenues......................................... 11,482 13,424
------- --------
COSTS AND EXPENSES
Distribution, general and administrative (Note 3)......... 10,412 26,473
Allocated charges from parent............................. 628 1,155
Affiliate fees, site costs and telephone service.......... 3,563 4,866
Depreciation.............................................. 1,311 885
Amortization of intangibles............................... 1,445 3,022
Satellite transponder and rent paid to related party...... 761 855
------- --------
Total costs and expenses............................... 18,120 37,256
------- --------
Income (loss) before income taxes, interest, and interest in
income (losses) of equity investee........................ (6,638) (23,832)
Interest expense............................................ (252) (690)
Interest income............................................. 116 103
Benefit for income taxes.................................... -- --
------- --------
Income (loss) before interest in income (losses) of equity
investee.................................................. (6,774) (24,419)
Interest in income (losses) of equity investee.............. (304) (223)
------- --------
Net income (loss)...................................... $(7,078) $(24,642)
======= ========
</TABLE>
See notes to consolidated financial statements.
F-41
<PAGE> 129
THE BOX WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 1,719 $ 1,021
Accounts receivable, less allowance for doubtful accounts
of $393 (1998) and $525 (1999)......................... 5,041 4,956
Prepaid expenses and other current assets................. 531 628
------- -------
Total current assets................................... 7,291 6,605
Property and equipment, net................................. 10,587 10,580
Deferred costs and other assets, net........................ 6,839 6,014
Goodwill, net............................................... 25,910 47,159
Investment in and advances to equity investee............... 534 371
------- -------
$51,161 $70,729
======= =======
LIABILITIES AND EQUITY
Current liabilities
Accounts payable.......................................... $ 3,347 $ 1,592
Accrued expenses.......................................... 5,462 5,342
------- -------
Total current liabilities.............................. 8,809 6,934
Affiliate fees payable...................................... 941 1,456
------- -------
9,750 8,390
------- -------
Commitments and contingencies (Note 8)
TCIM's net equity investment................................ 41,408 62,534
Accumulated other comprehensive income (loss) -- foreign
currency translation...................................... 3 (195)
------- -------
Total equity........................................... 41,411 62,339
------- -------
$51,161 $70,729
======= =======
</TABLE>
See notes to consolidated financial statements.
F-42
<PAGE> 130
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1999
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $(7,078) $(24,642)
Adjustment to reconcile net income (loss) to net cash flow
from operating activities
Depreciation........................................... 1,311 885
Amortization of intangibles............................ 1,445 3,022
Interest in income (losses) of equity investee......... 304 223
Provision for bad debts and estimated chargebacks...... 80 24
Changes in assets and liabilities:
(Increase) decrease in accounts receivable........... (95) 59
Increase in prepaid expenses and other current
assets.............................................. (26) (96)
Decrease in accounts payable and accrued expenses.... (455) (1,360)
------- --------
NET CASH FLOW USED FOR OPERATING ACTIVITIES....... (4,514) (21,885)
------- --------
INVESTING ACTIVITIES:
Capital expenditures...................................... (2,081) (878)
Launch incentives and other fees paid..................... (105) (146)
Increase in investment in and advances to equity
investee............................................... (275) (59)
------- --------
NET CASH FLOW USED FOR INVESTING ACTIVITIES....... (2,461) (1,083)
------- --------
FINANCING ACTIVITIES:
Advances from TCIM, net................................... 6,387 22,468
------- --------
NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES.... 6,387 22,468
------- --------
Effect of exchange rate changes on cash..................... 14 (198)
------- --------
Net decrease in cash........................................ (574) (698)
Cash at beginning of period................................. 934 1,719
------- --------
Cash at end of period....................................... $ 360 $ 1,021
======= ========
NON CASH INVESTING ACTIVITIES
Incremental revaluation of The Box's assets (Note 3)...... $ -- $ 23,300
</TABLE>
See notes to consolidated financial statements.
F-43
<PAGE> 131
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
NOTE 1--BASIS OF PRESENTATION
The interim consolidated financial statements and related notes of the
business and operations of The Box Worldwide, Inc. ("the Company"), which
consists of the domestic division as well as the various international divisions
of the Company, for the six months ended June 30, 1998 and 1999 and as of
December 31, 1998 and June 30, 1999 have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission and are unaudited. The
interim consolidated financial statements are presented on a carve-out basis
from TCI Music, Inc. ("TCIM") and reflect the consolidated historical results of
operations, financial position, and cash flows of the Company.
In the opinion of management, the interim financial statements include all
recurring adjustments and normal accruals necessary to present fairly the
Company's combined financial position and its consolidated results of operations
for the dates and periods presented. For the six months ended June 30, 1998 and
1999 and as of December 31, 1998 and June 30, 1999 certain expenses in the
consolidated financial statements include an allocation of corporate expenses
from TCIM (see Note 7). All such costs and expenses have been deemed to have
been paid by the Company to TCIM in the period in which the costs and expenses
were recorded. Management believes that these allocations were made on a
reasonable basis, however, the allocations of costs and expenses do not
necessarily indicate the costs that would have been incurred by the Company on a
stand-alone basis. Also, the financial statements may not necessarily reflect
the financial position, results of operations and cash flows of the Company in
the future or what the financial position, results of operations and cash flows
of the Company in the future would have been if the Company had been a separate,
stand-alone company during the periods presented. All significant intercompany
balances and transactions have been eliminated in consolidation.
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the years ended December
1997 and 1998 presented herein.
NOTE 2--SUBSEQUENT EVENTS
On July 15, 1999, MTV Networks ("MTVN"), a unit of Viacom Inc. ("Viacom"),
acquired from Liberty Digital (formerly known as TCI Music, Inc.) the Company,
excluding its equity investee, and substantially all of the businesses of
SonicNet, Inc. ("SonicNet") in exchange for an aggregate 10% limited partnership
interest in MTVN Online L.P. (the "Partnership") formed by MTVN and Liberty
Digital and certain of their affiliates. MTVN contributed to the Partnership
substantially all of its Internet music businesses' assets, including its
MTV.com, VH1.com and Imagine Radio Inc. businesses and certain of their related
wholly owned international online operations in exchange for an aggregate 90%
general and limited partnership interest in the Partnership. Liberty Digital
contributed, among other assets, substantially all of the businesses of the
Company, SonicNet, and certain related wholly owned international online
operations to the Partnership.
Also, the Partnership and MTVN entered into a license and distribution
agreement wherein MTVN will license for a fee the use of the Company's
intellectual property rights, technology and subscriber base.
In connection with the Acquisition, TCIM accelerated the vesting for 20% of
all the outstanding unvested stock options granted under the TCIM 1997 Stock
Incentive Plan.
F-44
<PAGE> 132
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)
------- -------
Intangibles, 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> 133
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate on income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Statutory U.S. tax rate.................................. 35% 35%
Amortization of goodwill................................. (8) (3)
State and local taxes, net of federal tax benefit........ 2 3
Foreign operations....................................... (10) (2)
Valuation allowance...................................... (19) (33)
--- ---
Effective tax rate....................................... --% --%
=== ===
</TABLE>
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1998 1999
--------------- -----------
<S> <C> <C>
Deferred tax assets:
Book-tax basis differences in reserves............. $ 386 $ 234
Employee compensation.............................. 757 4,871
Net operating loss carryforward.................... 6,157 10,082
Equity interest.................................... 1,882 1,882
------- --------
Gross deferred tax assets............................ 9,182 $ 17,069
------- --------
Deferred tax liabilities:
Book-tax basis differences in intangibles.......... (472) (589)
Book-tax basis differences in fixed assets......... (1,077) (1,132)
------- --------
Gross deferred tax liabilities....................... (1,549) (1,721)
Valuation allowance.................................. (7,633) (15,348)
------- --------
Total net deferred tax assets................... $ -- $ --
======= ========
</TABLE>
As of December 31, 1998 and June 30, 1999, the Company had net deferred tax
assets of $7,633 and $15,348, respectively. In compliance with the tax sharing
agreements with Tele-Communications Inc. and AT&T Corp., a full valuation
allowance has been provided against the December 31, 1998 and June 30, 1999 net
deferred tax assets, principally associated with tax benefits of net operating
losses for which the Company will not likely receive any benefit.
For tax purposes, the Company has $17,461 and $26,531 of net operating loss
carryforwards at June 30, 1998 and June 30, 1999, respectively. These net
operating loss carryforwards expire between 2009 and 2018 and are available to
offset future taxable income. The utilization of the net operating loss
carryforwards may be subject to limitations under U.S. federal income tax laws.
F-46
<PAGE> 134
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
NOTE 5--UNCONSOLIDATED INVESTMENT
Summary financial information for the Company's equity investee in Holland
accounted for under the equity method is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1998 1999
--------------- -----------
<S> <C> <C>
Current assets...................................... $647 $ 837
Current liabilities................................. 511 1,665
Equity, advances and notes payable to
shareholders...................................... 763 300
Company's share of net assets....................... 637 983
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1998 1999
------------ -----------
<S> <C> <C>
Net revenues........................................... $ 464 $ 825
Net losses............................................. (609) (446)
Company's share of net losses.......................... (304) (223)
</TABLE>
NOTE 6--TCIM'S NET EQUITY INVESTMENT
TCIM's net equity investment includes accumulated equity as well as any
interest bearing payable and receivable due to/from the parent resulting from
cash transfers and other intercompany activity. An analysis of TCIM's net equity
investment activity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Balance, beginning of period................. $ 38,836 $ 41,408
Net loss..................................... (13,925) (24,642)
Advances from TCIM........................... 14,994 6,091
Allocated charges from TCIM.................. 1,404 1,155
Stock compensation........................... 99 15,222
Allocated goodwill (see Note 3).............. -- 23,300
-------- --------
Balance, end of period....................... $ 41,408 $ 62,534
======== ========
</TABLE>
NOTE 7--RELATED PARTY TRANSACTIONS
From December 17, 1997, TCIM provided the Company with certain general and
administrative services including insurance, legal, treasury, financial and
other corporate functions. The allocation of expenses was based on a percentage
of weighted average funding provided to the Company by TCIM.
The charges for such services were $376 and $465 for the six months ended
June 30, 1998 and 1999, respectively. Management believes that the methodologies
used to allocate these charges are reasonable; however, these allocations of
costs and expenses do not necessarily indicate the costs and expenses that would
have been incurred by the Company had they been on a stand-alone basis.
For the six months ended June 30, 1998 and 1999, in addition to the
overhead allocation discussed above, TCIM allocated approximately $252 and $690
in interest expense to the Company on advances due to TCIM.
F-47
<PAGE> 135
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
On October 1, 1998, the Company entered into a one year agreement with
America Online, Inc. ("AOL") and SonicNet whereby AOL provides SonicNet with
anchor tenant distribution within the music subchannel offered on the AOL
Service. As part of this agreement, the Company will provide $450 of in-kind
advertising commitments on behalf of SonicNet. The Company is recording the
revenue from SonicNet ratably over the term of the agreement.
NOTE 8--COMMITMENTS AND CONTINGENCIES
The Company has entered into written programming agreements with
approximately 81% of the cable system operators that presently carry the
Company's programming in the United States. Pursuant to such affiliation
agreements entered into prior to 1998, the Company pays cable operators the
greater of a guaranteed minimum monthly fee per subscriber or a specified
percentage of the gross revenues generated by each cable operator's system.
Agreements entered into in 1998, and planned to be offered for new affiliates in
1999 and thereafter, generally do not require any monthly payments to be made to
affiliates. Instead, an upfront launch incentive is paid for a long-term
carriage agreement.
In April 1999, MTVN received a civil investigative demand from the
Department of Justice, Antitrust Division, requesting information about certain
of MTVN's operations, focusing principally on exclusivity provisions in its
arrangements with record labels for the licensing of music videos. The
Department of Justice has requested additional information from MTVN and Liberty
Media Corporation regarding the formation of the Partnership and other
operations of MTVN. The Partnership, Liberty Media Corporation and MTVN have
been cooperating with the investigation. Although the Partnership cannot provide
any assurances, the Partnership does not expect that the investigation will
result in a material adverse effect on its business, financial condition or
results of operations.
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> 136
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Viacom Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in equity and of cash flows
present fairly, in all material respects, the financial position of The Box
Worldwide, Inc. at December 31, 1997 and 1998, and the results of their
operations and their cash flows for the period from December 17, 1997 through
December 31, 1997 and the year ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
January 10, 2000
F-49
<PAGE> 137
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Box Worldwide, Inc.
We have audited the consolidated balance sheet of The Box Worldwide, Inc.
and subsidiaries (Predecessor) as of December 16, 1997 (which is not presented
herein), and the related consolidated statements of operations, cash flows and
stockholders' equity for the period January 1, 1997 through December 16, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Box Worldwide, Inc. and subsidiaries (Predecessor) at December 16, 1997, and
the consolidated results of their operations and their cash flows for the period
January 1, 1997 through December 16, 1997, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Miami, Florida
February 4, 1998
F-50
<PAGE> 138
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------ ----------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, DECEMBER 17,
1997 THROUGH 1997 THROUGH YEAR ENDED
DECEMBER 16, DECEMBER 31, DECEMBER 31,
1997 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Advertising revenues......................... $10,625 $ 365 $ 13,669
Net viewer revenues, net..................... 9,184 459 11,641
Other revenues............................... 582 18 474
------- ----- --------
Total revenues............................ 20,391 842 25,784
------- ----- --------
COSTS AND EXPENSES
Distribution, general and administrative..... 17,622 1,036 22,146
Allocated charges from parent................ -- 60 1,404
Affiliate fees, site costs and telephone
service................................... 6,306 297 7,783
Depreciation................................. 2,179 111 2,794
Amortization of intangibles and deferred
costs..................................... 116 116 3,170
Satellite transponder and rent paid to
related party............................. 453 20 1,363
------- ----- --------
Total costs and expenses.................. 26,676 1,640 38,660
------- ----- --------
INCOME (LOSS) BEFORE INCOME TAXES, INTEREST,
AND INTEREST IN INCOME (LOSSES) OF EQUITY
INVESTEE..................................... (6,285) (798) (12,876)
Interest expense............................... -- -- (564)
Interest income................................ 322 8 191
Income tax benefit............................. 17 -- --
------- ----- --------
Income (loss) before interest in income
(losses) of equity investee.................. (5,946) (790) (13,249)
Interest in income (losses) of equity
investee..................................... (580) (43) (676)
------- ----- --------
NET INCOME (LOSS)......................... $(6,526) $(833) $(13,925)
======= ===== ========
</TABLE>
See notes to consolidated financial statements.
F-51
<PAGE> 139
THE BOX WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
ASSETS
Current assets
Cash...................................................... $ 934 $ 1,719
Accounts receivable, less allowance for doubtful accounts
of $335 (1997) and $393 (1998)......................... 3,489 5,041
Prepaid expenses and other current assets................. 376 531
------- -------
Total current assets................................... 4,799 7,291
Receivable from officer..................................... 100 --
Property and equipment, net................................. 8,823 10,587
Deferred costs and other assets, net........................ 1,924 6,839
Goodwill, net............................................... 28,801 25,910
Investment in advances to equity investee................... 423 534
------- -------
$44,870 $51,161
======= =======
LIABILITIES AND EQUITY
Current liabilities
Accounts payable.......................................... $ 1,728 $ 3,347
Accrued affiliate fees.................................... 719 2,852
Accrued expenses.......................................... 3,589 2,610
------- -------
Total current liabilities.............................. 6,036 8,809
Affiliate fees payable...................................... -- 941
------- -------
6,036 9,750
------- -------
Commitments and contingencies (Note 10)
TCIM's net equity investment................................ 38,836 41,408
Accumulated other comprehensive income (loss)--foreign
currency translation...................................... (2) 3
------- -------
Total equity........................................... 38,834 41,411
------- -------
$44,870 $51,161
======= =======
</TABLE>
See notes to consolidated financial statements.
F-52
<PAGE> 140
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET ACCUMULATED OTHER
EQUITY COMPREHENSIVE COMPREHENSIVE
INVESTMENT INCOME(LOSS) INCOME(LOSS) TOTAL EQUITY
---------- ------------- ----------------- ------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996...... $ 12,582 $ 29 $ 12,611
Proceeds from common stock
issuance........................ 120 120
Issuance of common stock for
affiliate launch incentive
fees............................ 771 771
Cumulative dividends on 6%
convertible redeemable preferred
stock........................... (143) (143)
Comprehensive income (loss)
Net income (loss)............... (6,526) $ (6,526) (6,526)
Other comprehensive income
(loss):
Cumulative translation
adjustment................... (83) (83) (83)
--------
Total comprehensive income
(loss)..................... $ (6,609)
-------- ======== ---- --------
BALANCE AT DECEMBER 16, 1997...... 6,804 (54) 6,750
Adjustment from TCIM
acquisition..................... 31,300 54 31,354
Comprehensive income (loss)
Net income (loss)............... (833) $ (833) (833)
Other comprehensive income
(loss):
Cumulative translation
adjustment................... (2) (2) (2)
--------
Total comprehensive income
(loss)..................... $ (835)
========
Allocated charges................. 60 60
Stock compensation................ 155 155
Advances from TCIM................ 1,350 1,350
-------- ---- --------
BALANCE AT DECEMBER 31, 1997...... 38,836 (2) 38,834
Comprehensive income (loss)
Net income (loss)............... (13,925) $(13,925) (13,925)
Other comprehensive income
(loss):
Cumulative translation
adjustment................... 5 5 5
--------
Total comprehensive income
(loss)..................... $(13,920)
========
Allocated charges................. 1,404 1,404
Stock compensation................ 99 99
Advances from TCIM................ 14,994 14,994
-------- ---- --------
BALANCE AT DECEMBER 31, 1998...... $ 41,408 $ 3 $ 41,411
======== ==== ========
</TABLE>
See notes to consolidated financial statements.
F-53
<PAGE> 141
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
------------- ----------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, DECEMBER 17,
1997 THROUGH 1997 THROUGH YEAR ENDED
DECEMBER 16, DECEMBER 31, DECEMBER 31,
1997 1997 1998
------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................... $(6,526) $ (833) $(13,925)
Adjustment to reconcile net income (loss) to
net cash flow from operating activities:
Depreciation............................. 2,179 111 2,794
Amortization of intangibles and deferred
costs.................................. 116 116 3,170
Interest in income (losses) of equity
investee............................... 580 43 676
Provision for bad debts and estimated
chargebacks............................ 39 -- 43
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable............................. (1,282) 262 (1,494)
(Increase) decrease in prepaid expenses
and other current assets............... (105) 171 (154)
Increase in accounts payable and accrued
expenses............................... 1,282 159 3,712
------- ------- --------
NET CASH FLOW (USED FOR) PROVIDED BY OPERATING
ACTIVITIES.................................. (3,717) 29 (5,178)
------- ------- --------
INVESTING ACTIVITIES:
Capital expenditures........................ (4,236) (242) (4,570)
Launch incentives and other fees paid....... (217) (131) (5,193)
Disposal of equipment....................... 93 -- 12
Increase in investment in and advances to
equity investee.......................... (724) (48) (787)
------- ------- --------
NET CASH FLOW USED FOR INVESTING ACTIVITIES... (5,084) (421) (10,538)
------- ------- --------
FINANCING ACTIVITIES:
Proceeds from common stock issuance......... 120 -- --
Advances from TCIM, net..................... 1,350 215 16,497
------- ------- --------
NET CASH FLOW PROVIDED BY FINANCING
ACTIVITIES.................................. 1,470 215 16,497
------- ------- --------
Effect of exchange rate changes on cash....... (7) (2) 4
------- ------- --------
Net (decrease) increase in cash............... (7,338) (179) 785
Cash at beginning of period................... 8,451 1,113 934
------- ------- --------
Cash at end of period......................... $ 1,113 $ 934 $ 1,719
======= ======= ========
NON CASH INVESTING ACTIVITIES:
TCIM acquisition of The Box................. $ -- $35,700 $ --
Forgiveness of loan to officer.............. $ -- $ -- $ 100
NON CASH FINANCING ACTIVITIES:
Stock issued for affiliate launch incentive
fees..................................... $ 771 $ -- $ --
</TABLE>
See notes to consolidated financial statements.
F-54
<PAGE> 142
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The Box Worldwide, Inc. (the "Company"), a Florida corporation, operates an
interactive television channel serving subscribers on various cable systems and
broadcast stations throughout the world.
The accompanying consolidated financial statements for the period from
December 17, 1997 through December 31, 1997 and for the year ended December 31,
1998 are presented on a carve-out basis from TCI Music, Inc. ("TCIM") and
reflect the historical results of operations, financial position and cash flows
of the Company. Certain expenses in the consolidated financial statements
include an allocation of corporate expenses from TCIM (see Note 9). All such
costs and expenses have been deemed to have been paid by the Company to TCIM in
the period in which the costs and expenses were recorded. 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, MTV Networks ("MTVN"), a unit of Viacom Inc. ("Viacom"),
acquired from Liberty Digital (formerly known as TCI Music, Inc.) the Company,
excluding its equity investee, and substantially all of the businesses of
SonicNet, Inc. ("SonicNet") in exchange for an aggregate 10% limited partnership
interest in MTVN Online L.P. (the "Partnership") formed by MTVN and Liberty
Digital and certain of their affiliates. MTVN contributed to the Partnership
substantially all of its Internet music businesses' assets, including its
MTV.com, VH1.com and Imagine Radio businesses, and certain related wholly owned
international online operations, in exchange for an aggregate 90% general and
limited partnership interest in the Partnership. Liberty Digital contributed,
among other assets, substantially all of the businesses of the Company, SonicNet
and certain related wholly owned international online operations to Partnership.
F-55
<PAGE> 143
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
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
F-56
<PAGE> 144
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
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
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
------ -------
2,745 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> 145
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
REVENUE RECOGNITION
Income is earned when the viewer-requested music video has aired, and is
recorded net of estimated denial calls and other billing charges. Advertising
revenue is recognized when the commercials have aired, whereas production and
promotional revenues are recognized when the produced spots are delivered or the
promotions aired.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. The Company recognized
advertising expenses of $305, $0 and $1,106 for the period from January 1, 1997
through December 16, 1997, the period from December 17, 1997 to December 31,
1997 and the year ended December 31, 1998, respectively. These expenses are
included in distribution, general and administrative expenses.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The financial statements of the Company's foreign operations were prepared
in their respective local currencies and translated into U.S. dollars for
reporting purposes. The assets and liabilities are translated at exchange rates
in effect at the balance sheet date, while results of operations are translated
at average exchange for the respective periods. The cumulative effects of
exchange rate changes on net assets are included as a part of accumulated other
comprehensive loss. Translation (losses) gains were $(83), $(2) and $5 for the
period from January 1, 1997 through December 16, 1997, the period from December
17, 1997 to December 31, 1997 and the year ended December 31, 1998,
respectively. Net foreign currency transaction gains and losses were not
significant for any of the periods presented.
INCOME TAXES
Income taxes are provided based on the liability method of accounting
pursuant to Statement of Financial Accounting Standards 109, "Accounting for
Income Taxes" ("SFAS 109"). Deferred income taxes are recorded to reflect the
tax benefit and consequences of future years' differences between the tax bases
of assets and liabilities and their financial reporting bases. The Company
records a valuation allowance to reduce deferred tax assets if it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards 130, "Reporting Comprehensive Income" ("SFAS 130"),
effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for the reporting and displaying of comprehensive income
(loss) and its components in financial statements. Comprehensive income (loss)
is defined as the change in equity (net assets) of a business enterprise during
a period from transactions and other events and circumstances from non-owner
sources. It consists of net income (loss) and other gains and losses affecting
stockholder's equity that, under generally accepted accounting principles, are
excluded from net income (loss), such as foreign currency translation
gains/losses. Foreign currency translation is the only item of other
comprehensive income (loss) impacting the Company.
RECLASSIFICATIONS
Certain amounts reported for prior years have been reclassified to conform
with the current year's presentation.
F-58
<PAGE> 146
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 5--ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Accrued compensation........................................ $ 749 $ 648
Accrual for viewer revenue chargebacks...................... 647 612
Accrued lease commitment.................................... 486 488
Legal and audit............................................. 303 165
Music costs................................................. 207 228
State and local taxes....................................... 191 172
Other....................................................... 1,006 297
------ ------
$3,589 $2,610
====== ======
</TABLE>
NOTE 6--BENEFITS
STOCK COMPENSATION
During 1997 and 1998, TCIM granted stock options with tandem Stock
Appreciation Rights ("SARs") to employees of the Company under the TCIM 1997
Stock Incentive Plan (the "Stock Plan"). Options granted under the Stock Plan
expire ten years from the date of grant. Options issued in 1998 under the Stock
Plan vest annually in 20% cumulative increments, and options issued in 1997 have
various vesting schedules.
On December 11, 1998, TCIM re-priced the stock options with tandem SARs at
$4.00 for all grants to its employees.
The Stock Plan provides for variable grants of equity-based interests
pursuant to awards of SARs, and for subsequent payments of cash based on their
appreciation in value over stated periods of time. Accordingly, the Company has
recognized in the statement of operations, compensation expense of $155 and $99
in 1997 and 1998, respectively. The calculation of compensation expense was
based on the excess of the market price over the option price, adjusted for the
December 11, 1998 re-pricing, in accordance with vesting schedule.
The following table summarizes the Company's stock option activity under
the various plans:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Balance at December 31, 1996........................ -- $0.00
Granted........................................... 112,720 6.25
Exercised......................................... -- 0.00
Canceled.......................................... -- 0.00
-------
Balance at December 31, 1997........................ 112,720 6.25
Granted........................................... 653,300 6.50
Exercised......................................... (21,400) 6.25
Canceled.......................................... (53,300) 6.39
-------
Balance at December 31, 1998........................ 691,320 4.00
=======
</TABLE>
F-59
<PAGE> 147
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes information concerning currently outstanding
and exercisable stock options of the Company at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING
----------------------
REMAINING
CONTRACTUAL EXERCISABLE
EXERCISE PRICE OPTIONS LIFE (YEARS) OPTIONS
-------------- ------- ------------ -----------
<S> <C> <C> <C>
$4.00.... 68,520 8.96 22,544
$4.00.... 622,800 9.04 --
------- ------
691,320 22,544
</TABLE>
SHARES ISSUABLE UNDER EXERCISABLE STOCK OPTIONS:
<TABLE>
<S> <C>
December 31, 1997........................................... --
December 31, 1998........................................... 22,544
</TABLE>
OTHER EMPLOYEE BENEFITS
The Company participates in a 401(k) plan covering substantially all
employees which is maintained by TCIM.
NOTE 7--INCOME TAXES
For the period from January 1, 1997 through December 16, 1997, income taxes
consisted entirely of alternative minimum taxes. For the period from December
17, 1997 through December 31, 1998, the calculation of the Company's income tax
benefit/expense and deferred tax asset/liability has been prepared on a separate
return basis as though the Company had filed stand-alone tax returns and in
accordance with a tax sharing agreement with Tele-Communications Inc. As further
discussed below, the Company does not reflect any income tax benefit/expense or
deferred tax asset/liability in the financial statements during this period.
A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate on income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 17, 1997
THROUGH YEAR ENDED
DECEMBER 1997 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Statutory U.S. tax rate...................... 35% 35%
Amortization of goodwill..................... (5) (8)
State and local taxes, net of federal tax
benefit.................................... 2 2
Foreign operations........................... (9) (11)
Valuation allowance.......................... (23) (18)
--- ---
Effective tax rate........................... --% --%
=== ===
</TABLE>
F-60
<PAGE> 148
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
The following is a summary of the deferred tax accounts in accordance with
SFAS 109:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Book-tax basis differences in reserves.................... $ 377 $ 386
Employee compensation..................................... 724 757
Net operating loss carryforward........................... 5,327 6,157
Equity interest........................................... 91 1,882
------- -------
Gross deferred tax assets................................... 6,519 9,182
------- -------
Deferred tax liabilities:
Book-tax basis differences in intangibles................. (237) (472)
Book-tax basis differences in fixed assets................ (967) (1,077)
------- -------
Gross deferred liabilities.................................. (1,204) (1,549)
------- -------
Valuation allowance......................................... (5,315) (7,633)
------- -------
Total net deferred tax assets.......................... $ -- $ --
======= =======
</TABLE>
As of December 31, 1997 and December 31, 1998, the Company had net deferred
tax assets of $5,315 and $7,633, respectively. In compliance with a tax sharing
agreement with Tele-Communications Inc., a full valuation allowance has been
provided against the 1997 and 1998 net deferred tax assets, principally
associated with tax benefits of net operating losses for which the Company will
not likely receive any benefit.
For tax purposes, the Company has $14,018 and $16,202 of net operating loss
carryforwards at December 31, 1997 and 1998, respectively. These net operating
loss carryforwards expire between the years 2009 and 2018 and are available to
offset future taxable income. The utilization of the net operating loss
carryforwards may be subject to limitations under U.S. federal income tax laws.
NOTE 8--EQUITY INVESTEE
Summary financial information for the Company's equity investee in Holland
accounted for under the equity method is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1997 1998
---- ----
<S> <C> <C>
Current assets.............................................. $370 $647
Current liabilities......................................... 456 511
Equity, advances and notes payable to shareholders.......... 548 763
Company's share of net assets............................... 502 637
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, DECEMBER 17,
1997 THROUGH 1997 THROUGH YEAR ENDED
DECEMBER 16, DECEMBER 31, DECEMBER 31,
1997 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues........................... $ 589 $ 10 $ 1,185
Net losses............................. (1,161) (85) (1,352)
Company's share of net losses.......... (580) (43) (676)
</TABLE>
F-61
<PAGE> 149
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 9--RELATED PARTY TRANSACTIONS
On September 14, 1995, the Company and Communications Equity Associates,
Inc., ("CEA"), a consulting firm owned by the principal shareholder of the
Company, entered into an international representation agreement, pursuant to
which CEA acted as the Company's exclusive representative for purposes of: (a)
arranging financing for the Company to expand the international distribution of
programming, and (b) assisting the Company in entering into certain foreign
countries. Under the agreement, CEA was paid a fee equal to 5% of the proceeds
from any financing obtained by the Company through CEA's efforts and was
reimbursed for reasonable expenses. In addition, the Company also agreed to pay
CEA from $75 to $175, if the Company consummated a joint venture or affiliation
agreement with a third party in certain specified countries.
In the fourth quarter of 1997, the Company paid CEA $500 for its part in
negotiating the sale of the Company to TCIM (see Note 2).
The Company entered into a lease agreement with Island Trading Company,
Inc. ("Island"), owned by the principal shareholder of the Company, to lease
approximately 16,000 square feet of office space in Miami Beach, Florida for a 7
year period beginning February 1995. Payment of rent commenced on July 15, 1995,
at a base rental of $22.00 per square foot for the first year and increasing to
$39.00 per square foot for the seventh and final year of the lease term. The
base rental does not include certain operating expenses to be paid by the
Company. The Company has the right to renew the lease subject to the negotiation
of a new rental rate, based upon the then-current market rate. The Company
incurred rental expense for this lease totaling approximately $453, $20 and $472
for the period from January 1 through December 16, 1997, the period from
December 17, 1997 through December 31, 1997 and the year ended December 31,
1998, respectively.
Pursuant to program affiliation agreements between the Company and cable
operators affiliated with stockholders, the Company incurred approximately
$1,167 in 1997 for affiliate fees.
On August 4, 1997, the Company exchanged 770,842 shares of common stock
with Suburban TV Co. Inc. for the right to broadcast their programming to
certain new cable subscribers. This transaction was measured and recorded based
on the fair value of the consideration received, or $771, since the Company
believes this is the best indicator of value, and this amount is being amortized
over a seven year period. The fair value of the consideration received was
equivalent to the underlying fair value of the Company's common stock. The
Chairman of the Company also owns a controlling interest in Suburban Cable TV
Co. Inc.
TCIM provided the Company with certain general and administrative services
including insurance, legal, treasury, financial and other corporate functions.
The allocation of expenses was based on a percentage of weighted average funding
provided to the Company by TCIM.
The charges for such services were $60 and $840 for the period from
December 17, 1997 through December 31, 1997 and the year ended December 31,
1998, respectively. Management believes that the methodologies used to allocate
these charges are reasonable, however, these allocations of costs and expenses
do not necessarily indicate the costs and expenses that would have been incurred
by the Company had they been on a stand-alone basis.
In 1998, in addition to the overhead allocation discussed above, TCIM
allocated approximately $564 in interest expense to the Company on advances due
to TCIM.
During 1998, SonicNet, a wholly owned subsidiary of TCIM, designed and
developed an Internet website for the Company. The 1998 Statement of Operations
includes other expenses of $123 related to the work performed by SonicNet.
F-62
<PAGE> 150
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
On October 1, 1998, the Company entered into a one year agreement with
America Online, Inc. ("AOL") and SonicNet whereby AOL provides SonicNet with
anchor tenant distribution within the music subchannel offered on the AOL
Service. As part of this agreement, the Company will provide $450 of in-kind
advertising commitments on behalf of SonicNet. The Company is recording the
revenue from SonicNet ratably over the term of the agreement.
NOTE 10--COMMITMENTS AND CONTINGENCIES
The Company leases its main and regional offices and various office
equipment under several operating lease agreements. Rent expense for office
space and local box installation sites was approximately $1,601, $70 and $1,960
for the period from January 1, 1997 through December 16, 1997, the period from
December 17, 1997 through December 31, 1997 and the year ended December 31,
1998, respectively. At December 31, 1998, future minimum payments under these
non-cancelable leases are as follows:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
1999........................................................ $2,057
2000........................................................ 1,363
2001........................................................ 701
2002........................................................ 33
------
$4,154
======
</TABLE>
The Company has entered into written programming agreements with
approximately 81% of the cable system operators that presently carry the
Company's programming in the United States. Pursuant to such affiliation
agreements entered into prior to 1998, the Company pays cable operators the
greater of a guaranteed minimum monthly fee per subscriber or a specified
percentage of the gross revenues generated by each cable operator's system.
Agreements entered into in 1998, and planned to be offered for new affiliates in
1999 and thereafter, generally do not require any monthly payments to be made to
affiliates. Instead, an upfront launch incentive is paid for a long-term
carriage agreement.
The Company is involved in ordinary and routine litigation incidental to
its business. Management believes that any ultimate liability resulting from
those actions or claims will not have a material adverse effect on the Company's
combined results of operations, financial position or cash flows.
NOTE 11--OPERATIONS BY GEOGRAPHIC AREA
The following table shows revenues and long-lived assets by geographic
area. Transfers between geographic areas were not significant.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
DECEMBER 1, DECEMBER 17,
1997 THROUGH 1997 THROUGH YEAR ENDED
DECEMBER 16, DECEMBER 31, DECEMBER 31,
1997 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
United States........................ $18,605 $715 $21,602
Europe............................... 999 76 2,171
Latin America and other.............. 787 51 2,011
------- ---- -------
Total revenues.................... $20,391 $842 $25,784
======= ==== =======
</TABLE>
F-63
<PAGE> 151
THE BOX WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C> <C>
LONG-LIVED ASSETS, NET
United States.................................. $38,316 $41,934
Europe......................................... 770 882
Latin America and other........................ 562 520
------- -------
Total long-lived assets, net................ $39,648 $43,336
======= =======
</TABLE>
F-64
<PAGE> 152
The MTVi Group, Inc.
<PAGE> 153
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
[ALTERNATE COVER PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS (Subject to Completion)
Issued February 11, 2000
Shares
The MTVi Group, Inc.
CLASS A COMMON STOCK
------------------------
THE MTVi GROUP, INC. IS OFFERING SHARES OF ITS CLASS A COMMON STOCK. THIS IS OUR
INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND
$ PER SHARE.
FOLLOWING THIS OFFERING, WE WILL HAVE TWO CLASSES OF AUTHORIZED COMMON STOCK,
CLASS A COMMON STOCK AND CLASS B COMMON STOCK. THE RIGHTS OF THE HOLDERS OF
CLASS A COMMON STOCK AND CLASS B COMMON STOCK ARE IDENTICAL, EXCEPT WITH RESPECT
TO VOTING AND CONVERSION.
------------------------
WE HAVE APPLIED TO HAVE OUR CLASS A COMMON STOCK APPROVED FOR LISTING ON THE
UNDER THE SYMBOL " ."
------------------------
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
-------- ------------- -----------
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total......................................... $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to an additional
shares of our Class A common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2000.
------------------------
MORGAN STANLEY DEAN WITTER CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS INTERNATIONAL LIMITED MERRILL LYNCH INTERNATIONAL
UTENDAHL CAPITAL PARTNERS, L.P. WIT SOUNDVIEW
, 2000
<PAGE> 154
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee........................................ $2,640
NASD filing fee............................................. 1,500
listing fee....................................... *
Blue Sky fees and expenses.................................. *
Attorneys' fees and expenses................................ *
Accountants' fees and expenses.............................. *
Transfer Agent's and Registrar's fees and expenses.......... *
Printing and engraving fees................................. *
Miscellaneous............................................... *
------
Total............................................. *
======
</TABLE>
- ------------
* To be supplied by amendment.
The amounts set forth above are estimates except for the SEC registration
fee and the NASD filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides, in summary,
that directors and officers of Delaware corporations are entitled, under certain
circumstances, to be indemnified against all expenses and liabilities, including
attorneys' fees, incurred by them as a result of suits brought against them in
their capacity as a director or officer, if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
MTVi Group, and, with respect to any criminal action or proceeding, if they had
no reasonable cause to believe their conduct was unlawful; provided that no
indemnification may be made against expenses in respect of any claim, issue or
matter as to which they shall have been adjudged to be liable to MTVi Group,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, they are fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper. Any such indemnification may be made by MTVi Group only as authorized in
each specific case upon a determination by the shareholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct.
MTVi Group's certificate of incorporation provides that to the fullest
extent permitted by the laws of the State of Delaware, as the same may be
amended from time to time, a director of MTVi Group shall not be personally
liable to MTVi Group or its stockholders for monetary damages for breach of
fiduciary duty as a director.
MTVi Group's certificate of incorporation and bylaws provide for
indemnification of its directors and officers to the fullest extent permitted by
Delaware law, as the same may be amended from time to time.
In addition, MTVi Group maintains liability insurance for its directors and
officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In February 2000, MTVi Group issued 100 shares of common stock to Viacom in
a private placement. No underwriters, brokers or other agents were involved in
this transaction. These securities were issued pursuant to an exemption from
registration provided by Section 4(2) of the Securities Act.
II-1
<PAGE> 155
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Form of Restated Certificate of Incorporation
3.2* Form of Bylaws
4.1* Form of Class A Common Stock Certificate
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* Indemnification Agreement between Registrant and MTV
Networks, a division of Viacom International Inc., dated as
of , 2000
10.13* Registration Rights Agreement between Registrant and MTV
Networks, a division of Viacom International Inc., dated as
of , 2000
10.14* Credit Agreement between The MTVi Group, L.P. and Viacom
Inc. dated as of , 2000
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 Ernst & Young LLP
23.5* Consent of Shearman & Sterling (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1* Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment.
II-2
<PAGE> 156
(b) FINANCIAL STATEMENT SCHEDULES.
The schedules have been omitted because of the absence of circumstances
under which they could be required.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding, is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the U.S. underwriting agreement and the
international underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-3
<PAGE> 157
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in New York,
New York on February 11, 2000.
The MTVi Group, Inc.
By: /s/ NICHOLAS BUTTERWORTH
------------------------------------
Nicholas Butterworth
President and Chief Executive
Officer
The undersigned Directors and Officers of The MTVi Group, Inc. hereby
constitute and appoint Nicholas Butterworth and Michael D. Fricklas, and each of
them severally, as the true and lawful attorneys-in-fact for the undersigned,
with full power of substitution and resubstitution, for and in the name, place
and stead of the undersigned, to sign and file with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act"),
any and all amendments (including post-effective amendments) and exhibits to
this Registration Statement, any related registration statement and its
amendments and exhibits filed pursuant to Rule 462(b) under the Securities Act
and any and all applications and other documents to be filed with the Securities
and Exchange Commission pertaining to the registration of the securities covered
hereby or under any related registration statement or any amendment hereto or
thereto, with full power and authority to do and perform each and every act and
thing requisite and necessary or desirable, hereby ratifying and confirming all
that each such attorney-in-fact or its substitute shall lawfully do or cause to
be done by virtue hereof.
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 February 11, 2000
- ------------------------------------ and Director (Principal Executive
Nicholas Butterworth Officer)
/s/ GEORGE S. SMITH, JR. Acting Senior Vice President and February 11, 2000
- ------------------------------------ Acting Chief Financial Officer
George S. Smith, Jr. (Principal Financial and Accounting
Officer)
/s/ SUMNER M. REDSTONE Chairman of the Board of Directors February 11, 2000
- ------------------------------------
Sumner M. Redstone
/s/ PHILIPPE P. DAUMAN Director February 11, 2000
- ------------------------------------
Philippe P. Dauman
/s/ THOMAS E. DOOLEY Director February 11, 2000
- ------------------------------------
Thomas E. Dooley
Director February 11, 2000
- ------------------------------------
Lee Masters
</TABLE>
II-4
<PAGE> 158
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ------------------------------------------------------------ -------------
<S> <C> <C>
1.1* Form of Underwriting Agreement
3.1* Form of Restated Certificate of Incorporation
3.2* Form of Bylaws
4.1* Form of Class A Common Stock Certificate
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* Indemnification Agreement between Registrant and MTV
Networks, a division of Viacom International Inc., dated as
of , 2000
10.13* Registration Rights Agreement between Registrant and MTV
Networks, a division of Viacom International Inc., dated as
of , 2000
10.14* Credit Agreement between The MTVi Group, L.P. and Viacom
Inc. dated as of , 2000
21.1* Subsidiaries of Registrant
23.1 Consent of PricewaterhouseCoopers LLP
</TABLE>
II-5
<PAGE> 159
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ------------------------------------------------------------ -------------
<S> <C> <C>
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of Ernst & Young LLP
23.5* Consent of Shearman & Sterling (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1* Financial Data Schedule
</TABLE>
- ------------
* To be filed by amendment.
II-6
<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 combined financial statements of MTVN
Online Music at December 31, 1997 and 1998 and for each of the three 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
February 11, 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
February 11, 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
February 11, 2000
<PAGE> 1
EXHIBIT 23.4
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. 333-00000) of The MTVi Group, Inc. for
the registration of its common stock.
/s/ Ernst & Young LLP
--------------------------------------
Miami, Florida
February 10, 2000
