<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 7, 1996
REGISTRATION NO. 333-12185
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MAGINET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
CALIFORNIA (PRIOR TO 4841 77-0407677
REINCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER
DELAWARE (AFTER INDUSTRIAL IDENTIFICATION NUMBER)
REINCORPORATION) CLASSIFICATION CODE
NUMBER)
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR
ORGANIZATION)
405 TASMAN DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 752-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
KENNETH B. HAMLET
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MAGINET CORPORATION
405 TASMAN DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 752-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
THOMAS C. DEFILIPPS, ESQ. EDWARD M. LEONARD, ESQ.
WILSON SONSINI GOODRICH & ROSATI BROBECK, PHLEGER & HARRISON LLP
PROFESSIONAL CORPORATION TWO EMBARCADERO PLACE
650 PAGE MILL ROAD 2200 GENG ROAD
PALO ALTO, CA 94304 (415) 493-9300 PALO ALTO, CA 94303 (415) 424-0160
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) FEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value... 5,750,000 $14.00 $80,500,000 $27,758.62(3)
</TABLE>
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(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) promulgated under the
Securities Act of 1933, as amended.
(3) Previously paid.
----------------
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 WHICH 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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated October 7, 1996
PROSPECTUS
5,000,000 SHARES
LOGO
COMMON STOCK
------------
Of the 5,000,000 shares of Common Stock, $.001 par value ("Common Stock"), of
MagiNet Corporation ("MagiNet" or the "Company") being offered hereby,
4,000,000 shares are being offered initially in the United States and Canada by
the U.S. Underwriters (the "U.S. Offering") and 1,000,000 shares are being
offered initially outside the United States and Canada by the International
Managers (the "International Offering"). Such offerings are referred to
collectively as the "Offerings."
Prior to the Offerings, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price per share will be between $12.00 and $14.00 per share. See "Underwriting"
for a discussion of factors to be considered in determining the initial public
offering price. Application has been made to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol "MGNT."
------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
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<S> <C> <C> <C>
Per Share.................................. $ $ $
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Total(3)................................... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the U.S. Underwriters and the
International Managers against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of the Offerings estimated at
$1,050,000 payable by the Company.
(3) The Company has granted to the U.S. Underwriters a 30-day option to
purchase up to 600,000 additional shares of Common Stock on the same terms
and conditions as set forth above solely to cover over-allotments, if any.
The International Managers have been granted a similar option to purchase
up to 150,000 additional shares of Common Stock solely to cover over-
allotments, if any. If such options are exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting."
------------
The shares of Common Stock offered by this Prospectus are offered by the U.S.
Underwriters, subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
U.S. Underwriters and to certain other conditions. It is expected that delivery
of such shares will be made at the offices of Lehman Brothers Inc., New York,
New York, on or about , 1996.
------------
LEHMAN BROTHERS HAMBRECHT & QUIST
, 1996
<PAGE>
[INSIDE FRONT COVER]
[MAGINET LOGO]
[ARTWORK]
----------------
IN CONNECTION WITH THE OFFERINGS, THE U.S. UNDERWRITERS AND THE
INTERNATIONAL MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE
OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL
ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS
MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
[GATEFOLD--FIRST PAGE]
MagiNet is the largest provider of in-room on-demand video entertainment and
information systems outside North America.
[Graphic: Underneath the above caption on both the first and second page of
the gatefold is a map of the continents outside of North and South America
with the countries where there are MagiNet installations indicated]
[Graphic: Two images of a television screen showing the Company's welcome
channel.]
Currently being tested in Australia, MagiNet's new Welcome Channel introduces
feature Hollywood movie trailers, advertising commercials, promotions and
instructions in five languages--all with the quality of network television
broadcasting.
MagiNet users are business and leisure guests at the world's leading hotels.
[Graphic: One image of a television screen showing casino-style gaming, and
two images of a television screen showing Bloomberg Information TV.]
In an exclusive agreement with InterGame, MagiNet will be able to provide
in-room, interactive casino-style gaming in hotel rooms worldwide where
jurisdictions allow. MagiNet also expects to distribute Bloomberg Information
Television, a 24-hour financial news program to hotels, starting with a test
in Israel in late 1996.
<PAGE>
[GATEFOLD-SECOND PAGE]
[Graphic: Three images of a television screen: one showing a welcome screen;
one showing a movie menu; and one showing text describing a movie.]
MagiNet's mainstay is on-demand entertainment, such as Hollywood
blockbusters and adult theme movies. Plus, hotel information and guest
services such as in-room check out and folio review. Providing guests as many
choices as possible is MagiNet's formula for winning the world's leading
hotels.
MagiNet has over 50,000 rooms installed with on-demand systems
250% annualized growth in rooms since 1993
[Graphic: Three images of a television screen showing an information
directory known as iLook.]
iLook is an interactive information and resource directory for travelers
that can provide hotel guests immediate and easy access to thousands of
businesses, services, restaurants, shops and cultural information. iLook is
expected to be launched in Thailand in early 1997, and is one of several
products being developed as additional revenue sources.
The world's leading hotels have selected MagiNet for their interactive
entertainment and information systems.
Sheraton On The Park, australia Yokohama Grand Inter-Continental
Hotel, japan
Inter-Continental Sydney, australia Regent Auckland, new zealand
Guam Hilton, Guam The Orchard Hotel, Singapore
Mandarin Oriental, Hong Kong Sandton Sun & Towers, South Africa
JW Marriott, Hong Kong Durban Crowne Plaza, South Africa
Island Shangri-La, Hong Kong Hotel Lotte, South Korea
Regent Hong Kong, Hong Kong Hotel Shilla, South Korea
Hilton Tel Aviv, Israel Grand Formosa Regent, Taiwan
Sheraton Tel Aviv, Israel Grand Hyatt Taipei, Taiwan
Hotel Inter-Continental Tokyo Bay, Shangri-La Hotel, Thailand
Japan
Hotel Okura Tokyo, Japan Regent Bangkok, Thailand
Grand Hyatt Fukuoka, Japan
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
MagiNet is the leading supplier of on-demand interactive video entertainment
and information services to the hospitality industry outside of North America.
The Company installs integrated video systems that allow hotel guests to order
pay-per-view movies on-demand. MagiNet has recently expanded these systems into
entertainment and information gateways that offer an increasingly varied range
of services, such as on-demand billing summaries, express checkout,
personalized messaging, guest surveys and room service ordering. The Company
expects to implement additional revenue enhancing services such as in-room
casino-style gaming, advertising, video games, financial news, Internet access
and in-room shopping in selected markets beginning in 1997.
To date, the Company has focused principally on leading hotels in the Pacific
Rim. Recently, the Pacific Rim has been experiencing a higher rate of economic
expansion and hotel construction than any other region in the world. Leading
hotels in this region are generally characterized by high occupancy and room
rates. The Company currently has operations and installations in Thailand,
Australia, Japan, Taiwan, Guam/Saipan, Hong Kong, Singapore, South Korea, South
Africa, Israel, New Zealand and France, and plans to expand its presence in the
Pacific Rim, Europe, the Middle East and Africa. MagiNet began installing its
systems in 1993 and, between 1993 and 1995, increased its installed base of
rooms from 2,087 to 39,122 and increased revenue from $395,000 to $8.7 million.
As of June 30, 1996, MagiNet served 138 hotels having 49,683 rooms, with an
additional 20,868 rooms in backlog. There are approximately two million hotel
rooms in MagiNet's current and target markets.
The Company's installed base includes certain hotels in the Hilton
International, Hyatt International, Inter-Continental, Mandarin Oriental,
Marriott, Okura, Regent/Four Seasons, Shangri-La, Sheraton, Southern Pacific
Hotel Corporation, Westin and other hotel chains. The Company has preferred
vendor status for future installations in hotels within the Hyatt
International, Shangri-La and Southern Pacific Hotel Corporation chains. In
addition, the Company believes there is a substantial opportunity to penetrate
the mid-market hotel sector in its target markets.
The Company holds an exclusive license to provide the on-demand interactive
video system developed by On Command Video Corporation in more than 30
countries outside of North America, and a license to provide the on-demand
interactive video system developed by Guestserve Development Group to all
countries outside of North America. MagiNet installs its systems in hotels at
the Company's cost and receives revenue from guest usage pursuant to five-to-
seven year contracts giving MagiNet the exclusive right to provide the hotel
with in-room on-demand video entertainment and information services. To date,
the Company's principal on-demand video entertainment services have provided a
reasonably predictable stream of recurring revenue during the term of these
exclusive contracts. The Company believes its new services will appeal to a
broader group of hotel guests than traditional purchasers of in-room video
entertainment and should increase revenue per installed room.
Beginning in early 1996, the Company added several key members to its
management team, including Kenneth B. Hamlet, its Chief Executive Officer, and
Gordon E. (Ned) Druehl, Jr., its Chief Operating Officer, both having over
twenty years of experience in the hospitality industry. Mr. Hamlet and Mr.
Druehl, as part of their executive responsibilities at Holiday Inns, Inc.,
managed a division known as HiNet which provided free-to-guest scheduled
broadcast and on-demand video entertainment to Holiday Inns hotels. This
management team further defined the Company's strategy to expand its installed
room base by (i) leveraging its strong market position to obtain contracts with
other leading hotels, (ii) penetrating existing or new target markets, directly
or through acquisition, and (iii) offering services to mid-market hotels in
target regions. In addition, this management team was influential in
establishing strategic relationships with Bloomberg for information and news
television programming, with InterGame for in-room casino-style gaming and with
Trinity Group for in-room advertising.
The Company incorporated in California in July 1991, changed its name from
Pacific Pay Video Limited to MagiNet Corporation in August 1995 and will
reincorporate into Delaware prior to the completion of the Offerings. Unless
the text otherwise requires, references in this Prospectus to "MagiNet" and the
"Company" refer to MagiNet Corporation, a California corporation, and its
Delaware successor, together with their subsidiaries. The Company's principal
executive offices are located at 405 Tasman Drive, Sunnyvale, California 94089,
and its telephone number at that address is (408) 752-1000.
3
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock initially offered in:
The U.S. Offering.................. 4,000,000 shares
The International Offering......... 1,000,000 shares
Total Common Stock offered........ 5,000,000 shares
----------
Common Stock to be outstanding after
the Offerings...................... 18,435,436 shares(1)
Use of proceeds..................... System installations, working capital and
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol............................. MGNT
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER
DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue.................. $ 395 $ 2,342 $ 8,689 $ 3,302 $ 7,923
Direct costs............. 294 1,156 3,731 1,687 3,854
Depreciation and
amortization............ 171 957 3,682 1,510 3,149
Operations expenses...... 464 2,876 3,108 1,213 1,016
Selling, general and
administrative.......... 1,497 4,294 8,420 3,563 4,652
Research and
development............. 1,320 856 1,247 571 937
------- ------- -------- -------- --------
Operating loss........... (3,351) (7,797) (11,499) (5,242) (5,685)
Interest income
(expense), net.......... (28) (253) (991) 4 (1,382)
------- ------- -------- -------- --------
Loss before income taxes
and minority interest in
net losses of
consolidated
subsidiaries............ (3,379) (8,050) (12,490) (5,238) (7,067)
Provision for income
taxes .................. -- -- (554) (300) (383)
Minority interest in net
losses of consolidated
subsidiaries............ -- 124 248 153 124
------- ------- -------- -------- --------
Net loss................. $(3,379) $(7,926) $(12,796) $ (5,385) $ (7,326)
======= ======= ======== ======== ========
Pro forma net loss per
share(2)................ $ (1.03) $ (0.59)
======== ========
Shares used in
computation of pro forma
net loss per share(2)... 12,392 12,407
OTHER DATA:
EBITDA (In
thousands)(3)........... $(3,180) $(6,840) $ (7,817) $ (3,732) $ (2,536)
EBITDA margin............ (805)% (292)% (90)% (113)% (32)%
New rooms installed...... 2,087 10,929 26,106 14,632 10,561
Total rooms served(4).... 2,087 13,016 39,122 27,648 49,683
Rooms in backlog......... -- 10,941 12,194 10,574 20,868
Average monthly gross
video revenue per room.. -- $ 32.39 $ 29.18 $ 30.05 $ 29.60
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED(5)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..... $ 14,772 $ 74,172
Working capital....................................... 13,571 72,971
Total assets.......................................... 52,185 111,585
Long-term debt........................................ 25,403 25,403
Accumulated deficit................................... (32,800) (32,800)
Total stockholders' equity............................ 20,163 79,563
</TABLE>
4
<PAGE>
(1) Based on shares outstanding as of June 30, 1996. Excludes as of June 30,
1996, an aggregate of 1,487,394 shares of Common Stock issuable upon
exercise of options outstanding under the Company's 1992 Key Personnel
Stock Option Plan and 1992 Stock Option Plan at a weighted average exercise
price of $1.55. See "Management--Stock Plans," "Certain Transactions" and
Note 5 of Notes to Consolidated Financial Statements. Also excludes an
aggregate of 2,560,528 shares reserved for issuance after June 30, 1996
under the 1992 Key Personnel Stock Option Plan, the 1996 Director Stock
Option Plan and the 1996 Employee Stock Purchase Plan. See "Management--
Stock Plans."
(2) See Note 1 of Notes to Consolidated Financial Statements for a discussion
of the computation of net loss per share.
(3) Indicates earnings (loss) before interest expense, income taxes,
depreciation and amortization, and minority interest in net losses of
consolidated subsidiaries and is not intended to represent an alternative
to net income (as determined in accordance with generally accepted
accounting principles) as a measure of performance. Management of the
Company believes that EBITDA provides an additional perspective on the
Company's operating results and its ability to service its long-term debt
and fund its operations.
(4) Includes all rooms installed with Company-owned systems.
(5) Adjusted to reflect the net proceeds of the sale of Common Stock offered by
the Company hereby at an assumed initial public offering price of $13.00
per share and the application thereof. See "Use of Proceeds."
----------------
Except as set forth in the Consolidated Financial Statements or otherwise
indicated herein, all information in this Prospectus (i) reflects the
reincorporation of the Company into Delaware which will be effected prior to
the effectiveness of the registration statement covering the Offerings, (ii)
reflects the conversion of all the Company's outstanding shares of Preferred
Stock into 10,908,878 shares of Common Stock, which will occur automatically
upon the closing of the Offerings, (iii) reflects the filing, upon the closing
of the Offerings, of the Company's Restated Certificate of Incorporation
authorizing 5,000,000 shares of undesignated Preferred Stock, (iv) assumes the
net exercise of warrants to acquire up to an aggregate maximum of 3,704,840
shares of Common Stock and Preferred Stock for 2,045,800 shares of Common Stock
in connection with the Offerings at an assumed fair market value of $13.00 per
share and (v) assumes that the U.S. Underwriters' and International Managers'
over-allotment options are not exercised. See "Description of Capital Stock,"
"Underwriting" and Note 5 of Notes to Consolidated Financial Statements.
----------------
MagiNet and iLook are trademarks of the Company. This Prospectus also
contains trademarks and tradenames of other companies.
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements relating to future
events or the future financial performance of the Company, which involve risks
and uncertainties. The Company's actual results and the timing of certain
events could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus. In addition to the
other information contained in this Prospectus, the following factors should
be carefully considered in evaluating the Company and its business before
purchasing the Common Stock offered hereby.
DEPENDENCE ON HOTEL INDUSTRY AND GUEST VIEWING PATTERNS
MagiNet's business is closely linked to the performance of the hotel
industry in the Company's targeted geographic markets. A decline in hotel
occupancy from current levels or changes in the mix of hotel business and
leisure guests as a result of general business, economic, seasonal or other
factors could have a material adverse effect on the Company's business,
financial condition and results of operations. MagiNet's performance is also
dependent on the frequency with which hotel guests purchase its services ("buy
rates"). Buy rates are subject to a variety of factors, including censorship
of adult theme movies, pricing of the movies, availability of popular titles,
general guest preferences and general economic conditions. MagiNet's
performance is also dependent on the relative buy rates of major motion
pictures to adult theme movies. For major motion pictures, the Company
generally pays ongoing licensing royalties equal to a percentage of the film's
gross revenue to the Company. For most adult theme movies, from which the
Company currently derives a majority of its revenue, the Company generally
pays a comparatively small, one-time fee. As a result, a shift in viewing
patterns away from these movies, or any limitation imposed on the offering of
such movies (including censorship by governmental authorities, unavailability
of titles, or restrictions imposed by customer hotels), would adversely affect
the Company's business, financial condition and results of operations. For
example, the Company has experienced significantly lower buy rates in censored
markets than in uncensored markets. Free-to-guest services such as HBO and
other cable stations compete directly with the Company's services. Such
alternative viewing choices available to hotel guests may reduce the buy rate
in the rooms installed with MagiNet's systems. Any change in guest viewing
patterns that reduces the buy rate of the Company's services could have a
material adverse effect on the Company's business, financial condition and
results of operations.
HISTORY OF LOSSES; FUTURE CAPITAL NEEDS; ANTICIPATED FUTURE LOSSES
MagiNet has recorded cumulative net losses of approximately $32,800,000
since its inception, including a loss of approximately $7,326,000 for the six
months ended June 30, 1996. MagiNet's business requires substantial investment
on a continuing basis for the installation of MagiNet's systems in additional
hotel rooms and the upgrading of existing installations. Capital expenditures
expected to be incurred by the Company will likely exceed cash flows from its
operating activities for the foreseeable future. The Company intends to use
the net proceeds of the Offerings and may use other secured and/or unsecured
borrowings to expand its installed base of rooms and support its projected
growth. If the Company cannot obtain sufficient funds to support installations
of rooms, the Company may have to reduce the rate of room installations, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Whether or when the Company can achieve
cash flow levels from operations sufficient to support its projected growth
cannot be accurately predicted, and unless and until such cash flow levels are
achieved, the Company may require additional borrowings or the sale of
additional equity securities, or some combination thereof. There can be no
assurance that the Company will be able to borrow additional amounts or sell
additional equity on terms acceptable to the Company, or at all.
RELIANCE ON NEW HOTEL CONTRACTS AND INSTALLATIONS
MagiNet's future growth will depend principally on its ability to obtain
contracts with new hotels and to install systems in such hotels in a timely
manner. The timing of obtaining new contracts is dependent upon the level of
competition in a particular market, the length of the negotiating process with
each individual hotel and the amount of the Company's local personnel
resources allocated to obtaining contracts as opposed to servicing
6
<PAGE>
existing hotel customers. To the extent new contracts are not obtained in
future periods at the rate anticipated by the Company, there could be a
significant shortfall in the Company's anticipated growth in installed rooms.
The timing of system installations has historically been reasonably
predictable after a contract has been executed, although, for certain prior
installations, technical and other issues have delayed installations in
specific hotels. Under the Company's master hotel contracts, the Company must
install the interactive video entertainment and information system specified
in the contract with the hotel chain. The inability to provide the particular
system specified could delay installations of such systems in the individual
hotels within such chain, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The
inability of the Company to obtain new contracts and install systems at the
rate it currently anticipates for these or other reasons could have a material
adverse effect on the Company's future results of operations.
FLUCTUATIONS IN OPERATING RESULTS
MagiNet's operating results have historically been, and will continue to be,
subject to quarterly and annual fluctuations due to a variety of factors,
including: the time required to obtain new contracts and install systems;
timely introduction, enhancement and market acceptance of new services;
changes in the pricing policies by the Company or its competitors; increased
competition; the gain or loss of contracts with hotels or hotel chains; the
introduction of new products, product enhancements or new services by
competitors; currency fluctuations and other uncertainties related to
operating in multiple jurisdictions; hotel occupancy; buy rates; availability
of programming and the ability to anticipate changing hotel or guest
preferences. A significant portion of MagiNet's installations are in tropical
climates where occupancies are generally higher in the first and fourth
quarters of the year, and buy rates are typically lower in the third quarter
of each year. As a consequence, revenue per room is generally lowest in the
third quarter. There can be no assurance that new contracts can be obtained in
a timely manner, or at all, or that systems can be installed in a timely
manner after contracts are obtained. The Company's operating results will also
be affected by general economic and other conditions affecting the timing of
contracts and installations, capital spending, and order cancellations or
rescheduling.
SUBSTANTIAL FIXED COMMITMENTS
Funds generated by existing operations are not sufficient to enable the
Company to meet its debt service obligations on the Senior Secured Notes due
2000 (the "Notes"), together with other fixed charges. Net proceeds from the
Offerings will be used by the Company primarily to install new systems. If
sufficient revenue is not generated from these installations, the Company's
ability to make necessary payments with respect to the Notes would be
impaired, and the Company's ability to service the Notes would then depend
upon the Company's ability to secure additional funds from other sources.
There can be no assurance that the Company will be able to obtain such
additional funds on favorable terms, if at all. Further, the instruments
governing the Company's debt obligations contain or will contain financial and
other covenants, and no assurance can be given that the Company will comply
with such covenants. During 1996, the Company failed to comply with certain
financial covenants and obtained from the holders of the Notes an amendment of
the covenants in exchange for the Company issuing additional warrants to the
holders of the Notes. In addition, as of September 30, 1996, the Company is
not in compliance with a financial covenant under the Notes and has requested
an amendment of the covenant from the holders of the Notes. No assurance can
be given that the holders of the Notes will agree to an amendment of the
covenant on acceptable terms, if at all. Failure of the Company to comply with
the covenants, or in the event of non-compliance, to obtain an amendment of
the covenants, could result in acceleration of the maturity of the Company's
borrowings, which would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's debt
obligations will be subject to acceleration in the event that the Company does
not meet its principal and interest payments or comply with its covenants.
IMPORTANCE OF POTENTIAL NEW SOURCES OF REVENUE
MagiNet's strategy includes developing new applications and markets for its
interactive entertainment and information systems. This strategy presents the
risks inherent in assessing the value of development opportunities and
committing capital to unproven markets. The Company expects that its future
performance will be dependent on usage of additional services such as in-room
casino-style gaming and advertising provided over the Company's systems to
hotel guests. There can be no assurance that the Company's new products will
generate additional revenue or earnings for the Company or that the Company
will successfully penetrate these additional markets. In addition, any new
services provided by the Company could induce guests to change their viewing
patterns away from an existing service of the Company and toward a new service
resulting in either no additional revenue or decreased actual revenue from the
installed base of rooms, depending upon the pricing of the new
7
<PAGE>
services and the change in guest viewing patterns that may result. MagiNet
will devote resources to developing such services through licensing agreements
and other arrangements and marketing such services to hotels and to hotel
guests. To the extent that such services are not attractive to hotels and
hotel guests, that hotel guests do not utilize such services to the extent
necessary to generate a sufficient return on the Company's development and
marketing expenditures or that governmental regulation prohibits the provision
of these services, the Company's business, financial condition and results of
operations would be adversely affected.
EXPANSION OF BUSINESS THROUGH ACQUISITIONS
Part of MagiNet's business strategy is to pursue acquisitions that will
complement its existing business. The Company has had preliminary discussions
with, or has evaluated the potential acquisition of, several companies.
Although no such transaction is being considered at this time, the Company is
unable to predict whether or when any prospective acquisition candidates will
become available or the likelihood of a material transaction being completed
should any negotiations commence. There can be no assurance that any
acquisitions will occur, that the Company can be successful in integrating the
operations and personnel of an acquired entity into the Company's business,
incorporating any acquired product lines into the Company's business,
establishing and maintaining uniform standards, controls, procedures and
policies, avoiding the impairment of relationships with employees and
management as a result of changes in management, or overcoming other problems
that may be encountered in connection with the integration of acquired
businesses. To the extent MagiNet proceeds with such a transaction, and if
such transaction is relatively large and consideration is in the form of cash,
a substantial portion of the Company's available cash, including the net
proceeds of the Offerings, could be used in order to consummate any such
acquisition. The Company may also seek to finance any such acquisition through
issuances of equity or debt financings, which could be dilutive to, or have an
adverse impact on, the Company's earnings. There can be no assurance that any
such financings will be available on acceptable terms or at all.
SYSTEM RELIABILITY
MagiNet has experienced and continues to experience problems with certain
equipment, including converters and remote control units. The Company has
replaced equipment at some hotels to correct problems that affected the
delivery of the Company's services to the hotel guests. It is possible that
the Company's systems may be found to be unreliable after installation at a
hotel or hotels. Such occurrences could result in the Company devoting
substantial resources to maintenance services for the systems, and could
result in a substantial number of installed rooms not having the Company's
services available for an extended period of time. Because substantially all
of the Company's revenue is derived from use of the Company's on-demand
services, system unreliability could result in reduced revenue for the Company
and dissatisfaction among hotels because of reduced commission revenue to the
hotel and disruption of certain hotel operations, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON LOCAL PARTNERS; INTERNATIONAL BUSINESS
All of MagiNet's revenue is generated outside of the United States,
subjecting the Company to a variety of risks that, individually or in the
aggregate, may adversely affect the Company's business, financial prospects
and results of operations. These risks include changes in political and
economic conditions; the availability and reliability of local independent
contractors for installation and maintenance services; differing legal and
business practices, particularly in regard to interpretation and
enforceability of contracts; changes in taxes, tariffs, freight rates and
foreign exchange regulations; foreign currency fluctuations; censorship by
governmental authorities or restrictions imposed by hotels and changes in the
regulatory environment relating to the telecommunications and media industries
in any of the Company's target markets. The Company has entered into joint
ventures or similar arrangements in certain of its markets with local
businesses and individuals believed by the Company to be familiar with local
laws, customs and practices and to be otherwise advantageous to the Company's
business prospects in that market. The Company believes that its success in
penetrating markets for its products depends in large part on its ability to
maintain these relationships, to cultivate additional relationships and to
cultivate alternative relationships if distribution channels change. Despite
these efforts, there can be no assurance that the Company will be successful
in avoiding or minimizing such risks or that such arrangements, if successful,
will
8
<PAGE>
continue to provide significant benefits to the Company and will not expose
the Company to potential liability as a consequence of actions taken by the
Company's local joint venture partners.
Most of MagiNet's revenue is denominated in foreign currencies. The Company
has not historically attempted to reduce the risk of currency fluctuations by
hedging except in certain limited circumstances. The Company may attempt to
reduce these risks by hedging in the future. Changes in the exchange rates of
foreign currencies or exchange controls may adversely affect the Company's
results of operations. There can be no assurance that the Company's current or
any future currency exchange strategy will be successful in avoiding exchange
related losses or that any of the factors listed above will not have a
material adverse effect on the Company's future international revenue and,
consequently, on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEPENDENCE UPON SUPPLIERS; SOLE SOURCES OF SUPPLY
MagiNet currently subcontracts the manufacture of its systems, including
head-ends, converters and remote controls. The Company's remote controls for
the OCV-based systems are manufactured by one company in Hong Kong, the remote
controls for the Guestserve-based systems are manufactured by one company in
China and the Company's converters are manufactured by three companies, one in
each of Taiwan, Japan and Singapore. The OCV-based head-ends are currently
available solely from OCV, and the Guestserve-based head-ends are available
solely from Guestserve. OCV is a majority-owned subsidiary of Ascent
Entertainment Group, Inc., which has recently acquired the assets of
SpectraVision, Inc. ("SpectraVision"), a competitor of the Company in the
Pacific Rim. MagiNet believes that similar contract manufacturing can be
obtained from other vendors, including those located in the Pacific Rim,
although no assurance can be given that such manufacturing resources will
continue to be available on reasonable terms, or at all. The Company will
pursue such alternative manufacturing arrangements when and if it appears
likely that significant cost savings or quality improvements can be achieved.
At present, the Company has no plans for alternative sourcing of the system or
major system sub-assemblies.
The Company has experienced delays in receiving converters for installations
planned for the Guestserve-based systems, and these delays caused an
approximately three to four month delay in installing certain hotels. Delays
in receiving products could delay a large number of planned room
installations. There can be no assurance that the Company will not face such
difficulties or delays in the future. An inability of the Company to obtain
sole-sourced or other components in a timely manner could significantly delay
installations of systems, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, any increase in cost to manufacture the system components from
existing or alternative sources could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Manufacturing."
DEPENDENCE ON KEY PERSONNEL
MagiNet's success depends upon the continued contributions of certain senior
corporate managers and key employees, the loss of whose services could have a
material adverse effect on the Company. The Company also depends on its
continued ability to attract and retain other highly skilled and qualified
personnel, and there can be no assurance that the Company will be successful
in attracting and retaining such personnel. See "Management."
COMPETITION
MagiNet competes with a number of companies, including SpectraVision,
Movielink Corporation Limited ("Movielink") and LodgeNet Entertainment
Corporation ("LodgeNet"), that specialize in providing in-room video services.
Certain of these competitors have greater financial, technical, sales and
marketing resources to devote to the development, promotion and sale of their
products, and may have longer operating histories, greater name recognition,
and greater market acceptance for their products and services compared to
those of the
9
<PAGE>
Company. SpectraVision was one of the earliest entrants into the hotel
entertainment market, and has developed its GuestChoice technology, which
allows guests to choose movies to watch on demand. Movielink, a privately-held
Australian company, represents the Company's primary competition in the
Pacific Rim. Movielink, which recently introduced an on-demand system, has a
large base of free-to-guest systems in Australia and in Singapore and has a
small number of installations in Hong Kong and Thailand. Although LodgeNet
markets its systems primarily in the United States, LodgeNet has recently
entered certain of the Company's markets.
The Company also experiences separate competition in certain specific
countries. For example, in Japan certain large international corporations,
such as Toshiba Corporation, Pioneer Electronic Corp., Hitachi, Ltd., and
Matsushita Electric Industrial Co., Ltd., which supply the Japanese
hospitality industry with master antenna television systems, sometimes offer a
scheduled broadcast, pay-per-view movie capability. In addition, Gosoh, Ltd.
competes in Hong Kong with a scheduled broadcast, pay-per-view system. In
Europe the Company faces competition from PRODAC Prozebdatentechnik GmbH,
Thorn-EMI Plc, Video Management Services, Inc. and Granada Group Plc, which
have installed mainly free-to-guest and scheduled systems.
The Company could also face competition in the future from existing and
emerging cable, direct broadcast satellite and other communications companies
providing entertainment and other in-room services to hotels and hotel guests.
Certain of these potential competitors have greater financial, managerial and
marketing resources than the Company. There can be no assurance that the
Company will continue its current level of success in obtaining new contracts
with hotels or that the Company will be able to retain contracts with the
hotels it serves when those contracts expire. The loss of one or more of its
major hotel chains could have a material adverse impact on the Company's
business, financial condition and results of operations. As competition
increases, the Company anticipates that system life cycles may shorten and
hotel commissions may increase resulting in reduced operating margins for the
Company.
The Company's ability to compete successfully depends on many factors,
including the success of competitors' systems and services, the ability to
interface directly with hotel property management systems, the ability to
provide appropriate programming for an international audience, obtaining
leading hotel contracts and name recognition among hotels, the quality of its
programming and services, the reliability of its systems, general economic
conditions and protection of Company and third-party licensor products by
effective utilization of intellectual property laws. In particular,
competitive pressures from existing or new competitors who offer lower prices
or other incentives or introduce new systems could result in price reductions
which would adversely affect the Company's profitability. There can be no
assurance that the Company's current or other new competitors will not develop
enhancements to, or future generations of, competitive systems and services
that offer superior price or performance features, that the Company will be
able to compete successfully in the future or that the Company will not be
required to incur substantial additional investment costs in connection with
its development, marketing and customer service efforts in order to meet any
competitive threat. The Company expects competition in its markets to
intensify. See "Business--Competition."
RISK OF OBSOLESCENCE
The markets for MagiNet's systems and services are characterized by changing
technologies, varying customer requirements in different markets, significant
new system designs, frequent new service introductions and changes in customer
requirements. The Company believes that its future success will depend upon
its ability to license technology on commercially acceptable terms and market
services that meet changing user needs, to continue to enhance its systems and
services and to develop and introduce in a timely manner new systems and
services that take advantage of technological advances, keep pace with
emerging industry standards and address the increasingly sophisticated needs
of its customers. There can be no assurance that the Company will be
successful in developing, licensing and marketing, on a timely basis, new
systems and services that respond to technological change or evolving industry
standards, that the Company will not experience difficulties that could delay
or prevent the successful installation and introduction of these systems or
services, or that any such enhancements will adequately meet the requirements
of the marketplace and achieve market acceptance. The
10
<PAGE>
Company's failure or inability to license new technology, adapt its systems and
services to technological changes or to develop new products and services
successfully would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that the introduction or announcement of new systems and services by
the Company or one or more of its competitors will not cause hotels to defer
installation of systems or that the Company will successfully manage the
transition from older systems to new or enhanced systems in order to minimize
disruption in customer installations. Such deferment of installations or
inability to manage the transition of installations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
TECHNOLOGY AND PROPRIETARY RIGHTS
MagiNet's success and ability to compete is dependent in part upon its own
proprietary technology. The Company relies primarily on a combination of
patent, copyright and trademark laws, trade secrets, software security
measures, and nondisclosure agreements to protect its proprietary technology.
There can be no assurance, however, that such protection will be adequate to
deter misappropriation of or deter unauthorized third parties from copying
aspects of, or otherwise obtaining and using, the Company's proprietary
technology. Moreover, the Company licenses from OCV and Guestserve the right to
install and operate on-demand video systems incorporating proprietary
technology of such companies. If for any reason the Company's rights under such
license agreements were to be successfully challenged by these or other
companies, the Company's business, financial condition and results of
operations would be materially adversely affected. Furthermore, there can be no
assurance that any confidentiality agreements between the Company and its
employees or any agreements with third parties will provide meaningful
protection for the Company's proprietary information or the technology licensed
from others in the event of any unauthorized use or disclosure of such
proprietary information. A substantial amount of the Company's sales are in
international markets, and the laws of the other countries may afford the
Company little or no effective protection of its intellectual property or the
intellectual property of its licensors.
While MagiNet believes that its products and trademarks do not infringe upon
the proprietary rights of third parties, there can be no assurance that the
Company will not receive future communication from third parties asserting that
the Company's products infringe, or may infringe, on the proprietary rights of
third parties. The Company's trademark registration of the name "MagiNet" has
been initially challenged by the U.S. Patent and Trademark Office. Any
infringement claims, with or without merit, could be time consuming, result in
costly litigation and diversion of technical and management personnel and
require the Company to develop non-infringing technology, enter into royalty or
licensing agreements or cease the marketing or use of certain products, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all.
See "Business--Technology and Proprietary Rights."
CONTROL BY CURRENT STOCKHOLDERS
MagiNet's officers, directors and principal stockholders and their affiliates
totaling 11 stockholders will in the aggregate beneficially own approximately
46.3% of the Company's outstanding shares of Common Stock after the Offerings.
As a result, these stockholders, acting together, would be able to effectively
control most matters requiring approval by the stockholders of the Company,
including the election of directors and any merger, consolidation or sale of
all the Company's assets. See "Principal Stockholders" and "Description of
Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares by existing stockholders could adversely affect the
prevailing market price of the Common Stock. Upon completion of the Offerings,
approximately 5,005,000 shares of Common Stock, including the 5,000,000 shares
offered hereby, will be eligible for immediate sale in the public market
without restriction. Ninety days after the date of this Prospectus,
approximately 31,000 additional shares will be eligible for sale
11
<PAGE>
pursuant to Rule 144 or Rule 701 under the Securities Act of 1933. Following
expiration or release from 180-day lock-up agreements, approximately 9,448,000
additional shares will be eligible for immediate sale, subject in some cases to
compliance with Rule 144. Thereafter, approximately 3,977,000 shares held by
existing stockholders will become eligible for sale at various times over a
period of less than two years and could be sold earlier if the holders exercise
registration rights. See "Description of Capital Stock--Registration Rights,"
"Shares Eligible for Future Sale" and "Underwriting."
NO PRIOR PUBLIC MARKET
Prior to the Offerings, there has been no public market for MagiNet's Common
Stock. There can be no assurance that an active trading market will develop and
continue upon the completion of the Offerings or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Underwriters, in conformity with
Schedule E of the By-Laws of the National Association of Securities Dealers,
Inc. As such, the initial public offering price is not necessarily related to
the Company's net worth or any other established criteria of value and may not
bear any relationship to the market price of the Common Stock following the
completion of the Offerings. See "Underwriting."
MARKET VOLATILITY
The market prices for securities of companies such as the Company have
historically been highly volatile. Announcements of technological innovations
or new products by the Company or its competitors, developments concerning
proprietary rights, including patents and litigation matters, and publicity
regarding actual or potential results with respect to products under
development by the Company or others may have a significant impact on the
market price of the Common Stock. Further, it is likely that in some future
quarters the Company's revenue or operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock would likely be materially adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ANTITAKEOVER PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND
DELAWARE LAW
Certain provisions of MagiNet's Certificate of Incorporation and Bylaws may
have the effect of making it more difficult for a third party to acquire, or
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could limit the price that certain investors might be willing
to pay in the future for shares of the Company's Common Stock. Certain of these
provisions eliminate the right of stockholders to act by written consent
without a meeting and specify procedures for director nominations by
stockholders and submission of other proposals for consideration at stockholder
meetings. In addition, the Company's Board of Directors has the authority to
issue up to 5,000,000 shares of Preferred Stock and to determine the price,
rights, preferences, privileges and restrictions of those shares without any
further vote or action by the stockholders. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The Company
has no present plans to issue shares of Preferred Stock. Certain provisions of
Delaware law applicable to the Company could also delay or make more difficult
a merger, tender offer or proxy contest involving the Company, including
Section 203 of the Delaware General Corporation Law, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years unless certain conditions are met.
Additionally, the issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, may have the effect of delaying, deferring or preventing a change in
control of the Company, may discourage bids for the Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of and the voting and other rights of the holders of the Common Stock.
Such provisions could have the effect of delaying, deferring or preventing a
change in control of the Company, including without limitation, discouraging a
proxy contest or making more difficult the
12
<PAGE>
acquisition of a substantial block of the Company's Common Stock. These
provisions could also limit the price that investors might be willing to pay in
the future for shares of the Company's Common Stock. See "Description of
Capital Stock--Preferred Stock," "--Antitakeover Effects of Provisions of
Certificate of Incorporation and Bylaws" and "--Effect of Delaware Antitakeover
Statute."
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate,
substantial dilution in the net tangible book value per share of the Common
Stock from the initial public offering price. See "Dilution."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
in the Offerings are estimated to be approximately $59,400,000 (approximately
$68,467,500 if the U.S. Underwriters' and International Managers' over-
allotment options are exercised in full) assuming an initial public offering
price of $13.00 per share and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses.
The Company currently anticipates that the net proceeds of the Offerings
will be used for system installations, working capital and for general
corporate purposes. The Board of Directors has broad discretion in determining
how the net proceeds of the Offerings will be applied. In the event
opportunities arise, net proceeds of the Offerings also may be used to acquire
businesses, technologies or products that complement MagiNet's business.
However, the Company is not currently in negotiations regarding any such
acquisitions. Although the Company believes the net proceeds of the Offerings,
together with its existing resources will be adequate to satisfy its capital
needs until at least December 1997, the timing and amount of spending of such
capital resources cannot be accurately determined at this time and will depend
upon several factors, including the availability of acquisition candidates,
installation costs, costs associated with penetrating new markets, competing
technological and market developments and market acceptance and demand for the
Company's products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Pending such uses, the Company intends to invest the net proceeds in short-
term, interest-bearing investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain future earnings, if any, for use in
the operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future. A note agreement entered in
connection with the issuance of the Company's Senior Secured Notes due 2000
contains a restrictive covenant which limits the Company's ability to pay cash
dividends or make stock repurchases. See Note 3 of Notes to Consolidated
Financial Statements.
14
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1996 the total capitalization
of the Company and the total capitalization as adjusted to reflect (i) the
reincorporation of the Company into Delaware, which will be effected prior to
the effectiveness of the registration statement covering the Offerings, (ii)
the conversion of all the Company's outstanding shares of Preferred Stock into
10,908,878 shares of Common Stock, which will occur automatically upon the
closing of the Offerings, (iii) the filing, upon the closing of the Offerings,
of the Company's Restated Certificate of Incorporation authorizing 5,000,000
shares of undesignated Preferred Stock and 45,000,000 shares of Common Stock,
(iv) the net exercise of warrants to acquire up to an aggregate maximum of
3,704,840 shares of Common Stock and Preferred Stock into 2,045,800 shares of
Common Stock in connection with the Offerings, at an assumed fair market value
of $13.00 per share, (v) that the U.S. Underwriters' and International
Managers' over-allotment options are not exercised and (vi) the sale by the
Company of 5,000,000 shares of Common Stock in the Offerings at an assumed
offering price of $13.00 per share and the application of the net proceeds
therefrom. The capitalization information set forth in the table below is
qualified by, and should be read in conjunction with, the more detailed
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt(1)........................................ $ 25,403 $ 25,403
Stockholders' equity:
Preferred Stock, no par value; 12,121,788 shares
authorized, 10,908,878 shares issued and outstanding,
actual; $.001 par value, 5,000,000 shares authorized,
no shares issued and outstanding, as adjusted.......... 53,241 --
Common Stock, no par value; 20,000,000 shares
authorized, 480,758 shares issued and outstanding,
actual; $.001 par value, 45,000,000 shares authorized,
18,435,436 shares issued and outstanding, as
adjusted(2)............................................ 255 18
Additional paid in capital.............................. -- 112,979
Warrants to purchase Common Stock....................... 101 --
Accumulated deficit..................................... (32,800) (32,800)
Cumulative translation adjustment....................... (634) (634)
-------- --------
Total stockholders' equity............................. 20,163 79,563
-------- --------
Total capitalization................................... $ 45,566 $104,966
======== ========
</TABLE>
- --------
(1) See Note 3 of Notes to Consolidated Financial Statements.
(2) Excludes an aggregate of 1,487,394 shares of Common Stock issuable upon
exercise of options outstanding under the Company's 1992 Key Personnel
Stock Option Plan and 1992 Stock Option Plan as of June 30, 1996 at a
weighted average exercise price of $1.55. Also excludes an aggregate of
2,560,528 shares reserved for issuance after June 30, 1996 under the 1992
Key Personnel Stock Option Plan, the 1992 Stock Option Plan, the 1996
Director Stock Option Plan and the 1996 Employee Stock Purchase Plan. See
"Management--Stock Plans," "Description of Capital Stock" and Note 5 of
Notes to Consolidated Financial Statements.
15
<PAGE>
DILUTION
The net tangible book value of the Company at June 30, 1996 was
approximately $19,070,000 or $1.42 per share of Common Stock. Net tangible
book value per share represents the Company's total tangible assets less total
liabilities, divided by the number of outstanding shares of Common Stock then
outstanding (assuming the conversion of all then outstanding Preferred Stock
into Common Stock and the net exercise of certain warrants to acquire an
aggregate of 3,704,840 shares of Common Stock into 2,045,800 shares of Common
Stock and Preferred Stock assuming, for purposes of such net exercises, a fair
market value of $13.00 per share of Common Stock). Dilution per share
represents the difference between the amount per share paid by investors in
the Offerings and the net tangible book value per share after the Offerings.
After giving effect to the sale of 5,000,000 shares in the Offerings (at an
assumed initial public offering price of $13.00 per share and after deducting
the estimated underwriting discounts and commissions and offering expenses
payable by the Company), the Company's net tangible book value as of June 30,
1996 would have been $78,470,000 or $4.26 per share of Common Stock. This
represents an immediate increase in net tangible book value of $2.84 per share
to existing stockholders and an immediate dilution in net tangible book value
of $8.74 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $13.00
Net tangible book value per share as of June 30, 1996........... $1.42
Increase in net tangible book value per share attributable to
new investors.................................................. 2.84
-----
Net tangible book value per share after offering.................. 4.26
------
Dilution per share to new investors............................... $ 8.74
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the number of shares of Common Stock, including Common Stock issuable upon the
net exercise of warrants and the shares into which the outstanding Preferred
Stock (including the Preferred Stock issuable upon net exercise of the
warrants) will convert, purchased from the Company, the total consideration
paid and the average price per share paid by the existing stockholders and by
new investors purchasing shares in the Offerings (at an assumed initial public
offering price of $13.00 per share and before deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 13,435,436 72.9% $ 56,758,000 46.6% $ 4.22
New investors................. 5,000,000 27.1 65,000,000 53.4 13.00
---------- ----- ------------ -----
Total....................... 18,435,436 100.0% $121,758,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing computations assume no exercise of stock options after June
30, 1996 and the net exercise of outstanding warrants to acquire up to an
aggregate of 3,704,840 shares of Common Stock and Preferred Stock into
2,045,800 shares of Common Stock, assuming, for purposes of such net
exercises, a fair market value of $13.00 per share of Common Stock. The
foregoing net exercises are anticipated to occur upon either the effectiveness
of the registration statement covering the Offerings, the closing of the
Offerings, or the tenth business day following such closing as set forth in
the applicable warrant agreement. As of June 30, 1996, there were outstanding
options to purchase 1,487,394 shares of Common Stock under the Company's 1992
Key Personnel Stock Option Plan and 1992 Stock Option Plan at a weighted
average price of $1.55 per share. After June 30, 1996 (i) an additional
1,800,000 shares of Common Stock were reserved for issuance under the
Company's 1992 Key Personnel Stock Option Plan, (ii) 200,000 shares were
reserved for issuance under the Company's 1996 Director Stock Option Plan and
(iii) 200,000 shares of Common Stock were reserved for issuance under the
Company's 1996 Employee Stock Purchase Plan. To the extent that any shares are
issued upon exercise of options, warrants or rights that are presently
outstanding or granted in the future, or reserved for future issuance under
the Company's stock plans, there will be further dilution to new investors.
See "Management--Stock Plans," "Description of Capital Stock" and Note 5 of
Notes to Consolidated Financial Statements.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated statement of operations and balance sheet data
presented below for, and as of the end of, each of the years in the five-year
period ended December 31, 1995, and for the six-month period ended June 30,
1996 are derived from the Consolidated Financial Statements of MagiNet
Corporation and its subsidiaries, which financial statements have been audited
by Ernst & Young LLP, independent auditors. The Consolidated Financial
Statements as of December 31, 1995 and 1994, and as of June 30, 1996, and for
each of the years in the three-year period ended December 31, 1995, and for
the six-month period ended June 30, 1996 and the report thereon of Ernst &
Young LLP, independent auditors, are included elsewhere in this Prospectus.
The selected consolidated statement of operations data set forth below for the
six months ended June 30, 1995 were derived from unaudited consolidated
financial statements, which are included elsewhere in this Prospectus, and
include, in the opinion of the Company, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
Company's financial position at that date and results of operations for those
periods. The results for the six months ended June 30, 1996 are not
necessarily indicative of the results for any future period. The selected
consolidated financial and other data set forth below is qualified by, and
should be read in conjunction with, the Consolidated Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in the Prospectus. The Company
has never declared or paid cash dividends on its capital stock.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
----- ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenue................ $ -- $ -- $ 395 $ 2,342 $ 8,689 $ 3,302 $ 7,923
Direct costs........... -- -- 294 1,156 3,731 1,687 3,854
Depreciation and
amortization.......... -- 2 171 957 3,682 1,510 3,149
Operations expenses.... -- -- 464 2,876 3,108 1,213 1,016
Selling, general and
administrative........ 149 514 1,497 4,294 8,420 3,563 4,652
Research and
development........... -- 665 1,320 856 1,247 571 937
----- ------- ------- ------- -------- -------- --------
Operating loss......... (149) (1,181) (3,351) (7,797) (11,499) (5,242) (5,685)
Interest income
(expense), net........ -- (43) (28) (253) (991) 4 (1,382)
----- ------- ------- ------- -------- -------- --------
Loss before income
taxes and minority
interest in net losses
of consolidated
subsidiaries.......... (149) (1,224) (3,379) (8,050) (12,490) (5,238) (7,067)
Provision for income
taxes................. -- -- -- -- (554) (300) (383)
Minority interest in
net losses of
consolidated
subsidiaries.......... -- -- -- 124 248 153 124
----- ------- ------- ------- -------- -------- --------
Net loss............... $(149) $(1,224) $(3,379) $(7,926) $(12,796) $ (5,385) $ (7,326)
===== ======= ======= ======= ======== ======== ========
Pro forma net loss per
share(1).............. $ (1.03) $ (0.59)
======== ========
Shares used in
computation of pro
forma net loss per
share(1).............. 12,392 12,407
OTHER DATA:
EBITDA (In
thousands)(2)......... $(149) $(1,179) $(3,180) $(6,840) $ (7,817) $ (3,732) $ (2,536)
EBITDA margin.......... -- -- (805)% (292)% (90)% (113)% (32)%
New rooms installed.... -- -- 2,087 10,929 26,106 14,632 10,561
Total rooms served(3).. -- -- 2,087 13,016 39,122 27,648 49,683
Rooms in backlog....... -- -- -- 10,941 12,194 10,574 20,868
Average monthly gross
video revenue per
room.................. -- -- -- $ 32.39 $ 29.18 $ 30.05 $ 29.60
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
---------------------------------------- ------------------------
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED(4)
---- ------ ------ -------- -------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and short-term
investments........... $ 1 $ 77 $ 315 $ 10,961 $ 18,823 $ 14,772 $74,172
Working capital........ (24) (386) (1,652) 7,751 14,542 13,571 72,971
Total assets........... 2 1,458 4,711 23,999 46,540 52,185 111,585
Long-term debt......... 125 349 1,400 -- 24,900 25,403 25,403
Accumulated deficit.... (149) (1,373) (4,752) (12,678) (25,474) (32,800) (32,800)
Total stockholders'
equity (net deficit).. (149) 648 1,208 19,924 14,611 20,163 79,563
</TABLE>
- --------
(1) Reflects the assumed conversion of the Company's outstanding Preferred
Stock into 10,908,878 shares of Common Stock upon the closing of the
Offerings. See Note 1 of Notes to Consolidated Financial Statements for a
discussion of the computation of net loss per share.
(2) Indicates earnings (loss) before interest expense, income taxes,
depreciation and amortization, and minority interest in net losses of
consolidated subsidiaries and is not intended to represent an alternative
to net income (as determined in accordance with generally accepted
accounting principles) as a measure of performance. Management of the
Company believes that EBITDA provides an additional perspective on the
Company's operating results and its ability to service its long-term debt
and fund its operations.
(3) Includes all rooms installed with Company-owned systems.
(4) Adjusted to reflect the net proceeds of the sale of Common Stock offered
by the Company hereby at an assumed initial public offering price of
$13.00 per share and the application thereof.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements relating to
future events or the future financial performance of the Company, which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
Since its inception in 1991, MagiNet has focused on developing its in-room
on-demand video entertainment systems, signing contracts with hotels,
installing systems and servicing its installed base of rooms. As of June 30,
1996, the Company had 49,683 rooms installed with its systems in 138 hotels
and had an installation backlog of 20,868 rooms in 58 hotels. In addition,
MagiNet has instituted a focused expansion plan that includes direct entry or
acquisitions in attractive existing and new markets. The Company's revenue
consists primarily of fees paid by guests for viewing MagiNet's on-demand
video programming on a pay-per-view basis.
The Company is actively developing, with its partners, several new in-room
video services to be provided through its installed systems. These new
interactive entertainment and information services include video games,
casino-style gaming, financial news and advertising. In addition, MagiNet is
exploring the possibility of providing other services, including in-room
shopping, news and Internet access. MagiNet believes that these new services
will appeal to a broader group of users than the traditional purchasers of in-
room video entertainment and should increase monthly revenue per installed
room.
MagiNet operates according to a financial model similar to the cable
television, cellular telephone and paging industries. Following an initial
capital expenditure for system installation in hotels, the Company derives
reasonably predictable, recurring revenue from system usage for the term of
each hotel contract, which is on an exclusive basis typically for five-to-
seven years. Since inception, the Company's capital costs associated with
installed systems have averaged approximately $525 per room, including a video
server in each hotel, in-room converter and remote control, upgrade of the
hotel's master antenna television network, system installation costs,
shipping, duties and taxes.
Revenue generated from on-demand movies are dependent upon four factors at
each hotel (i) the number of rooms in each hotel, (ii) the occupancy rate at
the hotel, (iii) the "buy rate" or percentage of occupied rooms that buy
movies and (iv) the price of the movie. Occupancy rates vary by hotel and
region based on the hotel's competitive position within its marketplace,
seasonal factors and general economic conditions. Buy rates generally reflect
the hotel's guest mix profile, the popularity of the motion pictures available
to the Company in each country and the availability of other entertainment
alternatives. Buy rates also vary over time with general economic conditions.
Costs and expenses include (i) direct costs such as royalties and fees paid
for programming and licensed technology, hotel commissions, video materials,
maintenance expenses and cost of equipment and systems sold, (ii) depreciation
and amortization, (iii) operations activities such as purchasing, programming
and headquarters technical support, (iv) selling, general and administrative
expenses consisting of headquarters and foreign office expenses and (v)
research and development of the Company's systems. The Company currently has
systems installed in twelve countries, all outside of North America. The
Company operates through subsidiary offices in ten countries and through
representatives in two countries. In addition, MagiNet sells systems directly
to hotel owners and to distributors in certain other countries. Costs and
expenses other than direct costs are expected to grow at a slower rate than
revenue as the Company spreads its overhead costs over a larger installed base
of rooms.
18
<PAGE>
The Company has incurred net losses since inception as a result of (i) costs
associated with establishing its headquarters and foreign subsidiaries
infrastructure, (ii) depreciation and amortization associated with its
investment in installed systems and acquired technology licenses and (iii)
research and development costs associated with the Company's systems. All of
the Company's systems are installed outside of North America. To date, MagiNet
has not experienced material foreign exchange transaction gains or losses but
has $634,000 in accumulated translation losses, which are reflected in
stockholders' equity as of June 30, 1996. A significant change in exchange
rates could give rise to material translation or transaction gains or losses
in the future.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenue, items from the
Company's consolidated statement of operations for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -------------
1993 1994 1995 1995 1996
------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue.......................... 100% 100% 100% 100% 100%
Costs and expenses
Direct costs.................... 74 49 43 51 49
Depreciation and amortization... 43 41 42 46 40
Operations expenses............. 118 123 36 37 13
Selling, general and administra-
tive........................... 379 183 97 108 59
Research and development........ 334 37 14 17 12
------- ------- ------- ----- ----
Total costs and expenses....... 948% 433% 232% 259% 173%
------- ------- ------- ----- ----
Operating loss................... (848) (333) (132) (159) (73)
Interest income (expense), net... (7) (11) (11) -- (17)
Provision for income taxes....... -- -- (6) (9) (5)
Minority interest in net losses
of consolidated subsidiaries.... -- 5 3 5 2
------- ------- ------- ----- ----
Net loss......................... (855)% (339)% (146)% (163)% (93)%
======= ======= ======= ===== ====
EBITDA........................... (805)% (292)% (90)% (113)% (32)%
======= ======= ======= ===== ====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
The following table sets forth information regarding revenue, average
monthly gross video revenue per room, average movie price, average movie buy
rate, average hotel occupancy and installed base of rooms for the six months
ended June 30, 1995 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1995(1) 1996(1)
------------ ------------
<S> <C> <C>
Revenue............................................. $3,302,000 $7,923,000
Average monthly gross video revenue per room........ $ 30.05 $ 29.60
Average movie price................................. $ 11.17 $ 10.85
Average movie buy rate.............................. 12% 12.2%
Average hotel occupancy............................. 74% 73%
Installed base of rooms............................. 27,648 49,683
</TABLE>
- --------
(1) Other than revenue and installed base of rooms, the numbers in this table
were derived in part from information that is reported to the Company by
hotels installed with the Company's systems. The Company believes that
such information is accurate.
19
<PAGE>
Revenue Analysis
During the six months ended June 30, 1996, the Company installed its systems
in an additional 10,561 hotel rooms, bringing the total number of installed
rooms to 49,683. The Company's revenue for the first six months of 1996
increased 140% to $7,923,000 compared to $3,302,000 for the same period in
1995. The increase was principally attributed to the increase in the number of
rooms receiving one or more of the Company's services in 1996.
During the six months ended June 30, 1996, average monthly gross video
revenue per room has declined approximately one-and-one-half percent compared
to that of the same period in 1995, principally as a result of price decreases
in certain countries and currency fluctuations affecting average movie prices.
Average monthly gross video revenue per room is the product of buy rates,
movie price, occupancy and the number of days in the month. Movie buy rates
have remained relatively constant principally as a result of installations in
new countries and improved buy rates in certain existing countries, offset by
lower buy rates in other existing countries.
Expense Analysis
The following table sets forth information regarding the Company's costs and
expenses for the six months ended June 30, 1995 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
1995 1996
--------------------- ----------------------
% OF % OF
AMOUNT REVENUE AMOUNT REVENUE
---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C>
Costs and expenses
Direct costs..................... $ 1,687 51% $ 3,854 49%
Depreciation and amortization.... 1,510 46 3,149 40
Operations expenses.............. 1,213 37 1,016 13
Selling, general and
administrative.................. 3,563 108 4,652 59
Research and development......... 571 17 937 12
---------- ------- ----------- -------
Total costs and expenses.......... $ 8,544 259% $ 13,608 173%
========== ======= =========== =======
</TABLE>
Direct costs. Direct costs increased by $2,167,000 for the first six months
of 1996 compared to the same period in 1995 but declined marginally as a
percentage of revenue, due principally to lower film royalty and licensing
fees resulting from greater efficiencies achieved through expanded operations
and direct management of film contracts rather than relying on Comsat
Corporation, which charged the Company higher royalties and fees. Prior to
July 1995, the Company obtained substantially all of its programming through
Comsat Corporation. As a percentage of revenue, these reduced royalty and
licensing fees have been partially offset by increased maintenance expenses
associated with repairing or replacing faulty equipment installed in hotel
rooms during the first half of 1996 and transitioning MagiNet's in-room
converters and remote controls to higher quality devices. Although the failure
rates experienced with this equipment have declined since the second quarter
of 1996, there can be no assurance that the Company will not experience
similar technical problems or equipment failures in the future, the occurrence
of which could have a material adverse effect on the Company's results of
operations.
Depreciation and amortization. Depreciation and amortization consists of
depreciation of installed video systems, equipment and office furniture, and
amortization of prepaid royalties related to licensed technologies. These
expenses increased by $1,639,000 for the first six months of 1996 compared to
the same period in 1995 as a result of additional video system installations
in hotels. Depreciation and amortization expense represented a smaller
percentage of revenue in 1996 as a result of lower cost of installed systems
achieved in late 1995 and equipment and system sales in the 1996 period for
which there was no depreciation expense. The lower installed costs were
principally the result of using lower cost converters manufactured by a new
supplier to the Company as well as lower average installation costs. The
Company has taken a more direct role in managing hotel
20
<PAGE>
installation projects and performing certain installations using its own
employees, resulting in lower costs and improved quality. In prior periods,
most installations were performed by outside contractors.
Operations expenses. Operations expenses decreased by $197,000 for the first
six months of 1996 compared to the same period in 1995 due to write-downs of
certain video system equipment taken in the first six months of 1995,
partially offset by increased headquarters personnel expenses in 1996
necessary to provide programming services for expanded operations. Operations
expenses, as a percentage of revenue, fell from 37% for the first six months
of 1995 to 13% for the same period in 1996 as the Company's investment in
headquarters operational support was leveraged over a larger installed base of
rooms.
Selling, general and administrative. Selling, general and administrative
expenses increased by $1,089,000 for the first six months of 1996 compared to
the same period in 1995 due to significant increases in local country
activities to support the Company's larger installed base of rooms. A new
office was opened in South Africa in 1996, and the offices in Israel and South
Korea, which opened in 1995, were fully staffed in the 1996 period. Overall,
employment in the Company's local country activities increased from 51
employees at June 30, 1995 to 107 employees at June 30, 1996. Headquarters
marketing expenses increased to support promotion and merchandising
initiatives as well as to provide leadership for new product development.
Headquarters administrative expenses in 1996 increased as a result of the
hiring of new members of senior management and the expansion of the accounting
and finance staff. Selling, general and administrative expenses decreased as a
percentage of revenue from 108% for the first six months of 1995 to 59% for
the same period in 1996. Selling, general and administrative expenses are
expected to decline as a percentage of revenue in the future as a result of
leveraging the Company's infrastructure over a larger installed base of rooms.
Research and development. Research and development expenses increased by
$366,000 for the first six months of 1996 compared to the same period in 1995
due to increases in engineering personnel, materials and related expenses.
Research and development decreased as a percentage of revenue from 17% for the
first six months of 1995 to 12% for the same period in 1996. The new
engineering personnel are focused on new product development and integration,
enhancements to existing systems, including technology and products licensed
from others, and quality improvements. All research and development personnel
are located at the Company's headquarters.
Interest income (expense), net. During the first half of 1996, the Company
incurred net interest expense of $1,382,000 as a result of the issuance in
August 1995 of its Senior Secured Notes due 2000 with an aggregate principal
amount of $24.9 million. During the first half of 1995, the Company earned net
interest income from short-term investments of excess cash.
Provision for income taxes. The Company has not incurred U.S. federal or
state income taxes. However, most of the Company's foreign subsidiaries and
branches are required to withhold local country income taxes relating to
payments of royalties and inter-company charges. As a result, a provision for
local country income taxes is accrued at the time the royalty or inter-company
charge is accrued. Following the utilization of the parent company's net
operating loss carryforward, the parent company may offset the withheld local
country income taxes against any U.S. federal income taxes payable. However,
there can be no assurance that the parent company will be able to fully
utilize its loss carryforwards or to offset U.S. federal income taxes payable
by the withheld local country income taxes.
21
<PAGE>
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Revenue Analysis
The following table sets forth information regarding revenue, average
monthly gross video revenue per room, average movie price, average movie buy
rate, average hotel occupancy and the installed base of rooms for the years
ended December 31, 1994 and 1995. Certain of this information was not
available for the year ended December 31, 1993, as the Company's limited
number of installed rooms during that year did not provide a meaningful year-
to-year comparison.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994(1) 1995(1)
----------- -----------
<S> <C> <C>
Revenue............................................... $ 2,342,000 $ 8,689,000
Average monthly gross video revenue per room.......... $ 32.39 $ 29.18
Average movie price................................... $ 11.74 $ 10.96
Average movie buy rate................................ 12.6% 11.7%
Average hotel occupancy............................... 72% 75%
Installed base of rooms............................... 13,016 39,122
</TABLE>
- --------
(1) Other than revenue and installed base of rooms, the numbers in this table
were derived in part from information that is reported to the Company by
hotels installed with the Company's systems. The Company believes that
such information is accurate.
The Company's revenue for the years ended December 31, 1995, 1994 and 1993
were $8,689,000, $2,342,000, and $395,000 respectively, representing year-to-
year increases of 271% between 1994 and 1995 and 493% between 1993 and 1994.
The growth of revenue in each of these periods is attributable to increases in
the Company's installed base of rooms and rooms installed in the prior period
generating revenue for a complete fiscal year. Prior to 1994, the Company had
installed its systems only in Guam. Average monthly gross video revenue per
room and average movie price declined between 1994 and 1995 principally as a
result of a broader mix of hotels and countries served in 1995 compared to the
small installed base of rooms in 1994. On an individual country basis, average
monthly gross video revenue per room increased between 1994 and 1995 in all
countries except Hong Kong and Taiwan, where the limited number of installed
rooms in 1994 compared to 1995 do not permit a meaningful comparison. Buy
rates in Guam declined from 12.3% in 1994 to 10.5% in 1995 although gross
revenue per room increased slightly because occupancy rates increased in Guam.
Average movie prices in U.S. dollars increased between 1994 and 1995 in all
countries except Australia and Taiwan. Australian prices have since recovered.
However, the overall average movie price declined as a result of increased
installations in countries with lower average movie prices.
Expense Analysis
The following table sets forth information regarding the Company's costs and
expenses for the years ended December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995
-------------- --------------- ---------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
------ ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Costs and expenses
Direct costs................... $ 294 74% $ 1,156 49% $ 3,731 43%
Depreciation and amortization.. 171 43 957 41 3,682 42
Operations expenses............ 464 118 2,876 123 3,108 36
Selling, general and
administrative................ 1,497 379 4,294 183 8,420 97
Research and development....... 1,320 334 856 37 1,247 14
------ --- ------- --- ------- ---
Total costs and expenses........ $3,746 948% $10,139 433% $20,188 232%
====== === ======= === ======= ===
</TABLE>
22
<PAGE>
Direct costs. Direct costs increased by $2,575,000 in 1995 compared to 1994
and by $862,000 in 1994 compared to 1993 due to the increase in installed
rooms. Direct costs as a percentage of revenue declined from 74% in 1993 to
49% in 1994 and 43% in 1995 principally due to lower programming costs,
particularly in the second half of 1995, and greater efficiencies achieved by
servicing the increasingly larger installed base of rooms.
Depreciation and amortization. Depreciation and amortization increased by
$2,725,000 in 1995 compared to 1994, due primarily to depreciation of video
systems and other property and equipment added in 1995 as well as 1994
installations that were depreciated for a full year in 1995. Such increases
were substantially in line with revenue growth achieved by the Company as
lower depreciation resulting from lower per-room installation costs was offset
by increased depreciation on office furniture and equipment and computer
equipment. Between 1993 and 1994, depreciation and amortization increased by
$786,000 due primarily to depreciation of video systems and other property and
equipment added in 1994 and 1993 installations that were depreciated for a
full year in 1994.
Operations expenses. Operations expenses increased by $232,000 in 1995
compared to 1994, but declined as a percentage of revenue from 123% to 36%
year-to-year. The modest increase in spending was attributed to additional
personnel in technical services and video programming, offset by a reduction
in operations management personnel and lower materials expenses. Between 1993
and 1994, operations expenses increased by $2,412,000 as a result of the
creation of an installation support department and increased spending in
customer support services and video programming to support the expanded number
of rooms installed during 1994. Operations headcount increased from five
employees at December 31, 1993, to 13 employees at December 31, 1994, and to
15 employees at December 31, 1995. As a percentage of revenue, operations
expenses rose from 118% in 1993 to 123% in 1994. Prior to 1994, installation
support was performed by research and development personnel.
Selling, general and administrative. Selling, general and administrative
expenses increased by $4,126,000 in 1995 compared to 1994 due to significant
spending increases in foreign offices that resulted from the creation of new
offices in Israel and South Korea and continuing selling, general and
administrative costs incurred for a full fiscal year by country offices that
opened in 1994. Foreign office headcount increased from 31 employees at
December 31, 1994 to 81 employees at December 31, 1995. Selling, general and
administrative expenses as a percentage of revenue decreased from 183% in 1994
to 97% in 1995, as the Company leveraged its expenses over the larger
installed base of rooms.
Selling, general and administrative expenses increased by $2,797,000 from
1993 to 1994 due to the establishment of new offices in Australia, Hong Kong,
Japan, New Zealand, Singapore, Taiwan and Thailand and an increase from seven
to 12 employees in the Company's headquarters. Selling, general and
administrative expenses as a percentage of revenue decreased from 379% in 1993
to 183% in 1994 as a result of economies of scale associated with an
increasing installed base of rooms.
Research and development. Research and development expenses increased by
$391,000 in 1995 compared to 1994 due to increases in employee compensation
and materials expenses. From December 1994 to December 1995, one additional
employee was added to the department, but 1995 expenses reflect a full year of
compensation expense for employees hired in 1994. Significant projects
completed during 1995 included development of new versions of the Company's
in-room converter and remote control unit and enhancing the system operating
software and screens, including enhancements to support additional foreign
languages.
Research and development expenses decreased by $464,000 from 1993 to 1994,
while engineering personnel increased from three employees to ten employees
over the same period. The decrease in spending is the result of significant
expenditures incurred in 1993 in connection with hiring outside contractors
and consultants, which enabled the Company to complete the major portions of
its development on the first generation of its proprietary room equipment and
the conversion of licensed technology to meet local market conditions. In
particular, the Company completed new versions of its in-room converter to
allow installations in countries not using the video standard employed in the
United States.
23
<PAGE>
Interest income (expense), net. Net interest expense increased by $738,000
in 1995 compared to 1994 and represented primarily interest accrued on $24.9
million of Senior Secured Notes due 2000, which the Company issued in August
1995. Between 1993 and 1994, net interest expense increased by $225,000
representing interest on bridge financing prior to the Company's issuance of
Series C Preferred Stock in September 1994.
Provision for Income Taxes. In 1995, the Company began accruing income tax
expense relating principally to foreign withholding of taxes relating to
inter-company charges for the provision of headquarters services and
programming and system royalties due third parties. No provision for foreign
or domestic income taxes was made during either 1994 or 1993.
SEASONALITY
The Company's quarterly operating results are subject to fluctuation
depending upon hotel occupancy and buy rates, and foreign currency exchange
rates as well as other factors. Although the Company generally believes that
such fluctuations are partially mitigated by operations in both the Northern
and Southern Hemispheres as well as by the breadth of its operations across
multiple economies, revenue per room has historically been lowest in the third
quarter because a significant portion of MagiNet's installations are in
tropical climates where occupancies are generally higher in the first and
fourth quarters of the year and buy rates are typically lower in the third
quarter of each year.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated financial
information for the six quarters ended June 30, 1996, as well as such data
expressed as a percentage of the Company's total revenue for the periods
indicated. This data has been derived from unaudited consolidated financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such information when read in conjunction with the Company's
audited Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. The results of operations for any quarter and
any quarter-to-quarter trends are not necessarily indicative of the results to
be expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 1,287 $ 2,015 $ 2,353 $ 3,034 $ 3,549 $ 4,374
Costs and expenses
Direct costs........... 700 987 899 1,145 1,827 2,027
Depreciation and
amortization.......... 646 864 1,054 1,118 1,388 1,761
Operations expenses.... 665 548 948 947 468 548
Selling, general and
administrative........ 1,524 2,039 2,084 2,773 2,074 2,578
Research and
development........... 314 257 319 357 421 516
------- ------- ------- ------- ------- -------
Total costs and
expenses............... 3,849 4,695 5,304 6,340 6,178 7,430
------- ------- ------- ------- ------- -------
Operating loss.......... (2,562) (2,680) (2,951) (3,306) (2,629) (3,056)
Interest income
(expense), net......... 77 (73) (383) (612) (667) (715)
Provision for income
taxes.................. (148) (152) (123) (131) (213) (170)
Minority interest in net
losses of consolidated
subsidiaries........... 67 86 51 44 78 46
------- ------- ------- ------- ------- -------
Net loss................ $(2,566) $(2,819) $(3,406) $(4,005) $(3,431) $(3,895)
======= ======= ======= ======= ======= =======
EBITDA.................. $(1,916) $(1,816) $(1,897) $(2,188) $(1,241) $(1,295)
======= ======= ======= ======= ======= =======
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- -------- --------
(AS A PERCENTAGE OF REVENUE)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. 100% 100% 100% 100% 100% 100%
Costs and expenses
Direct costs........... 55 49 38 38 52 46
Depreciation and
amortization.......... 50 43 45 37 39 40
Operations expenses.... 52 27 40 31 13 13
Selling, general and
administrative........ 118 101 89 91 58 59
Research and
development........... 24 13 14 12 12 12
----- ----- ----- ----- ---- ----
Total costs and
expenses............... 299 233 226 209 174 170
----- ----- ----- ----- ---- ----
Operating loss.......... (199) (133) (126) (109) (74) (70)
Interest income
(expense), net......... 6 (4) (16) (20) (19) (16)
Provision for income
taxes.................. (12) (8) (5) (4) (6) (4)
Minority interest in net
losses of consolidated
subsidiaries........... 5 4 2 1 2 1
----- ----- ----- ----- ---- ----
Net loss................ (200)% (141)% (145)% (132)% (97)% (89)%
===== ===== ===== ===== ==== ====
EBITDA.................. (149)% (90)% (81)% (72)% (35)% (30)%
===== ===== ===== ===== ==== ====
</TABLE>
Revenue Analysis
The following table sets forth, for each of the quarterly periods presented,
information regarding revenue, average monthly gross video revenue per room,
average movie price, average movie buy rate and average hotel occupancy, and
the installed base of rooms at the end of each of the quarterly periods
presented.
<TABLE>
<CAPTION>
QUARTER ENDED(1)
----------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue (in thousands).. $ 1,287 $ 2,015 $ 2,353 $ 3,034 $ 3,549 $ 4,374
Average monthly gross
video revenue per
room................... $ 29.56 $ 30.16 $ 27.03 $ 30.08 $ 30.00 $ 29.24
Average movie price..... $ 11.16 $ 11.18 $ 10.83 $ 10.83 $ 10.83 $ 10.87
Average movie buy rate.. 11.6% 12.3% 11.0% 11.9% 12.0% 12.5%
Average hotel
occupancy.............. 76% 72% 73% 75% 76% 71%
Installed base of
rooms.................. 18,424 27,648 31,091 39,122 42,940 49,683
</TABLE>
- --------
(1) Other than revenue and installed base of rooms, the numbers in this table
were derived in part from information that is reported to the Company by
hotels installed with the Company's systems. The Company believes that
such information is accurate.
During the six quarters ended June 30, 1996, the Company installed an
average of 6,111 rooms per quarter, with installations varying principally
upon the rate at which new contracts have been signed with hotels. In addition
to gross video revenue, revenue in the quarter ended June 30, 1996 included
the sale of one of the Company's video systems in the approximate amount of
$500,000. Average monthly gross video revenue per room has remained relatively
constant as improvements in certain countries have been offset by declines in
others. Increases in buy rates in the first two quarters of 1996, compared to
the first two quarters of 1995, have been offset by modest declines in average
hotel occupancy and/or average movie price in these same periods. Generally,
occupancies in the tropical climates, which represent the majority of the
Company's current installed base of rooms, are lower during the summer
quarters and higher in the first and fourth quarters, except during holidays.
Buy rates have been a function of the quality of movies available, the quality
of installed equipment, alternative entertainment available to guests and
other factors.
The U.S. dollar equivalent of foreign denominated average movie prices
declined during the last two quarters of 1995 principally as a result of an
increasing proportion of installed rooms in countries with lower average movie
prices than historical averages and the strengthening U.S. dollar as foreign
currency denominated
25
<PAGE>
prices in most countries have remained relatively constant. The Company is
instituting a program of multiple price points for movies installed in each
hotel in an effort to increase overall prices and revenue in each country.
Expense Analysis
Direct costs. Direct costs, as a percentage of revenue, declined quarter
over quarter during the first three quarters of 1995, from 55% to 38%, before
increasing to 52% in the first quarter of 1996. The decline was principally
the result of reductions in programming costs and greater efficiencies
achieved by servicing the increasingly larger installed base of rooms.
Starting in the fourth quarter of 1995, the Company began to experience
significant quality problems resulting in increased maintenance expenses for
labor and materials to fix in-room equipment. Direct costs declined to 46% of
revenue in the second quarter of 1996 reflecting a decrease in maintenance
expense.
Depreciation and amortization. The Company amortized a larger portion of
prepaid royalties during the first quarter of 1995 reflecting minimum annual
royalties required to maintain an exclusive technology license. Amortization
of prepaid royalties has remained relatively constant as a percentage of
revenue during the five quarters ended June 30, 1996. Depreciation expense has
trended downwards, as a percentage of revenue, over the last six quarters,
reflecting marginally lower installed costs of rooms during these periods.
Operations expenses. Operations expenses, as a percentage of revenue,
fluctuated from an average of 37% in 1995 to 13% in the first half of 1996.
The quarterly variances, as a percentage of revenue, are primarily attributed
to reserves taken against video systems throughout 1995, and to a lesser
extent, to other operations expenses spread over increased revenue.
Selling, general and administrative. Selling, general and administrative
expenses, as a percentage of revenue, declined from 118% in the first quarter
of 1995 to 89% in the third quarter of 1995. These expenses increased slightly
to 91% in the fourth quarter of 1995 before decreasing to 58% and 59% in the
first two quarters of 1996. The decreases as a percentage of revenue are
primarily attributed to subsidiary and headquarters expenses spread over a
larger revenue base. Selling, general and administrative expenses have
increased in foreign subsidiaries and at the Company's headquarters but at a
lesser rate than revenue increases.
Research and development. Research and development expenses declined, as a
percentage of revenue, from 24% in the first quarter of 1995 to 13% and 14% in
the second and third quarters of 1995. The decrease, as a percentage of
revenue, between the first and second quarter of 1995 is attributed to a
combination of increased revenue and a decrease in research and development
spending. Research and development, as a percentage of revenue, has stayed
constant at 12% over the three quarters ended June 30, 1996 as increases in
research and development expenses were proportional to revenue increases.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and funded its
capital expenditure requirements primarily through private issuances of
Preferred Stock, bank lines of credit, debt securities and capital equipment
leases. From inception through June 30, 1996, the Company raised an aggregate
of $53.2 million from the sale of Preferred Stock, net of related expenses. In
August 1995, the Company issued its Senior Secured Notes due 2000 (the
"Notes") with an aggregate principal amount of $24.9 million to New York Life
Insurance Company, Mutual Life Insurance Company of New York and two other
investors. The Notes currently bear interest at an annual rate of 11.5%,
subject to certain adjustments. In connection with the issuance of the Notes,
the Company also issued to the purchasers of such Notes warrants to acquire up
to an aggregate of 1,422,857 shares of Common Stock at an exercise price of
$7.00 per share, subject to adjustments of the number of shares and exercise
price as set forth in the applicable warrants. The Notes are secured by a
pledge of the stock of each of the Company's subsidiaries. During 1996, the
Company failed to comply with certain financial covenants of the Notes,
although the Company obtained from the holders of the Notes an amendment of
the covenants in exchange for warrants to acquire up to an aggregate of
200,000 shares of Common Stock at an exercise price of
26
<PAGE>
$7.00 per share, subject to adjustments of the number of shares and exercise
price as set forth in the applicable warrants. As of September 30, 1996, the
Company is not in compliance with a financial covenant under the Notes, but
has requested an amendment of the covenant from the holders of the Notes. No
assurance can be given that the holders of the Notes will agree to an
amendment of the covenant on acceptable terms, if at all. Failure of the
Company to comply with the covenants, or in the event of non-compliance, to
obtain an amendment of the covenants, could result in acceleration of the
maturity of the Company's borrowings, which would have a material adverse
effect on the Company's business, financial condition and results of
operations.
The continued expansion of the Company's business will require significant
capital investments to finance the installation of equipment in hotel rooms.
Historically, cash flow generated from the Company's operations has not been
sufficient to fund the costs associated with expanding the Company's business.
The Company believes that the net proceeds from the Offerings, together with
cash flow from operations, will be sufficient to support the Company's focused
expansion plans and capital expenditures as well as working capital
requirements until at least December 1997. Thereafter, if cash generated from
operations is insufficient to satisfy the Company's capital requirements, the
Company may be required to raise additional funds. No assurance can be given
that additional financing will be available or that, if available, such
financing could be obtained by the Company on terms favorable to the Company
and its stockholders. If the Company cannot obtain sufficient funds to support
installations of rooms, the Company may have to reduce the rate of room
installations. To the extent the Company raises additional capital by issuing
equity or convertible debt securities, ownership dilution to the Company's
stockholders will result.
The Company used cash from operating activities totaling $6,975,000 for the
six months ended June 30, 1996, $7,619,000 in 1995, $6,137,000 in 1994, and
$1,753,000 in 1993. The increased use of cash in 1995 as compared to 1994 and
1993 was primarily attributable to expansion into new geographic markets and
the expansion of its headquarters and local country offices. The Company used
$10,145,000 for the six months ended June 30, 1996, $14,477,000 in 1995,
$8,932,000 in 1994 and $3,091,000 in 1993 to fund capital expenditures,
consisting principally of video systems for hotels. For the six months ended
June 30, 1996, financing activities provided $13,984,000. Financing activities
provided $30,656,000, $25,715,000 and $5,082,000 for 1995, 1994 and 1993,
respectively.
27
<PAGE>
BUSINESS
The following Business section contains forward-looking statements relating
to future events or the future financial performance of the Company, which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
THE COMPANY
MagiNet is the leading supplier of on-demand interactive video entertainment
and information services to the hospitality industry outside of North America.
The Company installs integrated video systems that allow hotel guests to order
pay-per-view movies on-demand. MagiNet has recently expanded these systems
into entertainment and information gateways that offer an increasingly varied
range of services, such as on-demand billing summaries, express checkout,
personalized messaging, guest surveys and room service ordering. To date, the
Company's principal on-demand video entertainment services have provided a
reasonably predictable stream of recurring revenue during the term of its
exclusive five-to-seven year contract. The Company expects to implement
additional revenue enhancing services such as in-room casino-style gaming,
advertising, video games, financial news, Internet access and in-room shopping
in selected markets beginning in 1997. To date, the Company has focused
principally on leading hotels in the Pacific Rim, which has been experiencing
a higher rate of economic expansion and hotel construction than any other
region in the world. The Company currently has operations and installations in
Thailand, Australia, Japan, Taiwan, Guam/Saipan, Hong Kong, Singapore, South
Korea, South Africa, Israel, New Zealand and France, and plans to expand its
presence in the Pacific Rim, Europe, the Middle East and Africa. MagiNet began
installing its systems in 1993 and as of June 30, 1996 served 49,683 rooms in
138 hotels with an additional 20,868 rooms in backlog.
Beginning in early 1996, the Company added several key members to its
management team, including its current Chief Executive Officer and Chief
Operating Officer, both having over twenty years of experience in the
hospitality industry. This management team further defined the Company's
strategy to expand its installed room base by (i) leveraging its strong market
position to obtain contracts with other leading hotels, (ii) penetrating
existing or new target markets, directly or through acquisition and (iii)
offering services to mid-market hotels in target regions. In addition, this
management team was influential in establishing strategic relationships with
Bloomberg for information and news television programming, with InterGame for
in-room casino-style gaming and with Trinity Group for in-room advertising.
INDUSTRY BACKGROUND
Pacific Rim Hospitality Industry
The Pacific Rim has recently been experiencing a higher rate of economic
expansion and hotel construction than any other region in the world. As the
number of business and leisure travelers visiting the region has grown, most
of the leading hotel chains including Accor, Choice International, Conrad,
Hilton International, Holiday Inn Worldwide, Hyatt International, Marriott,
Regent/Four Seasons, Shangri-La, Sheraton, Southern Pacific Hotel Corporation
and Westin have focused their efforts on expanding in the Pacific Rim. The
growth in business and leisure travel has contributed to occupancy rates and
average daily room rates higher than those in the United States. In addition,
there has been a significant expansion of mid-market hotels, which offer less
expensive rooms and fewer services than leading hotels. It is estimated that
in 1996 the travel and tourism industry in the Pacific Rim will employ 169
million people and will generate $944 billion of personal, business and
government expenditures, capital investment both public and private, net
exports, and government operating expenditures to support travellers and
travel service providers, and is projected to employ 280 million people and
generate $2.1 trillion in 2006.
Video Entertainment and Information Services
Leading hotels throughout the Pacific Rim have become increasingly focused
on providing the same high caliber of guest amenities typically found in
leading hotels in the United States including on-demand video
28
<PAGE>
entertainment and information services. Mid-market hotels are also
increasingly providing on-demand video entertainment and information services
as guests in these hotels are becoming accustomed to such hotel amenities.
Video entertainment services first appeared in the U.S. hospitality industry
over 20 years ago. Originally, "free-to-guest" video entertainment was
provided by broadcasting a limited selection of movies to every room in a
hotel on fixed schedules for a fee paid by the hotel. In the 1980s, a new
service was developed that offered a limited selection of movies available at
scheduled intervals on a pay-per-view basis, transferring the expense of the
offerings to hotel guests and generally providing hotel operators with a
commission based on revenue from these pay-per-view services. Typically, four
to eight movies would be offered, each of which would be shown once every two
to four hours.
The subsequent development of on-demand video technology enabled providers
of in-room services to offer scheduling flexibility to guests for movie
viewing on a pay-per-view basis. The convenience of on-demand video technology
increased average buy rates significantly, increased revenue and related hotel
commissions and made on-demand video entertainment the leading segment of the
hotel interactive video market. Technological advances have allowed providers
of video entertainment and information services to offer other interactive
services to hotels and hotel guests, including room billing summaries, express
checkout, personalized messaging, interactive guest surveys and room service
ordering. New guest pay services such as in-room video games, shopping,
advertising, news, Internet access and casino-style gaming are under
development in order to provide new amenities to guests and offer additional
revenue sources per installation to the system providers and hotels.
Today, free-to-guest services and on-demand video entertainment services
have become standard amenities offered by most U.S. hotels serving all but the
budget hotel market. Leading hotels internationally are now adopting new
interactive video technologies. Hotels in the Pacific Rim are installing new
on-demand video entertainment and information systems at a rapid rate, and the
new international hotels being constructed in this region are expected to
install the most current on-demand systems available. Some leading hotels in
South Africa and Israel have free-to-guest systems, and a number of these
hotels are now converting to the Company's in-room interactive on-demand video
systems. The remainder of the rooms in Africa and the Middle East are largely
unpenetrated. In Europe, interactive video systems have been installed in only
a few leading hotels, and a number of major hotel chains are beginning to
convert to interactive video technology.
The Company targets high-growth markets outside of North America, Central
America and South America. The following table illustrates the size and the
growth of the Company's target markets:
<TABLE>
<CAPTION>
REGION TOTAL MARKET(1) HOTELS WITH 100+ ROOMS(2)
------ ------------------------- -----------------------------
# OF ROOMS 9-YEAR CAGR(3) # OF ROOMS # OF HOTELS
---------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Pacific Rim............. 1,700,000 7.1% 670,000 2,412
Middle East and Africa.. 600,000 3.9% 288,000 1,272
Europe.................. 5,500,000 4.0% 1,108,000 5,637
North, Central, and
South America.......... 4,500,000 2.9% N/A N/A
</TABLE>
--------
(1) Hotel Magazine, May 1996. Includes all travel accommodations.
(2) Central hotel database, Reed Travel Group, a division of Reed Elsevier,
Inc.
(3) Compound Annual Growth Rate, 1985-1994.
29
<PAGE>
MAGINET'S OPPORTUNITIES
MagiNet provides in-room interactive video entertainment and information
services to leading business and resort hotels located in underpenetrated and
underserved international markets. The Company installs integrated video
systems that allow hotel guests to order pay-per-view movies on demand.
MagiNet has recently expanded these systems into entertainment and information
gateways that offer an increasingly varied range of services, such as on-
demand billing summaries, express checkout, personalized messaging, guest
surveys and room service ordering. The Company expects to implement additional
revenue-enhancing services such as in-room casino-style gaming, advertising,
video games, financial news, Internet access and in-room shopping in selected
markets beginning in 1997. The Company believes that by continuing to partner
with leading international hotels in each of its targeted markets and
subsequently focusing on mid-market hotels in these markets, it can further
exploit its leadership position.
STRATEGY
The Company's objective is to be the leading provider of in-room video
entertainment and information services to hotels in its target international
markets. Key elements of the Company's strategy to achieve this objective are
as follows:
Expand Installed Base of Rooms. The Company, which already has the largest
number of installed on-demand video rooms in the Pacific Rim, believes there
is a significant opportunity to expand its installed base of rooms in the
underpenetrated Pacific Rim, European and other target international markets
through the following three-pronged approach:
. Leverage industry leading position. The Company has entered into anchor
contracts with leading hotels in each of its target markets and leverages
the success of these installations to encourage installations in
competing hotels in those markets. The Company intends to continue to
capitalize on its strong market position by aggressively marketing the
breadth of its programming, new interactive entertainment and information
services and high-level of local customer service to leading business and
resort hotels in the Company's target international markets.
. Penetrate target markets directly or through acquisition. The Company has
instituted a focused expansion plan that includes direct entry or
acquisition in attractive existing and new markets. Historically, the
Company has entered target markets in the Pacific Rim, Africa, Europe and
the Middle East directly; however, the Company also intends to evaluate
potential acquisitions in order to further penetrate its target markets.
The Company believes that growth through acquisition will be part of the
Company's expansion strategy.
. Offer services to mid-market hotel sector. Mid-market hotels, which have
lower room rates and fewer services than leading hotels, represent an
opportunity for the Company to expand its installed base of rooms in its
target markets by leveraging the reputation it has established with
leading hotels. To date, penetration of on-demand video systems in mid-
market hotels has been limited. The Company believes that mid-market
hotels represent an attractive additional source of revenue.
Implement New Interactive Entertainment and Information Revenue Sources. The
Company's current system provides a full range of interactive video
entertainment and information services including movies, on-demand billing
summaries, express check-out services, personalized messaging, guest surveys
and room service ordering. Currently, the Company is in the process of
enabling hotels to further maximize guest revenue and differentiate hotel
services by offering new interactive entertainment and information services,
including in-room casino-style gaming, video advertising, video games,
financial news, Internet access and in-room shopping. The Company believes
that these new services will appeal to a broader group of users than the
traditional purchaser of in-room videos and will serve to increase revenue per
installed room.
Increase Revenue Per Room by Effectively Merchandising Available
Services. The Company is promoting the MagiNet brand name and awareness of the
Company's product and service offerings. A key element to the
30
<PAGE>
Company's marketing strategy is to work closely with hotels to develop an
effective campaign for increasing the use of video-based services. These
strategies include in-room advertising and entertainment packages that
highlight the Company's services and feature films. The Company also assists
hotels in marketing hotel services to their guests through the Company's
systems.
Employ Cost-Effective, Proven Technology. The Company seeks to minimize
technology risk and rapidly incorporate technological enhancements by
licensing and purchasing cost-effective, leading-edge equipment and software
in addition to developing equipment and software in-house. Currently, the
Company utilizes the successful on-demand video technologies developed by OCV
and Guestserve. The Company has also developed its own proprietary technology
that enables its systems to operate with a number of different television
standards that exist in its target markets and to increase functionality and
reduce the cost of existing systems. The Company is continuously evaluating
new technologies to enable the provision of a wide variety of services at a
cost-effective price. For example, the Company is evaluating the use of
digital server technology to increase system capacity and allow for the
provision of additional interactive services.
Utilize Relationships with Local Partners. To facilitate the marketing,
installation and maintenance of the Company's systems in certain of its
markets, the Company has entered into joint ventures or similar arrangements
with local businesses and individuals believed by the Company to be familiar
with local customs and practices and to be otherwise advantageous to the
Company's business prospects in such markets. The Company has established such
joint ventures in Japan, South Korea, Taiwan and Thailand, and expects to
establish further ventures with local partners as and when the need and
opportunity arise.
Establish Strategic Relationships. The Company establishes strategic
relationships to facilitate the introduction of new interactive entertainment
and information services. The Company has signed a license agreement with
InterGame, Ltd. to provide in-room casino-style gaming in certain countries
where such services are permitted. The Company has also established a
relationship with Trinity Group in Thailand to sell advertising for display on
its iLook interactive information directory being introduced on MagiNet's
systems in Thailand, the country which represents the Company's largest
installed base of rooms. In addition, MagiNet has entered into an agreement
with Bloomberg L.P. to distribute Bloomberg Information Television, a 24-hour
financial news program, to hotels in the Pacific Rim, Europe, South Africa and
Israel.
PRODUCTS AND SERVICES
Current Products and Services
To date, MagiNet has focused primarily on providing in-room on-demand video
entertainment systems. The Company has recently expanded its systems into
entertainment and information gateways that offer an increasingly varied range
of services to hotel guests.
On-Demand Video. The Company's video entertainment and information systems
consist of a microprocessor controlling the converter and the television in
each room, a handheld remote control and a central "head-end" video storage
unit and system computer located elsewhere in the hotel. The in-room unit may
be integrated within, or located behind, the television. These systems allow
each hotel guest to use the remote control to choose, at their own
convenience, from a large selection of pay-per-view major motion pictures
(including new releases), independent motion pictures for adult audiences, as
well as free-to-guest broadcast, cable or satellite programming. Generally,
guests can choose from approximately 30 to 60 video titles on-demand,
depending on the size of the hotel and the capacity of the installed system.
Hotel Video Information Services. Pursuant to contracts with each individual
hotel, the Company currently offers a variety of interactive information
services, including on-demand billing summaries, express check-out services,
personalized messaging, interactive guest surveys and room service ordering,
as well as information screens to enable hotels to promote their facilities.
The Company provides these hotel services in selected languages as appropriate
for the hotel market. The Company also provides equipment and interfaces to
enable hotels to offer information services such as on-line airline schedules
and weather reports. These services allow
31
<PAGE>
the hotel to increase the productivity of its staff by automating certain
hotel services that would otherwise require additional personnel.
Future Products and Services
The Company intends to begin implementation of a number of interactive
entertainment and information services beginning in 1997 in selected markets.
MagiNet believes these services will further differentiate the Company from
competitors and enhance revenue per installed room.
In-room Casino-style Gaming. The Company has an exclusive, worldwide license
from InterGame, Ltd. to provide its casino-style gaming for use in the
hospitality industry. The hotel guest will be charged through standard credit
card verification, and the Company will receive a share of the net guest
losses. The initial market for this service will be certain hotels in the
Pacific Rim, and if successful the Company intends to offer this service to
hotels in countries where it is permitted by local law. The Company will enter
into arrangements with local gaming authorities as necessary.
Advertising. The Company has executed an agreement to provide its "yellow
page" style iLook advertising directory to guests in hotels utilizing the
Company's system. The Company will initiate this service in Thailand and later
identify local partners to assist the Company in soliciting advertisers for
the system in other markets. With this service, MagiNet's local partner in
Thailand will market the advertising space and the Company will provide the
advertising to the hotel guest on its systems. The Company expects
restaurants, travel agencies, airlines, hotels in other destinations, and
local stores and general services, which an international traveler may desire,
to subscribe for this service. The Company has also developed the Welcome
Channel, currently being tested in Australia. The Welcome Channel has been
designed to accommodate 30-second commercials as well as Hollywood-studio
movie previews, corporate identity advertising and hotel promotions.
Financial News and Information. MagiNet has entered into an agreement with
Bloomberg L.P. ("Bloomberg") to distribute Bloomberg Information Television, a
24-hour financial news program, to hotels in the Pacific Rim, Europe, South
Africa and Israel. The hotel providing this service to its guests will pay the
Company a monthly per-room charge to receive this service, and MagiNet and
Bloomberg will share in the revenue received from the hotels. This service
will be provided on a free-to-guest basis.
Other. The Company has under development or under discussion with potential
partners the provision of video games, in-room shopping and Internet access to
hotel guests.
ON-DEMAND VIDEO PROGRAMMING
The Company obtains first-run motion pictures and other programming through
distribution agreements with the authorized distributors of the major movie
studios in the United States (including Columbia, HBO, MGM, Miramax,
Paramount, TriStar, Twentieth Century Fox, United Artists and Universal) and
other countries, along with other studios and movie production companies. The
Company prepares monthly line-ups for video titles, arranges the ordering and
duplication of those titles and changes actual video cassettes for new movies
monthly. In recent months, the Company has been successful in acquiring major
theatrical films from European sources, enhancing its capability to serve
various hotel clientele. The Company obtains French, German, Japanese,
Chinese, Thai and Korean language programming from distributors in those
countries, and plans to establish similar arrangements with additional local
suppliers.
The distribution agreements relating to first-run motion pictures generally
provide for a specified license period and percentage of revenue of each
motion picture that are negotiated separately, with the studio receiving a
percentage generally ranging from 30% to 45% of the Company's gross revenue
from a major motion picture. For recently released motion pictures, the
Company typically obtains rights to exhibit the picture in a specific country
after the motion picture has been released in theaters in that country, but
prior to its release to the video rental market or exhibition on cable
television in that country.
32
<PAGE>
In addition to first-run motion pictures, most of the Company's
installations also offer programming independent of the major motion picture
studios originating in the United States, Europe and the Pacific Rim,
including titles considered appropriate for adult audiences only. Access to
such titles may be blocked from either the front desk or in-room remote
control. The Company typically obtains such programming for a one-time fee,
with no ongoing royalty obligation. Such films provide higher operating
margins because of the relatively low acquisition cost. Such programming can
therefore account for a significant portion of the Company's operating income
in certain of its markets.
INSTALLED BASE AND BACKLOG
MagiNet's installed base consists of rooms installed in hotels that have
signed exclusive five-to-seven year contracts for the Company to provide hotel
guests with MagiNet's interactive entertainment and information services. The
Company's backlog consists of rooms not yet installed with the Company's
systems at hotels that have signed such contracts or, in Japan, have signed a
memorandum of understanding. The Company does not include in backlog the rooms
in individual hotels within hotel chains that have signed master contracts
with the Company until the Company executes a contract with an individual
hotel in that chain.
The Company's installed base of rooms and backlog as of June 30, 1996 are
set forth below:
<TABLE>
<CAPTION>
ROOMS INSTALLED BACKLOG
------------------ ------------------
COUNTRY ROOMS # OF HOTELS ROOMS # OF HOTELS
------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Australia.............................. 6,356 27 2,480 8
France................................. 377 1 11 --
Guam/Saipan............................ 4,310 14 -- --
Hong Kong.............................. 3,885 7 1,473 3
Israel................................. 2,507 9 3,227 9
Japan.................................. 6,121 15 2,156 6
New Zealand............................ 1,794 7 -- --
The Philippines........................ -- -- 1,502 3
Singapore.............................. 3,115 6 830 1
South Africa........................... 2,630 8 3,996 19
South Korea............................ 2,974 6 2,964 5
Taiwan................................. 4,822 12 150 --
Thailand............................... 10,792 26 2,079 4
------ --- ------ ---
Total................................ 49,683 138 20,868 58
====== === ====== ===
</TABLE>
SALES, DISTRIBUTION AND MARKETING
The Company currently targets leading hotels generally in excess of 100
rooms in the Pacific Rim, the Middle East, Africa and Europe. The Company
markets its system as requiring no capital investment by the hotel and then
pays the hotel a monthly commission based on gross revenue derived from its
interactive video entertainment and information services. Except in smaller
markets, where the Company utilizes local distributors or representatives, the
Company markets its products through controlled subsidiaries located in each
market and generally uses its own personnel to supervise installation and
provide maintenance services. The Company currently maintains offices and
personnel in the metropolitan areas of Auckland, Bangkok, Hong Kong,
Johannesburg, Seoul, Singapore, Sydney, Taipei, Tel Aviv and Tokyo. The
Company's worldwide headquarters in Sunnyvale, California provides strategic
direction, management, finance and accounting, and research and development,
as well as support for the local offices in programming, marketing, sales,
installations and maintenance.
The Company provides service for its installed systems. Pursuant to an
exclusive five-to-seven year contract, the Company installs at its own cost
its system in the hotel and retains ownership of, and responsibility for, all
equipment utilized in providing interactive entertainment and information
services. Traditionally, the hotel
33
<PAGE>
provides and owns the televisions. The Company undertakes a significant
investment when it installs its system in a hotel, sometimes requiring
significant changes to be made to the hotel's master antenna television
system. The Company's contract with each hotel provides that the Company will
be the exclusive provider of interactive entertainment and information
services to hotel guests and generally permits the Company to set the price
for each pay-per-view event. The hotels collect viewing charges from their
guests and retain a commission equal to a percentage of the total pay-per-view
revenue. Some contracts also require the Company to upgrade its system to the
extent that new technologies and features are introduced during the term of
the contract. Based upon contracts entered into as of June 30, 1996, contracts
for approximately 6% of the Company's installed rooms expire on or before
December 31, 1998, 21% of the Company's installed rooms expire during 1999 and
28% of the Company's installed rooms expire during 2000.
The Company has signed master contracts with Hyatt International-Asia
Pacific Limited, Hyatt International (Europe Africa Middle East) Ltd.,
Shangri-La and the Southern Pacific Hotel Corporation. These master contracts
establish the Company as a preferred vendor of certain of MagiNet's
interactive entertainment and information systems and services without
guaranteeing any commitments from individual hotels within the chain. The
Company must sign agreements with individual hotels within the chain to
install its systems in such hotels. The Company also has individual hotel
contracts with other hotels within recognized chains with which the Company
does not have master contracts such as the Hilton International, Inter-
Continental, Mandarin Oriental, Marriott, Okura, Regent/Four Seasons,
Sheraton, and Westin.
The Company is currently developing additional marketing strategies and
obtaining and analyzing market data to promote the MagiNet brand name and the
awareness of the Company's product and service offerings. A key element of the
Company's marketing strategy is to work closely with the hotels to develop an
effective campaign for increasing the use of video-based services. These
strategies include in-room advertising and entertainment packages that
highlight the Company's services and feature films. The Company also assists
the hotels in marketing hotel services to their guests through the Company's
systems.
REGIONAL AND STRATEGIC RELATIONSHIPS
Local Partners
The Company's markets reflect a variety of different business cultures and
legal environments. To facilitate the marketing, installation and maintenance
of the Company's systems in certain of its markets, the Company has entered
into joint ventures or similar arrangements with local businesses and
individuals believed by the Company to be familiar with local customs and
practices and to be otherwise advantageous to the Company's business prospects
in such markets. The Company has established such joint ventures in Japan,
South Korea, Taiwan and Thailand, and expects to establish further ventures
with local partners as and when the need and opportunity arise.
In Australia, Hong Kong, Israel, New Zealand, Singapore and South Africa,
the Company operates through its local country subsidiaries and provides
sales, installation, service and maintenance through its own local employees
and independent contractors. The Company believes that the existing
familiarity its local employees and independent contractors have with the
business cultures of these countries will enable the Company to further
penetrate these markets successfully without the assistance of a joint venture
or similar arrangement.
Distributors and Representatives
The Company installs and services hotels in Guam and Saipan through one
distributor and one representative. In addition, the Company has retained a
distributor to install and service the Company's Guestserve-based systems in
Malaysia, Singapore, Indonesia and Brunei. The representative installs and
services systems owned by the Company, in exchange for a monthly fee and a
percentage of revenue. The distributors purchase, install and service the
systems and pay the Company a royalty based on rooms installed or revenue.
34
<PAGE>
Strategic Relationships
On Command Video. Pursuant to a Technology License Agreement dated April 15,
1992 (the "OCV License"), OCV has granted the Company an exclusive,
transferable license in 30 countries outside North America to manufacture,
modify, market and sell products incorporating OCV's proprietary technology.
Following an initial term of 10 years, the OCV License is automatically
renewable for an indefinite number of five-year periods. Although the Company
is not required to use OCV technology, it is currently incorporated into most
of the Company's installed systems. Pursuant to the OCV License, the Company
pays OCV royalties based on the Company's revenue derived from OCV patented
technology. The Company has paid OCV, in advance, a license fee that is
credited against its future royalty obligation under the OCV License. These
prepaid royalties are expected to be fully amortized before December 1996, at
which time the Company will begin to incur a monthly cash payment in order to
fulfill its continuing royalty obligations to OCV.
Guestserve. Pursuant to a Technology License Agreement dated December 20,
1995 (the "Guestserve License"), Guestserve has granted the Company a
transferable license to manufacture, modify, market and sell products
incorporating Guestserve's technology in all countries outside of North
America. The Guestserve License is exclusive for the hospitality industry and
non-exclusive for apartments serviced by hospitality providers. Following an
initial term of 10 years, the Guestserve License is automatically renewable for
an indefinite number of five-year periods. Guestserve has granted the Company a
license to future technological improvements along with the right to purchase
hardware on favorable terms, and the Company has granted Guestserve a license
to all technological improvements to the Guestserve system engineered by the
Company. Pursuant to the Guestserve License, the Company pays Guestserve
royalties, payable in installments upon the Company's acceptance of specified
Guestserve technology and on a per-room basis. The royalties are capped and
payable over a seven-year period.
InterGame, Ltd. The Company has entered into an agreement (the "InterGame
Agreement"), effective as of July 8, 1996, with InterGame, Ltd. ("InterGame"),
a company engaged in designing, implementing and operating electronic video
gaming programs for use with interactive PC and other platform-based systems.
Pursuant to the InterGame Agreement, InterGame will deliver its network systems
and software to MagiNet, develop an interface for the system to operate on
MagiNet's interactive video systems, and grant to MagiNet an exclusive
worldwide license to provide in-room casino-style gaming in hotels, as
permitted by law. The Company will bear the capital costs of the equipment
necessary to deliver the gaming services, and net revenue from the operation of
the system (after certain payments are made) is to be divided between the
Company and InterGame. MagiNet has exclusivity for the hospitality industry
with respect to the technology, provided certain installation milestones are
achieved. The InterGame Agreement will remain in force until July 8, 2001, and
thereafter is automatically renewable for an indefinite number of one-year
periods. To the extent the Company engages third parties to assist the Company
in installing and operating the casino-style gaming systems, the Company may
share with such parties a percentage of the revenue from the system.
Trinity Group. The Company has entered into an agreement with the Trinity
Group ("Trinity"), the Company's partner in Thailand, for Trinity to sell
advertising to be displayed to hotel guests using the Company's iLook service.
iLook is a service developed by the Company, that will display video
advertising directories on MagiNet systems. MagiNet has agreed to install the
technology on the Company's systems in Thailand to allow guests to
interactively search the iLook system for businesses and services, and to
provide training to the Trinity sales force. MagiNet will retain control over
the content of the advertising and will receive approximately one-half of the
gross iLook revenue. The agreement will remain in force until December 31,
2002, and thereafter automatically renew annually, unless terminated by either
party.
Bloomberg. The Company has entered into an agreement dated as of October 3,
1996 with Bloomberg to distribute Bloomberg Information Television, a 24-hour
financial news program, to hotels in the Pacific Rim, Europe, South Africa and
Israel. The Company will sell the service to the hotels for a monthly per-room
fee to be divided between the Company and Bloomberg. Pursuant to this
agreement, MagiNet will provide the Bloomberg service on a free-to-guest basis.
MagiNet may, subject to the consent of Bloomberg, offer to install a Bloomberg
terminal in a hotel's business center or a concierge floor, subject to certain
conditions.
35
<PAGE>
MANUFACTURING
Although under its technology agreements the Company has the right to
manufacture the components and sub-assemblies of its systems, the Company
currently subcontracts the manufacture of its systems including head-ends,
converters and remote controls. The Company's remote controls for the OCV-
based systems are manufactured by one company in Hong Kong, the remote
controls for the Guestserve-based systems are manufactured by one company in
China and the Company's converters are manufactured by three companies, one in
each of Taiwan, Japan and Singapore. The OCV-based head-ends are currently
available solely from OCV, and the Guestserve-based head-ends are available
solely from Guestserve. OCV is a majority-owned subsidiary of Ascent
Entertainment Group, Inc., which recently acquired the assets of
SpectraVision, a competitor of the Company in the Pacific Rim. MagiNet
believes that similar contract manufacturing can be obtained from other
vendors, including those located in the Pacific Rim, although no assurance can
be given that such manufacturing resources will continue to be available on
reasonable terms, or at all. The Company will pursue such alternative
manufacturing arrangements when and if it appears likely that significant cost
savings or quality improvements can be achieved. At present, the Company has
no plans for alternative sourcing of its systems or major system sub-
assemblies.
The Company has experienced delays in receiving converters for installations
planned for the Guestserve-based systems, and these delays caused an
approximately three-to-four month delay in installing certain hotels. Delays
in receiving products could delay a large number of planned room
installations. There can be no assurance that the Company will not face such
difficulties or delays in the future. An inability of the Company to obtain
sole-sourced or other components in a timely manner could significantly delay
installations of systems, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, any increase in cost to manufacture the system components from
existing or alternative sources could have a material adverse effect on the
Company's business, financial condition and results of operations.
MAINTENANCE AND SUPPORT
The Company believes that high quality and consistent systems support and
maintenance are essential to competitive success in its industry. As of June
30, 1996, the Company's installation and service organization consisted of 46
installation and service personnel in 11 countries. The Company emphasizes the
use of Company- employed installation and service personnel but also uses
Company-supervised subcontractors in areas where there is not a sufficient
concentration of systems to warrant a full-time installation and service
representative. Currently, the Company's in-house service organization is
responsible for a substantial majority of the Company's installed base of
rooms. Installation and service personnel are responsible for systems
maintenance and distribution and collection of video cassettes. In addition,
the Company's installation employees prepare site surveys to determine the
type of equipment to be installed at each particular hotel, install the
Company's systems or supervise third-party installers, train the hotel staff
and perform quality auditing in each country.
MagiNet receives on-line data daily through modem connections to its
systems, enabling the Company to track the status of all of its installed
systems. The on-line diagnostic capability of the Company's systems enable
MagiNet to identify and resolve a number of the reported system malfunctions
from the Company's service control center without visiting the hotel property.
When a service visit is required, the modular design of the Company's systems
permits installation and service personnel to replace defective components at
the hotel site. The Company generally maintains a fully-trained technical
support staff in each country, which is available on a 24 hour-a-day basis.
The Company also maintains a toll-free technical support line at its
headquarters, used by country service personnel.
36
<PAGE>
COMPETITION
The Company competes with a number of companies that specialize in providing
in-room video services, and such competitors may have greater financial,
technical, sales and marketing resources to devote to the development,
promotion and sale of their products, and may have longer operating histories,
greater name recognition and greater market acceptance for their products and
services compared to those of the Company. The Company could also face
competition in the future from existing and emerging cable, direct broadcast
satellite and other communications companies providing entertainment and other
in-room services to hotels and hotel guests.
The Company's primary competitors in the on-demand video systems market are
SpectraVision, Movielink and LodgeNet. SpectraVision was one of the earliest
entrants into the hotel entertainment market, and has developed its
GuestChoice technology, which allows guests to choose movies to watch on
demand. Movielink, a privately-held Australian company, represents the
Company's primary competition in the Pacific Rim. Movielink, which recently
introduced an on-demand system, has a large base of free-to-guest customers in
Australia and in Singapore and has a small number of installations in Hong
Kong and Thailand. Although LodgeNet markets its systems primarily in the
United States, it has recently entered certain of the Company's markets.
The Company also experiences separate competition in certain specific
countries. For example, in Japan certain large international corporations,
such as Toshiba Corporation, Pioneer Electronic Corp., Hitachi, Ltd. and
Matsushita Electric Industrial Co., Ltd., which supply the Japanese
hospitality industry with master antenna television systems, sometimes offer a
scheduled broadcast, pay-per-view movie capability. In addition, Gosoh, Ltd.
competes in Hong Kong with a scheduled broadcast, pay-per-view system.
In Europe, the Company faces competition from PRODAC Prozebdatentechnik
GmbH, Thorn-EMI Plc, Video Management Services, Inc. and Granada Group Plc,
which have installed mainly free-to-guest and scheduled systems. The Company
believes that penetration of the European market with on-demand video systems
by these or other competitors is fairly low.
The Company's ability to compete successfully depends on many factors,
including the success of competitors' systems and services, the ability to
interface directly with hotel property management systems, the ability to
provide appropriate programming for an international audience, the ability to
obtain leading hotel contracts and name recognition among hotels, the quality
of its programming and services, the reliability of its systems, general
economic conditions and protection of Company and third-party licensor
products by effective utilization of intellectual property laws. In
particular, competitive pressures from existing or new competitors who offer
lower prices or other incentives or introduce new systems could result in
price reductions which would adversely affect the Company's profitability.
There can be no assurance that the Company's current or other new competitors
will not develop enhancements to, or future generations of, competitive
systems and services that offer superior price or performance features, that
the Company will be able to compete successfully in the future or that the
Company will not be required to incur substantial additional investment costs
in connection with its development, marketing and customer service efforts in
order to meet any competitive threat. The Company expects competition in its
markets to intensify.
TECHNOLOGY AND PROPRIETARY RIGHTS
The patents to the basic architecture of the Company's system are held by
the Company's licensors in the United States and corresponding patent
applications for the OCV technology have been filed in Japan, the United
Kingdom and under the European Patent Cooperation Treaty. The Company has
engineered further improvements to the system to increase its cost-efficiency
and flexibility. Hardware enhancements to the system include engineering new
single-channel modulators, compatibility with television standards in other
countries, and a universal television controller/interface to reduce the need
for custom interfaces. The Company has also designed equipment to be
compatible with the eight different television standards, frequency plans and
AC voltage requirements for each of the countries served. Software
enhancements include foreign language prompts and menus, hotel information
services and hotel maintenance programs, as well as simplified systems
configuration and management. OCV has incorporated certain of the Company's
enhancements in its system installations in the United States.
37
<PAGE>
MagiNet's success and ability to compete is dependent in part upon its own
proprietary technology. The Company relies primarily on a combination of
patent, copyright and trademark laws, trade secrets, software security
measures and nondisclosure agreements to protect its proprietary technology.
There can be no assurance, however, that such protection will be adequate to
deter misappropriation of or deter unauthorized third parties from copying
aspects of, or otherwise obtaining and using, the Company's proprietary
technology. Moreover, the Company licenses from OCV and Guestserve the right
to install and operate on-demand video systems incorporating proprietary
technology of such companies. If for any reason the Company's rights under
such license agreements were to be successfully challenged by these or other
companies, the Company's business, financial condition and results of
operations would be materially adversely affected. Furthermore, there can be
no assurance that any confidentiality agreements between the Company and its
employees or any agreements with third parties will provide meaningful
protection for the Company's proprietary information or the technology
licensed from others in the event of any unauthorized use or disclosure of
such proprietary information. A substantial amount of the Company's sales are
in international markets, and the laws of the other countries may afford the
Company little or no effective protection of its intellectual property or the
intellectual property of its licensors.
While MagiNet believes that its products and trademarks do not infringe upon
the proprietary rights of third parties, there can be no assurance that the
Company will not receive future communication from third parties asserting
that the Company's products infringe, or may infringe, on the proprietary
rights of third parties. The Company's trademark registration of the name
"MagiNet" has been initially challenged by the U.S. Patent and Trademark
Office. Any infringement claims, with or without merit, could be time
consuming, result in costly litigation and diversion of technical and
management personnel and require the Company to develop non-infringing
technology, enter into royalty or licensing agreements or cease the marketing
or use of certain products, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations. Such
royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company or at all.
EMPLOYEES
As of June 30, 1996, the Company had 164 employees, of which 107 are located
in offices in the Company's local markets. The Company believes its
relationships with its employees are good.
FACILITIES
The Company's administrative, sales, marketing and product development
headquarters are located in Sunnyvale, California, where the Company leases
approximately 28,000 square feet under a lease expiring in March 1997. The
Company anticipates that it will be necessary to obtain a larger facility upon
the termination of its headquarters lease but believes that suitable
additional or substitute facilities will be available in the future as needed
on commercially reasonable terms. The Company also leases office space in the
metropolitan areas of Bangkok, Hong Kong, Johannesburg, Seoul, Singapore,
Sydney, Taipei, Tel Aviv and Tokyo.
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information concerning the directors,
executive officers and certain other key employees of the Company as of August
30, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kenneth B. Hamlet....... 52 Chairman of the Board, President and Chief Executive Officer
Robert R. Creager....... 51 Founder, Executive Vice President, Corporate Development, and Director
James A. Barth.......... 53 Executive Vice President, Chief Financial Officer and Secretary
Gordon E. (Ned) Druehl,
Jr. ................... 54 Executive Vice President and Chief Operating Officer
Pang T. Ho, Ph.D........ 50 Vice President of Engineering
Stuart J. Ellman(1)(2).. 29 Director
Michael D. Granoff(1)... 38 Director
Michael Ramsay(2)....... 44 Director
James D. Robinson
IV(2).................. 34 Director
</TABLE>
- --------
(1)Member of the Audit Committee.
(2)Member of the Compensation Committee.
Kenneth B. Hamlet has served as the Company's President and Chief Executive
Officer and as a member of its Board of Directors since January 1996 and as
Chairman of the Board since September 1996. Between 1991 and 1995, Mr. Hamlet
was Chairman and Chief Executive Officer of Hamlet & Associates, a private
investment banking and consulting firm. During such period, Mr. Hamlet provided
management consulting services to a number of companies, including serving as
Chairman and Chief Executive Officer of Caretenders Healthcorp, a health care
company, and Executive Vice President of NTN Communications, Inc., a
telecommunications equipment company. From March 1984 to January 1991, Mr.
Hamlet served as President and Chief Executive Officer for Holiday Inns, Inc.,
a wholly-owned subsidiary of Holiday Corporation that owned, operated and
franchised 1,750 hotels worldwide. From 1975 to 1984, Mr. Hamlet served in
numerous executive capacities within Holiday Inns, Inc. Mr. Hamlet holds a B.S.
in hotel administration from the Cornell University School of Hotel
Administration.
Robert R. Creager founded the Company and has served as Executive Vice
President, Corporate Development, since September 1996 and as a member of the
Company's Board of Directors since the Company's inception. From January 1996
to September 1996, Mr. Creager served as the Company's Chairman of the Board.
From July 1991 to January 1996, Mr. Creager served as President and Chief
Executive Officer of the Company. From 1988 to 1990, Mr. Creager was Vice
President, Corporate Development, and General Counsel of Arix Corporation, a
UNIX minicomputer manufacturer. Mr. Creager holds a B.A. in Business
Administration from Pacific Union College and a J.D. from the University of
California, Hastings College of Law.
James A. Barth has served as the Company's Executive Vice President since
September 1995, and as Chief Financial Officer and Secretary since October
1994. From October 1994 to September 1995, Mr. Barth was Vice President of
Finance of the Company. From March 1994 to October 1994, Mr. Barth was Vice
President and Chief Financial Officer of ACC Microelectronics Corporation, a
semiconductor company. From 1982 to March 1994, he served as Vice President and
Chief Financial Officer of Rational Software Corporation, a developer of
object-oriented software engineering tools. Mr. Barth is a certified public
accountant and holds a B.S. in business administration from the University of
California, Los Angeles.
Gordon E. (Ned) Druehl, Jr. has served as the Company's Executive Vice
President and Chief Operating Officer since August 1996. From January 1992 to
July 1996, he served as Chairman and Chief Executive Officer of Sandusky
Cabinets Manufacturing, Inc., a metal cabinet manufacturing company. From 1990
through October 1991, Mr. Druehl founded and operated NKI Hospitality, a hotel
management company, and subsequently worked as Vice President of RFS Real
Estate, Inc., a diversified property management company, which acquired
39
<PAGE>
NKI Hospitality. From 1975 to 1990, Mr. Druehl held various management
positions at Holiday Corporation, including President of the Hotel Services
Division and Senior Vice President of U.S. Operations. Mr. Druehl holds a B.S.
in hotel administration from the Cornell University School of Hotel
Administration.
Pang T. Ho, Ph.D. has served as the Company's Vice President of Engineering
since August 1994. From February 1994 until August 1994, Dr. Ho served as
Chairman of Spectrum, Inc., a cable television equipment distributor in
Taiwan. From December 1991 until January 1994, Dr. Ho was President of Po-Hsin
Entertainment, Inc., a cable television system operator located in Taiwan.
From 1985 to 1991, Dr. Ho served as Vice President of Commercial Products for
Pacific Monolithics Inc., a wireless communications equipment company. Dr. Ho
holds a B.S. in electrical engineering from National Taiwan University, an
M.S. in electrical engineering from Princeton University and a Ph.D. in
electrical engineering from Rutgers University.
Stuart J. Ellman has served as a member of the Company's Board of Directors
since October 1994. Since August 1994, he has served as a Managing Director of
RRE Investors, L.L.C., a venture capital investment firm. From August 1992 to
August 1994, he was Vice President of Advisory Capital Partners, an investment
firm. From June 1988 to July 1990, Mr. Ellman was an associate at Dillon, Read
& Co. Inc., an investment banking firm. Mr. Ellman holds a B.A. from Wesleyan
University and an M.B.A. from Harvard University.
Michael D. Granoff has served as a member of the Company's Board of
Directors since October 1994. Since January 1994, Mr. Granoff has served as
Chief Executive Officer of Pomona Capital, L.P., a private investment company.
From October 1988 to December 1993, Mr. Granoff was President of Golodetz
Ventures and a member of the Board of Directors of Golodetz Corporation. From
March 1981 to January 1985, Mr. Granoff served on the staff of the U.S. House
of Representatives Appropriations Subcommittee on Foreign Operations and was a
member of the 1992 Presidential Transition Team. Mr. Granoff holds a B.A. from
the University of Pennsylvania and a J.D. from Georgetown University Law
Center.
Michael Ramsay has served as a member of the Company's Board of Directors
since September 1993. Since April 1996, he has served as a Senior Vice
President of Silicon Desktop Group of Silicon Graphics, Inc., a developer and
manufacturer of computer workstations. From August 1994 to March 1996, he
served as President of Silicon Studio, Inc., a subsidiary of Silicon Graphics,
Inc. From July 1992 to August 1994, he served as Senior Vice President of
Silicon Graphics' Visual System Group, from February 1987 to July 1992, he
served as Senior Vice President of Silicon Graphics' Entry Systems Division,
and from May 1986 to July 1991, he served as Director of Engineering, Vice
President and Senior Vice President of various Silicon Graphics divisions.
Mr. Ramsay received his B.S. degree in electrical engineering from the
University of Edinburgh in Scotland.
James D. Robinson IV has served as a member of the Company's Board of
Directors since October 1994. Since December 1994, he has served as Managing
Director of RRE Investors, L.L.C., a venture capital investment firm. From
September 1992 to December 1994, he served as Vice President of Hambrecht &
Quist Venture Partners, a venture capital firm. From July 1986 to March 1990,
he was an associate at J.P. Morgan & Co. Incorporated, a commercial and
investment banking firm. From January 1984 to June 1986, he was President of
IV Systems, Inc., a software consulting firm. Mr. Robinson holds a B.A. from
Antioch College and an M.B.A. from Harvard University.
DIRECTOR COMPENSATION
The Company reimburses each member of the Company's Board of Directors for
out-of-pocket expenses incurred in connection with attending Board meetings.
No member of the Company's Board of Directors currently receives any
compensation for serving as a Director. The Company's 1996 Director Stock
Option Plan provides that options will be granted to non-employee directors of
the Company pursuant to an automatic nondiscretionary grant mechanism. On the
effective date of the Offerings, each of the Company's non-employee directors
who is neither the beneficial owner nor an affiliate of a beneficial owner of
more than 3% of the Company's outstanding Common Stock will automatically be
granted an option to purchase 25,000 shares of the Company's Common Stock at
an exercise price equal to the initial public offering price. In addition,
40
<PAGE>
upon joining the Board of Directors, each new non-employee director will
automatically be granted an option to purchase 25,000 shares of Common Stock.
Each non-employee director will subsequently be granted an option to purchase
5,000 shares of Common Stock at each annual meeting of stockholders beginning
with the 1997 Annual Meeting of Stockholders. Each such option will be granted
at the fair market value of the Common Stock on the date of grant. The initial
options granted to non-employee directors will vest at a rate of 25% on the
first anniversary of the date of grant and at a rate of 1/48 of the shares per
month thereafter, and subsequent options granted to non-employee directors
will become exercisable at a rate of 1/48 of the shares subject to such
additional options on the monthly anniversary of the date of grant subject to
continued Board service. See "--Stock Plans--1996 Director Stock Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company and administers various incentive compensation and
benefit plans. The Compensation Committee currently consists of Stuart J.
Ellman, Michael Ramsay and James D. Robinson IV. During 1995, the Compensation
Committee consisted of Michael Ramsay, Michael D. Granoff, James D. Robinson
III and James D. Robinson IV. Kenneth B. Hamlet, Chairman of the Board,
President and Chief Executive Officer and a director of the Company,
participates in all discussions and decisions regarding salaries and incentive
compensation for all employees and consultants of the Company, except that he
is excluded from discussions regarding his own salary and incentive
compensation. No interlocking relationship exists between any member of the
Company's Compensation Committee and any member of any other company's board
of directors or compensation committee.
41
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth in summary form information concerning the
compensation awarded to, earned by, or paid for services rendered to the
Company in all capacities during the fiscal year ended December 31, 1995 by
(i) the Company's Chief Executive Officer as of the end of fiscal year 1995,
(ii) the Company's next four most highly compensated executive officers whose
salary and bonus for such fiscal year exceeded $100,000 and who were serving
as an officer of the Company as of the end of such fiscal year, (iii) Kenneth
B. Hamlet, who became the Company's President and Chief Executive Officer in
January 1996, and (iv) Gordon E. (Ned) Druehl, Jr., who became the Company's
Executive Vice President and Chief Operating Officer in August 1996
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL 1995
------------
LONG-TERM
COMPENSATION
FISCAL 1995 AWARDS
------------------------------------
ANNUAL COMPENSATION(1) SECURITIES
------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS(2) OPTIONS
--------------------------- ----------- ------------------------
<S> <C> <C> <C>
Current Executive Officers
Kenneth B. Hamlet (3)..................... $ -- $ -- --
Chairman of the Board, President and
Chief Executive Officer
Robert R. Creager (4)..................... 175,000 -- 349,500
Founder and Executive Vice President,
Corporate Development
James A. Barth............................ 131,245 7,219 150,000
Executive Vice President and Chief
Financial Officer
Gordon E. (Ned) Druehl, Jr. (5)........... -- -- --
Executive Vice President and Chief
Operating Officer
Pang T. Ho, Ph.D.......................... 125,683 12,870 81,800
Vice President of Engineering
Former Executive Officers
Jeffrey A. Bixler (6)..................... 96,708 134,875 75,000
Vice President of Sales and Marketing
Eric S. Hass(7)........................... 147,406 -- 169,000
Executive Vice President and Chief
Operating Officer
</TABLE>
- --------
(1) Other than salary and bonus described herein, the Company did not pay the
persons named in the Summary Compensation Table any fringe benefits,
perquisites or other compensation in excess of 10% of such executive
officer's salary and bonus.
(2) Except as otherwise indicated, bonus compensation consists of performance
or contractually based cash incentive payments.
(3) Mr. Hamlet succeeded Robert R. Creager as President and Chief Executive
Officer of the Company in January 1996. In connection with Mr. Hamlet's
employment, the Company agreed to pay him an annual salary of $250,000. In
addition, Mr. Hamlet is entitled to receive a cash bonus and a
corresponding stock bonus based on performance. See "--Employment
Agreements and Change in Control Arrangements" and "Certain Transactions."
In January 1996, the Company granted Mr. Hamlet an option expiring January
2001 to acquire 654,324 shares of the Company's Common Stock at an
exercise price of $2.00 per share, with vesting to occur ratably over 36
months.
(4) Mr. Creager resigned as President and Chief Executive Officer in January
1996. The Company and Mr. Creager are parties to an agreement governing
Mr. Creager's employment with the Company under which Mr. Creager's salary
is set at $175,000. See "--Employment Agreements and Change in Control
Arrangements" and "Certain Transactions."
(5) Mr. Druehl became the Company's Executive Vice President and Chief
Operating Officer in August 1996. In connection with Mr. Druehl's
employment, the Company agreed to pay him an annual salary of $155,000 and
a cash bonus equal to 33% of his salary, based on performance. See "--
Employment Agreements and Change in Control Arrangements" and "Certain
Transactions." In August 1996, the Company granted Mr. Druehl an option
expiring August 2001 to acquire 150,000 shares of the Company's Common
Stock at an exercise price of $5.25 per share, with 25% of the shares
vesting in July 1997, and the remaining shares vesting ratably over the
succeeding 36 months of service.
(6) Mr. Bixler resigned from the Company effective in December 1995. Bonus for
Mr. Bixler includes $39,375 in severance payments, a bonus of $67,500 paid
pursuant to an employment agreement with the Company, a $25,000 signing
bonus and a $3,000 housing allowance.
(7) Mr. Hass resigned from the Company effective in March 1996.
42
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1995
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the fiscal year ended December
31, 1995. All such options were awarded under the Company's 1992 Key Personnel
Stock Option Plan. No stock appreciation rights were granted to the Named
Executive Officers during the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------- POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTIONS TERM(1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME GRANTED FISCAL 1995 SHARE(2)(3) DATE(4) 5% 10%
---- ---------- ------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current Executive Officers
Kenneth B. Hamlet(5)............ -- -- % $ -- -- $ -- $ --
Robert R. Creager............... 349,500 36.7 1.00 1/30/00 96,560 213,373
James A. Barth.................. 100,000 10.5 1.00 1/30/00 27,628 61,051
50,000 5.3 2.00 9/18/00 27,628 61,051
Gordon E. (Ned) Druehl, Jr.(6).. -- -- -- -- -- --
Pang T. Ho, Ph.D................ 61,800 6.5 1.00 1/30/00 17,074 37,730
20,000 2.1 2.00 9/18/00 11,051 24,420
Former Executive Officers
Jeffrey A. Bixler(7)............ 75,000 7.9 1.00 4/18/00 20,721 45,788
Eric S. Hass(8)................. 169,000 17.8 1.00 1/30/00 46,692 103,176
</TABLE>
- --------
(1) Potential realizable value is based on the assumption that the Common
Stock of the Company appreciates at the annual rate shown (compounded
annually) from the date of grant until the expiration of the five year
option term. These numbers are calculated based on the requirements
promulgated by the Securities and Exchange Commission and do not reflect
the Company's estimate of future stock price growth.
(2) Options were granted at an exercise price equal to the fair market value
of the Company's Common Stock, as determined by the Board of Directors on
the date of grant.
(3) Exercise price may be paid in cash, by check, by delivery of already-owned
shares of the Company's Common Stock subject to certain conditions, or
pursuant to a cashless exercise procedure under which the optionee
provides irrevocable instructions to a brokerage firm to sell the
purchased shares and to remit to the Company, out of the sale proceeds, an
amount equal to the exercise price plus all applicable withholding taxes.
(4) Twenty-five percent (25%) of the option shares vest on the first
anniversary of the date of grant, and the balance vests at the rate of
1/48 of the total option shares for each month of service thereafter,
except for Mr. Robert R. Creager's option, which vests ratably over 36
months.
(5) Mr. Hamlet became President and Chief Executive Officer of the Company in
January 1996. In January 1996, the Company granted Mr. Hamlet an option
expiring January 2001 to acquire 654,324 shares of the Company's Common
Stock at an exercise price per share of $2.00 with vesting to occur
ratably over 36 months.
(6) In August 1996, the Company granted Mr. Druehl an option to acquire
150,000 shares of the Company's Common Stock at an exercise price of $5.25
per share, with 25% of the shares vesting in July 1997 and the remaining
shares subject to the option vesting ratably over the succeeding 36 months
of service.
(7) Mr. Bixler resigned from the Company effective in December 1995. No shares
subject to the option had vested as of the date of Mr. Bixler's
resignation, and the option terminated.
(8) Mr. Hass resigned from the Company effective in March 1996. In connection
with his resignation, Mr. Hass exercised the option with respect to 66,895
shares. The option expired with respect to all unvested shares on the
effective date of Mr. Hass' resignation.
43
<PAGE>
AGGREGATE OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
No Named Executive Officer exercised a stock option during fiscal 1995. The
following table sets forth certain information regarding stock options held as
of December 31, 1995 by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995 DECEMBER 31, 1995(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Current Executive Officers
Kenneth B. Hamlet (2)...... -- -- $ -- $ --
Robert R. Creager ......... 135,917 213,583 1,631,004 2,562,996
James A. Barth............. 32,292 117,708 384,379 1,365,621
Gordon E. (Ned) Druehl,
Jr.(3).................... -- -- -- --
Pang T. Ho, Ph.D. ......... 29,583 75,417 353,746 886,254
Former Executive Officers
Jeffrey A. Bixler(4)....... -- -- -- --
Eric S. Hass(5)............ 73,000 146,000 876,000 1,752,000
</TABLE>
- --------
(1) Based on an initial public offering price of $13.00 per share minus the
exercise price of outstanding options.
(2) Mr. Hamlet became President and Chief Executive Officer of the Company in
January 1996 and, accordingly, held no outstanding options as of December
31, 1995. In January 1996, the Company granted Mr. Hamlet an option
expiring January 2001 to acquire 654,324 shares of the Company's Common
Stock at an exercise price per share of $2.00 with vesting to occur
ratably over 36 months.
(3) Mr. Druehl became Executive Vice President and Chief Operating Officer in
August 1996 and, accordingly, held no outstanding options as of December
31, 1995. In August 1996, the Company granted Mr. Druehl an option
expiring August 2001 to acquire 150,000 shares of the Company's Common
Stock at an exercise price per share of $5.25 with 25% of the shares
vesting in July 1997 and the remaining shares vesting ratably over the
succeeding 36 months of service.
(4) Mr. Bixler resigned from the Company effective in December 1995. No shares
subject to the option granted to Mr. Bixler had vested as of the date of
his resignation, and the option terminated as of such date. Accordingly,
Mr. Bixler held no outstanding options as of December 31, 1995.
(5) Mr. Hass resigned from the Company effective in March 1996. In connection
with his resignation, Mr. Hass exercised two outstanding options for
19,791 and 66,895 shares, respectively. All remaining shares subject to
options held by Mr. Hass were unvested and terminated on the effective
date of his resignation.
STOCK PLANS
1992 Key Personnel Stock Option Plan. The Company's Restated 1992 Key
Personnel Stock Option Plan (the "1992 Plan") was originally adopted by the
Board of Directors in December 1992 and approved by the Company's stockholders
in December 1993. The Board of Directors approved the amendment and
restatement of the 1992 Plan in September 1996. A total of 3,800,000 shares of
Common Stock, less the number of shares issued under and not returned to the
Company's now-terminated 1992 Stock Option Plan, has been reserved for
issuance under the 1992 Plan. The 1992 Plan provides for the grant to
employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and
for the grant to employees and consultants of nonstatutory stock options.
Unless terminated sooner, the 1992 Plan will terminate automatically in
December 2002.
The 1992 Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, consist of two or more "outside directors" within
the meaning of Section 162(m) of the Code. The Committee has the power to
determine the terms of the
44
<PAGE>
options granted, including the exercise price, the number of shares subject to
each option, the exercisability thereof and the form of consideration payable
upon such exercise. In addition, the Committee has the authority to amend,
suspend or terminate the 1992 Plan, provided that no such action may affect
any share of Common Stock previously issued and sold or any option previously
granted under the 1992 Plan.
Options granted under the 1992 Plan are not generally transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
only by the optionee. Options granted under the 1992 Plan must generally be
exercised within three months of the end of the optionee's status as an
employee or consultant of the Company, or within twelve months after the
optionee's termination by death or disability, but in no event later than the
expiration of the option's term. The exercise price of all incentive stock
options granted under the 1992 Plan must be at least equal to the fair market
value of the Common Stock on the date of grant. The exercise price of
nonstatutory stock options granted under the 1992 Plan is determined by the
Committee, but with respect to nonstatutory stock options intended to qualify
as "performance-based compensation" within the meaning of Section 162(m) of
the Code, the exercise price must be at least equal to the fair market value
of the Common Stock on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive stock
option granted must equal at least 110% of the fair market value on the date
of grant, and the term of such incentive stock option may not exceed five
years. The term of all other options granted under the 1992 Plan may not
exceed ten years.
The 1992 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets
or a like transaction involving the Company, each option shall be assumed or
an equivalent option substituted by the successor corporation. If the
outstanding options are not assumed or substituted for as described in the
preceding sentence, the Committee shall provide for the Optionee to have the
right to exercise the option as to all of the optioned stock, including shares
as to which it would not otherwise be exercisable. If the Committee makes an
option exercisable in full in the event of a merger or sale of assets, the
Administrator shall notify the optionee that the option shall be fully
exercisable for a period of fifteen (15) days from the date of such notice,
and the option will terminate upon the expiration of such period. Certain
options outstanding under the 1992 Plan contain a provision providing for
accelerated vesting of options following an assumption by the successor
corporation in the event the optionee's employment is terminated within
certain time periods after the consummation of the merger. The Committee may,
in its discretion, include such provision in the vesting arrangement for
future option grants.
1992 Stock Option Plan. The Company's now-terminated 1992 Stock Option Plan
(the "1992 Stock Option Plan") provided for the granting to employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code and for the granting to employees and consultants of nonstatutory
stock options. The 1992 Stock Option Plan was approved by the Board of
Directors in December 1992 and by the Company's stockholders in December 1993.
A total of 236,430 shares of Common Stock were reserved for issuance pursuant
to the 1992 Stock Option Plan. The Board terminated the 1992 Stock Option Plan
in September 1996, although the 211,061 shares of Common Stock previously
issued and sold and any option previously granted under the 1992 Stock Option
Plan will not be affected by the termination of this plan. No further grants
will be made under the 1992 Stock Option Plan.
Options granted under the 1992 Stock Option Plan are not generally
transferable by the optionee, and each option is exercisable during the
lifetime of the optionee only by such optionee. Options granted under the 1992
Stock Option Plan must generally be exercised within three months of the end
of the optionee's status as an employee or consultant of the Company, within
six months after such optionee's termination by disability or within twelve
months after such optionee's termination by death (but in no event later than
the expiration of the option's ten year term). The exercise price of all
incentive stock options granted under the 1992 Stock Option Plan was at least
equal to the fair market value of the Common Stock on the date of grant. The
exercise price of nonstatutory stock options granted under the 1992 Stock
Option Plan was at least equal to 85% of the fair market value of the Common
Stock on the date of grant. With respect to any participant who owned stock
possessing
45
<PAGE>
more than 10% of the voting power of all classes of the Company's outstanding
capital stock at the date of grant, the exercise price of any option granted
was at least 110% of the fair market value on the date of grant, and the term
of such option did not exceed five years. The term of all other options
granted under the 1992 Stock Option Plan did not exceed ten years.
The 1992 Stock Option Plan provides that in the event of a merger of the
Company with or into another corporation, a sale of substantially all of the
Company's assets or a like transaction involving the Company, each option
shall be assumed or an equivalent option substituted by the successor
corporation. If the outstanding options are not assumed or substituted for as
described in the preceding sentence, the Committee shall notify the optionee
that the option shall be exercisable to the extent it has vested for a period
of fifteen (15) days from the date of such notice, and the option shall
terminate upon the expiration of such period.
1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
September 1996 but will not become effective until the effectiveness of the
Registration Statement related to the Offerings. A total of 200,000 shares of
Common Stock has been reserved for issuance under the Purchase Plan. The
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code, is implemented by consecutive and overlapping twenty-four month
offering periods beginning on the first trading day on or after May 1 and
November 1 each year, except for the first such offering period which
commences on the first trading day on or after the effective date of the
Offerings and ends on the last trading day on or before October 31, 1998. Each
offering period contains four intervening purchase periods of approximately
six months duration, during which payroll deductions of participants are
accumulated and, at the end of which, shares of Common Stock are purchased.
The Purchase Plan is administered by the Board of Directors or by a committee
appointed by the Board. Employees are eligible to participate if they are
customarily employed by the Company or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar year. The
Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions of up to 15% of an employee's compensation (excluding
commissions, overtime and other bonuses and incentive compensation). The price
of stock purchased under the Purchase Plan is 85% of the lower of the fair
market value of the Common Stock at the beginning of the offering period or
the end of the purchase period. Employees may end their participation at any
time during an offering period, and they will be paid their payroll deductions
to date. Participation ends automatically upon termination of employment with
the Company.
Rights granted under the Purchase Plan are not transferable by a participant
other than by will, the laws of descent and distribution, or as otherwise
provided under the Purchase Plan. The Purchase Plan provides that, in the
event of a merger of the Company with or into another corporation or a sale of
substantially all of the Company's assets, the Board of Directors shall
shorten the offering period then in progress (so that employees' rights to
purchase stock under the Plan are exercised prior to the merger or sale of
assets). The Purchase Plan will terminate in September 2006. The Board of
Directors has the authority to amend or terminate the Purchase Plan, except
that no such action may adversely affect any outstanding rights to purchase
stock under the Purchase Plan.
1996 Director Stock Option Plan. The Company's 1996 Director Stock Option
Plan (the "Director Plan") was adopted by the Board of Directors in September
1996 but will not become effective until the date of the effectiveness of the
Registration Statement relating to the Offerings. Non-employee directors are
entitled to participate in the Director Plan. The Director Plan has a term of
ten years, unless terminated sooner by the Board. A total of 200,000 shares of
Common Stock have been reserved for issuance under the Director Plan.
The Director Plan provides for the grant of 25,000 shares of Common Stock
(the "First Option"), to each non-employee director on the later of (i) the
effective date of the Director Plan or (ii) the date on which the person first
becomes a non-employee director. No non-employee director will be granted a
First Option if either (i) immediately prior to becoming a non-employee
director, such person was a director of the Company or (ii) such individual is
the direct or indirect beneficial owner or an affiliate of a direct or
indirect beneficial owner of 3% or more of the Company's outstanding Common
Stock. Each non-employee director, including non-
46
<PAGE>
employee directors not entitled to receive a First Option, will also be
granted an option to purchase 5,000 shares of Common Stock (a "Subsequent
Option") each year on the date of the annual shareholder's meeting of the
Company, if on such date he or she shall have served on the Board for at least
six months. The First Option shall have a term of 10 years and the shares
subject to each such option shall vest as to 25% of the shares of Common Stock
subject to the option one year after its date of grant, and as to 1/48th of
the shares subject to the option each month thereafter, and each Subsequent
Option will become exercisable at a rate of 1/48 of the shares subject to such
additional options on the monthly anniversary of the date of grant. The
exercise prices of the First Option and each Subsequent Option shall be 100%
of the fair market value per share of the Common Stock, generally determined
with reference to the closing price of the Common Stock as reported on the
Nasdaq National Market on the date of grant.
In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each option may be assumed or an equivalent option
substituted by the successor corporation. If an option is assumed or
substituted for, it shall continue to vest as provided in the Director Plan.
If a non-employee director's status as a director of the Company or the
successor corporation, as applicable, is terminated other than upon a
voluntary resignation by the non-employee director, each option granted to
such non-employee director shall become fully vested and exercisable. If the
successor does not agree to assume or substitute the option, each option shall
also become fully vested and exercisable for a period of thirty days, after
which period the option shall terminate. Options granted under the Director
Plan must be exercised within three months of the end of the optionee's tenure
as a director of the Company, or within twelve months after termination of the
director's tenure by death or disability, but in no event later than the
expiration of the option's ten year term. No option granted under the Director
Plan is transferable by the optionee other than by will or the laws of descent
and distribution, and each option is exercisable, during the lifetime of the
optionee, only by such optionee.
401(k) Plan. The Company maintains the MagiNet Corporation 401k Savings Plan
(the "401(k) Plan") which covers all of the Company's U.S. employees who have
completed 1/12 of a year of service. Pursuant to the 401(k) Plan, eligible
employees may elect to defer their current compensation by up the statutorily
prescribed annual limit and have the amount of such reduction contributed to
the 401(k) Plan on their behalf as an elective deferral contribution. The
401(k) Plan is intended to qualify under Section 401 of the Internal Revenue
Code of 1986, as amended, so that contributions to the 401(k) Plan, and income
earned on such contributions, are not includible in the participant's gross
income until withdrawn from the 401(k) Plan. The trustee under the 401(k)
Plan, at the direction of each participant, invests the assets of the 401(k)
Plan in any of a number of investment options.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company currently has employment agreements in effect with Kenneth B.
Hamlet, the Company's Chairman of the Board, President and Chief Executive
Officer and Gordon E. (Ned) Druehl, Jr., the Company's Executive Vice
President and Chief Operating Officer.
On November 28, 1995, the Company entered into an at-will employment
agreement with Mr. Hamlet pursuant to which the Company retained his services
as President and Chief Executive Officer beginning January 15, 1996. The
agreement provides for an annual base salary of $250,000, subject to annual
review concerning increases. In addition, Mr. Hamlet is eligible to receive an
annual bonus based upon certain financial criteria to be agreed upon by
Mr. Hamlet and the Board of Directors, including revenue and profitability
targets and other organizational milestones. Such bonus shall be payable in
part in cash and in part in Common Stock of the Company. The number of shares
of Common Stock issuable in connection with Mr. Hamlet's bonus shall, upon the
closing of the Offerings, be determined by dividing the cash portion of the
bonus by a price per share to be determined by negotiation between the Company
and Mr. Hamlet. Such shares shall be fully vested at the time of issuance.
47
<PAGE>
On June 20, 1996, the Company entered into an at-will employment letter
agreement with Mr. Druehl which provides for an annual base salary of $155,000
and an annual cash bonus based on the achievement of individual and Company
performance objectives.
Under the 1992 Plan, in the event of a merger or change-of-control of the
Company, the successor corporation may assume outstanding options or
substitute equivalent options. If such successor corporation does not assume
such options or substitute equivalent options, vesting of outstanding options
under the 1992 Plan will automatically accelerate. In addition, currently
outstanding options under the 1992 Plan for the Named Executive Officers
provide that if such option is assumed or an equivalent option is substituted,
vesting of such option will automatically accelerate if such officer's
employment with the successor corporation is terminated within twelve months
of the merger or change-of-control transaction.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Certificate of Incorporation that
eliminate to the fullest extent permissible under Delaware law the liability
of its directors to the Company for monetary damages. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. The Company's Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted by
Delaware law, including in circumstances in which indemnification is otherwise
discretionary under Delaware law. The Company has entered into indemnification
agreements with its officers and directors containing provisions which may
require the Company, among other things, to indemnify the officers and
directors against certain liabilities that may arise by reason of their status
or service as directors or officers (other than liabilities arising from
willful misconduct of a culpable nature), and to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified.
There is no currently pending litigation or proceeding involving a director,
officer, employee or other agent of the Company in which indemnification would
be required or permitted. The Company is not aware of any threatened
litigation or proceeding that may result in a claim for such indemnification.
48
<PAGE>
CERTAIN TRANSACTIONS
Between October 1992 and May 1996, the Company sold and issued 10,908,878
shares of its Preferred Stock for an aggregate consideration of $56,402,000.
The Company sold the Preferred Stock in series as follows: (i) 150,000 shares
of Series A Preferred Stock in October 1992 at a price of $2.00 per share;
(ii) 440,068 shares of Series B Preferred Stock in October 1992 at a price of
$4.00 per share; (iii) 888,859 shares of Series B Preferred Stock in March
1993 at a price of $4.50 per share and warrants to acquire 174,993 shares of
Common Stock at an exercise price of $4.50 per share; (iv) 6,287,093 shares of
Series C Preferred Stock in September 1994 at a price of $4.50 per share and
warrants to acquire 1,111,111 shares of Series C Preferred Stock at an
exercise price of $4.50 per share; (v) an aggregate of 3,142,858 shares of
Series D Preferred Stock in December 1995 and May 1996 at a price of $7.00 per
share and warrants to acquire up to an aggregate 200,000 shares of Common
Stock (subject to adjustment) at an exercise price of $7.00 per share.
The following table summarizes purchases, valued in excess of $60,000, of
shares of Preferred Stock and Common Stock by directors, executive officers
and 5% stockholders of the Company:
<TABLE>
<CAPTION>
SHARES
-----------------------------------------------------------------
COMMON SERIES C SERIES D
COMMON SERIES C WARRANTS(1) WARRANTS(2) SERIES D WARRANTS(3)
------ --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
RRE Investors,
L.L.C.(4).............. -- 4,000,000 -- 1,111,111 -- --
Equity-Linked Investors
II..................... -- -- -- -- 1,500,000 95,455
Festival Company, Inc... -- -- -- -- 1,000,001 63,636
Pomona Capital,
L.P.(5)................ -- 669,150 66,667 -- -- --
Kenneth B. Hamlet(6).... 28,000(8) -- -- -- 28,000 1,782
James A. Barth(7)....... 12,000(8) -- -- -- 12,000 764
</TABLE>
- --------
(1) Represents the maximum number of shares issuable upon exercise of warrants
to acquire Common Stock at an exercise price of $0.50 per share issued in
connection with a bridge note financing in September 1994.
(2) Represents the maximum number of shares issuable upon exercise of warrants
to acquire Series C Preferred Stock (and, upon the effectiveness of the
registration statement covering the Offerings, to acquire Common Stock)
issued in connection with the Company's Series C Preferred Stock
Financing. If not exercised in connection with the Offerings, such
warrants will terminate.
(3) Represents the maximum number of shares issuable upon exercise of warrants
to acquire Common Stock issued in connection with the Company's Series D
Preferred Stock Financing. If not exercised in connection with the
Offerings, such warrants will terminate.
(4) Includes shares purchased by Sunset Partners, L.P., Sunset Partners II,
L.P., and Sunset Partners III, L.P. (collectively, the "Sunset
Partnerships"). RRE Investors, L.L.C. is the general partner of each of
the Sunset Partnerships.
(5) Includes shares purchased by Pomona Capital, L.P., SOF Venture Capital,
L.P., SP Offshore Venture Capital, L.P. and SP Venture Capital, L.P.
Michael D. Granoff, a member of the Company's Board of Directors, is the
sole shareholder of Pomona Partners, Inc., the general partner of SOF
Venture Capital, L.P., SP Offshore Venture Capital, L.P. and SP Venture
Capital, L.P. and the general partner of Pomona Associates, L.P. which
serves as the general partner of Pomona Capital, L.P.
(6) Mr. Hamlet is Chairman of the Board, President and Chief Executive Officer
of the Company.
(7) Mr. Barth is Executive Vice President and Chief Financial Officer of the
Company.
(8) Mr. Hamlet and Mr. Barth purchased the number of shares of Common Stock
indicated on May 30, 1996 at a purchase price per share of $2.00.
On September 29, 1994, the Company entered into a consulting agreement with
RRE Investors, L.L.C. ("RRE"), which terminates on September 28, 1997. RRE is
the general partner of each of Sunset Partners, L.P., Sunset Partners, L.P.
and Sunset Partners III, L.P., which collectively hold greater than 5% of the
outstanding Common Stock of the Company. The agreement provides that RRE will
provide consulting and advisory services to the Company regarding strategic
planning and business and financial matters for a fee of $150,000 for the
first year of the agreement and $200,000 for each of the following two years.
The agreement also provides that the Company will reimburse RRE for reasonable
business expenses incurred by RRE, its employees and its agents in providing
such services.
The Company has entered into employment agreements with certain officers of
the Company. See "Management--Employment Agreements and Change in Control
Arrangements."
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of August 31, 1996 and as adjusted
to reflect the sale of the 5,000,000 shares of Common Stock offered hereby by
(i) each person or entity who is known by the Company to own beneficially 5%
or more of the Company's outstanding Common Stock; (ii) each director of the
Company; (iii) each of the Named Executive Officers and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF TOTAL SHARES(2)
SHARES BENEFICIALLY ------------------------------
NAME AND ADDRESS(1) OWNED(2) BEFORE OFFERING AFTER OFFERING
------------------- ------------------- --------------- --------------
<S> <C> <C> <C>
RRE Investors, L.L.C.(3).... 4,726,495 35.1% 25.6%
126 East 56th Street, 22nd
Floor
New York, NY 10022
Equity-Linked Investors II.. 1,522,028 11.3% 8.2%
c/o Desai Capital
Management, Inc.
540 Madison Avenue, 36th
Floor
New York, NY 10022
Festival Company, Inc. ..... 1,014,685 7.5% 5.5%
Wisma Barito Pacific, Tower
B
Lt. 11, J1 S. Paman Kav.
62-63 Jakarta 11410
Indonesia
Pomona Capital, L.P.(4)..... 733,251 5.4% 4.0%
780 Third Avenue
New York, NY 10017-7076
Kenneth B. Hamlet(5)........ 219,992 1.6% 1.2%
Robert R. Creager(6)........ 423,000 3.1% 2.3%
James A. Barth(7)........... 85,718 * *
Gordon E. (Ned) Druehl, Jr.
............................ -- -- --
Pang T. Ho, Ph.D.(8) ....... 51,459 * *
Stuart J. Ellman(9)......... 4,726,495 35.1% 25.6%
Michael D. Granoff(10)...... 733,251 5.4% 4.0%
Michael Ramsay(11).......... 7,292 * *
James D. Robinson IV(12).... 4,726,495 35.1% 25.6%
Jeffrey A. Bixler(13)....... -- -- --
Eric S. Hass(14)............ 132,826 1.0% *
All current executive
officers and directors as a
group
(9 persons)(15)............. 6,247,207 44.8% 33.0%
</TABLE>
- --------
*Less than 1%.
(1) Unless otherwise indicated, the address for each listed stockholder is
c/o MagiNet Corporation, 405 Tasman Drive, Sunnyvale, California 94089.
Except as otherwise indicated, and subject to applicable community
property laws, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock held by them.
(2) Applicable percentage ownership is based on 13,459,439 shares of Common
Stock outstanding as of August 31, 1996 and 18,459,439 shares immediately
following the completion of the Offerings (assuming no exercise of the
Underwriters' over-allotment option), together with applicable options
for such stockholder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally
includes voting or investment power with respect to securities, subject
to community property laws, where applicable. Shares of Common Stock
subject to options that are presently exercisable or exercisable within
60 days of August 31, 1996 are deemed to be beneficially owned by the
person holding such options for the purpose of computing the percentage
of ownership of
50
<PAGE>
such person but are not treated as outstanding for the purpose of computing
the percentage of any other person. To the extent that any shares are
issued upon exercise of options or other rights to acquire the Company's
capital stock that are presently outstanding or granted in the future or
reserved for future issuance under the Company's stock plans, there will be
further dilution to new public investors.
(3) Includes 1,808,907 shares held by Sunset Partners, L.P. ("Sunset"),
1,591,412 shares held by Sunset Partners II, L.P. ("Sunset II") and
1,326,176 shares held by Sunset Partners III, L.P. ("Sunset III"). RRE
Investors, L.L.C. is the general partner of each of Sunset Partners,
L.P., Sunset Partners II, L.P. and Sunset Partners III, L.P.
(collectively, the "Sunset Partnerships").
(4) Includes 244,417 shares held by Pomona Capital, L.P. ("Pomona"), 195,534
shares held by SOF Venture Capital, L.P. ("SOF Venture"), 175,980 shares
held by SP Offshore Venture Capital, L.P. ("SP Offshore") and 117,320
shares held by SP Venture Capital, L.P. ("SP Venture"). Michael D.
Granoff, a director of the Company, is the sole shareholder of Pomona
Partners, Inc., which serves as the general partner of SOF Venture, SP
Offshore and SP Venture, and which also serves as the general partner of
Pomona Associates, L.P., the general partner of Pomona.
(5) Includes 163,581 shares of Common Stock issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of August 31, 1996. Mr. Hamlet is the Company's President and
Chief Executive Officer and Chairman of its Board of Directors.
(6) Includes 233,000 shares of Common Stock issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of August 31, 1996. Mr. Creager is the Company's founder and
Executive Vice President of Corporate Development.
(7) Includes (i) 63,542 shares of Common Stock issuable upon exercise of
stock options which are presently exercisable or will become exercisable
within 60 days of August 31, 1996, (ii) 5,000 shares of Common Stock held
by Mr. Barth's wife and (iii) 1,000 shares held by Mr. Barth's son. Mr.
Barth is the Company's Executive Vice President and Chief Financial
Officer.
(8) Includes 27,459 shares of Common Stock issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of August 31, 1996 and 4,000 shares held byDr. Ho's children. Dr.
Ho is the Company's Vice President of Engineering.
(9) Includes 1,808,907 shares held by Sunset, 1,591,412 shares held by Sunset
II and 1,326,176 shares held by Sunset III. Mr. Ellman is a member of the
Company's Board of Directors and a member of RRE Investors, L.L.C., a
limited liability company that serves as general partner of each of the
Sunset Partnerships. Mr. Ellman disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.
(10) Includes 244,417 shares held by Pomona, 195,534 shares held by SOF
Venture, 175,980 shares held by SP Offshore and 117,320 shares held by SP
Venture. Mr. Granoff, a member of the Company's Board of Directors, is
the sole shareholder of Pomona Partners, Inc., the general partner of SOF
Venture, SP Offshore and SP Venture and the general partner of Pomona
Associates, L.P., which serves as the general partner of Pomona. Mr.
Granoff disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest therein.
(11) Includes 7,292 shares of Common Stock issuable upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of August 31, 1996. Mr. Ramsay is a member of the Company's Board
of Directors.
(12) Includes 1,808,907 shares held by Sunset, 1,591,412 shares held by Sunset
II and 1,326,176 shares held by Sunset III. Mr. Robinson is a member of
the Company's Board of Directors and a member of RRE Investors, L.L.C., a
limited liability company that serves as general partner of each of the
Sunset Partnerships. Mr. Robinson disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.
(13) Mr. Bixler resigned from the Company effective in December 1995.
(14) Includes 46,140 shares held by Mr. Hass individually and 86,686 shares
held by Mr. Hass and his wife, as trustees of the Hass Community Property
Trust. Mr. Hass resigned from the Company effective in March 1996.
(15) Includes 494,874 shares of Common Stock issuable upon exercise of
outstanding stock options which are presently exercisable or will become
exercisable within 60 days of August 31, 1996. Excludes 132,826 shares
beneficially held by Eric S. Hass, who resigned as an officer of the
Company effective in March 1996.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of the Offerings, the Company will be authorized to
issue 45,000,000 shares of Common Stock, $0.001 par value, and 5,000,000
shares of undesignated Preferred Stock, $0.001 par value. The following
description of the Company's capital stock does not purport to be complete and
is subject to and qualified in its entirety by the Company's Restated
Certificate of Incorporation and Bylaws, which are included as exhibits to the
Registration Statement of which this Prospectus forms a part, and by the
provisions of applicable Delaware law.
COMMON STOCK
Upon conversion of the Preferred Stock, there will be 13,459,439 shares of
Common Stock outstanding held of record by approximately 90 holders. Holders
of Common Stock are entitled to one vote per share on all matters to be voted
upon by the stockholders. Holders of Common Stock do not have cumulative
voting rights, and, therefore, holders of a majority of the shares voting for
the election of directors can elect all of the directors. In such event, the
holders of the remaining shares will not be able to elect any directors.
Holders of the Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. The Company has never declared or
paid cash dividends on its capital stock, expects to retain future earnings,
if any, for use in the operation and expansion of its business, and does not
anticipate paying any cash dividends in the foreseeable future. See "Dividend
Policy." In the event of the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding.
PREFERRED STOCK
Effective upon the closing of the Offerings, the Company will be authorized
to issue 5,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and
the number of shares constituting a series or the designation of such series,
without any further vote or action by the Company's stockholders. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the market price
of, and the voting and other rights of, the holders of Common Stock. The
issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. The Company has no current plans to issue any shares
of Preferred Stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Restated Certificate of Incorporation provides that all
stockholder actions must be effected at a duly called annual or special
meeting and may not be effected by written consent. The Company's Bylaws
provide that, except as otherwise required by law, special meetings of the
stockholders can only be called pursuant to a resolution adopted by a majority
of the Board of Directors, by the chief executive officer of the Company, or
by stockholders holding shares in the aggregate entitled to cast not less than
10% of the votes at such meeting. In addition, the Company's Bylaws establish
an advance notice procedure for stockholder proposals to be brought before an
annual meeting of stockholders, including proposed nominations of persons for
election to the Board. Stockholders at an annual meeting may only consider
proposals or nominations specified in the notice of meeting or brought before
the meeting by or at the direction of the Board of Directors or by a
stockholder who was a stockholder of record on the record date for the
meeting, who is entitled to vote at the meeting and who has delivered timely
written notice in proper form to the Company's Secretary of the stockholder's
intention to bring such business before the meeting.
52
<PAGE>
The foregoing provisions of the Company's Restated Certificate of
Incorporation and Bylaws are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions which may involve an actual or threatened change of control of
the Company. Such provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal and, accordingly, could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. Such provisions are also intended to discourage
certain tactics that may be used in proxy fights but could, however, have the
effect of discouraging others from making tender offers for the Company's
shares and, consequently, may also inhibit fluctuations in the market price of
the Company's shares that could result from actual or rumored takeover
attempts. These provisions may also have the effect of preventing changes in
the management of the Company. See "Risk Factors--Effect of Certain Charter
Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law."
EFFECT OF DELAWARE ANTITAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law (the "Antitakeover Law"), which regulates corporate acquisitions. The
Antitakeover Law prevents certain Delaware corporations, including those whose
securities are listed for trading on the Nasdaq National Market, from
engaging, under certain circumstances in a "business combination" with any
"interested stockholder" for three years following the date that such
stockholder became an interested stockholder. For purposes of the Antitakeover
Law, a "business combination" includes, among other things, a merger or
consolidation involving the Company and the interested stockholder and the
sale of more than ten percent (10%) of the Company's assets. In general, the
Antitakeover Law defines an "interested stockholder" as any entity or person
beneficially owning 15% or more the outstanding voting stock of the Company
and any entity or person affiliated with or controlling or controlled by such
entity or person. A Delaware corporation may "opt out" of the Antitakeover Law
with an express provision in its original certificate of incorporation or an
express provision in its certificate of incorporation or bylaws resulting from
amendments approved by the holders of at least a majority of the Company's
outstanding voting shares. The Company has not "opted out" of the provisions
of the Antitakeover Law. See "Risk Factors--Effect of Certain Charter
Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law."
REGISTRATION RIGHTS
After the Offerings, the holders of approximately 3,977,000 shares of Common
Stock will be entitled upon expiration of lock-up agreements with the
Underwriters to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of the agreement between the Company
and the holders of such registrable securities, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or for the account of other securityholders exercising registration
rights, such holders are entitled to notice of such registration and are
entitled to include shares of such Common Stock therein. Holders of
registration rights may also require the Company to file a registration
statement under the Securities Act at the Company's expense with respect to
their shares of Common Stock, and the Company is required to use its best
efforts to effect such registration. Further, holders may require the Company
to file registration statements on Form S-3 at the Company's expense when such
form becomes available for use to the Company. All such registration rights
are subject to certain conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares to be included in
such registration.
TRANSFER AGENT
The Transfer Agent and Registrar for the Common Stock is The First National
Bank of Boston.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings, there has been no market for the Common Stock and
there is no assurance that a significant public market for the Common Stock
will develop or be sustained after the Offerings. Sales of substantial amounts
of Common Stock in the public market could adversely affect the market price
of the Common Stock and could impair the Company's future ability to raise
capital through the sale of its equity securities.
Upon completion of the Offerings, the Company will have outstanding
18,459,439 shares of Common Stock based upon shares outstanding as of August
31, 1996. In addition to the 5,000,000 shares of Common Stock offered hereby
(assuming no exercise of the Underwriters' over-allotment option), as of the
effective date of the Registration Statement (the "Effective Date"), there
will be 13,459,439 shares of Common Stock outstanding, all of which are
"restricted" shares (the "Restricted Shares") under the Securities Act of
1933, as amended (the "Securities Act"). Approximately 5,000 Restricted Shares
will be eligible for sale immediately following the Effective Date in reliance
on Rule 144(k) of the Securities Act. Beginning 90 days after the Effective
Date approximately 31,000 Restricted Shares of Common Stock will become
eligible for sale in the public market pursuant to Rule 144 and Rule 701 of
the Securities Act. Beginning 180 days after the Effective Date, approximately
9,448,000 additional Restricted Shares of Common Stock subject to lock-up
agreements will become eligible for sale in the public market. Of the
approximately 9,448,000 Restricted Shares that will become available for sale
in the public market beginning 180 days after the Effective Date,
approximately 7,411,000 shares will be subject to certain volume and other
resale restrictions pursuant to Rule 144.
On August 31, 1996, options to purchase 1,655,484 shares were outstanding,
of which options to purchase approximately 489,483 shares were then
exercisable. See "Management--1992 Key Personnel Stock Option Plan." The
Company intends to file a Form S-8 registration statement under the Securities
Act to register shares reserved for issuance under this stock option plan and
upon exercise of outstanding options. Shares of Common Stock issued upon
exercise of options after the effective date of the Form S-8 will be available
for sale in the public market, subject to Rule 144 volume limitations
applicable to affiliates and lock-up agreements. Beginning 180 days after the
Effective Date, 798,679 shares issuable upon the exercise of vested options
will be eligible for sale.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least two years but less than
three years, will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of (i) 1% of the then outstanding
shares of the Common Stock (approximately 185,000 shares immediately after the
Offerings) or (ii) the average weekly trading volume during the four calendar
weeks immediately preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission (the "Commission"). Sales pursuant to
Rule 144 are subject to certain requirements relating to manner of sale,
notice and availability of current public information about the Company. A
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who has beneficially owned his or her shares for at
least three years is entitled to sell such shares pursuant to Rule 144(k)
without regard to the limitations described above. Under Rule 701, shares
issued under certain compensatory stock-based plans, such as the Company's
option plan, may be resold under Rule 144 by non-affiliates subject only to
the manner of sale requirements, and by affiliates without regard to the two-
year holding period requirements, commencing 90 days after the date of the
Offerings.
54
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a person that, for United States federal income tax purposes, is a
non-resident alien individual, a foreign corporation, a foreign partnership or
an estate or trust, in each case not subject to U.S. federal income tax on a
net income tax basis in respect of income or gain from Common Stock (a "non-
U.S. holder"). This discussion is based on the Internal Revenue Code of 1986,
as amended, Treasury regulations thereunder, and administrative and judicial
interpretations as of the date hereof, all of which may be changed. This
discussion does not address all the aspects of U.S. federal income and estate
taxation that may be relevant to non-U.S. holders in light of their particular
circumstances, or to certain types of holders subject to special treatment
under United States federal income tax laws (such as life insurance companies
and dealers in securities). Nor does it address tax consequences under the
laws of any state, municipality or other taxing jurisdiction or under the laws
of any country other than the United States.
Prospective holders should consult their own tax advisors about the
particular tax consequences to them of holding and disposing of Common Stock.
DIVIDENDS
Generally, dividends paid to a non-U.S. holder of Common Stock will be
subject to United States federal withholding tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty, unless the
dividends are effectively connected with the conduct of a trade or business
within the United States (or alternatively are attributable to a United States
permanent establishment of such holder, if an applicable income tax treaty so
requires as a condition for the non-U.S. holder to be subject to United States
income tax on a net income basis in respect of such dividends). Such
"effectively connected" dividends, or dividends attributable to a permanent
establishment, are subject to tax at rates applicable to United States
citizens, resident aliens and domestic United States corporations, and are not
generally subject to withholding. Effectively connected dividends received by
a non-U.S. corporation may be subject to an additional "branch profits tax" at
a 30% rate (or a lower rate under an applicable income tax treaty) when such
dividends are deemed repatriated from the United States.
Under current U.S. Treasury regulations, dividends paid to an address
outside the United States in a foreign country are presumed to be paid to a
resident of such country for purposes of the withholding tax. Under current
interpretation of U.S. Treasury regulations, the same presumption applies to
determine the applicability of a reduced rate of withholding under a tax
treaty. Thus, non-U.S. holders receiving dividends at addresses outside the
United States are not currently required to file tax forms to obtain the
benefit of an applicable treaty rate. Under U.S. Treasury regulations that are
proposed to be effective for distributions after 1997 (the "Proposed
Regulations"), to claim the benefits of a tax treaty a non-U.S. holder of
Common Stock would be required to satisfy applicable certification
requirements. In addition, under the Proposed Regulations, in the case of
Common Stock held by a foreign partnership, (x) the certification requirement
would generally be applied to the partners of the partnership and (y) the
partnership would be required to provide certain information. The Proposed
Regulations also provide look-through rules for tiered partnerships. It is not
certain whether, or in what form, the Proposed Regulations will be adopted as
final regulations.
If there is excess withholding on a person eligible for a treaty benefit,
the person can file for a refund with the United States Internal Revenue
Service.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to United States federal
income tax in respect of gain recognized on a disposition of Common Stock
unless (i) the gain is effectively connected with a trade or business of the
non-U.S. holder in the United States, (ii) in the case of a non-U.S. holder
who is an individual and holds
55
<PAGE>
the Common Stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of the disposition and certain
other conditions are met, (iii) the non-U.S. holder is subject to tax pursuant
to the provisions of United States tax law applicable to certain United States
expatriates, or (iv) the Company is or has been a "U.S. real property holding
corporation" for federal income tax purposes and, if the Common Stock is
regularly traded on an established securities market, the non-U.S. holder
held, directly or indirectly, at any time during the 5-year period ending on
the date of disposition (or such shorter period that such shares were held)
more than 5% of the Common Stock. The Company has not been and does not
anticipate becoming a "U.S. real property holding corporation" for United
States federal income tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Generally, the Company must report to the U.S. 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 U.S. Internal Revenue
Service may make its reports available to tax authorities in the recipient's
country of residence. Dividends not subject to withholding tax may be subject
to backup withholding if the non-U.S. holder is not an "exempt recipient" and
fails to provide a tax identification number and other information to the
Company. Under the Proposed Regulations, dividend payments generally will be
subject to information reporting and backup withholding unless applicable
certification requirements are satisfied.
If the proceeds of a disposition of Common Stock are paid over by or through
a United States office of a broker, the payment is subject to information
reporting and possible backup withholding at a 31% rate unless the disposing
holder certifies under penalties of perjury as to his name, address, and non-
U.S. holder status or otherwise establishes an exemption. Generally, United
States information reporting and backup withholding requirement will not apply
to a payment of disposition proceeds if the payment is made outside the United
States through a non-United States office of a broker. However, United States
information reporting requirements (but not backup withholding) will apply to
a payment of disposition proceeds outside the United States if (A) the payment
is made through an office outside the United States of a broker that either
(i) is a U.S. person, (ii) derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States or (iii)
is a "controlled foreign corporation" for United States federal income tax
purposes and (B) the broker fails to maintain documentary evidence that the
holder is a non-U.S. holder or that the holder otherwise is entitled to an
exemption.
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.
FEDERAL ESTATE TAXES
Common Stock held by a non-U.S. holder at the time of death will be included
in such holder's gross estate for United States federal estate tax purposes
unless an applicable estate tax treaty provides otherwise.
56
<PAGE>
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the U.S.
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement (the "Registration Statement") of which this Prospectus
forms a part, each of the Underwriters named below (the "U.S. Underwriters"),
for whom Lehman Brothers Inc. and Hambrecht & Quist LLC are acting as
representatives (the "Representatives"), has severally agreed to purchase from
the Company, and the Company has agreed to sell to each U.S. Underwriter, the
number of shares of Common Stock set forth opposite the name of such U.S.
Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
U. S. UNDERWRITERS SHARES
------------------ ---------
<S> <C>
Lehman Brothers Inc. .............................................
Hambrecht & Quist LLC.............................................
---------
Total........................................................... 4,000,000
=========
Under the terms of, and subject to the conditions contained in, the
International Underwriting Agreement, the form of which is filed as an exhibit
to the Registration Statement of which this Prospectus forms a part, each of
the managers named below (the "International Managers"), for whom Lehman
Brothers International (Europe) and Hambrecht & Quist LLC are acting as lead
managers (the "Lead Managers"), has severally agreed to purchase from the
Company, and the Company has agreed to sell to each International Manager, the
number of shares of Common Stock set forth opposite the name of such
International Manager below:
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- ---------
<S> <C>
Lehman Brothers International (Europe)............................
Hambrecht & Quist LLC.............................................
---------
Total........................................................... 1,000,000
=========
</TABLE>
The U.S. Underwriting Agreement and the International Underwriting Agreement
(collectively, the "Underwriting Agreements") provide that the obligations of
the U.S. Underwriters and the International Managers to purchase shares of
Common Stock are subject to certain conditions, and that, if any of the
foregoing shares of Common Stock are purchased by the U.S. Underwriters
pursuant to the U.S. Underwriting Agreement or by the International Managers
pursuant to the International Underwriting Agreement, all the shares of Common
Stock agreed to be purchased by either the U.S. Underwriters or the
International Managers, as the case may be, pursuant to their respective
Underwriting Agreement must be so purchased. The offering price and
underwriting discounts and commissions for the U.S. Offering and the
International Offering are identical. The closing of the U.S. Offering is a
condition to the closing of the International Offering, and the closing of the
International Offering is a condition to the closing of the U.S. Offering.
The Company has been advised that the U.S. Underwriters and the
International Managers propose to offer the shares of Common Stock directly to
the public initially at the public offering price set forth on the cover page
of this Prospectus, and to certain selected dealers (who may include the U.S.
Underwriters and the International Managers) at such public offering price
less a selling concession not in excess of $ per share. The selected
dealers may reallows a concession not in excess of $ per share to certain
brokers and dealers. After the initial public offering, the public offering
price, the concession to selected dealers and reallowance may be changed by
the Representative and the Lead Managers.
57
<PAGE>
Prior to the Offerings, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop
for shares of the Common Stock or as to the price at which shares of the
Common Stock may trade in the public market from time to time subsequent to
the Offerings. The initial public offering price for the Common Stock will be
determined by negotiations among the Company, the Representatives and the Lead
Managers. Among the factors to be considered in determining the initial public
offering price of the Common Stock, in addition to prevailing market
conditions, will be the financial and operating history and condition of the
Company, the Company's business and financial prospects, the prospects for the
industry in which the Company operates, the recent market prices of securities
of companies in businesses similar to that of the Company and other relevant
factors.
The Company has granted to the U.S. Underwriters and the International
Managers options to purchase up to an aggregate of 600,000 and 150,000
additional shares of Common Stock, respectively, exercisable solely to cover
over-allotments, at the initial price to the public less the aggregate
underwriting discounts, shown on the cover page of this Prospectus. Either or
both options may be exercised at any time up to 30 days after the date of this
Prospectus. To the extent that the U.S. Underwriters or International Managers
exercise such options, each of the U.S. Underwriters or International
Managers, as the case may be, will be committed, subject to certain
conditions, to purchase a number of the additional shares of Common Stock
proportionate to such U.S. Underwriter's or International Manager's initial
commitment.
The U.S. Underwriters and the International Managers have entered into an
Agreement between U.S. Underwriters and International Managers pursuant to
which such U.S. Underwriter has agreed that as part of the distribution of the
shares (plus any of the shares to cover over-allotments) of Common Stock
offered in the U.S. Offering, (i) it is not purchasing any of such shares for
the account of anyone other than a U.S. Person (as defined below) and (ii) it
has not offered or sold, and will not offer, sell, resell or deliver, directly
or indirectly, any of such shares or distribute any Prospectus relating to the
U.S. Offering to anyone other than a U.S. Person. In addition, pursuant to the
same Agreement, each International Manager has agreed that, as part of the
distribution of the shares (plus any of the shares to cover over-allotments)
of Common Stock offered in the International Offering, (i) it is not
purchasing any of such shares for the account of a U.S. Person and (ii) it has
not offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any Prospectus relating to the
International Offering to any U.S. Person. Each International Manager has also
agreed that it will offer to sell shares only in compliance with all relevant
requirements of any applicable laws.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Underwriting Agreements and the
Agreement Between U.S. Underwriters and International Managers, including (i)
certain purchases and sales between the U.S. Underwriters and International
Managers, (ii) certain offers, sales, resales, deliveries or distributions to
or through investment advisors or other persons exercising investing
discretion, (iii) purchases, offers or sales by a U.S. Underwriter who is also
acting as an International Manager or by an International Manager who is also
acting as a U.S. Underwriter and (iv) other transactions specifically approved
by the Representatives and the Lead Managers. As used herein, "U.S. Person"
means any resident or citizen of the United States or Canada and its
provinces, any corporation or other entity created or organized in or under
the laws of the United States or Canada and its provinces or any estate or
trust the income of which is subject to United States or Canadian federal
income taxation regardless of the source of its income. The term "United
States" means the United States of America (including the District of
Columbia) and its territories, its possessions and other areas subject to its
jurisdiction.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, sales may be made between the U.S. Underwriters and the
International Managers of such number of shares of Common Stock as may be
mutually agreed upon. The price of any shares so sold shall be the public
offering price as then in effect for Common Stock being sold by the U.S.
Underwriters and the International Managers, less an amount not greater than
the selling concession allocable to such Common Stock. To the extent there are
sales between the U.S. Underwriters and the International Managers pursuant to
the Agreement Between U.S. Underwriters and International Managers, the number
of shares initially available for sale by the U.S. Underwriters or by the
International Managers may be more or less than the amount appearing on the
cover page of this Prospectus.
58
<PAGE>
Each International Manager has represented and agreed that (i) it has not
offered or sold, and will not offer or sell, in the United Kingdom, by means
of any document, any shares of the Common Stock other than to persons whose
ordinary business it is to buy or sell shares or debentures, whether as
principal or agent (except under circumstances which do not constitute an
offer to the public within the meaning of the Companies Act 1985); (ii) 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
Common Stock in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on, and will only issue and pass on to any person in
the United Kingdom, any document received by it in connection with the issue
of the Common Stock if that person is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1995 or is a person to whom the document may otherwise be lawfully issued or
passed on.
Purchasers of the shares offered pursuant to the Offerings may be required
to pay stamp taxes and other charges in accordance with the laws and practices
of the country to purchase in addition to the initial public offering price
set forth on the cover page hereof.
The Company has agreed to indemnify the U.S. Underwriters and the
International Managers against certain liabilities, including liabilities
under the Securities Act or to contribute to payments that U.S. Underwriters
and the International Managers may be required to make in respect thereof.
In connection with the Offerings, the officers and directors of the Company,
certain other securityholders and the Company have agreed, with certain
exceptions, not to sell or otherwise dispose of any shares of Common Stock for
a period of 180 days from the date of this Prospectus, in each case, without
first obtaining the written consent of Lehman Brothers.
The Representatives have informed the Company that the U.S. Underwriters do
not intend to confirm sales of Common Stock to any accounts over which they
exercise discretionary authority.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California, and for the U.S. Underwriters and International Managers by
Brobeck, Phleger & Harrison LLP, Palo Alto, California. As of the date of this
Prospectus, a member of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, and investment partnerships of which members of such firm are
partners beneficially own 17,457 shares of the Company's Common Stock.
EXPERTS
The consolidated financial statements of MagiNet Corporation at December 31,
1994 and 1995 and June 30, 1996, and for each of the three years in the period
ended December 31, 1995 and for the six months ended June 30, 1996, appearing
in this Prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
59
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is
made to the Registration Statement and the exhibits and schedules filed as a
part thereof. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete.
In each instance, reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement, and each such statement is
qualified in all respects by such reference. The Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the Commission's Web site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent accountants and with
quarterly reports containing unaudited summary financial information for each
of the first three quarters of each fiscal year.
60
<PAGE>
MAGINET CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statement of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
MagiNet Corporation
We have audited the accompanying consolidated balance sheets of MagiNet
Corporation as of December 31, 1994 and 1995 and June 30, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995 and
for the six months ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MagiNet
Corporation at December 31, 1994 and 1995 and June 30, 1996, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995 and for the six months ended
June 30, 1996 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Palo Alto, California
August 21, 1996
F-2
<PAGE>
MAGINET CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
UNAUDITED PRO
FORMA
STOCKHOLDERS'
EQUITY
JUNE 30, JUNE 30,
1994 1995 1996 1996
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 10,532 $ 18,672 $ 14,772
Short-term investments........ 429 151 --
Accounts receivable........... 347 1,191 2,152
Other current assets.......... 351 624 1,930
-------- -------- --------
Total current assets........... 11,659 20,638 18,854
Video systems, net............. 10,704 20,961 27,854
Property and equipment, net.... 638 1,376 1,659
Prepaid royalties.............. 876 1,095 1,466
Other assets................... 122 2,470 2,352
-------- -------- --------
Total assets................... $ 23,999 $ 46,540 $ 52,185
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Short-term debt............... $ 374 $ 97 $ 180
Accounts payable.............. 2,327 1,738 1,544
Accrued compensation.......... 54 340 510
Accrued interest.............. 16 1,016 1,070
Other accrued liabilities..... 1,137 2,905 1,979
-------- -------- --------
Total current liabilities...... 3,908 6,096 5,283
Deferred tax liability......... -- 544 915
Long-term debt................. -- 24,900 25,403
Minority interests in
consolidated subsidiaries..... 167 389 421
Commitments....................
Stockholders' equity:
Preferred stock, no par value;
12,122 shares authorized,
issuable in series: 7,766
shares, 9,005 shares and
10,909 shares issued and
outstanding at December 31,
1994 and 1995, and June 30,
1996, respectively, all of
which are convertible;
aggregate liquidation
preference of $56,572 at June
30, 1996 (pro forma: $.001
par value, 5,000 shares
authorized, none
outstanding)................. 32,593 40,231 53,241 $ --
Common stock, no par value;
20,000 shares authorized; 276
shares, 307 shares and 481
shares issued and outstanding
at December 31, 1994 and
1995, and June 30, 1996,
respectively (pro forma:
$.001 par value, 45,000
shares authorized, 11,390
shares issued and outstanding
at June 30, 1996)............ 9 23 255 11
Additional paid-in capital.... -- -- -- 53,485
Warrants to purchase common
stock........................ -- 101 101 101
Accumulated deficit........... (12,678) (25,474) (32,800) (32,800)
Cumulative translation
adjustment................... -- (270) (634) (634)
-------- -------- -------- --------
Total stockholders' equity.... 19,924 14,611 20,163 $ 20,163
-------- -------- -------- ========
Total liabilities and
stockholders' equity.......... $ 23,999 $ 46,540 $ 52,185
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
MAGINET CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- -------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue....................... $ 395 $ 2,342 $ 8,689 $ 3,302 $ 7,923
Costs and expenses:
Direct costs................ 294 1,156 3,731 1,687 3,854
Depreciation and
amortization............... 171 957 3,682 1,510 3,149
Operations expenses......... 464 2,876 3,108 1,213 1,016
Selling, general and
administrative............. 1,497 4,294 8,420 3,563 4,652
Research and development.... 1,320 856 1,247 571 937
------- ------- -------- ------- -------
Total costs and expenses...... 3,746 10,139 20,188 8,544 13,608
------- ------- -------- ------- -------
Operating loss................ (3,351) (7,797) (11,499) (5,242) (5,685)
Interest expense.............. (49) (319) (1,297) (42) (1,855)
Interest income and other,
net.......................... 21 66 306 46 473
------- ------- -------- ------- -------
Loss before income taxes and
minority interest in net
losses of consolidated
subsidiaries................. (3,379) (8,050) (12,490) (5,238) (7,067)
Provision for income taxes.... -- -- (554) (300) (383)
Minority interest in net
losses of consolidated
subsidiaries................. -- 124 248 153 124
------- ------- -------- ------- -------
Net loss...................... $(3,379) $(7,926) $(12,796) $(5,385) $(7,326)
======= ======= ======== ======= =======
Pro forma net loss per share.. $ (1.03) $ (0.59)
Shares used in computation of
pro forma
net loss per share........... 12,392 12,407
</TABLE>
See accompanying notes.
F-4
<PAGE>
MAGINET CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK CUMULATIVE TOTAL
---------------- ------------- ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT WARRANTS DEFICIT ADJUSTMENT EQUITY
------- -------- ------ ------ -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31,
1992................... 590 $ 2,018 285 $ 3 $ -- $ (1,373) $ -- $ 648
Issuance of Series B
Convertible Preferred
Stock (net of issuance
costs of $61)......... 889 3,939 -- -- -- -- -- 3,939
Repurchase of Common
Stock................. -- -- (21) -- -- -- -- --
Net loss............... -- -- -- -- -- (3,379) -- (3,379)
------- -------- --- ---- ----- -------- ----- -------
BALANCES AT DECEMBER 31,
1993................... 1,479 5,957 264 3 -- (4,752) -- 1,208
Exercise of stock
options............... -- -- 12 6 -- -- -- 6
Issuance of Series C
Convertible Preferred
Stock (net of issuance
costs of $1,656)...... 6,287 26,636 -- -- -- -- -- 26,636
Net loss............... -- -- -- -- -- (7,926) -- (7,926)
------- -------- --- ---- ----- -------- ----- -------
BALANCES AT DECEMBER 31,
1994................... 7,766 32,593 276 9 -- (12,678) -- 19,924
Exercise of stock
options............... -- -- 31 14 -- -- -- 14
Warrants to purchase
Common Stock issued in
conjunction with
senior debt
financing............. -- -- -- -- 101 -- -- 101
Issuance of Series D
Convertible Preferred
Stock (net of issuance
costs of $1,038)...... 1,239 7,638 -- -- -- -- -- 7,638
Translation
adjustment............ -- -- -- -- -- -- (270) (270)
Net loss............... -- -- -- -- -- (12,796) -- (12,796)
------- -------- --- ---- ----- -------- ----- -------
BALANCES AT DECEMBER 31,
1995................... 9,005 40,231 307 23 101 (25,474) (270) 14,611
Exercise of stock
options............... -- -- 109 102 -- -- -- 102
Issuance of Common
Stock................. -- -- 65 130 -- -- -- 130
Issuance of Series D
Convertible Preferred
Stock (net of issuance
costs of $314)........ 1,904 13,010 -- -- -- -- -- 13,010
Translation
adjustment............ -- -- -- -- -- -- (364) (364)
Net loss............... -- -- -- -- -- (7,326) -- (7,326)
------- -------- --- ---- ----- -------- ----- -------
BALANCES AT JUNE 30,
1996................... 10,909 $ 53,241 481 $255 $ 101 $(32,800) $(634) $20,163
======= ======== === ==== ===== ======== ===== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
MAGINET CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- --------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss..................... $(3,379) $(7,926) $ (12,796) $(5,385) $(7,326)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation................ 153 851 3,212 1,282 2,605
Amortization of prepaid
royalties.................. 18 106 479 228 544
Amortization of Senior
Secured Note financing
costs...................... -- -- 145 -- 238
Interest on convertible
subordinated debt.......... -- 192 -- -- --
Minority interests.......... -- (124) (248) (153) (124)
Changes in operating assets
and liabilities:
Accounts receivable......... (46) (301) (844) (507) (961)
Other current assets........ (90) (261) (273) (735) (1,306)
Other assets................ 43 (105) (303) (270) (120)
Accounts payable and other
accrued liabilities........ 1,548 1,431 3,009 1,136 (525)
------- ------- --------- ------- -------
Total adjustments........... 1,626 1,789 5,177 981 351
------- ------- --------- ------- -------
Net cash used in operating
activities................. (1,753) (6,137) (7,619) (4,404) (6,975)
------- ------- --------- ------- -------
INVESTING ACTIVITIES
Redemption (purchase) of
available-for-sale
securities.................. -- (429) 278 429 151
Investment in video systems.. (2,590) (8,670) (13,262) (8,353) (9,590)
Investment in property and
equipment................... (501) (262) (1,215) (246) (555)
Nonrefundable prepaid
royalty..................... -- -- (698) -- (915)
------- ------- --------- ------- -------
Net cash used in investing
activities.................. (3,091) (9,361) (14,897) (8,170) (10,909)
------- ------- --------- ------- -------
FINANCING ACTIVITIES
Proceeds from debt........... -- 374 6,000 5,000 586
Payment on debt.............. (257) -- (6,277) (256) --
Proceeds (payment) of note
payable to stockholders..... 1,400 (1,400) -- -- --
Proceeds from Senior Secured
Notes, net of issuance
costs....................... -- -- 22,811 -- --
Proceeds from Convertible
Subordinated Debt........... -- 9,000 -- -- --
Issuance of Preferred Stock,
net of issuance costs....... 3,939 17,444 7,638 -- 13,010
Issuance of Common Stock..... -- 6 14 7 232
Proceeds from minority
investors................... -- 291 470 470 156
------- ------- --------- ------- -------
Net cash provided by
financing activities........ 5,082 25,715 30,656 5,221 13,984
------- ------- --------- ------- -------
Net increase (decrease) in
cash and cash equivalents... 238 10,217 8,140 (7,353) (3,900)
Cash and cash equivalents at
beginning of period......... 77 315 10,532 10,532 18,672
------- ------- --------- ------- -------
Cash and cash equivalents at
end of period............... $ 315 $10,532 $ 18,672 $ 3,179 $14,772
======= ======= ========= ======= =======
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of Series C
Preferred Stock for
cancellation of convertible
subordinated debt plus
accrued interest............ $ -- $ 9,192 $ -- $ -- $ --
======= ======= ========= ======= =======
Warrants issued in connection
with Senior Secured Notes... $ -- $ -- $ 101 $ -- $ --
======= ======= ========= ======= =======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid................ $ 18 $ 319 $ 187 $ 45 $ 1,592
======= ======= ========= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
In August 1995, MagiNet Corporation (the Company) was created as a holding
company for all of its operating subsidiaries. The Company provides advanced
in-room interactive video entertainment and information systems to hotels in
the Pacific Rim, Middle East, Europe, and Africa.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of MagiNet
Corporation and its subsidiaries primarily located in the Pacific Rim. All
significant intercompany balances and transactions have been eliminated.
The accompanying financial statements have been prepared assuming that the
Company will remain in compliance with its senior note covenants by achieving
its operating plan for the remainder of 1996 and 1997. If the Company were not
able to achieve its operating plan, the Company may need to either raise
additional equity capital, reduce expenses or both in order to remain in
compliance with the senior note covenants. Management believes the Company
will be able to remain in compliance with the senior note covenants, obtain
waivers thereof or establish alternative debt financing through 1997.
INTERIM FINANCIAL DATA
The interim financial data for the six months ended June 30, 1995 is
unaudited; however, in the opinion of management, the interim data includes
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the results for the interim period ended June 30,
1995. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996.
NET LOSS PER SHARE
Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
from stock options, convertible Preferred Stock and warrants are excluded from
the computation as their effect is antidilutive, except that, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and
common share equivalent shares issued during the period beginning 12 months
prior to the proposed initial filing of the Company's Registration Statement
at prices below the assumed public offering price have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method and the assumed public offering price for stock options
and warrants and the if-converted method for convertible Preferred Stock).
F-7
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)
Historical net loss per share information is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net loss per share.......... $(0.73) $(1.72) $(2.77) $(1.17) $(1.58)
Shares used in computing
historical net loss per
share (in thousands)....... 4,598 4,606 4,626 4,617 4,641
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of convertible preferred shares not included
above that will automatically convert upon completion of the Company's initial
public offering (using the if-converted method). Such shares are included from
the original date of issuance.
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
The Company installs and operates its video systems at no cost to the
hotels, and issues invoices to the hotels and recognizes revenue, less an
allowance for denials, each month based on reported viewings of hotel guests.
The Company also sells its video systems to hotels in markets where it does
not expect to maintain operations. The Company performs ongoing credit
evaluations of its installed hotels and does not generally require collateral.
Reserves are maintained for potential credit losses and such losses have been
within management's expectations.
FOREIGN CURRENCY TRANSLATION
The Company's foreign subsidiaries use as their functional currency the
local currencies of the countries in which they operate. Their assets and
liabilities are translated into U.S. dollars at the exchange rates in effect
at the balance sheet date. Revenues and expenses are translated at average
rates of exchange prevailing during the period. The resulting cumulative
translation adjustments are disclosed as a separate component of stockholders'
equity. Foreign currency transaction gains and losses were not material in any
of the comparison periods.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted in 1996, FASB Statement No.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(FAS 121), which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. FAS 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The adoption of FAS 121
did not have a material impact on the Company.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-8
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company invests its surplus cash principally in money market funds and
certificates of deposit. Those investments maturing within 90 days after
purchase are classified as cash equivalents. Those maturing after 90 days are
classified as short-term investments. Short-term investments are stated at
cost which approximates market. All marketable securities held by the Company
are classified as available-for-sale. The Company has not realized any
material gains or losses on such investments during the six months ended June
30, 1995 and 1996, and during the years ended December 31, 1993, 1994 and
1995.
The Company's marketable investments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1994 1995 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash................................................ $ 908 $ 2,623 $ 2,299
Money market........................................ 3,496 12,768 9,778
Certificates of deposit............................. 599 3,432 2,695
U.S. treasury obligation............................ 3,000 -- --
U.S. commercial paper............................... 2,958 -- --
------- ------- -------
Total............................................... $10,961 $18,823 $14,772
======= ======= =======
Disclosed as:
Cash and cash equivalents......................... $10,532 $18,672 $14,772
Short-term investments............................ 429 151 --
------- ------- -------
Total............................................. $10,961 $18,823 $14,772
======= ======= =======
</TABLE>
During the six months ended June 30, 1995 and 1996, there were no gross cash
flows from the purchases of available-for-sale securities. During the six
months ended June 30, 1995 and 1996 gross cash flows from the maturities of
available-for-sale securities were $429,000 and $151,000, respectively.
Gross cash flows from the purchases of available-for-sale securities were
none, $429,000 and $151,000 for the years ended December 31, 1993, 1994 and
1995. Gross cash flows from the maturities of available-for-sale securities
were none for the years ended December 31, 1993 and 1994, and $429,000 for the
year ended December 31, 1995.
At June 30, 1996, the Company held approximately $312,000 of restricted cash
as collateral against an equipment lease line of credit and $500,000 of
certificates of deposit restricted as collateral for letters of credit which
expire on August 31, 1996.
DEFERRED DEBT FINANCING COSTS
Debt financing costs are deferred and amortized over the term of the related
debt. The Company's deferred financing costs are included within other assets
and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
(IN THOUSANDS)
<S> <C> <C>
Deferred financing costs incurred in connection with
the August 1995 issuance of Senior Secured Notes, net
of amortization of $145 at December 31, 1995 and $383
at June 30, 1996..................................... $2,045 $1,807
====== ======
</TABLE>
F-9
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)
VIDEO SYSTEMS
Video systems are stated at cost, net of accumulated depreciation, and
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Installed video systems......................... $ 7,592 $20,845 $25,932
Uninstalled video systems and installations-in-
progress....................................... 3,935 3,674 7,812
------- ------- -------
11,527 24,519 33,744
Less accumulated depreciation................... (823) (3,558) (5,890)
------- ------- -------
$10,704 $20,961 $27,854
======= ======= =======
</TABLE>
Installed video systems consist of equipment and installation costs at hotel
locations and are depreciated using the straight-line method over the lesser
of the life of the contract or five years. Uninstalled video systems and
installations-in-progress consist primarily of purchased components.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation and
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1994 1995 1996
------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer and video testing equipment................ $ 703 $ 1,758 $2,347
Furniture and fixtures.............................. 117 277 310
----- ------- ------
820 2,035 2,657
Less accumulated depreciation....................... (182) (659) (998)
----- ------- ------
$ 638 $ 1,376 $1,659
===== ======= ======
</TABLE>
Property and equipment is depreciated using the straight-line method over an
estimated useful life of between two and seven years.
2. TECHNOLOGY AGREEMENTS
Pursuant to an agreement in 1992, the Company has the exclusive right to use
certain technology in the design and manufacture of its product, as defined in
the agreement, for use in specific countries principally in the Pacific Rim,
Middle East and Africa. The owner of the technology became a related party
pursuant to the purchase of Preferred Stock in 1993. Such owner held a seat on
the Company's Board of Directors until December 1995. As of June 30, 1996,
such owner's share of total outstanding voting securities had declined to 3%.
In addition, pursuant to a technology license agreement entered into in
December 1995, the Company acquired the exclusive right to use another
technology in the design and manufacture of its product for use outside of
North America.
The Company has paid cumulative nonrefundable royalties of $2,000,000 as of
June 30, 1996 in prepayments against future royalty obligations. Future
royalty obligation terms range from a certain percentage of net revenues less
hotel commissions (subject to reduction upon certain conditions) generated
from use of the
F-10
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)
technology to a flat fee per room per month where the technology is utilized.
Additional nonrefundable royalty prepayments in the amount of $3,000,000 will
be due in the second half of 1996, $1,000,000 in 1997 and $1,500,000 in 1998,
based on performance of the vendor in providing additional enhancements to the
technology.
3. DEBT
Short-term debt represents notes payable on borrowings by the Company's
majority-owned joint venture in Japan from the joint venture's minority
partner, and the current portion of liabilities for an equipment lease line of
credit in Korea. Interest on the Japanese note accrues at 9.5%. Both interest
and principal on the Japanese note are payable after the joint venture is
profitable for at least one quarter.
Long-term debt consists of Senior Secured Notes issued by the Company on
August 15, 1995, and an amount borrowed pursuant to a $2.8 million equipment
lease line of credit in South Korea which was established in May, 1996. The
equipment lease line of credit is partially denominated in Korean won and
partially in U.S. dollars. The balance due on the equipment lease line was
$592,000 at June 30, 1996 and is to be repaid over 5 years at LIBOR plus 1.42%
on the U.S. portion and at South Korean Basic Lending Rate on the South Korean
portion. The interest rate at June 30, 1996 was approximately 7% per annum.
The amount of restricted cash collateralized against the South Korean
equipment lease line was $312,000 at June 30, 1996.
The $24,900,000 Senior Secured Notes are payable in full on August 15, 2000
and bear interest at 11.5% per annum. Interest is payable semiannually on
February 15 and August 15. The Company has pledged, as collateral to the
holders of Senior Secured Notes, between 66% and 100% of its shares in each of
its wholly owned subsidiaries and majority-owned joint ventures. The Senior
Secured Notes covenants restrict payment of dividends.
The carrying value of the Senior Secured Notes approximates fair value at
June 30, 1996. The fair value of the Company's Senior Secured Notes was
estimated using discounted cash flow analysis, based on the incremental
borrowing rates currently available to the Company for borrowings with similar
terms and maturity.
4. COMMITMENTS
The Company leases its headquarters and foreign sales and support facilities
and certain equipment under noncancelable operating leases. At June 30, 1996,
minimum lease commitments are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
--------------
(IN THOUSANDS)
<S> <C>
Six months ending December 31, 1996........................ $295
Years ending December 31, 1997............................. 318
1998..................................................... 153
1999..................................................... 23
2000..................................................... 8
----
Total minimum payments required............................ $797
====
</TABLE>
Rent expense was approximately $143,000 and $291,000 for the six months
ended June 30, 1995 and 1996 and $59,000, $222,000 and $320,000 for the years
ended December 31, 1993, 1994 and 1995, respectively.
F-11
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Preferred Stock authorized and outstanding at June 30, 1996 is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------- AGGREGATE
ISSUED AND LIQUIDATION
AUTHORIZED OUTSTANDING AMOUNT PREFERENCE
---------- ----------- ------- -----------
(IN THOUSANDS, EXCEPT SHARES)
<S> <C> <C> <C> <C>
Designated series (all convert-
ible):
A........................... 150,000 150,000 $ 277 $ 300
B........................... 1,328,930 1,328,927 5,680 5,980
C........................... 7,500,000 6,287,093 26,636 28,292
D........................... 3,142,858 3,142,858 20,648 22,000
---------- ---------- ------- -------
12,121,788 10,908,878 $53,241 $56,572
========== ========== ======= =======
</TABLE>
All series of Preferred Stock are convertible at the stockholder's option at
any time into Common Stock on a one-for-one basis (subject to adjustment for
certain dilutive events). All series have voting rights equal to the voting
rights of the shares of Common Stock they would have upon conversion.
Conversion is automatic upon the closing of an underwritten public offering
with aggregate offering proceeds exceeding $25,000,000. At June 30, 1996, the
Company had reserved 10,908,878 shares of Common Stock to be issued to
stockholders upon conversion of the outstanding Preferred Stock.
Holders of Preferred Stock are entitled to noncumulative dividends (per
share) as follows:
<TABLE>
<S> <C>
Series A............................................................ $0.16
Series B............................................................ $0.36
Series C............................................................ $0.36
Series D............................................................ $0.56
</TABLE>
Dividends, if declared, shall be set apart for payment and paid first to
holders of Series D Preferred Stock, second to holders of Series C Preferred
Stock, and third ratably to the holders of Series A and B Preferred Stock. No
dividends shall be declared on Common Stock until all holders of Preferred
Stock have been paid in full. As of June 30, 1996 no dividends have been
declared.
In the event of a liquidation or winding up of the Company, holders of
Preferred Stock are entitled to the following liquidation preferences (per
share):
<TABLE>
<S> <C>
Series A............................................................ $2.00
Series B............................................................ $4.50
Series C............................................................ $4.50
Series D............................................................ $7.00
</TABLE>
The liquidation preferences are to be paid in full, so long as proceeds are
available, first to the holders of Series D Preferred Stock, second to the
holders of Series C Preferred Stock, third to the holders of Series B
Preferred Stock, and fourth to the holders of Series A Preferred Stock. If any
assets of the Company remain after payment of the full liquidation preferences
of the holders of Preferred Stock, they will be distributed among the holders
of Series B, Series C, and Series D Preferred Stock and Common Stock in
proportion to the shares of
F-12
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)
Common Stock then held by them and the shares of Common Stock which they then
have the right to acquire upon the conversion of their Preferred Stock.
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
During 1992, the Company adopted two stock option plans, the Key Personnel
Stock Option Plan and the 1992 Stock Option Plan (together, the Plans). The
Plans provide that options for 2,000,000 shares of Common Stock may be granted
to employees, officers, directors, consultants and promotional representatives
of the Company. The Plans allow for both incentive and nonqualified stock
options to be granted to employees.
The Plans provide that the exercise price for incentive stock options will
be no less than the fair market value of the Company's Common Stock (no less
than 85% of fair market value for nonqualified stock options), as determined
by the board of directors at the date of grant. These options have five year
terms and become exercisable ratably over three to four years.
The effect of applying the FASB statement's minimum value method to the
Company's stock option awards did not result in pro forma net loss and loss
per share that are materially different from historical amounts reported.
Therefore, such pro forma information is not separately presented herein.
Future pro forma net income and earnings per share results may be materially
different from actual amounts reported.
F-13
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)
Aggregate option activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
----------------------------
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
-------------- ------------
<S> <C> <C>
Balance at December 31, 1992................... 49,000 $ 0.45
Granted...................................... 58,300 $ 0.46
--------------
Balance at December 31, 1993................... 107,300 $ 0.46
Granted...................................... 149,750 $ 0.83
Exercised.................................... (12,469) $ 0.45
Canceled..................................... (34,331) $ 0.46
--------------
Balance at December 31, 1994................... 210,250 $ 0.72
Granted...................................... 951,450 $ 1.12
Exercised.................................... (30,913) $ 0.47
Canceled..................................... (118,337) $ 0.89
--------------
Balance at December 31, 1995................... 1,012,450 $ 1.09
Granted...................................... 718,524 $ 2.00
Exercised.................................... (108,696) $ 0.95
Canceled..................................... (134,884) $ 0.99
--------------
Balance at June 30, 1996....................... 1,487,394 $ 1.55
==============
</TABLE>
As of June 30, 1996, 360,528 shares of Common Stock reserved under the Plans
were available for granting of additional options. The price range at June 30,
1996 of options outstanding under the Plans is $0.45 to $2.00. The weighted
average contractual life of the outstanding options at June 30, 1996 is 47
months. At June 30, 1996, the Company has reserved 1,847,922 shares of
authorized Common Stock for issuance under the Plans.
The following table summarizes the number and weighted average price per
share of exercisable stock options under the Plans.
<TABLE>
<CAPTION>
EXERCISABLE STOCK OPTIONS
---------------------------
WEIGHTED
AVERAGE
NUMBER OF PRICE PER
SHARES SHARE
------------- ------------
<S> <C> <C>
December 31, 1993............................... 23,748 $ 0.47
December 31, 1994............................... 44,432 $ 0.50
December 31, 1995............................... 314,187 $ 0.96
June 30, 1996................................... 430,236 $ 1.21
</TABLE>
WARRANTS
As of June 30, 1996, warrants to purchase 2,520,396 shares of Common Stock
were outstanding at exercise prices of $0.50 to $7.00 per share. As of June
30, 1996, warrants to purchase 1,184,444 shares of Series C Preferred Stock
were outstanding at an exercise price of $4.50 per share. At June 30, 1996,
the Company has reserved 3,704,840 shares of authorized Common Stock pursuant
to these warrants. All warrants are exercisable at the option of the holders
on or before dates ranging from March 1, 1998 through September 29, 1999, or
earlier upon effectiveness of an initial public offering.
F-14
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)
6. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------- ENDED
1993 1994 1995 JUNE 30, 1996
-------- -------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
State
Current........................... $ -- $ -- $ 2 $ 2
Foreign
Current........................... -- -- 8 10
Deferred.......................... -- -- 544 371
-------- -------- ------- ----
$ -- $ -- $ 554 $383
======== ======== ======= ====
</TABLE>
The Company's effective provision for income taxes from continuing
operations differs from the amount computed by applying the federal statutory
rate of 34% due to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------- ENDED
1993 1994 1995 JUNE 30, 1996
------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Expected tax (benefit) at federal
statutory rate.................. $(1,149) $(2,695) $(4,315) $(2,445)
Net operating losses not benefit-
ted............................. 1,149 2,695 4,315 2,445
State taxes...................... -- -- 2 2
Foreign withholding taxes........ -- -- 544 371
Other, net....................... -- -- 8 10
------- ------- ------- -------
Provision for income taxes....... $ -- $ -- $ 554 $ 383
======= ======= ======= =======
</TABLE>
For the years ended December 31, 1993, 1994 and 1995 and the six months
ended June 30, 1996 the Company had pre-tax losses from foreign operations of
$408,000, $1,239,000, $3,990,000 and $2,430,000, respectively.
As of December 31, 1995, the Company had federal net operating loss
carryforwards and research and development tax credits of approximately
$16,200,000 and $130,000, respectively. The net operating loss and credit
carryforwards will expire at various dates beginning in 2007 through 2011. The
Company had state net operating loss carryforwards of approximately $9,500,000
as of December 31, 1995, which will expire at various dates beginning in 1997
through 2002. The Company also had foreign net operating loss carryforwards
from various taxing authorities of approximately $5,800,000 at December 31,
1995. The principal portion of the foreign net operating loss carryforwards
will expire at various dates beginning in 1999 through 2000.
Utilization of the federal and state net operating losses and credits may be
subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
credits before utilization.
F-15
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)
Significant components of the Company's deferred tax assets for federal,
state and foreign income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------ ENDED
1994 1995 JUNE 30, 1996
----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Federal and state net operating
losses.......................... $ 3,450 $ 6,090 $ 7,620
Foreign net operating losses..... 540 1,890 2,670
Research credit carryforwards.... 150 200 210
Capitalized research & develop-
ment............................ 90 130 160
Video systems reserves........... 520 600 590
Other............................ 50 90 85
----------- ----------- --------
Total deferred tax assets........ 4,800 9,000 11,335
Valuation allowance for deferred
tax assets...................... (4,800) (9,000) (11,335)
----------- ----------- --------
Net deferred tax assets.......... -- -- --
----------- ----------- --------
Deferred tax liabilities:
Foreign withholding taxes........ -- (544) (915)
----------- ----------- --------
Net deferred tax liability....... $ -- $ (544) $ (915)
=========== =========== ========
</TABLE>
Due to the Company's lack of earnings history, the net deferred tax asset has
been fully offset by a valuation allowance. The valuation allowance increased
by $1,300,000 and $3,000,000 in 1993 and 1994, respectively.
F-16
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)
7. GEOGRAPHIC DATA
Geographic information for the years ended December 31, 1993, 1994 and 1995
and the six months ended June 30, 1996 is presented in the following table.
Identifiable assets are those that can be directly associated with a
particular geographic area.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
-------------------------- ENDED
1993 1994 1995 JUNE 30, 1996
------- ------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue
United States.................... $ -- $ -- $ -- $ 146
Pacific Rim...................... 395 2,342 8,520 7,287
Other............................ -- -- 169 490
------- ------- -------- --------
$ 395 $ 2,342 $ 8,689 $ 7,923
======= ======= ======== ========
Operating loss
United States.................... $(3,111) $(6,763) $ (5,637) $ (2,056)
Pacific Rim...................... (240) (941) (3,763) (1,872)
Other............................ -- (10) (508) (581)
Intercompany elimination......... -- (83) (1,591) (1,176)
------- ------- -------- --------
$(3,351) $(7,797) $(11,499) $ (5,685)
======= ======= ======== ========
Identifiable assets
United States.................... $ 4,752 $23,925 $ 49,266 $ 56,543
Pacific Rim...................... 1,050 6,308 22,689 30,374
Other............................ -- 15 1,701 4,296
Intercompany elimination......... (1,091) (6,249) (27,116) (39,028)
------- ------- -------- --------
$ 4,711 $23,999 $ 46,540 $ 52,185
======= ======= ======== ========
</TABLE>
8. SUBSEQUENT EVENTS
On August 8, 1996, the Board of Directors authorized the Company to proceed
with an Initial Public Offering (IPO) of Common Stock and increased the
authorized number of shares of Common Stock to 45,000,000. Upon completion of
the IPO, all of the Company's 10,908,878 shares of convertible Preferred Stock
outstanding as of June 30, 1996 will be converted into 10,908,878 shares of
Common Stock. The pro forma effect of these conversions has been reflected on
the accompanying unaudited pro forma balance sheet assuming they had occurred
at June 30, 1996.
On August 8, 1996, the Board of Directors approved the reincorporation of
the Company in the State of Delaware, which is expected to be effective in
October 1996.
On August 8, 1996, the Board of Directors granted options under the 1992
Stock Option Plan and the Key Personnel Stock Option Plan to purchase 193,500
shares of common stock at an exercise price of $5.25 per share. These options
were granted to provide additional incentives to retain management, key
employees and consultants. The deemed fair value of common stock at this date
was $5.25 per share.
On August 8, 1996, the Board of Directors also approved, subject to
stockholder approval which is expected to be obtained in September 1996, an
amendment to the 1992 Stock Option Plan increasing the number of shares of
Common Stock reserved for issuance thereunder by 1,800,000 shares to 3,647,922
shares.
F-17
<PAGE>
MAGINET CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 IS UNAUDITED)
On August 8, 1996, the Board of Directors approved the 1996 Director's Stock
Option Plan and reserved a total of 200,000 shares of the Company's authorized
but unissued Common Stock for issuance to non-employee directors upon the
exercise of options granted. Options must be granted with exercise prices at
least equal to the fair market value of the Common Stock on the date of grant
as determined by the Company's Board of Directors.
On August 8, 1996, the Board of Directors approved the 1996 Employee Stock
Purchase Plan and reserved a total of 200,000 shares of the Company's
authorized but unissued Common Stock for issuance thereunder.
F-18
<PAGE>
[GRAPHIC DEPICTING MAGINET LOGO WITH FILM REEL]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, OR ANY OF THE U.S.
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLIC-
ITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES
TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Consolidated Financial and Other Data........................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 28
Management............................................................... 39
Certain Transactions..................................................... 49
Principal Stockholders................................................... 50
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 54
Underwriting............................................................. 57
Legal Matters............................................................ 59
Experts.................................................................. 59
Additional Information................................................... 60
Index to Consolidated Financial Statements............................... F-1
</TABLE>
------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DE-
LIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,000,000 SHARES
LOGO
COMMON STOCK
------------------
PROSPECTUS
, 1996
------------------
LEHMAN BROTHERS
HAMBRECHT & QUIST
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ [FRONT COVER; INTERNATIONAL PROSPECTUS] +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated October 7, 1996
PROSPECTUS
5,000,000 SHARES
LOGO
COMMON STOCK
-------------
Of the 5,000,000 shares of Common Stock, $.001 par value ("Common Stock"), of
MagiNet Corporation ("MagiNet" or the "Company") being offered hereby,
1,000,000 shares are being offered initially outside the United States and
Canada by the International Managers (the "International Offering") and
4,000,000 shares are being offered initially in the United States and Canada by
the U.S. Underwriters (the "U.S. Offering"). Such offerings are referred to
collectively as the "Offerings."
Prior to the Offerings, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price per share will be between $12.00 and $14.00 per share. See "Underwriting"
for a discussion of factors to be considered in determining the initial public
offering price. Application has been made to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol "MGNT."
-------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the International Managers and the U.S.
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of the Offerings estimated at
$1,050,000 payable by the Company.
(3) The Company has granted to the International Managers a 30-day option to
purchase up to 150,000 additional shares of Common Stock on the same terms
and conditions as set forth above solely to cover over-allotments, if any.
The U.S. Underwriters have been granted a similar option to purchase up to
600,000 additional shares of Common Stock solely to cover over-allotments,
if any. If such options are exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
-------------
The shares of Common Stock offered by this Prospectus are offered by the
International Managers, subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
International Managers and to certain other conditions. It is expected that
delivery of such shares will be made at the offices of Lehman Brothers Inc.,
New York, New York, on or about , 1996.
-------------
LEHMAN BROTHERS HAMBRECHT & QUIST
, 1996
<PAGE>
[BACK COVER; INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE INTERNA-
TIONAL MANAGERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SO-
LICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURI-
TIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN
ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Consolidated Financial and Other Data........................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 28
Management............................................................... 39
Certain Transactions..................................................... 49
Principal Stockholders................................................... 50
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 54
Underwriting............................................................. 57
Legal Matters............................................................ 59
Experts.................................................................. 59
Additional Information................................................... 60
Index to Consolidated Financial Statements............................... F-1
</TABLE>
-----------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 SHARES
LOGO
COMMON STOCK
-----------------
PROSPECTUS
, 1996
-----------------
LEHMAN BROTHERS
HAMBRECHT & QUIST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts, commissions and certain accountable expenses, payable
by the Company in connection with the sale of Common Stock being registered.
All amounts are estimates except the SEC registration fee and the NASD filing
fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 27,759
NASD Filing Fee................................................ 8,050
Nasdaq National Market Listing Fee............................. 50,000
Printing Fees and Expenses..................................... 150,000
Legal Fees and Expenses........................................ 500,000
Accounting Fees and Expenses................................... 250,000
Blue Sky Fees and Expenses..................................... 10,000
Transfer Agent and Registrar Fees.............................. 15,000
Miscellaneous.................................................. 39,191
----------
Total........................................................ $1,050,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article VIII of the Registrant's Certificate of Incorporation provides for
the indemnification of directors to the fullest extent permissible under
Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the corporation if
such person acted in good faith and in a manner reasonably believed to be in
and not opposed to the best interest of the corporation, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for
in the Registrant's Bylaws, and intends to enter into indemnification
agreements with any new directors and executive officers in the future.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since inception the Registrant has issued and sold the following
unregistered securities:
1. From March 31, 1994 to July 31, 1996, the Registrant issued and sold
201,192 shares of Common Stock to employees and consultants at prices
ranging from $.45 to $2.00 upon exercise of stock options pursuant to the
Registrant's 1992 Key Personnel Stock Option Plan and its 1992 Stock Option
Plan.
2. On July 23, 1992, the Registrant issued and sold 150,000 shares of
Series A Preferred Stock to two investors at a sale price of $2.00 per
share.
3. On August 31, 1992, the Registrant issued and sold 440,068 shares of
Series B Preferred Stock to 11 investors at a sale price of $4.50 per
share.
4. On March 15, 1993, the Registrant issued and sold 888,859 shares of
Series B Preferred Stock to 19 investors at a sale price of $4.50 per
share. In connection with the issuance of such shares of Series B Preferred
Stock, the Company also issued the investors warrants to acquire up to an
aggregate of 182,993 shares of Common Stock.
II-1
<PAGE>
5. On September 23, 1993, the Registrant issued a Secured Promissory Note
in the principal amount of $4,500,000 due on June 30, 1995 to Comsat Video
Enterprises, Inc. ("Comsat"). In connection with such note, the Company
also issued to Comsat a warrant to acquire up to an aggregate of 157,500
shares of Common Stock at an exercise price per share of $5.00.
6. On March 11, 1994, the Registrant issued its Convertible Secured
Promissory Notes in the aggregate principal amount of $3,710,015 to 24
investors. Such notes were convertible into the series of Preferred Stock
issued in connection with the Registrant's next round of equity financing
and subsequently converted into Series C Preferred Stock on September 29,
1994. The Registrant also issued warrants to such investors to acquire up
to an aggregate of 152,381 shares of Common Stock at an exercise price of
$0.50 per share.
7. In connection with a debt financing transaction, on June 24, 1994, the
Registrant issued to Silicon Valley Bank and Hambrecht & Quist Guaranty
Finance warrants to acquire up to an aggregate of 18,553 shares of Common
Stock at an exercise price of $0.50 per share.
8. On September 12, 1994, the Registrant issued its Convertible Secured
Promissory Notes in the aggregate principal amount of $5,000,000 to eight
investors. Such notes were convertible into the series of Preferred Stock
issued in connection with the Registrant's next round of equity financing
and subsequently converted into Series C Preferred Stock on September
29,1994. The Registrant also issued warrants to such investors to acquire
up to an aggregate of 111,112 shares of Common Stock at an exercise price
of $0.50 per share.
9. On September 29, 1994, the Registrant issued and sold 6,264,871 shares
of Series C Preferred Stock to 37 investors at a sale price of $4.50 per
share. In addition, the Registrant also issued to certain purchasers of the
Series C Preferred Stock warrants to acquire up to an aggregate of
1,111,111 shares of Series C Preferred Stock at an exercise price of $4.50
per share. In connection with the issuance of Series C Preferred Stock, on
October 26, 1994, the Registrant also issued to three consultants to the
Company warrants to acquire up to an aggregate of 73,333 shares of Series C
Preferred Stock at an exercise price of $4.50 per share.
10. On December 1, 1994, the Registrant issued and sold 22,222 shares of
Series C Preferred Stock at a sale price of $4.50 per share.
11. In connection with a debt financing transaction, on May 16, 1995, the
Registrant issued to Silicon Valley Bank a warrant acquire up to an
aggregate of 75,000 shares of Common Stock at an exercise price of $7.00
per share.
12. On August 15, 1995, the Registrant issued its Seniors Secured Notes
due 2000 in the aggregate principal amount of $24,900,000 to New York Life
Insurance Company, The Mutual Life Insurance Company of New York, Waslic
Company II and Namtor BVC LP (collectively, the "Senior Noteholders"). In
connection with such financing, the Registrant issued warrants to such
investors to purchase up to an aggregate of 1,422,857 shares of Common
Stock at an exercise price of $7.00 per share.
13. On December 29, 1995, the Registrant issued and sold 1,239,397 shares
of Series D Preferred Stock to 5 investors at a price of $7.00 per share.
On May 15, 1996, the Registrant issued and sold 1,562,202 shares of Series
D Preferred Stock to four investors at a purchase price of $7.00 per share.
On May 15, 1996, the Registrant also issued to the purchasers and prior
purchasers of its Series D Preferred Stock warrants to purchase up to an
aggregate of 178,284 shares of Common Stock at an exercise price of $7.00
per share, subject to adjustment of the number of shares and exercise
price. In addition, in connection with effecting certain amendments to the
Note Agreement dated August 15, 1996 among the Company and the Senior
Noteholders relating to the issuance of Series D Preferred Stock, the
Registrant amended the warrants issued August 15, 1996 to provide for the
issuance of up to an additional 200,000 shares of Common Stock at a sale
price of $7.00, subject to adjustment of the number of shares and exercise
price.
14. On May 30, 1996, the Registrant issued an aggregate of 341,259 shares
of Series D Preferred Stock to seven investors, including the Company's
President and Chief Executive Officer and Chief Financial Officer, at a
sale price of $7.00 per share. In addition, the Registrant issued to such
purchasers warrants to acquire up to an aggregate of 21,716 shares of
Common Stock at an exercise price of $7.00 per share, subject to adjustment
of the exercise price and number of shares.
II-2
<PAGE>
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section
3(b) of the Securities Act as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with the Company,
to information about the Registrant.
ITEM 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
(A)
EXHIBITS
-----------
<C> <S>
1.1* Form of U.S. Underwriting Agreement.
1.2* Form of International Underwriting Agreement.
3.1** Form of Certificate of Incorporation to be filed prior to the
effective date of the Registration Statement under which the
Offerings are made.
3.2** Form of Restated Certificate of Incorporation to be filed after
the closing of the Offerings made under this Registration
Statement.
3.3** Bylaws, as amended.
4.1* Specimen Common Stock Certificate.
4.2** Form of Lock-Up Agreement.
4.3** Amended and Restated Shareholders' Agreement, as amended, dated
December 29, 1995.
4.4** First Amendment of Amended and Restated Shareholders' Agreement,
dated May 15, 1996.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement for directors and officers.
10.2** 1992 Key Personnel Stock Option Plan, as amended, and form of
agreement thereunder.
10.3** 1996 Employee Stock Purchase Plan, as amended, and form of
agreement thereto.
10.4** 1996 Director Stock Option Plan, as amended, and form of agreement
thereto.
10.5+** Technology License Agreement between Registrant and On Common
Video Corporation
10.6+** Technology License Agreement between Registrant and Guestserve
Development Group
10.7** Exclusive License Agreement between Registrant and Comsat Video
Enterprises, Inc., dated March 15, 1993.
10.8** Exclusive Sublicense Agreement between Registrant and Comsat Video
Enterprises, Inc., dated March 15, 1993.
10.9+** Agreement between Registrant and InterGame, Ltd., dated July 8,
1996.
10.10+** Note Agreement among Registrant, New York Life Insurance Company,
The Mutual Life Insurance Company of New York, Waslic Company II
and Namtor BVC LP, dated August 15, 1995.
10.11** First Amendment Agreement to Note Agreement among Registrant and
New York Life Insurance Company, The Mutual Life Insurance Company
of New York, Waslic Company II and Namtor BVC LP, dated May 7,
1996.
10.12+** Installation Agreement between Registrant and Shangri-la Hotel &
Resorts (undated).
10.13+** Revised Installation Agreement between Registrant and Shangri-La
Hotel & Resorts, dated September 7, 1994.
10.14+** Guest Video Services Agreement between Registrant and Southern
Pacific Hotel Corporation Limited, dated September 6, 1995.
10.15+** Master Guest Video Services Agreement by and among Registrant and
Hyatt International-Asia Pacific Limited, Hyatt Chain Services
Limited and Guestserve Development Group, dated August 11, 1995.
10.16+** Memorandum of Agreement between Registrant and Trinity Group,
dated May 22, 1996.
10.17+** Agreement between Registrant and United International Pictures,
dated June 28, 1996.
10.18** Employment Agreement between Registrant and Kenneth B. Hamlet,
dated November 28, 1995.
10.19** Employment Agreement between Registrant and Robert R. Creager,
dated September 22, 1995.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.20** Offer of Employment Letter from Registrant to Gordon E. (Ned)
Druehl, Jr., dated June 18, 1996.
10.21** Lease for the Registrant's headquarters in Sunnyale, CA, dated
February 16, 1994.
10.22** Pledge of Shares Agreement among Registrant, New York Life
Insurance Company, The Mutual Life Insurance Company of New York,
Waslic Company II, Namtor BVC LP and The Chase Manhattan Bank,
N.A., dated December 29, 1995.
10.23** Pledge Agreement between Registrant and The Chase Manhattan Bank
N.A., dated December 28, 1995.
10.24** Shareholders Agreement between Registrant, Mr. Arun Churdboonchart
and AC Telecom Limited, dated June 6, 1995.
10.25+ Bloomberg Information Television Programming Affiliation Agreement
between Registrant and Bloomberg, L.P., dated October 3, 1996.
10.26** Shareholder Agreement between Registrant and Spectrum, Inc., dated
August 1, 1994.
10.27 Master Guest Video Services Agreement by and among the Registrant,
Hyatt International (Europe Africa Middle East) Ltd., Hyatt Chain
Services Limited and Guestserve Development Group, dated November
15, 1995.
11.1** Calculation of earnings per share.
21.1** List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditor.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney (see page II-5).
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission on September 18, 1996, as amended.
Omitted portions have been filed separately with the Commission.
(b) Financial Statement Schedules
None.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement 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, 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 hereunder, 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 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(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 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose 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.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON
FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF SUNNYVALE, STATE OF CALIFORNIA, ON THE 4TH DAY OF
OCTOBER, 1996.
MAGINET CORPORATION
/s/ James A. Barth
By __________________________________
JAMES A. BARTH
EXECUTIVE VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND SECRETARY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED
SIGNATURE TITLE DATE
Chairman of the
Kenneth B. Hamlet* Board, President October 4, 1996
- ------------------------------------- and Chief Executive
(KENNETH B. HAMLET) Officer (Principal
Executive Officer)
/s/ James A. Barth Executive Vice
- ------------------------------------- President, Chief October 4, 1996
(JAMES A. BARTH) Financial Officer
and Secretary
(Principal
Financial and
Accounting Officer)
Director
Robert R. Creager* October 4, 1996
- -------------------------------------
(ROBERT R. CREAGER)
Director
Stuart J. Ellman* October 4, 1996
- -------------------------------------
(STUART J. ELLMAN)
Director
Michael D. Granoff* October 4, 1996
- -------------------------------------
(MICHAEL D. GRANOFF)
Director
Michael Ramsay* October 4, 1996
- -------------------------------------
(MICHAEL RAMSAY)
Director
October 4, 1996
James D. Robinson IV*
- -------------------------------------
(JAMES D. ROBINSON IV)
/s/ James A. Barth
--------------------------------
* By:
(JAMES A. BARTH)
(ATTORNEY-IN-FACT)
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1* Form of U.S. Underwriting Agreement.
1.2* Form of International Underwriting Agreement.
3.1** Form of Certificate of Incorporation to be filed prior to the
effective date of the Registration Statement under which the
Offerings are made.
3.2** Form of Restated Certificate of Incorporation to be filed after
the closing of the Offerings made under this Registration
Statement.
3.3** Bylaws, as amended.
4.1* Specimen Common Stock Certificate.
4.2** Form of Lock-Up Agreement.
4.3** Amended and Restated Shareholders' Agreement, as amended, dated
December 29, 1995.
4.4** First Amendment of Amended and Restated Shareholders' Agreement,
dated May 15, 1996.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement for directors and officers.
10.2** 1992 Key Personnel Stock Option Plan, as amended, and form of
agreement thereunder.
10.3** 1996 Employee Stock Purchase Plan, as amended, and form of
agreement thereto.
10.4** 1996 Director Stock Option Plan, as amended, and form of agreement
thereto.
10.5** Technology License Agreement between Registrant and On Common
Video Corporation
10.6** Technology License Agreement between Registrant and Guestserve
Development Group
10.7** Exclusive License Agreement between Registrant and Comsat Video
Enterprises, Inc., dated March 15, 1993.
10.8** Exclusive Sublicense Agreement between Registrant and Comsat Video
Enterprises, Inc., dated March 15, 1993.
10.9+** Agreement between Registrant and InterGame, Ltd., dated July 8,
1996.
10.10+** Note Agreement among Registrant, New York Life Insurance Company,
The Mutual Life Insurance Company of New York, Waslic Company II
and Namtor BVC LP, dated August 15, 1995.
10.11** First Amendment Agreement to Note Agreement among Registrant and
New York Life Insurance Company, The Mutual Life Insurance Company
of New York, Waslic Company II and Namtor BVC LP, dated May 7,
1996.
10.12+** Installation Agreement between Registrant and Shangri-la Hotel &
Resorts (undated).
10.13+** Revised Installation Agreement between Registrant and Shangri-La
Hotel & Resorts, dated September 7, 1994.
10.14+** Guest Video Services Agreement between Registrant and Southern
Pacific Hotel Corporation Limited, dated September 6, 1995.
10.15+** Master Guest Video Services Agreement by and among Registrant and
Hyatt International-Asia Pacific Limited, Hyatt Chain Services
Limited and Guestserve Development Group, dated August 11, 1995.
10.16+** Memorandum of Agreement between Registrant and Trinity Group,
dated May 22, 1996.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.17+** Agreement between Registrant and United International Pictures,
dated June 28, 1996.
10.18** Employment Agreement between Registrant and Kenneth B. Hamlet,
dated November 28, 1995.
10.19** Employment Agreement between Registrant and Robert R. Creager,
dated September 22, 1995.
10.20** Offer of Employment Letter from Registrant to Gordon E. (Ned)
Druehl, Jr., dated June 18, 1996.
10.21** Lease for the Registrant's headquarters in Sunnyale, CA, dated
February 16, 1994.
10.22** Pledge of Shares Agreement among Registrant, New York Life
Insurance Company, The Mutual Life Insurance Company of New York,
Waslic Company II, Namtor BVC LP and The Chase Manhattan Bank,
N.A., dated December 29, 1995.
10.23** Pledge Agreement between Registrant and The Chase Manhattan Bank
N.A., dated December 28, 1995.
10.24** Shareholders Agreement between Registrant, Mr. Arun Churdboonchart
and AC Telecom Limited, dated June 6, 1995.
10.25+ Bloomberg Information Television Programming Affiliation Agreement
between Registrant and Bloomberg, L.P., dated October 3, 1996.
10.26 Shareholder Agreement between Registrant and Spectrum, Inc., dated
August 1, 1994.
10.27 Master Guest Video Services Agreement by and among the Registrant,
Hyatt International (Europe Africa Middle East) Ltd., Hyatt Chain
Services Limited and Guestserve Development Group, dated November
15, 1995.
11.1** Calculation of earnings per share.
21.1** List of Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditor.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1** Power of Attorney (see page II-5).
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission on September 18, 1995. Omitted
portions have been filed separately with the Commission.
<PAGE>
Exhibit 10.25
BLOOMBERG INFORMATION TELEVISION/TM/ PROGRAMMING
------------------------------------------------
AFFILIATION AGREEMENT
---------------------
AGREEMENT made this 3rd day of October, 1996, by and between BLOOMBERG
L.P., a Delaware limited partnership ("Bloomberg") and MAGINET, a California
corporation ("MagiNet").
For and in consideration of the conditions hereinafter set forth, the
parties agree as follows:
1. RIGHTS GRANTED
--------------
Bloomberg hereby grants to MagiNet, and MagiNet hereby accepts a non-
exclusive license, right and commitment during the Term of this Agreement
to distribute the BIT Programming to hotel rooms within the hotels to which
MagiNet provides its services in the Asia Pacific Region, Europe, South
Africa and Israel ("Hotels"). MagiNet shall not distribute the BIT
Programming in a cut, edited or otherwise altered form. MagiNet may not
copy or make any use of the BIT Programming other than as specifically set
forth in this Agreement. MagiNet agrees to pay Bloomberg in accordance with
the terms and conditions of Schedule 1 attached hereto. MagiNet agrees to
provide Hotel and System reports to Bloomberg, as Bloomberg may reasonably
request, for the purpose of verifying compliance with this Agreement.
2. TERM
----
Unless earlier terminated pursuant to the provisions of this Agreement, the
term ("Term") of this Agreement shall be for a period of [***] from
the date hereof [***].
3. DELIVERY AND DISTRIBUTION
-------------------------
(a) Delivery.
--------
(i) Bloomberg shall make available to MagiNet a secure or encrypted
signal of the BIT Programming by transmitting it via satellite or
terrestrial delivery, such delivery to be coordinated by Bloomberg and
MagiNet. The costs associated with the receipt at the Hotels of such
signal shall be borne by MagiNet.
(ii) Notwithstanding anything contained in the Agreement, it is understood
and agreed that if, at any time in the future, Bloomberg shall choose
to deliver its BIT Programming by means of new technology, which
technology shall be used for delivery of programming by at least
eighty percent (80%) of other program
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
<PAGE>
providers in the industry, then Bloomberg shall have the right to
discontinue distribution by satellite or any other outdated
technology.
(b) Distribution. MagiNet shall, at its own expense, distribute the BIT
Programming to the Hotels in its entirety (24 hours per day), as and
when transmitted by Bloomberg in the sequence received from Bloomberg
in accordance with all applicable local, state and federal laws.
(c) Availability. Notwithstanding any other provision of this Agreement to
the contrary, MagiNet shall ensure that the BIT Programming is
received by the hotel guests of each Hotel free of charge to such
guests. Once the BIT Programing has been carried by any or all of
MagiNet's Hotels, MagiNet shall have no right, during the term of this
Agreement to delete the BIT Programming from any such Hotel (except in
the event of force majeure, as defined in Section 8), or unless in
MagiNet's reasonable judgment the quality of the BIT programming has
so materially changed from the programming as of the date hereof as to
make it fundamentally unacceptable to MagiNet's Hotel customers.
(d) Piracy. MagiNet shall not itself, and shall not authorize others to,
copy, take or otherwise reproduce any part of the BIT Programming
without Bloomberg's prior written authorization and shall take
reasonable and practical security measures to prevent the unauthorized
or otherwise unlawful copying or taping by others.
(e) Termination of BIT Programming. Bloomberg retains the right at all
times to discontinue providing the BIT Programming (i) to any and all
of the Hotels without incurring any liability upon thirty (30) days
written notice to MagiNet in the event Bloomberg no longer engages in
the business of providing BIT Programming (ii) to any single Hotel in
the event there is no Recoupment (as defined below) of capital costs
and preferred return on equity (as provided on Schedule 1) within nine
(9) months of the commencement of delivery of BIT Programming to such
Hotel, and (iii) to any Hotel, if the delivery of such signal, is
contrary to or violates, any applicable law, rule or regulation. This
Agreement may be terminated by Bloomberg at any time in the event
MagiNet fails to perform any material obligation hereunder which is
not cured after receipt of written notice thereof from Bloomberg
within ten (10) days in regard to payment to be paid by MagiNet to
Bloomberg and twenty (20) days in regard to all other obligations
hereunder.
(f) Non-exclusivity. Notwithstanding anything herein to the contrary,
Bloomberg may market and distribute the BIT Programming to any Hotel
in the Asia Pacific region, Europe, South Africa and Israel not under
contract with MagiNet, and in the event a Hotel under contract with
MagiNet elects not to receive the BIT Programming, Bloomberg may
market and subsequently distribute the BIT to such Hotel. Bloomberg
expressly reserves to itself any and all rights in the BIT Programming
not herein specifically granted to MagiNet. Such reserved rights may
be exercised and exploited by Bloomberg concurrently with and during
the term hereof, freely and without limitation
-2-
<PAGE>
or restriction, regardless of the extent to which the same are
competitive with MagiNet or the license granted.
4. PROMOTION
---------
Without limiting any other related obligations contained in this Agreement,
from the date hereof and throughout the Term, MagiNet shall promote the BIT
Programming in at least a comparable manner as it promotes other services.
5. TRADEMARKS
----------
Bloomberg will permit MagiNet and each Hotel to use the service marks,
trademarks, trade names, logos and other BIT Programming indicia for the
distribution and promotion of the BIT Programming, subject to Bloomberg's
prior review and approval, which approval will not be unreasonably
withheld. In addition, Bloomberg consents to the use of such indicia in
MagiNet's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on September 17, 1996, and any amendment thereto, and
in the prospectus contained therein, provided however, that such use and
reference to Bloomberg therein is subject to the prior review and approval
of Bloomberg.
6. CONFIDENTIALITY
---------------
Neither MagiNet nor Bloomberg shall disclose to any third party (other than
its respective employees, consultant or agents in their capacity as such),
any confidential business information concerning the other, including but
not limited to, any information relating to identification of subscribers
or financial material obtained through an audit. MagiNet and Bloomberg
shall undertake reasonable commercial efforts to ensure that such
employees, consultants, and agents maintain the confidentiality of such
information.
7. INDEMNIFICATION
---------------
(a) Bloomberg will indemnify MagiNet from and against any and all claims,
liabilities, costs and expenses arising out of the provision of BIT
Programming, pursuant to this Agreement, to the extent that such
claims, damages, liabilities, costs and expenses are: (i) based upon
alleged libel, slander, defamation, invasion of the right of privacy,
or violation or infringement of copyright (other than music
performance rights) arising out of the content of the BIT Programming,
or based on alleged violations by the BIT Programming of literary or
dramatic rights, and (ii) are not based upon any deletions, additions
or alterations to the BIT Programming by MagiNet, any Hotel or third
party.
(b) MagiNet will indemnify Bloomberg, its parent and related and
affiliated companies from and against any and all claims, liabilities,
costs and expenses arising out of the distribution of the BIT
Programming, pursuant to this Agreement, to the extent that such
claims,
-3-
<PAGE>
damages, liabilities, costs and expenses are based upon alleged libel,
slander, defamation, invasion of the right to privacy or violation or
infringement of copyright (other than music performance rights) based
upon or growing out of deletions, additions or alterations to the BIT
Programming by MagiNet or any System. Notwithstanding anything
contained herein to the contrary, MagiNet agrees that it shall pay and
forever hold Bloomberg harmless from all payments and fees arising out
of the provision of the BIT Programming to Hotels or the exhibition or
use of the Bit Programming by MagiNet. MagiNet acknowledges the BIT
Programming provides information taken from the New York Stock
Exchange, The American Stock Exchange, NASDAQ and others and that the
Bloomberg does not guarantee the sequence, accuracy, completeness, or
timeliness of the data and information contained therein. Accordingly,
anything to the contrary herein set forth notwithstanding, Bloomberg,
its parent, affiliates or subsidiaries shall not directly or
indirectly, be liable, in any way, to MagiNet, to Hotels, to any of
the Hotel's viewers, to any person or entity to whom or to which the
BIT Programming shall be provided, or to any other person or entity
for (i) any inaccuracies or errors in or omission of, any information
or data therein; (ii) any delays or errors in the transmission or
delivery of any part thereof, or (iii) any loss or damage arising
therefrom or occasioned thereby, or by any reason of nonperformance,
or interruption in any such information or data transmitted by
Bloomberg for any reason.
(c) The party entitled to indemnification hereunder (the "Indemnified
Party") shall notify the other party hereto (the "Indemnifying Party")
in writing of the claim or action for which such indemnity applies.
The Indemnifying Party shall undertake the defense of any such claim
or action and permit the Indemnified Party to participate therein at
the Indemnified Party's own expense. The settlement of any such claim
or action by an Indemnified Party, without the Indemnifying Party's
prior written consent, shall release the Indemnifying Party from its
obligations hereunder with respect to such claim or action so settled.
8. FORCE MAJEURE
-------------
If Bloomberg shall fail to make timely delivery of the BIT Programming
hereunder by reason of any act of God, war, fire, flood, strike, labor
dispute, public disaster, transportation or laboratory difficulties, order
or decree of governmental agency, failure or degradation in performance of
the satellite or transponders providing Bloomberg's signal or feed,
scrambling/de-scrambling equipment or any other equipment owned and
maintained by others, any failure at the origination and up linking center
used by Bloomberg, or any other similar or dissimilar cause beyond the
control of Bloomberg, such failure on the part of Bloomberg shall not be
deemed to be a breach of this Agreement and shall not extend the term
thereof.
9. ASSIGNMENT
----------
(a) Bloomberg may freely assign this Agreement, or any portion thereof,
without the consent of MagiNet. In the event of any valid assignment
of this Agreement by Bloomberg,
-4-
<PAGE>
Bloomberg shall be relieved of all obligations arising thereafter and
MagiNet shall look solely to the assignee for enforcement of such
obligations. MagiNet agrees that upon receipt of written notice of
assignment by Bloomberg, monies due Bloomberg shall be paid to any
third party assignee in accordance with Bloomberg's instructions
without offset, deduction, counterclaim or other credits which the
MagiNet may have against Bloomberg.
(b) This Agreement may not be assigned by MagiNet, either voluntarily or
by operation of law, without the prior written consent of Bloomberg;
provided however, that this Agreement shall automatically be assigned
to MagiNet's successor corporation in connection with its
redomiciliation in Delaware. Any such assignment shall not relieve
MagiNet of its obligations hereunder.
10. THE BLOOMBERG TERMINAL
----------------------
As an incentive to persuade certain top business oriented Hotels to carry
BIT Programming, MagiNet may, with the prior consent of Bloomberg, offer to
install a BLOOMBERG terminal (for the term during which BIT Programming is
delivered to the Hotel) either in the Hotel's business center or concierge
floor, provided:
(a) Bloomberg shall have final absolute approval over which Hotels are
supplied with a BLOOMBERG terminal;
(b) Each Hotel shall pay all installation and monthly phone charges as
well as the charges for the installation of the equipment to deliver
the Bloomberg service; and
(c) Each Hotel shall sign a Bloomberg Agreement and Schedule of Services.
11. AUDIT
-----
(a) Subscriber Records. MagiNet shall keep accurate and complete records
and accounts of billings and all matters which pertain to the Hotels
and are relevant to or required by this Agreement. Bloomberg shall
have the right to examine and audit those records and accounts, no
more than twice in each 365 day period, on reasonable notice to
MagiNet to be conducted during normal business hours during the Term
and for one (1) year after the final termination. Within two (2) weeks
of Bloomberg's request, MagiNet shall provide to Bloomberg all
information requested in order to verify the geographical limits of
any government authorization pertaining to Hotels.
(b) Monthly Reports. On or before the fifteenth (15th) day of each month
during the Term of this Agreement, MagiNet shall provide Bloomberg a
true and complete report for the prior month signed by MagiNet's chief
financial officer, or his/her authorized designee,
-5-
<PAGE>
specifying for each of MagiNet's Hotels which carry the BIT
Programming the following information:
(i) the name of the Hotel;
(ii) the total number of Hotel rooms;
(iii) the fee charged by MagiNet for each room in the Hotel;
(iv) itemization of capital costs related to each Hotel;
(v) other information reasonably requested by Bloomberg for
accurate billing purposes; and
(vi) the information required pursuant to Exhibit A hereto.
12. DEFINITIONS
-----------
As used in this Affiliation Agreement, the following term has the following
meaning:
(a) "Bloomberg Information Television ("BIT") Programming" means the
program service covered by this Agreement, which is offered by
Bloomberg consisting primarily of world news, business news, financial
market data, sports, health and general information.
13. GENERAL
-------
(a) A waiver by either party of any of the terms or conditions of this
Agreement shall not be deemed or construed to be a waiver of such term
or condition for the future, or of any subsequent breach thereof. All
remedies, rights, undertakings, obligations and agreements contained
in this agreement shall be cumulative and none of them shall be in
limitation of any other remedy, right, undertaking, obligation or
agreement of either party.
(b) All notices, statements and other documents required to be given shall
be given in writing either by personal delivery or mail at the
respective addresses:
If to MagiNet: If to Bloomberg:
MagiNet Bloomberg L.P.
Tasman Drive 499 Park Avenue
Sunnyvale, CA 94089 New York, NY 10022
ATTN: Kenneth B. Hamlet ATTN: Emilia Fazzalari
-6-
<PAGE>
(c) This Agreement and all matters or issues collateral thereto shall be
governed by the laws of the State of New York, without reference to
its choice of law doctrine, and any applicable rules and regulations
of the Federal Communications Commission.
(d) This Agreement constitutes the entire agreement between Bloomberg and
MagiNet with respect to the subject matter herein contained and this
Agreement cannot be changed or terminated orally, and no changes,
amendments or assignments thereof shall be binding upon Bloomberg
until accepted in writing by a duly authorized officer of Bloomberg.
(e) In the event any provision of this Agreement is found to be invalid,
illegal or unenforceable, the validity, legality and enforceability of
any of the remaining provisions shall not in any way be affected or
impaired thereby.
(f) This Agreement supersedes all prior written or oral communications or
understanding between the parties concerning the subject matter.
(g) Each Hotel receiving the BIT Programming shall agree to be bound by
the terms of this Agreement applicable to such Hotel.
(h) Bloomberg may, in its absolute discretion, withdraw the BIT
Programming, or any portion thereof, if Bloomberg determines that
telecast thereof would or might infringe upon the rights of others or
violate any law, court order, governmental regulation or other ruling
of any government agency, or constitute a breach of the use permitted
hereby of the BIT Programming or the material or rights contained
therein, or subject Bloomberg to any material liability with respect
to the distribution of BIT Programming or otherwise.
IN WITNESS WHEREOF, the parties have executed this agreement as of the
above date.
MAGINET BLOOMBERG L.P.
BY: Bloomberg, Inc.,
General Partner
By: /s/ James A Barth By: /s/ Louis V. Eccleston
--------------------------------- -----------------------
Name: James A. Barth Name: Louis V. Eccleston
------------------------------- ---------------------
Title: Executive Vice President, CFO Title:____________________
-------------------------------
405 Tasman Drive 499 Park Avenue
Sunnyvale, CA 94089 New York, NY 10022
-7-
<PAGE>
SCHEDULE 1
----------
Service Rates
-------------
MagiNet shall sell the BIT Programming to Hotels at approximately [***] per
Hotel room per month (but for not less than [***] per Hotel room per month).
MagiNet will use its best efforts to secure the best possible prices for the BIT
Programming.
MagiNet shall retain 100% of the gross revenue generated from amounts paid
to MagiNet by Hotels for the BIT Programming until MagiNet has gross received
revenues in an amount equal to capital costs (such capital costs related only to
the delivery of the BIT Programming) plus a preferred return on capital equal to
[***]. Such total capital costs (along with the preferred return) per Hotel
shall not be more than [***]. All other expenses of MagiNet shall not be
included in the calculation of these capital costs. MagiNet agrees to itemize
the specific capital costs with respect to each Hotel for review by Bloomberg.
To the extent such capital costs are also applicable to the receipt of other
services, such costs shall be allocated accordingly for purposes of this
Agreement.
Once gross revenues equal to capital costs plus the above-referenced
preferred return on capital have been paid to MagiNet by Hotels ("Recoupment"),
MagiNet must pay a license fee to Bloomberg equal to [***] of the gross revenues
from the sale of BIT Programming to the Hotels. Recoupment shall be measured on
a Hotel by Hotel basis.
Notwithstanding anything herein to the contrary, in the event the capital
costs and preferred return on capital will not be paid within nine (9) months of
the commencement of BIT Programming by any single Hotel, MagiNet shall not offer
the BIT Programming to any such Hotel. In addition, to the extent that a Hotel
is in default of any payment due MagiNet for receipt of the BIT Programming,
MagiNet shall not offer or provide the BIT Programming to any Hotel that is a
member of the same chain of Hotels and is under common ownership until such non-
paying hotel shall satisfy any outstanding payment obligations to MagiNet.
*** Confidential treatment requested pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission. Omitted portions have been filed separately with the
Commission.
-8-
<PAGE>
EXHIBIT A
---------
(MagiNet to list all Hotels* as defined in the Agreement)
- - Data
- - Name and Address of Hotel
- - Hotel Representative
Address
Telephone
- - Service Launch Date
- - Number of Hotel rooms
- - Chanel Carrying the BIT Programming
- - Name of Town, County, State and
Zip Code of Hotel's Operating Area
-9-
<PAGE>
EXHIBIT 10.27
November 15, 1995
MASTER GUEST VIDEO SERVICES AGREEMENT
-------------------------------------
This Master Guest Video Services Agreement (hereinafter referred to as this
"Agreement" or "Master Agreement"), is made this ------- day of November, 1995
("Effective Date") by and among Hyatt International (Europe Africa Middle East)
Ltd., a Switzerland corporation ("Hyatt"), and Hyatt Chain Services Limited, a
Hong Kong corporation ("Hyatt Services") (collectively the "Hyatt Parties"),
Guestserve Development Group, a California corporation ("GDG"), and MagiNet
International Corporation, a California corporation ("MagiNet"), which is a
wholly-owned subsidiary of MagiNet Corporation (all such signatories herein
being individually a "Party" and collectively the "Parties").
WHEREAS, the Hyatt Parties wish to arrange, for all hotels for which Hyatt has
and will have responsibility during the term of this Agreement (the "Hotels"),
for the procurement from GDG and MagiNet of consistent, high quality guest in-
room video and audio content and all necessary hardware and software that will
permit the transmission to hotel rooms and remote guest selection of such
content (the "System," as further defined in Section 4. below) over each Hotel's
video and audio transmission and receiving systems, including antenna systems
(the "MATV," which includes all required wiring to the guest rooms);
WHEREAS, the Hyatt Parties wish to arrange for the updating, installation,
operation and maintenance and current and future design and development of the
System for and in the Hotels, and the ongoing maintenance of the MATV
(collectively the "Activities");
WHEREAS, GDG owns or is licensed to provide software programs and related
hardware ("GDG Technology," as further described, represented and warranted in
sections 4.1. and 19.2. below) which GDG represents and warrants meets the
Technical Requirements (defined below) and will therefore permit GDG, MagiNet
and, to the extent desired and permitted hereunder, the Hyatt Parties and others
to perform the Activities;
WHEREAS, the Hyatt Parties and GDG recognize that GDG requires the assistance of
one or more other persons and entities located in the countries in which the
Hotels are or will be operated in undertaking the Activities;
WHEREAS, the System enables guests, in the privacy of the Hotels' guest rooms
(the "Rooms"), to obtain full audio and visual access to off-air broadcast,
satellite and cable television transmissions, on demand movies and televised
events, interactive games, advertising (including infomercials), informational
programs, product and services ordering systems, and other interactive
activities, services and programming as provided hereunder and as may be agreed
upon among the parties or between MagiNet and any Hotel (the "Content"), through
channels provided through the System (the "Channels") and transmitted to the
Rooms over the MATV, all in accordance with the specific requirements and
general guidelines of Exhibit A (the "Technical Requirements");
WHEREAS, MagiNet has been performing similar activities on similar systems,
providing Content in other hotels, and has represented that it is fully capable
of undertaking the Activities, and GDG has warranteed that it has assessed
MagiNet's capabilities and believes MagiNet is fully capable of performing its
obligations as defined herein;
WHEREAS, GDG and MagiNet will continue to work throughout the term of this
Agreement
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the securities and exchange commission. Omitted
portions have been filed separately with the Commission.
<PAGE>
November 15, 1995
for the Hyatt Parties in developing new technologies, services, enhancements,
hardware, software and Content for the Hyatt Parties, the Hotels and the System;
and
WHEREAS, MagiNet is willing to install, operate and maintain the System in the
Hotels, to upgrade and maintain the MATVs, and to procure movies, video games
and other Content, GDG is willing to provide all necessary technical support to
MagiNet to perform its obligations within respect to deployment of GDG
Technology hereunder, and the Hyatt Parties and the Hotels wish to accomplish
the same pursuant to this Master Agreement and separate individual agreements
("Individual Agreements") with each Hotel;
NOW, THEREFORE, the Parties do hereby warrant, covenant and agree for good and
valuable consideration duly received as follows:
1. MASTER AGREEMENT
----------------
1.1. Consistent with the above recitals, which are incorporated herein as
if set forth fully below, the Parties have agreed as follows:
1.1.1. MagiNet will procure, install, operate and maintain, and
undertake current and future design and development of, the
System, the Content and the related MATV for and in the
Hotels, with GDG's assistance with respect to the Activities
relating to GDG Technology and with the participation and
direction of the Hyatt Parties, Hotels and others, all as
further provided for in the Technical Requirements and
elsewhere in this Agreement. Except as otherwise provided
herein, MagiNet and GDG shall be solely responsible for all
capital and operating expenditures required to fulfill their
obligations hereunder;
1.1.2. GDG will provide all needed support on the GDG Technology to
MagiNet, the Hyatt Parties and the Hotels that is necessary to
accomplish the Activities;
1.1.3. GDG has licensed or will license the GDG Technology to MagiNet
so that the GDG Technology and any improvements thereon can be
provided to the Hyatt Parties, the Hotels and other Hyatt
entities according to the terms of this Agreement for as long
as the Master Agreement is in effect. GDG has retained
sufficient rights in the GDG Technology so that GDG can
continue (i) to work on and improve the GDG Technology and all
other necessary parts of the System, (ii) to select and work
on the Content, and (iii) to provide further and continuing
assistance to the Hyatt Parties and through MagiNet to the
Hotels in connection with the System and the Content;
1.1.4. The Hyatt Parties and the Hotels are hereby fully licensed as
provided herein by GDG and MagiNet for as long as the Master
Agreement is in effect to have and use the GDG Technology and
any improvements thereon made by GDG, MagiNet and/or any third
party acting under a license or contract from either party;
and
-2-
<PAGE>
November 15, 1995
1.1.5. The Hyatt Parties are hereby fully licensed by GDG and MagiNet
to have and use a software development tool kit (the "Tool
Kit") that enables the Hyatt Parties to create their own
Content for display on the System through the GDG Technology
(as described in Section 9.2 below). This license covers all
uses in the Hotels by the Hyatt Parties and any other entities
affiliated with the Hyatt Parties (the "Hyatt Affiliates")
throughout the duration of this Master Agreement and for such
time thereafter as permitted by this Agreement. Subject to GDG
and MagiNet's consent, not to be unreasonably withheld, the
Tool Kit will permit changes to the System required both to
work on the Activities, System features and the Hyatt Property
(defined below). Any Party making changes to the System will
ensure that there is as little disruption of the Hotels' and
others operations as possible. Any third parties selected by
Hyatt Parties to be licensed to use the Tool Kit under this
provision will enter into appropriate licensing and
confidentiality agreements with GDG and MagiNet, such licenses
to be at no cost and restricted to Hyatt Content (defined
below) production only.
1.2. This Master Agreement governs the relationship of the Parties, and
shall take precedence over the terms in each Individual Agreement
insofar as the Parties' obligations are concerned unless all Parties
hereto expressly agree in writing that such term(s) do not apply.
1.3. The language in this Master Agreement shall take precedence in the
event of any inconsistency with language used in any exhibit or other
attachment to this Agreement.
1.4. The Parties have entered into or have agreed to enter into agreements
containing the same terms as herein with respect to Hyatt
International properties in Asia, the Pacific and Latin America (the
"Related Hyatt Agreements").
2. INDIVIDUAL AGREEMENTS
---------------------
2.1. The form that will be used for all Individual Agreements is attached
as Exhibit B. As soon as practicable and legally permissible,
beginning immediately with the signing of this Master Agreement, the
Parties shall undertake commercially reasonable efforts to ensure that
MagiNet and the Hotels have entered into Individual Agreements, and
that GDG has entered into any needed agreements directly with each
Hotel, so that the purposes of this Agreement can be achieved.
2.2. MagiNet may have distributors and subsidiaries act on its behalf
insofar as is necessary for the installation, operation and
maintenance of the System and the MATV at each Hotel. MagiNet and GDG
hereby fully and directly guarantee the performance of the GDG
Technology at the Hotels. MagiNet hereby fully and directly guarantees
the performance of the System at the Hotels and of all distributors
and subsidiaries performing all or part of any Individual Agreement.
Subject to the dispute resolution provisions of this Agreement and the
Individual
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<PAGE>
November 15, 1995
Agreements, MagiNet and GDG agree that they remain fully obligated
under the terms of this Agreement and all Individual Agreements for
their respective obligations, so that the Hyatt Parties and each Hotel
shall have full immediate and direct recourse against them for their
respective obligations without ever being required first to proceed
against any distributor, subsidiary or other third party.
2.3. The Hyatt Parties shall have no payment or any other obligations under
any Individual Agreement. Any payments to be paid by the Hotels are
and shall be the sole responsibility of the Hotels.
3. TERMS OF THE AGREEMENTS
-----------------------
3.1. The term of this Master Agreement will begin on the Effective Date and
will terminate seven (7) years after this date (the "Initial
Termination Date"). This Master Agreement will continue thereafter for
as long as any single Individual Agreement remains in effect. Upon
termination, the Parties' obligations shall continue as to any
required payments and audits not completed, and specifically as to
sections 1.1.5., 4.5 (with respect to that portion of the manuals that
deal with the tool kit), 9., 10., 15.7., 15.8., 20., 21., 28., and 30.
of this Agreement.
3.2. On or about the expiration of the fifth year of the Master Agreement,
the Parties will commence discussions regarding the possible extension
of the Master Agreement for an additional term. Should no agreement be
reached concerning such an extension prior to the Initial Termination
Date, the Master Agreement and all Individual Agreements will be
automatically extended after the Initial Termination Date to a date at
least ninety (90) days after MagiNet's receipt of written notice of
the Hyatt Parties' and/or a given Hotel's intent to terminate the
particular agreement(s) involved.
3.3. Each Individual Agreement will continue to be effective at least until
the Initial Termination Date. Upon the expiration of one or more
Individual Agreements, or the refusal of MagiNet to install the System
at a Hotel as permitted under section 3.4 of this Agreement, other
guest video systems may be installed at those Hotels.
3.4. MagiNet will not be required to sign any Individual Agreement if there
are less than twenty-four (24) months remaining prior to the Initial
Termination Date. If there are less than twenty-four (24) months
remaining, MagiNet may, at its option exercised through written notice
within thirty (30) days of any installation request, refuse to sign an
Individual Agreement. If MagiNet determines not to go forward with any
installation, then the Hyatt Parties may seek another vendor to
install the guest video services system for any Hotel for which
installation has been refused.
3.5. The Parties agree that the System shall be installed in all existing
Hotels in accordance with the timetable attached hereto as Exhibit C,
and they shall take all commercially reasonable actions to achieve
this goal. The Parties warrant
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<PAGE>
November 15, 1995
and agree that, except as set forth in Exhibit C, there are no known
existing contractual obligations or legal restrictions that would
prevent them or the Hotels from completing such installations within
two (2) years from the Effective Date.
3.6. MagiNet and GDG shall cooperate fully with any and all third party
vendors chosen by the Hyatt Parties and/or the Hotels, including those
hired as consultants, designers, advertising experts and programmers
to assist in developing Content and to provide advice concerning the
System, and the use of other vendors for another guest video services
system when such system(s) can be installed in accordance with this
Agreement.
4. THE SYSTEM
----------
4.1. The System shall include at least: (i) a module for each television
set that can remotely control on demand requests made by guests from
Rooms to central storage devices within the Hotel; (ii) a remote
control and appropriate spares for each television in the Hotel; (iii)
Content storage sufficient for the Content initially installed and a
reasonable amount of expansion capability for additional Content that
may be installed in the future; (iv) a front-desk personal computer,
monitor and printer; and (v) all necessary software, electronic,
computer and switching equipment, including GDG Technology to permit
the receipt, transmission, monitoring and on demand remotely
controlled interactive guest operated in-room display of the Content.
GDG Technology shall include all technologies developed by GDG and
currently available and, as further provided for herein, future
technology developed by GDG, provided to or usable by hotel customers.
4.2. MagiNet and GDG shall provide for use during the term of this
Agreement at no charge one demonstration System, including the updated
Content except for the Movies, for Hyatt International headquarters in
Chicago, Illinois.
4.3. As part of the consideration to MagiNet for installation of the
Systems, in the absence of material breach by MagiNet, the Hyatt
Parties agree that they will undertake their best efforts to ensure
that the System will be the sole and exclusive in-room guest video
services system provided to their guests for each Hotel during the
term of its Individual Agreement (except as provided for herein,
including section 4.16 of this Agreement). The Hyatt Parties will not
either directly or indirectly solicit the installation of any video
system in Hotels which might directly compete or cause transmission
interference with the System. MagiNet will not be obligated to install
the System in any Hotel that will not agree to such exclusivity.
4.4. MagiNet and/or GDG shall develop and install software, and MagiNet
shall repair, purchase, build and install all hardware required to
operate the System, including all needed upgrades to Hotel MATVs. All
installed and provided hardware and software shall be specified and
listed as an exhibit to the Individual Agreements, and their presence
shall be verified in each Individual
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Agreement.
4.5. MagiNet and GDG shall provide documentation to provide the reader
with sufficient information so that the System can be operated
without further consultation (the "System Manual"). Two (2) copies of
each System Manual shall be provided for each Hotel, with one copy to
both Hyatt Parties.
4.6. Ten (10) copies of a manual that describes the Tool Kit sufficiently
to permit its use shall be provided to the Hyatt Parties (the "Tool
Kit Manual").
4.7. System Manuals and Tool Kit Manuals may be copied and printed in
whole or in part by Hyatt Parties and Hotels on an as needed basis.
All Manuals shall be marked and treated by all Parties as
confidential. Notice of copying of each Manual shall, with best
efforts, be given to MagiNet and/or GDG.
4.8. The System shall provide guests with the Content in as efficient and
effective a manner as is reasonably and technically possible at the
time the System is installed in each Hotel, and as further specified
and described in the Technical Requirements.
4.9. The System shall accommodate, and MagiNet and GDG shall ensure the
delivery of across the System and the MATVs, to the extent reasonable
and commercially possible, all Content that the Hyatt Parties
determine in the future would benefit Hotel guests or Hotel staffs
and would be economically viable to add to each Hotel's services.
4.10. The System will be multilingual, and shall permit displays and
commands in at least three separate languages in any given Hotel. The
selected languages have been preliminarily designated in Exhibit A
for the Hotels identified, which designations can be modified at the
Hyatt Parties' and/or Hotel's option and at the Hotel's or Hyatt
Parties' expense for Hyatt Content.
4.11. MagiNet and GDG shall at all times in the future ensure that the
System and all other computer, reservations and information systems
operated or used by the Hyatt Parties and Hotels ("Hyatt Systems")
are interoperable, and each will ensure that it takes no action(s)
that could jeopardize such interoperability provided that Hyatt
-------------
Parties will ensure standard industry interfaces are provided by such
Hyatt Systems for interface with GDG Technology. If such
interoperability of the System and Hyatt Systems were threatened,
then the Hyatt Parties and/or the Hotel(s) affected can immediately
seek any assistance deemed necessary by the Hyatt Parties and/or
those Hotel(s) to disconnect the System from the point of interface
to such Hyatt System to avoid, prevent and/or cure any such threat or
defect. In the event that any Hyatt Systems are modified after the
System is installed, MagiNet and GDG shall be required, if necessary
in order for the System to function with the Hyatt Systems, to use
their best efforts to modify the System so that it operates in
accordance with the requirements of this Agreement and any Individual
Agreement that exists with the Hotel(s) involved. If such
modifications are feasible, then MagiNet and GDG shall
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provide the Hotel(s) affected with an estimate of what is required to
undertake the modifications. The estimate shall be binding upon
MagiNet and GDG, but the affected Hotel(s) may seek other quotes for
the work required, and are not bound by the estimate unless it
indicates in writing that it agrees with the estimate.
4.12. MagiNet and GDG understand and agree that the System must meet or
exceed all Technical Requirements. MagiNet shall provide sufficient
spare equipment to minimize the effect of component failure on guest
services and to enable rapid repair and replacement of defective
components, including spare converters and remote controls to enable
Hotel staff to meet the short term needs of its guests if repair
and/or replacement of components are required as further referenced
in Section 12.8.
4.13. The development and use of the System shall not interfere with the
operations of the Hyatt Parties or any Hotel, including any
interference with the continued operation of the Hotels during the
period of installation except as may reasonably be required to
effectuate the installation.
4.14. Each Hotel will ensure the safety and security of the System and all
related property of MagiNet at all times while the System is
installed in the Hotel, and will be liable for any loss or damage to
the System resulting from negligence on the part of Hotel's employees
or third parties (excepting MagiNet and GDG and their associated
entities) to which Hotel permits access to the System.
4.15. The System shall not contain any undocumented features. MagiNet, GDG,
the Hyatt Parties, the Hotels or any other person shall not adversely
or improperly affect or alter either the Content or other materials
being transmitted over the System and/or Hyatt Systems. MagiNet and
GDG are specifically prohibited from knowingly including, and agree
not to include, any virus, timer, clock, or limitations in design or
routine designed to adversely affect or alter the Content or
components of the System and/or Hyatt Systems, in particular any
devices that destroy or otherwise make data inaccessible.
4.16. Nothing in this Master Agreement nor any Individual Agreement shall
be deemed to affect in any way, and/or preclude: (i) the Technical
Requirements; (ii) the Hyatt Parties or the Hotels from entering into
agreements in order to obtain other vendors as otherwise permitted by
this Agreement; (iii) the complete and unfettered right and ability
of the Hyatt Parties and the Hotels to install video devices, cd
players and other devices, including telefax machines, computers and
computer lines (collectively the "Devices"), in Hotels for guest or
others' use provided that content made available by Hyatt Parties and
the Hotels for such Devices does not compete with content provided
via the System; (iv) the Hyatt Parties' and Hotels' rights and
ability to connect other communications devices that will be able to
communicate with guests through the guests' televisions and other
forms of monitors; (v) the Hyatt Parties' and Hotels' rights to
continue to broadcast the Hyatt Content after termination of this
Agreement or any Individual Agreements; and (vi) guests' rights to
have and use
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their own Devices with their own content in the Rooms. Any
installation or use of Devices by Hotels and guests may not interfere
with delivery, reception or use of Content anywhere else in the Hotel
by any other guest, or violate any copyright restrictions of any
other Content.
5. ADVISORY BOARD
--------------
5.1. An Advisory Board (the "Advisory Board") shall be formed for the
purpose of assisting in the administration of the relationships
between the Parties contemplated by this Agreement.
5.2. The Advisory Board shall be comprised of at least three (3), not to
exceed (4), voting persons, at least one of whom shall be designated
by each of the two Hyatt Parties, MagiNet and GDG. Such number of
Board members shall in no event be reduced below three. Each party
shall be entitled to have as many nonvoting persons attend Advisory
Board meetings as they desire.
5.3. The Hyatt Parties representative(s) shall be entitled to cast a total
of two (2) votes on any issue. MagiNet and GDG shall be entitled to
cast one (1) vote each. No action voted upon and approved by a
majority of the Advisory Board's votes shall be acted upon without
subsequent written approval of the chief executive officer of each
party or his or her designee.
5.4. Meetings of the Advisory Board shall be held not less than four times
per year. A meeting of the Advisory Board may be called by any
Advisory Board member by telephonic or written notice to all Advisory
Board members at least ten (10) days prior to such meeting of the
time, place and general purpose of such meeting. The meeting may be
held telephonically.
5.5. The Advisory Board shall have specific authority to discuss and vote
on the following matters:
5.5.1. Advertising Rates - The Advisory Board shall discuss standard
advertising rates for local, regional and global advertising.
5.5.2. System And New Technology Development and Implementation -The
Advisory Board shall serve in an advisory role in evaluating
System and new technology development and implementation
alternatives and schedules, and confirming the eligibility of
development expenditures for reimbursement from revenue
obtained from any approved new services revenue or otherwise.
5.5.3. Dispute Resolution - The Advisory Board shall consider all
disputes that arise during the day-to-day conduct of the
relationship, including the key account status of certain
accounts.
5.5.4. General Oversight - The Advisory Board will generally oversee
the relationships and activities contemplated by this
Agreement, and will provide executive commitment and
direction to such relationships and
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activities. Such oversight shall include, but not be limited
to, considering issues arising concerning compliance by the
Parties with the terms of this Agreement.
5.6. Each party shall designate a senior executive of their respective
organizations to serve as a senior executive affected by a particular
issue ("Senior Executive"). The Senior Executives shall jointly hear
appeals of issues which are submitted by the Advisory Board.
5.7. An affirmative vote is required from the Hyatt representative(s) in
order for any vote to be binding.
6. HYATT INTERFACES AND CONTENT
----------------------------
6.1. The Hyatt Parties will have the exclusive right to develop, design,
and implement, and obtain and retain full ownership rights of: (i)
the design elements, including the color scheme used, for all Hyatt
Content other than that covered by third party copyrights and
approved by the Hyatt Parties, including all screens and displays;
(ii) all materials and designs created for or by the Hyatt Parties
for the System; and (iii) all Hyatt Parties' Intellectual Property
that relates to these elements, including all those that are subject
to trademark and trade dress ownership under United States or any
local laws. All such elements shall be known as the "Hyatt
Interfaces."
6.2. The Hyatt Interfaces may be changed by the Hyatt Parties at any time.
Such changes shall be implemented within a reasonable time after the
Hyatt Parties' written request to do so, and in any event no later
than ninety (90) days after written notice thereof unless additional
time is reasonably necessary and approved by the Parties.
6.3. The Hyatt Parties shall have the right and complete control to
utilize the Hyatt designated System capacity in Hotels to display
infomercials, programs on other hotels and resorts, and similar
advertising and merchandising of hospitality industry products and
services offered by Hyatt or Hyatt Affiliates ("Hyatt Products"),
including Hyatt Interactive Services (see Section 7. below) and Hotel
Services (see Section 8. below) (collectively, "Hyatt Content").
6.4. The Hyatt Parties may use the Tool Kit to develop, design and
implement the Hyatt Interfaces and Hyatt Content. If the Hyatt
Parties choose to do so, the Hyatt Parties may pay GDG and/or MagiNet
their standard rates to undertake such development, design and
implementation. Nothing herein shall relieve GDG and MagiNet from
their obligation to install, operate and maintain the System and the
MATVs, and to implement Hyatt Interfaces and Hyatt Content in
accordance with this Agreement. All persons who work on such
implementation shall sign all necessary documents to ensure that all
ownership rights to Hyatt Interfaces and Hyatt Content vest fully and
completely in the Hyatt Parties.
6.5. Hyatt Content shall not be directly competitive with any then
currently available
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Content.
6.6. Except as specifically otherwise provided herein, all Content other
than Movies must first be approved by the Hyatt Parties and the
Hotels prior to installation on the System.
7. HYATT INTERACTIVE SERVICES
--------------------------
7.1. "Hyatt Interactive Services" shall mean those Interactive Services
that relate to Hyatt Products that are developed for or by one or
more of the Hyatt Parties or Hyatt Affiliates. Hyatt Interactive
Services may be offered to guests and others through the System.
7.2. Any person or entity working for or related to any Hyatt Party or
Hyatt Affiliate may develop Hyatt Interactive Services. Nothing in
this Agreement shall be read to prohibit such independent
development.
7.3. All specialized hardware and software not covered by this Agreement
for the provision of or constituting Hyatt Interactive Services shall
be paid for by and deemed to be the property of one of the Hyatt
Parties or its designee or assignee.
7.4. MagiNet and GDG shall cooperate fully in providing and fully
implementing all interfaces and operating procedures required so that
any Hyatt Interactive Services may be used on the System.
8. HOTEL SERVICES
--------------
8.1. "Hotel Services" shall mean those guest information and other
services available now and in the future from Hyatt Parties, Hyatt
Affiliates and Hotels, including the development, storage and
transmission of information about: (1) guest billings status, (2)
minibar consumption and other charges, (3) hotel, transportation, and
restaurant reservations, (4) guest marketing information for or on
behalf or third parties, and (5) guest messaging systems and
services.
8.2. MagiNet shall ensure that Hotel Services are available through the
System, and can be accessed with no more delay than may be
experienced in order to obtain Interactive Services from MagiNet,
including such assistance as may be needed for each Hotel so that all
technical requirements are met for the transmission of Hotel Services
through the System.
8.3. If any of the Hyatt Parties or any individual Hotel requires MagiNet
or GDG to provide services requiring the modification of hardware or
software interfaces other than those on the System in order to
implement Hotel Services, then the party making such a request shall
be solely responsible for such costs. If MagiNet or GDG satisfies
such requirements, then any direct costs for the alteration of
existing interfaces solely for the purpose of providing Hotel
Services, and approved by the Hyatt Parties and one or more Hotels,
shall be paid by the approving entity. The Hyatt Parties' own costs
of development and
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transmission of Hotel Services shall be borne by Hyatt or any
specific Hotel or group of Hotels responsible for approving such
costs.
9. OWNERSHIP RIGHTS
----------------
9.1. "Hyatt Systems" shall mean those hardware and software systems other
than the System used by Hyatt Parties and the Hotels to deliver
Content to guests in their rooms, including any transmitting devices
and equipment, wiring, televisions, and cable or master antennae
transmission systems, as well as all software and hardware used for
each Hotel's PMS and MATV.
9.2. The Hyatt Interactive Services, Hyatt Interfaces, Hyatt Content,
Hyatt Systems, all signal boosters, wiring and faceplates, and any
portions of the System that are permanently installed, or installed
in such a way that the removal of that part would cause more than
incidental wear and tear to the premises, and all other property at
the Hotels and with the Hyatt Parties apart from the System, shall be
considered by the Parties to be the sole and exclusive property of
the Hyatt Parties and/or the Hotels (the "Hyatt Property"). All Hyatt
Property shall be considered by the Parties to be the property of the
Hyatt Parties and/or the Hotels, irrespective of whether such
information, materials, hardware and software systems are used on or
developed by MagiNet and/or GDG and/or any affiliated entities or
third parties.
9.3. The System and Content provided by MagiNet and/or GDG that is not
Hyatt Property shall be either the property of MagiNet or GDG or
property licensed to MagiNet or GDG by a third party.
9.4. Hotels will not allow any lien, encumbrance, mortgage, claim or
security interest to be attached to or be made against those portions
of the System owned by MagiNet and/or GDG. MagiNet and GDG and those
working for these Parties shall not allow any lien, encumbrance,
mortgage, claim or security interest to be attached to or be made
against Hyatt Property.
9.5. Hotels will maintain all MagiNet notices or plaques affixed to the
System's equipment, stating that all such equipment is the sole and
exclusive property of MagiNet. If MagiNet elects to file documents
with governmental agencies for the purpose of notifying potential
creditors of Hotels that the equipment is the property of MagiNet,
Hotels will assist with such filing at no expense to the Hotels, if
requested to do so by MagiNet. Nothing herein shall require the
expenditure of any time or resources by any Hotels beyond
administrative assistance on any legally required and appropriate
documents, which shall first be reviewed and approved by the Hyatt
Parties for form and content relative to their own ownership
interests.
9.6. Equipment comprising part of the System and owned by MagiNet will not
be removed from Hotels for any purpose whatsoever during the term of
the Individual Agreements except for purposes of repair, and when
otherwise permitted hereunder.
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9.7. In the event the safety of the System is threatened due to
earthquake, flood, fire, strike, civil disruption or similar force
majeure causes, MagiNet will be entitled to enter upon Hotel premises
and to remove the System from danger upon reasonable notice to Hotel.
This provision shall not entitle MagiNet to disrupt normal guest
services, nor to intrude on or violate the privacy of the Hotels'
guests.
9.8. Upon termination of its Individual Agreement, each Hotel will allow
MagiNet to remove that portion of the Systems owned by MagiNet.
MagiNet will undertake to remove the System from the premises within
thirty (30) days after such termination, and, at Hotel's option, will
return the premises affected by the installation and or removal of
the System to their original condition, normal wear and tear
excepted, at no cost to Hotel and with minimal disruption to the
provision of Content to Rooms and other Hyatt Property. MagiNet also
hereby agrees that if a new vendor is installing a system in the
Rooms, that MagiNet will remove those portions of the System owned by
MagiNet in a timely and efficient manner.
10. INTELLECTUAL PROPERTY
---------------------
10.1. "Intellectual Property" shall mean all trademarks, service marks,
trade names, trade dress, patents, copyrights, trade secrets, and
other proprietary rights recognized under the laws of any nation.
10.2. Subject to the provisions of this Agreement, all Intellectual
Property owned by Hyatt Parties, the Hotels and any related entities
shall be and remain the property of those entities. MagiNet and GDG
and any related entities shall be provided the limited right to use
and practice such Intellectual Property solely for the purpose of
ensuring that they can perform the Activities.
10.3. Subject to the provisions of this Agreement, all Intellectual
Property of MagiNet and GDG and any related entities shall be and
remain the property of those entities. Hyatt, Hyatt Services, the
Hotels and any related entities shall be provided the limited right
to use and practice such Intellectual Property solely for the
purposes described in this Agreement and the Individual Agreements.
10.4. The Parties recognize and agree that it is necessary for each party
to use certain Intellectual Property of the other in their activities
contemplated under this Agreement. The Parties shall protect the
other parties' Intellectual Property to be same degree as they
protect their own Intellectual Property, but in any event reasonable
steps shall be taken to ensure its protection, including steps to
prevent any reverse engineering of software, hardware, or other
proprietary technology.
10.5. Nothing herein shall be interpreted to transfer, convey or license
any rights whatsoever in any party's Intellectual Property unless
provision therefore is specifically provided for herein. No party
shall have the right to use any trademarks or service marks in the
absence of the owning party's specific
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written agreement to permit such use.
11. INSTALLATION
------------
11.1. MagiNet shall apply for and obtain all licenses, permits and other
government approvals required to do work on each Hotel's premises,
and shall at all times comply with the applicable legal and
regulatory requirements for such work. It shall be MagiNet's
responsibility to handle all such requirements, and also its
responsibility to pay for any legal expenses and fines incurred due
to MagiNet's failure to comply with such requirements.
11.2. MagiNet and its subsidiaries and distributors shall carry and
maintain for each installation, and any later work at the Hotels,
worker's compensation insurance, or such other insurance as is
required and or needed to pay for any actions of MagiNet's personnel
and all such other personnel, in the amount of at least $1,000,000
combined single limit comprehensive general contractual liability
insurance, and at least $1,000,000 combined single limit vehicle
liability insurance. Copies of all applicable policies and
certificates of insurance shall be provided to the Hyatt Parties and
the relevant Hotel prior to commencement of any work on the premises
of any Hotel. All such policies and other contracts and certificates
of insurance shall include the following provision, or wording with
the same legal effect:
"Hyatt International (Europe Africa Middle East) Limited, its
affiliates and subsidiaries and the owners of Hyatt hotels are
named as additional insureds under these policies; such
insurance shall be primary to and not contributory with these
entities' and persons' own insurance."
11.3. An interface with each Hotel's PMS shall be completed by MagiNet and
GDG during installation of the System. A front-desk personal computer
and printer will be included as a part of the System for printing
charges for each guest purchase or rental in case such interface
fails at any time. MagiNet and GDG will ensure that the System will
fully interface and integrate with the PMS. As a part of such
integration, guest usage charges shall be automatically posted to
each individual guest's bill, counts of access shall be available to
the Hotel and centrally consolidated for all Hotels, and other
reporting will be permitted. Each Hotel will cooperate with MagiNet
and GDG for the purpose of successfully implementing the interface,
and shall undertake its best efforts to insure cooperation between
MagiNet and GDG and each PMS software vendor used by the Hotel. All
interface protocol installation or maintenance charges asserted by
the PMS software vendor and agreed upon in advance by the Hotel will
be paid for by each Hotel.
11.4. Each Hotel will provide such access as may be reasonably requested by
authorized personnel to enable complete installation of the System in
the Hotel, including without limitation providing all Hotel
facilities set forth in Exhibit A within a reasonable time to permit
complete installation. Each Hotel will make reasonable efforts to
provide sufficient access to guest rooms for the purpose of
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equipment installation so that such installation is performed with a
minimum of delay. During the installation process, each Hotel will
provide complimentary or discounted rooms for out of town members of
the installation team consistent with its practices for other
vendors.
11.5. Appropriate fully qualified personnel of MagiNet and GDG shall
perform MagiNet's and GDG's obligations hereunder in an efficient,
courteous, effective and timely manner and all such personnel shall
be bonded, trained and supervised in accordance with appropriate
hospitality industry practices consistent with local practice and
custom. All actions of any person acting for or on behalf of MagiNet
and GDG shall be subject to the same rules and regulations as are
applicable to Hotel staff. All such persons shall wear
identification badges and shall be dressed in a proper fashion.
11.6. Upon completion of the installation, MagiNet and GDG will test and
ensure that the System in each Hotel, and in all Rooms is fully
functional without material defects. Upon the successful conclusion
of such testing, MagiNet and GDG will each deliver to the Hotel and
the Hyatt Parties a written Certification (the "Certification") that
the System is fully functional and without material defects and
meets all Technical Requirements. Such Certifications will be
attached to the Individual Agreement and added to this Agreement as
exhibits.
11.7. MagiNet shall visit each Hotel and shall train all employees deemed
by a Hotel to be appropriate in the use of the System at
installation, as specified in Section 23.3.
11.8. Each Hotel will begin the process of billing guests for and
generating revenue from the Content no later than the date of the
Certification.
11.9. Each Hotel shall provide access to its MATV. MagiNet shall be
responsible for all work required to and all costs incurred in
upgrading MATVs as required for proper operation of the System,
except that improvements required for in-wall cable and its
installation in excess of [***] shall be paid by the Hotels. If
these costs exceed [***] and MagiNet elects not to pay for such
excess, then the Movie commission rate payable to the Hyatt Parties
and/or the Hotels for the Movies shown at those Hotels shall be
increased by [***] for a period of three years. Nothing herein shall
be deemed to allow or require either the Hyatt Parties or any Hotel
to submit any records beyond those showing the actual costs of the
purchase and installation.
11.10. The installation of the System and upgrading of MATVs shall not
degrade MATVs, or impair the ordinary reception of broadcast
programs or other services on the MATV. Any MATV hardware and
equipment owned by Hotel which has been disconnected as a result of
the installation will be taken to Hotel designated storage locations
by the installation personnel.
11.11. Hyatt Parties shall exercise best efforts to ensure that new Hotels
to be added hereunder shall be constructed with MATV which comports
with the Technical
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the securities and exchange commission. Omitted
portions have been filed separately with the Commission.
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Requirements.
12. MAINTENANCE
-----------
12.1. MagiNet will promptly provide all maintenance, repairs and
replacement of all software and hardware and other equipment
necessary to ensure proper operation of the System and the MATV in
each Hotel, including satisfactory signal quality and shall ensure
that a qualified person is available on a twenty-four (24) hour
basis to receive service requests. GDG will provide backup support
to MagiNet as necessary to ensure proper maintenance, repair and
replacement occurs. Such maintenance and technical assistance will
be provided free of charge, unless the maintenance is occasioned by
a breach by Hotel of any of its obligations as set forth in the
Individual Agreement, or by unauthorized use, access, theft,
negligence or damage caused by Hotel staff or third parties not
under contract to MagiNet or GDG. Hotels shall be trained so that
they can undertake routine maintenance as agreed upon by the Hotel
and MagiNet. MagiNet shall not have any obligations under this
paragraph for maintenance of hardware which the Hotel has contracted
to other parties.
12.2. Each Hotel will, at the Hotel's expense, notify a person designated
by MagiNet by telephone or by fax of any failure or degradation of
any part of the System anywhere within the Hotel, including in any
Room.
12.3. The Hotel will notify MagiNet as soon as is reasonably possible and
upon Hotel's actual notice of any unauthorized use, access, theft,
damage or malfunction of or to the System.
12.4. Each Hotel will allow authorized personnel of MagiNet and GDG to
have escorted access to the System at reasonable times in order to
conduct routine maintenance, to observe and to monitor the System,
to ensure suitable operating conditions, to implement improvements
in the System, to conduct repairs, and to otherwise carry out
MagiNet's and GDG's obligations set out in this Agreement or the
Individual Agreement.
12.5. In the event that any malfunction, nonconformity or other defect in
the System is believed to exist by Hotel or the Hyatt Parties, and
notice of such defect is given, MagiNet shall promptly undertake
their best efforts to have the defect corrected and in no event
shall there be more than a four (4) hour delay in MagiNet's response
and all repairs shall be made as quickly as possible. If Hotel does
not provide prompt access to the System to correct System failures
once MagiNet has been notified by Hotel of such System defects,
MagiNet will not be liable for any delays so incurred.
12.6. Any repairs or replacements to any equipment supplied by MagiNet
made necessary by any negligent or willful act by Hotel or any of
its guests, employees, contractors, servants, and agents, or force
majeure events, will be undertaken by MagiNet at Hotel's expense.
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12.7. Hotels shall not permit any person to tamper with or attempt to make
repairs to any equipment supplied by MagiNet, except for the
replacement of televisions and such other circumstances agreed upon
by the Hotels. In emergencies, Hotels may carry out repairs in
accordance with instructions given by MagiNet.
12.8. Each Hotel will be responsible for replacement of depleted batteries
and for paying for replacement infrared remote control units in the
event of theft, loss or damage in excess of twenty (20) units per
year. Initial replacement cost is as set forth on Exhibit D, plus
shipping, duties and taxes, and is subject to change upon written
notice from MagiNet to Hotel, with an effective date at least thirty
(30) days in advance of a change, in accordance with commercially
reasonable and customary practices.
13. MOVIES
------
13.1. It is understood and agreed that, except as otherwise provided
below, MagiNet shall have absolute control and discretion in the
selection of the movies it contracts for with the movie studios or
their distributors and provides to Hotels (the "Movies").
13.2. MagiNet shall provide a method whereby a guest will be able to
electronically restrict persons from viewing any adult selections
being offered in a Room.
13.3. When available from producing studios, the Content offered by
MagiNet shall include first run Movies offered to Hotels that shall
be no less current and offer no less variety of first run and other
titles than those available at competing hotels in the relevant
country. MagiNet shall consult with the Hotels on a regular basis to
ensure the provision of a selection of titles properly suited to
each Hotel's guest profile. Hotels and the Hyatt Parties may review
the movies and other video materials being offered by MagiNet, and
may object to Movies they feel violate the sensitivities of the
guests at a particular Hotel, and any unresolved disputes will be
adjudicated by the Advisory Board, pending which resolution the
objectionable Movies shall not be offered at the Hotel.
13.4. MagiNet will be solely responsible for any royalty payable to Movie
suppliers and any license fees for Movies made available on the
System.
13.5. Each Hotel will be responsible for ensuring that access to the
room(s) in which the central storage and transmission equipment for
the System is located is restricted to persons accompanied by
persons authorized by MagiNet to be present there except in cases of
emergency. MagiNet shall authorize a sufficient number of persons
employed by the Hotel for such purpose. Hotels will not authorize
copying of any Movies and will undertake their best efforts to
ensure that the Movies are exhibited in the Rooms only, and not in
the public rooms and public areas (including lobbies, hallways,
restaurants, bars, meeting rooms, etc.) of the Hotels. The Movies
will not be exhibited other than in accordance with this Agreement.
Each Hotel will use reasonable efforts to insure that only
registered guests of the Hotel and their invitees may view the
Movies.
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November 15, 1995
13.6. Cassettes and other media that contain the Movies ("Cassettes") will
be kept in a secure and locked area. Hotels will prevent
unauthorized access to and use, exhibition or viewing of any
Cassette by any person other than as set forth herein. Hotels will
not permit any person to duplicate or make alterations of any kind
to Cassettes. Hotels will promptly report to MagiNet any
unauthorized use of the Cassettes as soon as a Hotel becomes aware
of any such use. If a Hotel has videocassette recorders installed in
the Rooms, the Hotel shall agree that MagiNet may, where required to
do so as a result of its licensing agreements, as directed by the
Hotel, either (i) disable the "record" function in such a way that
does not permanently damage the videocassette equipment, but only to
the extent required to comply with such restrictions, or (ii)
disable the Movie function for such Rooms.
13.7. MagiNet shall be responsible to ensure that any of the transmissions
on the System controlled by it do not violate any applicable laws,
including those of the country in which each Hotel is located,
including specifically any laws relating to copyright, pornography,
and censorship of information or materials.
14. NEW TECHNOLOGIES
----------------
14.1. MagiNet and GDG shall at all times offer to the Hyatt Parties and
each Hotel the most advanced guest video services and features (and
associated technologies) either of these Parties or its competitors
offers to any other hotel.
14.2. MagiNet and GDG shall provide the Hyatt Parties with written notice
of any new guest video services and features (and associated
technologies) within thirty (30) days of the party's first knowledge
of such development(s).
14.3. The Parties agree that the Advisory Board will periodically, and at
least quarterly hold a meeting to review the guest video services
and features (and associated technologies) currently available to
hotel chains and hotels competitive with the Hotels and the services
and features (and associated technologies) which may become
available in the industry, whether from MagiNet, GDG or otherwise.
14.4. Should Hyatt determine that it is commercially necessary in order to
maintain its competitive position in the marketplace for one or more
services or features (and associated technologies), or a more
advanced version of existing services or features (and associated
technologies), to be added to the System, then GDG and/or MagiNet
shall within nine (9) months of written notice from the Hyatt
Parties of such determination (which shall be six (6) months in
cases where such service or feature and associated technology is in
use in the marketplace), implement the service or feature and
associated technology in all future Hotel installations and in any
Hotels then subject to Individual Agreements. The failure of MagiNet
or GDG to comply with this provision shall be a default under this
Agreement and shall be subject to the remedies set forth in section
26.3. hereof. The failure of MagiNet and/or GDG to comply with this
provision shall also permit Hyatt and or Hotels to obtain from a
third party those services
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November 15, 1995
or features (and associated technologies) not provided by MagiNet or
GDG, notwithstanding the exclusivity provisions of section 4.3.
hereof.
14.5. Should MagiNet or GDG add to the System a service or feature (and
associated technology) requested by Hyatt or otherwise, such service
or feature (and associated technology) will be implemented in such a
way as not to prevent Hyatt from providing consistent guest services
throughout its Hotels. The failure of MagiNet and GDG to comply with
this provision shall also permit Hyatt and/or Hotel to obtain any
assistance from a third party necessary to provide such consistent
service, notwithstanding the exclusivity provisions of section 4.3.
hereof.
15. HOTEL FEES
----------
15.1. Each Hotel will charge hotel guests for access to Movies and other
pay per view or pay for service Content for which charges are
assessed (the "Rental Fees"). The amount to be charged for Movies
shall be set by MagiNet in consultation with and approved by each
Hotel at the time of the execution of the Individual Agreements or,
for other pay per view or pay for service Content, at the time the
Content is made available. To the extent that the Hotel and MagiNet
agree, such charges shall not commence until after a guest has been
allowed to review the selection for five (5) minutes. In addition to
the Rental Fee, each Hotel will collect from guests any taxes
applicable to such receipts, and will pay those taxes to the
appropriate government authorities.
15.2. From time to time, MagiNet may revise the Rental Fees after
consultation with Hotels. Rental Fees shall be charged which are
customary in each locale, and shall be increased annually in an
amount at least equal to the increase in the local cost of living.
MagiNet will notify each Hotel in writing of any new Rental Fee and
the effective date at least thirty (30) days in advance of a
revision.
15.3. In the event any Hotel guest disputes the amount of Rental Fees in a
situation in which Hotel personnel are otherwise unaware of any
System malfunction (herein referred to as a "Denial"), each Hotel
may in its sole discretion credit the disputed amount to the guest's
account provided it provides MagiNet's local representative with a
copy of the credit voucher showing room number, date, time of day,
and reason for the disputed charge. Hotel will use its best efforts
to limit Denials to not more than five percent (5%) of gross Rental
Fees per month from Rental Fee payments otherwise due for Denials
actually credited to guests. MagiNet will provide training and/or
materials to assist Hotels in these efforts, and the Advisory Board
will provide suitable guidelines to achieve this objective.
15.4. The System VAR generate an accurate record (the "Access Record") of
the access to the System by any guests, including a record of the
access charges for each individual guest's bill or Room account, the
types of access made, and any other reasonably recordable
information that may be requested. The Access Record will not retain
the names of guests. MagiNet and GDG will be responsible at
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November 15, 1995
their own cost for programming the System to enable it to provide
the aforesaid data. The Access Record for each Hotel will be held in
confidence by the personnel of each Hotel. MagiNet and the Hyatt
Parties may review and use the Access Record for such purposes as
they may reasonably deem appropriate. Each party will indemnify the
other against any and all claims as a result of their improper use
of such Access Record.
15.5. Hotels will submit a report (via telefax) to MagiNet on the first
day of each month which details the previous month's gross Rental
Fees and itemizes deductions for all Denials allowed. MagiNet shall
invoice the Hotels for gross Rental Fees less Denials allowed, Hotel
commissions payable under Exhibit D, and unreimbursed tax payments
("Net Rental Fees"), all based upon guest useage as reported by the
relevant PMS accounting records during each calendar month, which
information shall be accessible and reviewable during the month by
MagiNet, the Hotels and the Hyatt Parties. Hotels shall hand post
any invoices printed in hard form as a result of PMS downtime to
accurately capture those buys in PMS records. Both parties agree to
mutually and amicably resolve any variances between their respective
records of Rental Fees and Denials.
15.6. Each Hotel will pay to MagiNet or the designated subsidiary or
distributor or other designated party within a reasonable time as
established in the Individual Agreement the Net Rental Fees invoiced
by MagiNet as provided in Section 15.5. The payment transmission
will also specify the occupancy rate for the month.
15.7. Each Hotel will keep current, complete and accurate records of
occupancy rates and all Net Rental Fees and other amounts due to
MagiNet pursuant to this Agreement. Throughout the duration of this
Agreement, each Hotel's books and records pertinent to the Rental
Fees, Denials and Net Rental Fees for any month will be open to
inspection and reproduction by MagiNet and, if necessary, to an
audit by a mutually agreed upon certified public accountant as an
authorized representative of MagiNet upon reasonable advance written
notice to Hotel. No such records need to be retained beyond one
year. MagiNet's right to inspect and audit the books and records of
Hotel will not extend beyond one year from the expiration of its
Individual Agreement. If any audit by MagiNet discloses any non-
payment or underpayment of any amount payable to MagiNet, the
audited Hotel will immediately pay to MagiNet any deficiency, plus
the interest charges established in the Individual Agreement. If the
deficiency is in excess of fifteen percent (15%) of the actual
amount payable to MagiNet for the period for which the deficiency
occurred, the audited Hotel will reimburse MagiNet for all costs
incurred by MagiNet in conducting the audit.
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November 15, 1995
16. THIRD PARTY CONTENT
-------------------
16.1. The Parties intend to market advertising and merchandising system
capacity for the System to third parties. All such Content, apart
from that defined as Hyatt Content shall be known as "Third Party
Content". GDG, the Hyatt Parties and MagiNet may solicit and enter
into agreements to provide third parties with space for advertising
and merchandising through the System for all Hotels.
16.2. A "Key Account" is a third party advertiser or merchandiser that is
specifically reserved to Hyatt Parties, or which falls within an
identified category of entities and persons about whom no Content is
to be included on the System, or who are otherwise not appropriate
for the System, all of which is to be determined at the Hyatt
Parties' sole discretion. Such Key Accounts will be identified by
the Advisory Board for a decision by the Hyatt Parties.
16.3. The Parties shall develop guidelines for the marketing of
advertising and merchandising system capacity for the System through
the Advisory Board. The Hyatt Parties shall have exclusive right to
accept or reject any specific Third Party Content, and to control
how and who makes any contact with a prospective marketer of
products or services. Each prospective customer shall be identified
prior to any approach being made by either MagiNet or GDG by
providing to the Advisory Board: (i) the name of such customer, (ii)
the name of the contact person at such customer, (iii) the
individual unit for which the contact person has buying authority,
and (iv) if applicable, an indication that such customer constitutes
a Key Account, or that a determination with respect to Key Account
status is pending.
16.4. GDG and its affiliates will offer to provide the production services
for Hyatt Content and for Third Party Content but the Hyatt Parties
and third parties are not obligated to use GDG's services. Any
production services provided to third parties shall be on
commercially reasonable terms to be mutually agreed upon between GDG
and such third party. Production services provided to the Hyatt
Parties shall be for the lowest fees offered to other customers of
similar services.
16.5. Each party shall fully cooperate with each other party hereto, and
any other person or entity involved in creating Third Party Content,
in providing format information useful in the production of Third
Party Content and in implementing any technical interfaces necessary
to enable display of Third Party Content on the System.
16.6. For any Third Party Content utilizing the System at a Hotel, the
Hyatt Parties and the Hotels shall be entitled to retain [***] and
GDG and MagiNet shall be entitled to retain [***] of Net Content
Revenues actually paid to one of the Parties and the Hotels hereto
("Content Commission"). The precise methods by which such payments
are to be made, and the calculations of appropriate expenses to be
charged for soliciting and obtaining Third Party Content prior to
any distribution to the other parties, shall
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the securities and exchange commission, Omitted
portions have been filed separately with the Commission.
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November 15, 1995
be determined by the Advisory Board.
16.7. The Parties agree to make and maintain complete books, records and
accounts regarding sales of and expenses relating to Third Party
Content. Each of the Hyatt Parties, GDG and MagiNet shall have the
right to examine such books, records and accounts during the other
party's normal business hours once annually to verify the reports on
Content Commission payments due. If any such examination discloses a
shortfall or overpayment, the appropriate party shall promptly pay
the amount of such shortfall or refund such overpayment.
16.8. "Net Content Revenue" shall mean all revenues or other consideration
received by any of the Parties and the Hotels from advertisers,
merchandisers, hotel guests and others from the transmission of
Third Party Content over the System, less allowable Denials,
applicable unreimbursed tax payments, and any production costs,
development costs, marketing costs or other expenditures which have
been approved for reimbursement by the Advisory Board.
17. INTERACTIVE PRODUCTS AND SERVICES
---------------------------------
17.1. The Parties intend to develop and otherwise obtain interactive guest
video products and services including games ("Interactive
Services").
17.2. The Parties shall develop and otherwise solicit and obtain
Interactive Services for the System through the Advisory Board. The
Hyatt Parties shall have exclusive right to accept or reject any
specific Interactive Services.
17.3. GDG and its affiliates will offer to provide the production services
for Hyatt interactive Services and for Interactive Services but the
Hyatt Parties and third parties are not obligated to use GDG's
services. Any production services provided to third parties shall be
on commercially reasonable terms to be mutually agreed upon between
GDG and such third party. Production services provided to the Hyatt
Parties shall be for the lowest fees offered to other customers of
similar services.
17.4. Each party shall fully cooperate with each other party hereto, and
any other person or entity involved in creating Interactive
Services, in providing format information useful in the production
of Interactive Services and in implementing any technical interfaces
necessary to enable display of Interactive Services on the System.
17.5. For any Interactive Services utilizing the System at a Hotel, the
Hyatt Parties and the Hotels shall be entitled to retain [***] and
GDG and MagiNet shall be entitled to retain [***] of Net Interactive
Services Revenues actually paid to one of the Parties and the Hotels
hereto ("Interactive Commission"). The precise methods by which such
payments are to be made, and the calculations of appropriate
expenses to be charged for soliciting and obtaining and developing
Interactive Services prior to any distribution to the other parties,
shall be determined by the Advisory Board.
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the securities and exchange commission. Omitted
portions have been filed separately with the Commission.
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November 15, 1995
17.6. The Parties agree to make and maintain complete books, records and
accounts regarding sales of and expenses relating to Interactive
Services. Each of the Hyatt Parties, GDG and MagiNet shall have the
right to examine such books, records and accounts during the other
party's normal business hours once annually to verify the reports on
Interactive Commission payments due. If any such examination
discloses a shortfall or overpayment, the appropriate party shall
promptly pay the amount of such shortfall or refund such
overpayment.
17.7. "Net Interactive Services Revenues" shall mean all revenues or other
consideration received by any of the Parties and the Hotels from
interactive services providers, hotel guests and others from the
provision of Interactive Services over the System, less allowable
denials, applicable unreimbursed tax payments, and any production
costs, development costs, marketing costs or other expenditures
which have been approved for reimbursement by the Advisory Board.
18. REPRESENTATIONS AND WARRANTIES OF HOTELS
----------------------------------------
18.1. Each Hotel shall represent and warrant as follows with MagiNet that
throughout the duration of its Individual Agreement:
18.1.1. The Hotel warrants and represents that it has full legal
power and authority to enter into the Individual Agreement
and to perform all of is obligations thereunder. The Hotel
shall further warrant and represent that all necessary
corporate action has been taken to authorize it to enter
into the Individual Agreement and perform its obligations
thereunder.
18.1.2. The Hotel will comply, and will ensure that performance of
its obligations under the Individual Agreement complies,
with all applicable laws, ordinances, rules, regulations,
orders, licenses, permits or other requirements now or
hereafter in effect, of any governmental authority. Without
limiting the generality of the foregoing, to the extent any
filing with, or any license, approval or other agreement
of, any applicable authority is required for performance of
any of Hotel's obligations, Hotel will file the appropriate
documents and will maintain such documents on file, which
MagiNet may inspect upon demand.
19. REPRESENTATIONS AND WARRANTIES OF PARTIES
-----------------------------------------
19.1. Each of the Hyatt Parties, MagiNet and GDG represent and warrant to
each other party on a continuing basis that:
19.1.1. It has full legal power and authority to enter into this
Agreement and to perform all of its obligations hereunder
and all necessary corporate action has been taken to
authorize it to enter into this Agreement and perform its
obligations hereunder.
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November 15, 1995
19.1.2. It will comply, and will ensure that performance of its
obligations hereunder complies, with all applicable laws,
ordinances, rules, regulations, orders, licenses, permits
or other requirements now or hereafter in effect, of any
governmental authority.
19.2. Each of MagiNet and GDG separately represents and warrants to the
Hyatt Parties on a continuing basis that:
19.2.1. The GDG Technology was developed, and is owned or properly
licensed, exclusively by GDG, and will be owned or licensed
exclusively by GDG as long as the Master Agreement is in
effect, except for licenses granted to MagiNet and other
licensees, or except as permitted under Section 30.3. No
person other than MagiNet, GDG or GDG's licensees or GDG's
licensors possesses any rights to any technology that has
been or would otherwise be considered GDG Technology, nor
will have any such rights as long as the Master Agreement
is in effect.
19.2.2. The publication or dissemination over the System of Content
other than Hyatt Content which is supplied by MagiNet or
GDG under this Agreement will not infringe any copyright or
other intellectual property rights of any person and the
Hyatt Parties will not be obliged to pay as a result of the
operation of the System under this Agreement any license
fees, royalties or other payments, nor will Hotels be
obligated to make such payments over and above the Rental
Fees payable by Hotels to MagiNet.
19.2.3. The value received under this Master Agreement is at least
equivalent to the best or better value provided to any
similar customer under similar terms and conditions.
19.2.4. The System and MATVs and all portions thereof shall be free
of material defects and operate in all material respects in
conformance with the Technical Requirements in Exhibit A.
19.2.5. MagiNet and/or GDG have full ownership or authority to
provide all hardware, software, transmissions and services
contemplated by this Agreement.
19.2.6. MagiNet has or can obtain all necessary licenses,
government approvals, and meet all other technical
standards and legal requirements in order to provide the
hardware, software, transmissions and services contemplated
by this Agreement.
19.2.7. MagiNet and GDG have not and will not place any
encumbrances on the software and hardware being provided
pursuant to this Agreement, except in connection with an
assignment permitted under Section 30.3.
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November 15, 1995
19.2.8. MagiNet and GDG have full approval and support from their
related persons and entities so that MagiNet and GDG will
obtain the full cooperation of all necessary related
parties and contracted third parties to carry out the tasks
contemplated in this Agreement.
19.2.9. There are no existing contracts to which either MagiNet or
GDG, or any party related thereto, is a party that will be
in conflict with this Agreement.
20. CONFIDENTIAL INFORMATION
------------------------
20.1. The Parties recognize that they may come into contact with sensitive
business and proprietary information regarding each other and third
parties. By reason of certain provisions in the Agreement, the
Parties are required to provide each other with access to such
information, including information regarding software operation and
Hotel customer information.
20.2. The Parties agree to take such steps as are reasonably necessary in
order to protect Confidential Information from disclosure. Such
actions shall include (1) providing the information to personnel on
a need-to-know basis, and (2) the retention of all non-public
information regarding software on machines and in a repository to
which the general public does not have access.
20.3. The Packs will make reasonable efforts to identify the categories of
information considered potentially confidential. The identification
of such information is not deemed to be an admission by either party
that such information is in fact confidential.
20.4. The Parties shall make a reasonable effort to identify all
confidential information by marking the information as
"Confidential." However, failure to mark information "Confidential"
shall not preclude any party from asserting that the information is
confidential. All confidential information of a party shall be
returned to it upon termination of this Agreement.
20.5. Breach of confidentiality obligations shall permit the other party
to seek relief in the first instance before any court of competent
jurisdiction for the further protection of such information. This
provision shall not affect the requirement that the Parties engage
in arbitration of any dispute, and any court action taken shall be
considered in aid of arbitration and shall terminate upon the
designation of an arbitrator who may change any ruling made by a
court in this connection.
20.6. All information pertaining to specific guests, groups of guests or
all guests who use Hotels shall be treated as confidential.
21. INDEMNIFICATION; GUARANTY
-------------------------
21.1. (a) MagiNet agrees, at its own expense, to defend or at its option
to settle, any claim, suit or proceeding brought against Hyatt
Parties or Hotels including all
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November 15, 1995
affiliated companies of the foregoing entities and their respective
officers, directors, employees and agents, for infringement of any
third party's copyright, patents, or other Intellectual Property
rights arising from Hyatt Parties' or Hotels use of the System as
permitted in this Agreement, and to indemnify the foregoing persons
and entities against any court awarded damages and costs (including
reasonable attorneys' fees) for such infringement. MagiNet shall be
relieved of the foregoing obligations unless Hyatt Parties or the
applicable Hotel notifies MagiNet promptly in writing of such claim,
suit or proceeding and gives MagiNet authority to proceed as
contemplated herein, and, at MagiNet's expense (except for the value
of the time of Hyatt Parties or Hotel employees), gives MagiNet
proper and full information and reasonable assistance to settle
and/or defend any such claim, suite or proceeding. MagiNet shall not
be liable for any costs or expenses incurred without its prior
written authorization.
(b) In the event that the System is held, or in MagiNet's reasonable
opinion may be held, to constitute such an infringement, MagiNet at
its option and expense, may do one or more of the following: (i)
obtain for Hyatt Parties or Hotels, as applicable, the right to
continue to use and distribute the infringing material as
contemplated herein, (ii) modify such infringing material so that it
becomes noninfringing, but without materially altering the
functionality of such material, and/or (iii) replace the infringing
material with functionally equivalent noninfringing products.
(c) Notwithstanding the provisions of clauses (a) and (b) above,
MagiNet assumes no liability for infringement claims arising from
(i) Content not developed by MagiNet, (ii) the combination of the
System with other products not provided by MagiNet if such
infringement would not have occurred but for such combination, (iii)
the modification of the System unless such modification was made or
authorized by MagiNet, when such infringement would not have
occurred but for such modifications, or (iv) specifications,
materials, products or Content provided solely by Hyatt Parties,
Hotels or GDG to MagiNet hereunder.
(d) The foregoing provisions of this Section 21.1 state the entire
liability and obligation of MagiNet and the exclusive remedy of
Hyatt Parties or Hotels with respect to any alleged or actual
infringement of patents, copyrights, trade secrets, or other
Intellectual Property or proprietary rights by the System.
21.2. (a) GDG agrees, at its own expense, to defend or at its option to
settle, any claim, suit or proceeding brought against Hyatt Parties
or Hotels including all affiliated companies of the foregoing
entities and their respective officers, directors employees and
agents, for infringement of any third party's copyright, patents or
other Intellectual Property rights arising from Hyatt Parties' or
Hotels use of the GDG Technology as permitted in this Agreement, and
to indemnify the foregoing persons and entities against any court
awarded damages and costs (including reasonable attorneys' fees) for
such infringement. GDG shall be relieved of the foregoing
obligations unless Hyatt Parties or the applicable Hotel notifies
GDG promptly in writing of such claim, suit or proceeding and gives
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November 15, 1995
GDG authority to proceed as contemplated herein, and, at GDG's
expense (except for the value of the time of Hyatt Parties or Hotel
employees), gives GDG proper and full information and reasonable
assistance to settle and/or defend any such claim, suit or
proceeding. GDG shall not be liable for any costs or expenses
incurred without its prior written authorization.
(b) In the event that any GDG Technology is held, or in GDG's
reasonable opinion may be held, ton constitute such an infringement,
GDG, at its option and expense, may do one or more of the following:
(i) obtain for Hyatt Parties or Hotels, as applicable, the right to
continue to use and distribute the infringing material as
contemplated herein, (ii) modify such infringing material so that it
becomes non-infringing, but without materially altering the
functionality of such material, and/or (iii) replace the infringing
material with functionally equivalent non-infringing products.
(c) Notwithstanding the provisions of clauses (a) and (b) above, GDG
assumes no liability for infringement claims arising from (i)
combination of the GDG Technology with other products not provided
by GDG if such infringement would not have occurred but for such
combination, or (ii) the modification of such GDG Technology unless
such modification was made or authorized by GDG, when such
infringement would not have occurred but for such modifications, or
(iii) specifications, materials or products provided solely by Hyatt
Parties, Hotels or MagiNet to GDG hereunder.
(d) The foregoing provisions of this Section 21.2 state the entire
liability and obligation of GDG and the exclusive remedy of Hyatt
Parties or Hotels with respect to any alleged or actual infringement
of patents, copyrights, trade secrets, or other Intellectual
Property or proprietary rights by the GDG Technology.
21.3. MagiNet Corporation, the sole shareholder of MagiNet, shall provide
a full and completely binding guarantee of MagiNet's performance
hereunder together with a formal representation and warranty letter
acceptable to the Hyatt Parties respecting its license rights to the
GDG Technology and related source code (collectively, the "MagiNet
Guarantee").
22. MARKETING AND PROMOTION.
-----------------------
22.1. Any marketing and promotion that occurs with respect to the System
in connection with the Hyatt Parties or the Hotels shall be first
approved by the Hyatt Parties or their designee.
22.2. No party is or shall act as the agent for any other party, and no
statement may be made that can be attributable to a party, or any of
its affiliated or related companies or entities, or any Hotel,
without first obtaining such entity's permission for the statement.
22.3. The Parties agree to cooperate with each other to promote the use of
the System.
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November 15, 1995
22.4. Except as required by MagiNet and GDG licensing agreements with
others, nothing herein may be used by MagiNet and GDG to limit the
Hotels or the Hyatt Parties or any entity affiliated with the Hyatt
Parties in their promotion of any Content whatsoever, which
promotion shall be entirely within the Hyatt Parties and the Hotels'
reasonable discretion.
23. TRAINING AND CONSULTATION
-------------------------
23.1. MagiNet shall provide in each country at least one telephone number
that can be called to obtain immediate assistance on a twenty-four
(24) hour basis.
23.2. MagiNet shall designate at least one entity within each country that
shall be responsible for maintenance of the System, which
maintenance shall include periodic examinations (as advised by
remote monitoring procedures called for in Exhibit A) of the
machines used to ensure that they are all in proper working
condition.
23.3. To enable each Hotel to generate suitable promotional material
related to the use of the System and to enable personnel of each
Hotel to advise and encourage guests regarding their use of the
System, MagiNet will provide a one-time training course on the use
and operation of the System for as many employees as each Hotel
deems desirable at no charge. GDG and MagiNet shall also, at no
charge, train up to ten (10) individuals from the Hyatt Parties once
per year in the use and operation of the System, and one person with
each of the Hyatt Parties in the use of the off-site monitoring
technology for the System. Such training shall take place within
sixty (60) days of the first installation done under this Agreement.
23.4. Hotels will provide accommodations for MagiNet training personnel at
the best rate offered to any customer, and shall offer discounted or
complimentary rooms if consistent with their policies. In addition,
MagiNet and GDG personnel will be reasonably available at no charge
for telephone consultation to personnel of Hotels to provide further
assistance regarding use and operation of the Systems.
24. ACCOMMODATIONS
--------------
24.1. Each Hotel shall agree to provide to visiting MagiNet and GDG
employees present for Hotel business during the term of the
Individual Agreement accommodations at the best rate offered to any
customer and shall offer discounted or complimentary rooms if
consistent with their policies.
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November 15, 1995
25. PIRACY PROTECTION
-----------------
25.1. Each Hotel shall be required insofar as is commercially reasonable
to notify MagiNet of any video recording and/or playback devices
that are provided by the Hotel to its guests.
26. SUSPENSION AND DEFAULT
----------------------
26.1. It shall be an event of default if (a) any party or designated party
acting on their behalf (i) breaches performance of any material
term, condition, representation or warranty contained in this
Agreement or any Individual Agreement and/or any Related Hyatt
Agreement, and fails to cure, correct or remedy such breach or
default within sixty (60) days after receipt of a written notice
thereof, (ii) is adjudicated bankrupt or petitions for relief under
any bankruptcy, reorganization receivership, liquidation, compromise
arrangement or moratorium statute, (iii) makes an assignment for the
benefit of its creditors, or (iv) petitions for the appointment of a
receiver, liquidator, trustee or custodian for all or part of its
assets; (b) all or any portion of the MagiNet Guarantees are revoked
or terminated or otherwise fail to be of continuing force and
effect; or (c) if MagiNet Corporation is adjudicated bankrupt or
petitions for relief from or makes an assignment in favor of its
creditors.
26.2. Some portion or all of this Agreement may be suspended by any entity
signatory to or bound by this Agreement that is a part of the Hyatt
Parties upon sending written notice of the destruction or renovation
of Hotels, or the occurrence of any force majeure events as set
forth in section 27. Any Individual Agreement may be suspended or
terminated in part or in whole, at the Hyatt Parties' or each
Hotel's sole option, due to any closure of any portion of the
Hotel(s) involved, temporary cessation of business, termination of
any other agreement between the Hotel(s) and the Hyatt Parties, and
any force majeure events set forth in section 27 below. For any
suspension that extends beyond ninety (90) days, MagiNet may, at its
option, remove the System until the cause of the suspension is
resolved.
26.3. If any of the events of default set out in section 26.1 above occur,
the harmed party not in default may exercise any or all of the
following remedies: (i) cancel and/or terminate any and all
Individual Agreements, (ii) cancel and/or terminate the Master
Agreement, (iii) undertake either steps (i) and/or (ii) while
retaining the System in place (subject to continuance of all other
material terms and conditions herein and until a replacement vendor
can be selected in an orderly transition to that vendor's
technology), (iv) obtain injunctive and other equitable
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November 15, 1995
relief, and (v) obtain such damages and other rights and remedies as
the party not in default may have at law, provided that this
-------------
provision shall not allow MagiNet or GDG to exercise such remedies
against the Hyatt Parties or the Hotels in the event of a default by
either MagiNet or GDG. The remaining nonbreaching Parties shall
negotiate in good faith to determine how to proceed absent the
terminated party.
27. FORCE MAJEURE
-------------
27.1. Where a party is unable, wholly or in part, by reason of Force
Majeure, to carry out any obligations under this Agreement and that
party: (i) gives the affected party prompt notice of that Force
Majeure with reasonably full particulars and, insofar as known, the
probable extent to which it will be unable to perform or be delayed
in performing that obligation; and (ii) uses all reasonable efforts
to remove that Force Majeure as quickly as possible; then that
obligation is suspended insofar as it is affected by the continuance
of that Force Majeure provided that this section will not operate to
relieve any party of an obligation to pay money.
27.2. For the purposes of this Agreement, "Force Majeure" means: (i) an
act of God, strike, lockout or other interference, (ii) war declared
or undeclared, blockade, disturbance, lightning, fire, earthquake,
storm, flood, or explosion, (iii) governmental or quasi-governmental
restraint, expropriation, prohibition, intervention, direction or
embargo (iv) unavailability or delay in availability of equipment or
transport not due to any action or inaction on behalf of the
affected party, (v) unavailability or delay in obtaining
governmental or quasigovernmental approvals, consents, permits,
licenses, authorities or allocations and (vi) any other cause
whether of the kind specifically enumerated in this section or
otherwise which is not reasonably within the control of the party
affected; and "all reasonable efforts" does not require the
settlement of strikes, lockouts or other, labor disputes, or claims
or demands by any government or quasi-government authority on terms
contrary to the reasonable business judgment of the party affected.
27.3. In the event any Force Majeure prevents performance under this
Agreement by either party which continues in existence for more than
thirty (30) days, the Parties will meet in good faith to discuss the
situation and to make all reasonable efforts to achieve a mutually
satisfactory resolution of the problem so that Force Majeure no
longer prevents performance under this Agreement, provided that the
Hyatt Parties shall have the option to terminate any Individual
Agreement for any Force Majeure event that lasts longer than one
hundred and eighty (180) days, and to terminate the Master Agreement
if such extended Force Majeure prevents performance at more than 25%
of the Hotels.
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November 15, 1995
27.4. In the event performance by any Hotel is prevented due to Force
Majeure for a period of one hundred and twenty (120) days or more
during any twelve (12) month period, MagiNet will be entitled to
remove the System from such Hotel until performance is no longer
prevented by Force Majeure, or earlier as permitted under Section
26.2.
28. DISPUTES
--------
28.1. The Parties hereby agree that any and all disputes arising under or
in any way connected or related to this Agreement, and any subject
matters covered by this Agreement, including the Intellectual
Property, shall be finally adjudicated and resolved through final
and binding arbitration.
28.2. The Parties shall provide each other with written notice of any
dispute that arises and is deemed to be one that one or more Parties
wishes to have resolved through arbitration.
28.3. The Parties shall wait for fifteen days subsequent to receipt of
notice to take any action, during which time the Parties shall meet
together in an effort to resolve the dispute.
28.4. Should no resolution be achieved within the fifteen day waiting
period, then either party may submit the matter to the American
Arbitration Association ("AAA") for arbitration in accordance with
the rules of commercial arbitration then in effect.
28.5. The arbitration shall be tried in Chicago, Illinois, before a panel
of three arbitrators, who shall be selected in accordance with the
AAA Commercial Rules if not picked by agreement of the Parties
within the fifteen days discussed above.
28.6. The arbitrators shall first decide if there exists a bona fide
dispute between the parties capable of resolution in arbitration.
28.7. Interim court relief may be sought at any time by any party, and any
request for interim relief shall not be considered a bar to
arbitration, nor limit the power of the arbitrator to change any
interim relief awarded during the course of the arbitration.
29. RECOGNITION OF AGENCY.
---------------------
29.1. MagiNet and GDG recognize that the Hyatt Parties act as agents for
the owners of the Hotels, and that any action that is to be
undertaken by the Hyatt Parties is one that is on behalf of such
owners. MagiNet and GDG recognize and agree that the Hyatt Parties'
actions with respect to any Hotel are therefore only as agent for
such owners.
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November 15, 1995
30. GENERAL TERMS
-------------
30.1. No person has, or as a result of the transactions contemplated
hereby will have, any right or valid claim against any of the
Parties or the System for any commission, fee or other compensation
as a finder or broker, or in any similar capacity, relating to the
transactions contemplated herein.
30.2. This Agreement will be governed by the laws of the State of
California without reference to its conflict of law principles. Each
Individual Agreement shall also be governed by the laws of the State
of California except to the extent that the laws of the country in
which the Hotel is located override such governing law provision.
30.3. Except as otherwise set forth herein, the provisions hereof will be
binding upon, and will inure to the benefit of, the respective
successors and assigns of the parties hereto. Each of the Hyatt
Parties shall have the right to assign this agreement to any of its
affiliates, subsidiaries or a parent company. MagiNet shall have the
right to assign this Agreement and any Individual Agreement to a
bank or other financial institution as collateral for a loan
(provided that such institutions agree to abide by the terms of this
Agreement and the Individual Agreements) and to assign this
Agreement and any Individual Agreement to an entity acquiring all or
substantially all of MagiNets assets or voting securities.
Notwithstanding any such assignment by MagiNet, none of MagiNet's
property installed in a Hotel shall be removed therefrom prior to
the Hyatt Parties' or Hotel's uncured default or termination of this
Agreement or the Individual Agreement. GDG may assign this Agreement
to an entity acquiring all or substantially all of its assets or
voting securities.
30.4. This Agreement may be modified or amended only by a written
agreement signed by all Parties. No waiver by any party of any
breach or default hereunder will be construed as a waiver of any
precedent or subsequent breach or default.
30.5. This Agreement sets forth the entire agreement and understanding of
the Parties relating to the subject matter hereof, and merges and
supersedes all prior discussions and understanding between the
Parties related thereto, whether written or oral.
30.6. In the event that better value for the Activities contemplated
herein are offered by MagiNet or GDG to any similar hotel chain or
hotel as the Hyatt Parties and the Hotels, the Hyatt Parties and the
Hotels will be offered all the same terms and conditions, and any
less favorable payments made or receipts obtained subsequent to
their being contracted with another customer but prior to the
effective date of the change in the terms in this Master Agreement
and the Individual Agreements shall be reimbursed to or for the
Hyatt Parties and the
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November 15, 1995
Hotels. For purposes of this paragraph "value" shall mean the value
of (i) all fees, allowances and commissions, (ii) all equipment,
(iii) all software, software licenses and/or other Intellectual
Property rights, (iv) all services including installation,
maintenance, repair and replacement, and (v) all cost savings or
other benefits provided to the Hotels, their parent companies or
affiliates.
IN WITNESS WHEREOF, this Agreement is entered into by the Parties hereto this 29
day of December 1995.
MAGINET INTERNATIONAL CORP. HYATT INTERNATIONAL (EUROPE
AFRICA MIDDLE EAST) LTD.
By: /s/ Robert R. Creager By: /s/ Andre Pury, Sr.
Title: President Title: /s/ Andre Pury, Sr. V.P.
GUESTSERVE DEVELOPMENT HYATT CHAIN SERVICES LIMITED GROUP
By: /s/ Philip S. Knudsen By: /s/ David Chan
Title: Director Title: Director
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November 15, 1995
EXHIBIT A
TECHNICAL REQUIREMENTS
----------------------
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<PAGE>
EXHIBIT "A" - TECHNICAL REQUIREMENTS
This exhibit describes the technical requirements for the hardware, software,
Content, and services to be provided under this Agreement.
1.0 MINIMUM QUALITY & PERFORMANCE STANDARDS
---------------------------------------
At installation, the System, MATV, and televisions will meet the following
standards.
1.1 VIDEO QUALITY
Video images transmitted and displayed across the System, MATV, and a good
quality brand new twenty-five inch (25") television set(provided by the hotel
for quality testing) must be observed to be similar quality as the same images
when the image source is directly connected to the television set. The video
image source for quality tests shall be a full action, color movie on a new,
unused VHS tape provided by a major recording studio played back on a brand new
VHS tape player connected directly to the television with A/V connectors.
When compared to the same movie provided as part of the Content across the
System, MATV, and television set, there shall be no material degradation in
resolution, discoloration, focus, or brighten, nor multiple images (ghosting),
artifacting, or other negative differences in image quality.
1.2 AUDIO QUALITY
Audio must meet the same quality and testing standard as for video images
described above, and must be clear, undistorted, and in perfect synchrony with
the video image. In addition, audio quality shall meet or exceed the following
standards:
1. Audio Signal Level-8dBmV
2. Output Impedance 600 ohm
3 Signal to Noise Ratio (weighted in SP Mode), more than 38 dB.
4. Wow and Flutter (audio on VHS in SP mode), less than 0.2 WRMS
5. Frequency Response (Ref to 1 Khz SP mode, 100 Hz - 15000 Hz (10dB down)
6. Interactive programming shall be accompanied by CD quality audio and/or by
digitally synthesized voice software. Digitized voice is required to be 8 bit
technology or greater to conform to highest standard prevailing at time of
installation. Audio Frequency range is required to be at least 100 to 15000 Hz,
without perceivable distortion at normal listening levels (less than 1% THD).
Page 1 of 25
<PAGE>
EXHIBIT "A" TECHNICAL REQUIREMENTS
1.3 RESPONSE MINIMUM REQUIREMENTS
1. The maximum delay permitted between the guest executing a keystroke on the
remote control, and the System, MATV, and television responding, shall be
five (5) seconds for Movies or Hotel Services, unless response time is
influenced by input from 3rd party interfaces.
2. The System, MATV, and televisions must allow simultaneous access by at
least 1.5% of available rooms at any time, and the minimum number of
interactive ports shall be 4.
3. At all times, all guests shall have access to the System, MATV, and
televisions within 60 seconds of selecting or interacting with any Content.
Guests denied immediate access shall be notified of the delay by a screen
message.
4. Response delays caused by equipment or Content not under the control of
Maginet and GDG lasting longer than five(5) seconds, will trigger an
appropriate intermediate screen message. It must be possible to place
text, graphics and sound on intermediate screens for notification purposes
or for advertising.
5. The delay between a guest pressing the final key to make a video on demand
selection and the feature appearing on the screen shall not exceed IO
seconds.
6. The System, MATV, and televisions shall have imperceptible delays in
response to video game control devices controlling interactive video game
Content.
1.4 RELIABILITY
Equipment supplied under the Agreement shall have a mean time between failure of
not less than three (3) years.
1.5 MANUALS AND DOCUMENTATION
Manuals and Documentation supplied to each distributor at initial installation
shall consist of at minimum:
1. Manufacturers product documentation and written performance specifications
for each piece of equipment supplied under the Agreement.
2. Operating and Repair manuals for each component of the System, including
both hardware and software.
3. Trouble-shooting diagnostic programs and guides for each component of the
System, including both hardware and software.
Page 2 of 25
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EXHIBIT "A" TECHNICAL REQUIREMENTS
4. A simple user manual describing the integrated operation of the System in
easily understood terms (the System Manual), will be provided for each
hotel.
5. A Tool Kit manual describing the operation of the Toot Kit will be provided
to designated Hyatt Parties.
6. A detailed interface protocol manual and source code examples of interfaces
already developed for the System. Interface protocols for both connections
to external systems, and interface protocols for intra-System connections
-------- ------------------------
(interactive controls) must be provided, to designated Hyatt Parties.
1.6 SYSTEM HARDWARE REQUIREMENTS
The System hardware at initial installation shall include at minimum the
following:
1. A Pentium 90 MHz Interactive server with 32 MB RAM and 1 GB hard drive
shall be the minimum platform for the interactive server.
2. External magnetic storage and/or CDi and/or CD ROM or other system as
required to deliver Content.
3. A high speed modem connection to the System for remote diagnostic testing,
downloading of Content, etc.
4. A PC work station suitable for operation of the Graphics generator for the
exclusive use of the Hotel to update hotel related Content for use on the
System.
5. The above work station have a printer, and be connected to the System and
located at the Hotel's direction for the creation and printing of guest
charges for use of System Content in the event of failure of the PMS or
interfaces to the PMS.
6. Two-way communication protocol via MATV between Guest room Terminal and
interactive file server.
7. In room terminal, with standardized remote control and channel numbering
plan.
8. VHS tape players as required operating within the following performance
specifications:
a. Luminance Level: 1.0 +/- 30% Vp-p for machine to machine operation at
75ohm terminated composite video of 140 IRE units source
Page 3 of 25
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EXHIBIT "A" TECHNICAL REQUIREMENTS
b. Chrominance Level: 0 63 +/- 30% Vp-p for machine to machine operation
at 75ohm terminated composite video of 140 [RE units source
c. Horizontal resolution: More than 360 lines, or as required for
prevailing TV Standards
d. Frequency Response 2 Mhz - 10dB;
e. Signal to Noise Ratio (weighted) more than 43 dB in SP mode, more than
41 dB in other modes, using Luminance by Rohde & Schwartz noise meter
f. Tape transport Speed: SP mode 33.35 mm/s +/- 0. 5%
g. Rewind Speed: SP mode for 120 minute tape less than 7 min.
h. Tape load Speed: Less than 5 seconds
9. All other equipment as required to make up the complete System.
1.7 SYSTEM SOFTWARE REQUIREMENTS
The System software at initial installation shall include at minimum the
following:
1. A "Toolkit" consisting of GDG's software which when combined with
commercially available software applications operating in a windows
environment, and packaged with a set of instructions, appropriate
interfaces, help screens and telephone support, will be all that is
required for the Hyatt Parties, Hotels, and authorized third parties to
develop content from multimedia sources, and set up interactive sequences
for use on the system for generating revenue or obtaining information.
A sub-section of the Toolkit, called Graphics Generator shall be a desk top
broadcasting application offering similar features and graphics capability
as a product called Catview. The application shall be provided to hotels
not using the full Toolkit to enable them to make minor modifications to
interactive programming, and to produce basic hotel information screens
that have similar text and graphics as the interactive screens.
2. Interactive Component
This software shall enable guests to call up different screens from a
selection of screen options so that an interactve program results. This
interactive application and necessary programming will form the basis for
making video on demand selections accessing hotel services, shopping,
advertising, games and other revenue generating services defined within the
exhibit.
3. Appropriate communications software to support item 1.6.3.
Page 4 of 25
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EXHIBIT "A" TECHNICAL REQUIREMENTS
4. A statistical information application sufficient to capture, manipulate,
and report on the following System usage and performance data.
a. Number of guests denied access to selected movies, including room
number, date, time, and the duration of the denial.
b. Number of guests denied access to Hotel Services, Hyatt Interactive
Content, or Interactive Content, including the room number, date, time, and
duration of the denial.
c. Room numbers where video on demand features were viewed, and the time
and duration of viewing session.
d. Room numbers of those rooms accessing the interactive guest services,
the time they spent browsing, and details of all selections made on the
system,
e. Exception reports, the content of which is to be developed; including
records of when the system was down, when dial up connections were made,
their duration and a list of individual rooms that were out of order.
f. Guest survey results.
g. Viewing ratings of interactive content for marketing analysis purposes
by Hyatt and authorized parties using the system for such purposes. The
detailed requirements of these rating reports are to be developed, but they
shall include the number of guests viewing of each interactive content
package, the time each viewer browsed, and any sales made as a result.
1.8 MATV REQUIREMENTS
The MATV in each existing Hotel or Hotel currently under construction and where
MATV has already been installed as of date of master agreement, shall be
upgraded to meet or exceed the following specifications. MATV systems will be
provided by the Hotel to meet the following specifications in all new Hotels (as
listed in Exhibit C). All equipment shall meet type and safety approvals and
radiation requirements. as required in each country. All installations shall be
made according to national and local electrical codes. Standard for signal
strength measurement shall be a calibrated field strength meter.
The MATV shall be capable of concurrently carrying all Content over the MATV
network, and at minimum will meet the following channel capacities and broadcast
standards.
a. A minimum of 77 channels for NTSC and 60 channels for PAL/SECAM.
b. Operation in compliance with local broadcast standards (NTSC, PAL or SECAM)
and/or as required for the installed TV sets.
Page 5 of 25
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EXHIBIT "A" TECHNICAL REQUIREMENTS
1.8.1 MATV REQUIREMENTS - HEAD-END
The MATV head-end shall meet or exceed the following specifications
a. Single channel processors with AGC and aural carrier reduction will be used
to process each off-air signal. Pre-amplifiers will be used, where
necessary, to achieve an input carrier level of sufficient amplitude to be
within the range of the AGC in the channel processor.
i. The output of individual strip amplifiers, modulators, or channel
processors will be combined using a methodology which will provide a
minimum of twenty (20) dB isolation between individual carriers.
ii. Items providing less than twenty five (25) dB of isolation will not be used
in the head-end environment to combine signals.
b. A Broadband Amplifier having a band width of 5-550 MHZ, or greater, and
equipped with Sub-Split Return will be used to amplify the combined output.
The amplifier will be designed for two-way compatibility using sub-split
return. The forward direction designed for 54 to 550 MHZ or greater and
the return designed for 5 to 30 MHZ. The forward direction is to include
both gain and tilt controls.
c. UHF to VHF converters and VHF to VHF convertors will be completely solid-
state with a self-contained power supply. Input and output impedance shall
be 75ohms. The frequency of the output will be crystal controlled and will
be within .005% of the desired output frequency for both components.
d. All passive equipment shall not have less than 20dB port-to-port isolation
and shall be capable of operating in a band width of 5-550 Mhz.
e. Antennas will be selected and installed so as to produce the best picture
obtainable. Any local government permits required for antenna installation
will be obtained prior to actual installations of the antennas. Antennas
and masts will be constructed and installed so as to withstand 100 mph
winds. All Antennas used will have an adapted impedance of 75 ohms and
weather boots will be used to protect all outdoor antenna connections.
f. When antennas are providing the signal source for "off-the-air" channels.
Picture quality will be equal to or better than the picture quality
available from local cable TV sources, as appropriate or applicable. At
minimum, local VHF and UHF channels required by each hotel will be
available from the MATV. UHF channels must be converted to VHF. Closed
caption service at the TV must be provided for each of the three principal
network channels, given programming availability as provided by network
sources.
Page 6 of 25
<PAGE>
EXHIBIT "A" TECHNICAL REQUIREMENTS
g. Metal Cabinets designed for 19" rack mounted equipment will be used to
enclose the head-end active equipment. Suitable AC power outlets will be
installed in the cabinet for the equipment powering, including two
additional outlets for maintenance equipment.
h. Pads, cable, and other miscellaneous equipment will be supplied and
installed to make an operating head-end that meets all of the
specifications as outlined. All cable used in the head-end equipment rack
will be of Tri or Quad Shield design and will provide a maximum available
shielding from radiation and signal ingress or such other cable as to meet
MATV standards of performance established herein.
i. Maximum output after combining shall not exceed:
i. 45dB Maximum highest frequency
ii. 40dB Minimum lowest frequency
iii. 6dB maximum amplifier tilt.
j. Cross modulation shall be less than minus 60dB.
k. Visual carrier to spurious signal response shall be greater than 50 db.
Cross modulation shall be greater than 51 db.
l. Visual/aural carrier ratio on any channel will be 15 dBmV to 17 dBmV
m. Carrier to noise shall be no less than 41dB, 43dB optimum.
n. Visual carrier levels shall differ by no more than 12dB through the band
width (50-550 Mhz).
o. Visual carrier level stability shall vary no more than 10dB over any 24
hour period.
p. Hum modulation shall be less than 2%.
q. Second Order (spurious beats) shall be 50dB below the visual carrier.
r. Frequency response shall be N/10 + 1.
s. Adjacent channel visual carrier shall differ by no more than 3 dB.
t. Amplitude response within any single TV channel (visual carrier to aural
Carrier) Will be flat 2 dB).
Page 7 of 25
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EXHIBIT "A" TECHNICAL REQUIREMENTS
1.8.2 MATV REQUIREMENTS - CABLE PLANT
The cable plant shall meet or exceed the following specifications:
a. Frequency Response of the system (excluding amplifiers) will pass 5 Mhz to
550 Mhz. Amplitude response for this spectrum will be +-4 dB with respect
to the line represented by normal cable tilt. The system will be designed
as two-way capable, i.e. sub-split return.
b. Visual Carrier Level in each room will be no less than 2 dBmV on any single
channel of the system.
i. The maximum allowable variance between any two adjacent channels
will be 2 dBmV.
ii. The maximum allowable variance between any two non- adjacent
channels will be 12 dBmV at 550 Mhz or 3 dB per 100 Mhz of band
width.
c. Room to Room isolation will be greater than 20 dB. isolation values of all
devices separating any two given rooms will be used for the purpose of this
calculation, as well as the structural return loss of all interconnecting
cabling.
d. Visual carrier-to-noise ratio on any channel (3 MHz bandwidth) will be at
least 42 dB at any TV outlet for broadcast signal source of carrier to
noise ration better than 56 dB.
e. The visual carrier to coherent noise ratio (inter-modulation) will be
greater than 46 dB, for the same signal source as in d.
f. Reflections ingressing MATV distribution system, which may cause ghosts and
shadows within the system, will be more than 40 dB below the respective
picture carrier.
g. Taps, splitters, and other passive equipment will be of the totally
shielded type, using a sealed metal or aluminum case, so as to minimize
radiation and ingress. All connections will be "F" for NTSC, or IEC for PAL
type connectors.
i. Taps used will be designed to pass 5 MHz to 550 MHz, or greater.
ii. Splitters will be designed to pass 5 MHz to 550 MHz or greater.
iii. Where the last tap on the riser is not a terminated tap, 75 ohm
terminations will be used to terminate the end of all riser lines at
the through port output.
h. Coaxial cable shall be of 75 ohm impedance with a return loss of 20 dB
minimum from 5MHz to 550 MHz Cable construction will be solid copper or
copper-clad steel center conductor and cellular polyethylene dielectric.
Cables will be provided with two shields. The first shield shall consist
of .002 inch double aluminum coated mylar or polypropylene tape with 1/8"
overlap, bonded to the dielectric. The second shield shall be a minimum of
60% coverage braid consisting of 34 AWG aluminum or tinned copper wire.
The jacket shall be non-contaminating low temperature polyvinyl chloride
cable having an effective shielding of 67% or greater will be utilized
outside of all conduits.
Page 8 of 25
<PAGE>
EXHIBIT "A" TECHNICAL REQUIREMENTS
i. Cable sizes used in the system can be either RG-6 or RG-11. The RG-11 size
is used for longer trunk lines and the RG-6 size is used for shorter
feeder lines. Where conservation amplifiers will have their maximum full
gain derated by a minimum of three dB. Further doubling of the cascade
will result in additional gain reductions of three dB, each time the
cascade is doubled.
j. Cross modulation shall not exceed minus 57dB from any distribution
amplifier with 77 channel loading.
k. All new distribution feeder cable shall be. 500 or RG-11 cable only.
1. No distribution (feeder) line shall feed in excess 550 television sets, or
per limitations imposed on the system by segmentation.
m. All distribution (feeder) lines shall begin at the head-end and end at a
central distribution location. No riser can be fed by a distribution be.
n. All risers must originate at a central distribution location. If risers
must be extended, RG-56 cable with 90% shielding will be used from the
splice to the central distribution location.
o. All risers shall be identified to the rooms they feed.
p. All jumper cables from the wall plates to the televisions shall be
replaced as necessary with RG6 or RG-59 foam cable with ferrule type
connectors.
q. Sub-band return loss shall not exceed 40dB
1.8.3 MATV REQUIREMENTS - IN ROOM TAPS
a. For in room directional tap outlets, all signal levels shall be 5-15db
(and typically at 5dB) from 40 to 550 MHz.
b. Cross modulation shall be less than minus 57dB.
c. Carrier to noise shall be 41 dB.
d. Adjacent channel visual carrier levels shall differ by no more than 3dB.
e. Visual carrier levels shall differ by no more than 12dB through the
bandwidth (50-550 Mhz).
F. Visual carrier level stability shall vary no more than 10dB in any 24 hour
period.
Page 9 of 25
<PAGE>
EXHIBIT "A" TECHNICAL REQUIREMENTS
1.9 TELEVISION REQUIREMENTS
New Hotels (as listed in Exhibit B) will provide television sets meeting the
following specifications. Maginet and GDG will make best efforts to ensure that
the System, MATV, and television sets in existing Hotels or Hotels currently
under construction operate as though the television sets met these
specifications. Maginet and GDG will provide all required remote controls for
all Hotels.
a. 20 to 27 inch screens, at Hyatt's option.
b. "Smart Plug" compatibility to accommodate the requirements of-the
interactive system
c. Closed caption capable
d. Stereo sound
e. Channel labeling
f. Sleep timer
g. Clone programming
h. Non-volatile memory
i. 100+ channel capacity
j. Remote interface connector
k. TV'S will be capable of no few than 400 scan lines of resolution.
1. Teletext compatible
m. Multisystem where required or appropriate
n. All television sets will be provided with full function infra red remote
controls with the following minimum functions
1. Power on/off
2. Pay TV
3. Free TV
4. Hotel Services & Information
5. Interactive services
6. Channel up and channel down
Page 10 of 25
<PAGE>
EXHIBIT "A" TECHNICAL REQUIREMENTS
7. Volume up and down buttons
8. Mute button
9. Numeric Channel control keyboard
1.10 SPACE REQUIREMENTS
Maginet, GDG, the Hotels, and the Hyatt parties shall work together to
coordinate the space requirements for installations in each Hotel prior to
beginning installation work in each hotel. Each Hotel shall provide the agreed
upon space requirements.
Each Hotel shall provide at minimum, sufficient space to house the equipment and
accommodate a minimum of two people in an appropriate working environment (the
"control room"). Typical space requirements will include the following:
a. One(1), line conditioned, dedicated, 30 amp AC circuit with provisions for
6 duplex outlets (as determined by the computer rack locations).
b. Two standard 30 amp, AC circuits with provisions for 3 duplex outlets (as
determined by the work counter location).
c. The space shall have sufficient air conditioning to maintain a constant
temperature of between 68 degrees and 72 degrees fahrenheit at 40% relative
humidity.
d. The control room shall have sufficient telephone lines (both outside direct
and in-house) and telephone instruments.
e. Cable paths (ie: conduit, plenum, etc.) shall be provided from:
i. the control room to the head-end.
ii. the control room to the PMS.
iii. the control room to the PBX.
iv. the control room to the front desk.
v. if additional services are supplied, needed path must be provided,
ie: food & beverage.
Page 11 of 25
<PAGE>
EXHIBIT "A" TECHNICAL REQUIREMENTS
2.0 CONTENT
-------
At installation, the Content will meet the following standards.
2.1 LANGUAGES
Maginet and GDG shall provide Movie instructions/access, Hotel Services, and
Hyatt Interactive Content in at minimum the three(3) languages listed on Exhibit
"C" for each Hotel installation. Language requirements must be confirmed by the
hotel before final installation. All language options shall be ready for the
first installation requiring that language according to the installation dates
listed in Exhibit "C".
A guest's preferred language will be selected from a list of the available
options in the hotel property management system (PMS). Language choice will be
set by the front office clerk when a guest checks in, so that Hotel Services,
Hyatt Interactive Content and Movie selections will appear on the TV in the
guest's preferred language. On check-out, the default language shall be re-set
automatically to the default language selected by the Hotel.
2.2 FREE-TO-GUEST CONTENT
The System, MATV, and televisions shall deliver up to Twenty (20) free-to-guest
channels at the Hotels option, to include any combination of the sources listed
below. Free-to-guest channel sources shall be selected and approved by the
Hotel at Hotel's expense from provider of choice, prior to final installation
Free to guest programming shall be available at all public area and back of
house MATV points throughout the hotel GDG and Maginet shall make best efforts
to optimize signals from free-to-guest sources, and program them according to
the standard channel numbering sequence. These sources and their processing
equipment will by provided by Hotel or Hotel's third party contractor.
FREE-TO-GUEST SOURCES
a. Satellite programming
b. Local Broadcast TV
c. Local Cable TV
d. In house Video programs
e. Guest-room background Music
Access free-to-guest channels must be possible using the remote control and on
screen menus. Channel numbering shall be standardized to the extent that is
practical throughout all of the Hotels.
Free to guest programming shall include wherever possible, CNN and other
international news and sport satellite and cable programming and a
representative selection of local broadcast TV.
In house video sources include VHS playback, live camera inputs, and desk top
broadcast programming
Page 12 of 25
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EXHIBIT "A" TECHNICAL REQUIREMENTS
2.3 MOVIES
1. Quantity
The minimum number of movie selections simultaneously available from the System
at installation shall be as shown in the table below.
<TABLE>
<CAPTION>
Number of Guest- Video on Demand Scheduled Movies
rooms Movies
<S> <C> <C>
less than 250 24 3
250 TO 550 36 3
Over 551 Additional 12 for 3
each 250 rooms
</TABLE>
2. QUALITY
Minimum requirements for movie programming to be provided by Maginet at each
hotel shall be defined by the following criteria:
a. Number of copies of each title and title selections shall be established by
Maginet based on the latest movie title release window provided by the
studios for the given regions. Hyatt International and the hotels will
review these selections for quality assurance purposes. The frequency of
such reviews shall be at quarterly intervals during the first year of
operation, and as required after that. The objective will be to maximize
revenue, maintain programming and system delivery quality standards and
keep up with the competition.
b. Maginet shall update titles such that at least four (4) "blockbuster"
selections are available in every hotel. A blockbuster title is considered
to be a movie that is released within the same theatrical release window or
that immeadiatley following those movies shown on the major international
airlines. Where the above criteria cannot be met because of censorship, or
limitations imposed by the recording studios, each hotel must have at least
four (4) of the latest release fides that are available in that country at
competing international hotels, irrespective of which system they are
using.
c. Other video program content shall be such that it remains generally
equivalent to those titles offered by competing hotels, regardless of their
supplier, providing their programming is legal. Foreign language and ethnic
programming are also required, where it is offered by competing hotels
and/or where it can increase the revenue generating potential of the
system.
Page 13 of 25
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EXHIBIT "A" TECHNICAL REQUIREMENTS
2.4 HOTEL AND HYATT INTERACTIVE CONTENT
Maginet and GDG shall develop and produce a standard Hyatt User Interface
package for use by each Hotel as the basis for the Hotel Services Content
delivery in the Hotel. Each Hotel will be responsible for the development and
production of hotel specific elements of the Hyatt User Interface, and Maginett
and GDG will be responsible for the coordination and incorporation of these
hotel specific elements into the Hyatt User Interface. Hotel Services Content
at initial installation shall include at minimum:
a. Guest Folio Review & Video Check-out
b. Guest-room compendium / hotel services directory minimum twenty screens
and/or images each.
c. Worldwide Hyatt Hotels Video Directory with capacity for at least five
interactive screens or images per property, callback prompt, and
reservations office notification.
d. Room Service Menu Ordering.
e. Food & Beverage outlet menu review.
f. Message Center Display (Notification on voice mail and display message
information on PMS).
g. Guest Welcome channel.
h. Interactive Guest Survey report format and delivery to appropriate
application interface and/or printer.
i. Interactive event information screens for groups, tours, meetings, etc.
j. Airline departure and arrival information for those airport hotel locations
identified in exhibit "C", where such database information is available and
provided by the hotel.
k. Standard formats and interactive tree/branches structures ready for
interactive content input.
Hyatt parties will be responsible for the development and production expense of
Hyatt Parties Content.
Page 14 of 25
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EXHIBIT "A" TECHNICAL REQUIREMENTS
2.5 INTERACTIVE PRODUCTS AND SERVICES FOR THIRD PARTY USE
Maginet and GDG shall develop and produce a standard interface package for use
on the System as the basis for the Interactive Services delivery in the Hotels.
The standard interface package shall be available at initial system
installation, and shall include standard means for authorized parties to
interact with the guest and the System in one or more of the following ways:
a. Receive notification from a guest requiring callback
b. Disseminate or collect information
c. Post charges for goods and services delivered
Interactive applications that must be supported by the system include Shopping,
Video Games, Advertising
2.6 INTERFACES
Maginet and GDG shall develop and implement interfaces between the System and
the following Hyatt systems.
<TABLE>
<CAPTION>
SYSTEM REQUIRED FUNCTIONALITY PRODUCTS
<S> <C> <C>
Property Guest Preferred Language Fidelio, Maxial,
Management Guest Folio Review/Check-out and CLS
System Bill posting for movies and
interactive services
Message Center screen, including
information, hard copy messages,
voice and fax notification
Other service required within
PMS capabilities
Point of Sale Room Service menu selection and bill Micros, Maxial,
System posting CLS and
Squirrel
Voice Mail On screen voice mail message waiting TMS Voicelink,
System indication Nortel HVS
</TABLE>
Maginet and GDG are not responsible for limitations that result from
deficiencies in other systems but shall make their best efforts to minimize the
impact of such deficiencies.
Page 15 of 25
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EXHIBIT "A" TECHNICAL REQUIREMENTS
3.0 OPERATING AND MAINTENANCE PERFORMANCE STANDARDS
The services specified below shall be provided as required:
3.1 INSTALLATION SERVICES
Maginet and GDG are required to design and supply and Maginet is required to
install and set up the complete system as described in this agreement as
required for the hotel without cost to the hotel. These services are to
include, as needed, upgrade to existing MATV system, and cabling where it
effects system segmentation.
3.2 ON LINE SERVICES
This network is required for, but not limited to, monitoring remote system and
equipment performance, distributing media, collecting system usage statistics,
diagnosing system problems and providing on line support, assistance and repair.
The network shall allow two-way real time communication between systems and any
one of the locations. Maginet's local office is required to dial in to the
system every 24 hours to verify defects.
3.3 CENTRAL TECHNICAL SUPPORT SERVICES
Maginet and GDG are required to maintain a qualified technician on call 24 hours
per day 365 days per year to provide second line support for the local offices
and the installed systems; and to distribute expedited content upgrade.
3.4 LOCAL FIELD SERVICES
Maginet are required to maintain local field services to provide first line
support to each site. The local field services shall be equipped with the
appropriate facilities (space, tools, equipment and expertise) to carry out all
service requirements for all systems located in the field service facility's
territory. Each Field Service Facility is required to maintain a technician on
24 hour call, who shall be provided with second line support via modem and phone
from the central technical support facility mentioned in 3.3. Maginet and GDG
will be responsible for maintaining hardware, software and training resources in
their field offices to the latest specification.
3.5 SYSTEM UPGRADE SERVICES
The System shall be upgraded by Maginet to meet the minimum criteria as defined
below:
1. In order to add more capacity to the system if the statistical information
application described in 1.7.4 indicates that the following conditions have
been reached:
i. Video on demand
The number of simultaneous video on demand channels shall be increased by a
minimum of 12 outputs when the daily requests for movies on demand exceed the
installed number of outputs by 12 or more, on 90 days out of a consecutive
period of 365 days.
Page 16 of 25
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EXHIBIT "A" TECHNICAL REQUIREMENTS
ii. Interactive services
The number of guests denied immediate access to the system, exceeds two percent
(2%) of the available rooms on 30 days within a consecutive period of 90 days.
Immediate access is access within 5 seconds of hitting the appropriate remote
control button.
2. To provide features and functionality that are offered at competing hotels,
to comply with section 14 of the master agreement and section 6 of this
exhibit.
3. To add hardware and software enhancements in order to maintain all the
installed systems to the latest current standard. Such upgrades shall take
place on an annual basis, according to a software release schedule to be
posted by Maginet and GDG.
4. As required to rectify software problems.
3.6 CONTENT UPDATE SERVICES
Maginet and GDG, shall coordinate and deliver all content for use on the system
to meet the following requirements:
1. Bulk Content Update Service
Generally, System Content is required to be updated every month, according to a
publicized schedule to be produced by Maginet and made available to GDG, Hyatt
parties and authorized parties. Deadlines no more than 7 days prior to shipment
must be established for content submissions. All content packages shall be
installed in hotels by midnight on the publicized scheduled day. Content update
is to take place with minimum effect on Guest Access to the system
2. Interim Update Services
Interim content upgrade services must be provided to any or all hotels to cover
the following requirements:
a. On-line Interactive Content upgrade
It must be possible to download interactive files from Toolkits to
installed systems so that content update can be completed and on line
within 15 minutes, and without taking the System off-line.
b. Defective Content Replacement
Content where the video quality deteriorates below the standards
established within this exhibit shall be replaced, within the time
limits set for unscheduled maintenance services (standard service)
within this section.
Page 17 of 25
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EXHIBIT "A" TECHNICAL REQUIREMENTS
c. Incorrect Content Replacement
Where video content is incorrect, such that it effects the image of
Hyatt, or is misrepresentative, offensive, or effects revenue, or for
other reasons deemed important by authorized parties using the system,
the offending content shall be removed within the time limits set for
unscheduled maintenance services (critical component failure) within
this section.
3.7 SERVICE AND MAINTENANCE STANDARDS CRITERIA
Equipment manufacturers' repair manuals and specifications are to be furnished
as a reference to be used by all parties to establish standards or maintenance
practices and operating tolerances. Maginet and GDG shall repair or replace
components as needed to maintain consistency with the minimum criteria defined
in section 1.1.
Critical equipment no longer meeting manufacturer's performance specifications,
or as required under the requirements to keep current with technology in the
master agreement, is to be replaced as part of the ongoing maintenance and
upgrade procedure. Maginet and GDG shall be responsible for ensuring that field
services facilities are capable of carrying out work to the above standard.
3.8 PREVENTIVE MAINTENANCE SERVICES
Maginet and GDG shall develop a preventive maintenance program for use by field
offices, and this shall be provided to the hotels who will provide notification
of non compliance to Hyatt parties. This program is to include MATV system
performance monitoring on a twice annual basis, and as required to maintain
standards.
3.9 UNSCHEDULED MAINTENANCE
Field response time following critical component failure must be within four
hours. Standard service must be provided within 24 hours of a non critical
fault being reported, Emergency service must be provided 365 days per year / 24
hour per day basis. Standard service must be provided on a five (or six days
where local working practices dictate) per week eight hours per day basis. On
line support as well is live first and second line phone support must be
guaranteed as available at each hotel. The local representative provides first
line support for the hotels, while the US office will provide second -line
support.
3.10 PARTS REPLACEMENT SERVICE
1. ON SITE
- -------------
Maginet shall provide adequate spare parts on-site at each hotel to facilitate
change out of in-room devices and remote control by the hotel engineering staff,
which includes in room devices (begin with 5% stock) and other site replaceable
items (jumper cables, connectors, etc.( begin with at least 2% stock).
Page 18 of 25
<PAGE>
EXHIBIT "A" TECHNICAL REQUIREMENTS
2. At field Services Facility
- --------------------------------
Details of the minimum spare parts inventory must be provided to show that
inventory levels are being held at 2% of the installed levels in that location,
except where demand for parts is greater, in which case stock must be maintained
at five (5) percent of installed inventory,
Maginet shall adjust spare parts inventory to sustain the levels of service
identified throughout this section.
3.11 SERVICE HISTORY LOG
The local field services facility shall hold a detailed service history
containing all records pertaining to the system
3.12 LIMITATION OF TECHNICAL ASSISTANCE RENDERED BY THE HOTEL
The technical responsibility for the hotels shall be limited to the following
actions to be carried out by the engineering department and those hotel
employees monitoring the system:
1. Removing and replacing defective in-room components and handing them over
to Maginet and GDG'S field staff during site visits
2. Reporting problems observed on the MATV system to Maginet's agents.
Hotel will not be responsible for any matters relating to other aspects of the
interactive services, but will cooperate fully with the vendors and his agent to
maximize system performance and revenue.
Page 19 of 25
<PAGE>
EXHIBIT "A" TECHNICAL REQUIREMENTS
4.0 NEW TECHNOLOGY PERFORMANCE AND DEVELOPMENT STANDARDS
----------------------------------------------------
4.1 GENERAL REQUIREMENTS
1. Hardware
- --------------
The system and components are to be designed such that they can be upgraded
to adapt to developing technologies. As a minimum it must be possible to
retrofit to already installed systems those items listed under section four
of this exhibit to comply with the terms of the master agreement.
2. Software
- --------------
Maginet and GDG will be responsible for keeping all sites in a region
current with the latest software release. These details will be agreed
between Hyatt International and Maginet and GDG. Generally software
upgrades shall be expected and installed in all sites on an annual basis,
except where required sooner to correct observed software problems that
adversely effect the system performance, Hyatt's Image and/or revenue
generating capacity.
3. Future Development
- --------------------
Hyatt International is committed to developing a global marketing
communications database. Maginet and GDG shall commit to establish and
maintain compatibility with these requirements and to cooperate with Hyatt
International, Regency Systems Solutions and other software vendors and
consultants on an ongoing basis to further develop this concept under the
terms of the master agreement.
4.2 SPECIFIC UPGRADE REQUIREMENTS
1. December 31, 1995 Release
- -------------------------------
The following items we not yet incorporated into the Maginet GDG platform at
this time, but already offered in some markets by the competition. It has
therefore been agreed that they will be incorporated into the installations to
be completed after January 1996, and provided as an upgrade to those
installations completed before that date, by January 1, 1997.
Installations shall be upgraded to incorporate the following by December 31
1995.
a. Access to nationally available teletext where available.
b. Video games from one of the market leaders in this field. The current
generation of products from either Sega, Nintendo, 3DO or approved
alternative are to be provided. It shall be possible to charge for games
on a unit time or number of plays basis.
c. In-room terminals that can be tuned from a central location, that they
bypass the TV tuning device where A/V outputs are provided in the TV sets.
They shall also be concealed with a sensor no larger that 30 mm high x 50
mm long x 30 mm deep will be visible from the guest room.
Page 20 of 25
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EXHIBIT "A" TECHNICAL REQUIREMENTS
d. Hotel information channels which can be set up for and accessed by all
guests or by particular groups which can be individually addressed by the
hotel staff except as limited by the PMS.
2. July 31, 1996 Release
- ---------------------------
The following advanced interface requirements are already provided in some
markets and are required at the latest to be implemented in new installations by
July 31,1996 and retro-fitted where required in existing hotels by July 31,
1997.
Hyatt Parties will identify a preferred solution, or present a similar system
installed at a competing hotel and will make best efforts to obtain interface
protocol, for use by Maginet and/or GDG to develop the required interface.
Maginet & GDG shall deliver the required interface, to comply with section 14 of
the master agreement.
a. Advanced Interface Development Requirements that shall be installed by
Maginet/GDG are:
i. Interface to fax server and in-room printer/scanner interfaces for the in
room terminal.
ii. Assistance in developing means to post minibar charges using MATV network.
iii. Interface to allow access to voicemail system features, via TV remote as
well as telephone.
iv. Interface to Screen format application for collecting data entered via
remote control, such as maintenance information and room status update and
similar applications.
v. Interface to remote printer or application associated with the Hyatt
Reservations network.
b. Other Screen captures will be developed according to requirements Selected
Internet screens, Public information system like teletext, Minitel and
Airline Information Systems on line hotel signage systems, and similar
applications will be required to be captured and displayed on the hotel.
Page 21 of 25
<PAGE>
EXHIBIT "A" TECHNICAL REQUIREMENTS
5.0 TECHNOLOGY (FUTURE)
Below is an indication of technology that is known to be under development.
These are items that may be required as upgrades to installations to comply with
section 14 of the Master Agreement and section 6 of this exhibit. Upgrades may
also be required for services that may be offered at competing hotels. but that
are not yet identified at this time or listed below.
5.1 Movie & interactive content in compressed digital format, such as MPEG 2,
when use of such a format is made available. This may include headend
upgrade to incorporate digital MATV signal delivery to the guest rooms to
the extent permitted by the MATV systems in each hotel.
5.2 Satellite, frame relay, ISDN, ATM and/or other advanced networking methods
that would enable on line downloading of movie & interactive content, in
those areas where it becomes the accepted norm.
5.3 Increasing simultaneous access to pay video and interactive services as
demand for them increases and as technology facilitates increased
bandwidth.
5.4 Incorporation of newly developed broadcast and video standards as and when
adopted by the multimedia and television industries. examples include but
are not limited to HDTV, advanced digital video formats up to and beyond
MPEG 2, Studio movie master formats, such as Do, updated operating systems
such as Windows NT.
5.5 Upgrading System communication protocol to take advantage of Increased
bandwidth and the switching capability offered by advanced networks.
Examples include fast ethernet and ATM.
5.6 Provide full motion video for interactive services content.
5.7 Provision to accommodate increased number of viewing channels as MATV
technology updates dictate.
5.8 Use of the pay TV gateway to charge for programming provided by third
parties like satellite, and cable TV providers to increase revenue for
Maginet, GDG and the hotel for example.
5.9 Cooperative development of other interfaces on an as need basis, this is to
include full interface with the Hyatt Spirit Reservations system including
on screen reservations, using the interactive system.
5.10 Provide interface with hotel fax server software to enable faxes to be
displayed on screen; and the option to print them on a printer located in
the guest rooms. Print outs of coupons and folios will also be required.
5.11 To keep Hyatt International Technical Services abreast of the latest
industry trends to give them the opportunity to update MATV system
specifications in new projects, so as to be ready for the above.
5.12 Interface with and communication between on-line hotel and signage systems,
as any be installed in the hotels.
5.13 Multi-media interface with voicemail system to duplicate phone and
voicemail capability via MATV system, for link to video-teleconferencing
facilities.
5.14 Upgrade head-end to provide Stereo Audio delivery
5.15 Development of more foreign Language Content, especially Malaysian,
Indonesian and other Asian languages.
Page 22 of 25
<PAGE>
EXHIBIT "A" TECHNICAL REQUIREMENTS
6.0 COMPETITIVE STANDARDS
---------------------
6.1 GENERAL STANDARDS
The master agreement requires that Maginet shall keep the system up to date to
ensure that installed systems have die features and functionality butt in to the
latest Systems, or systems provided by a competitor.
6.2 KEY SYSTEM PERFORMANCE PARAMETERS
The following are key features and functions defined in the minimum technical
specification, that if improved upon by a competitor would render the System
inferior; whereby Maginet and GDG would be required to modify the system to
deliver the same or better features and functionality, under the terms of the
master agreement:
6.2.1 VIDEO & AUDIO QUALITY
In cases where competing hotels offer materially better video quality in a
system with similar features then the system video and audio shall be upgraded
to match that level of quality. In cases where it is difficult to quantify
improvements to video quality, the following criteria will be used to establish
the acceptable minimum quality:
Video images transmitted and displayed across the system, MATV, and a good
quality brand now twenty-five inch (25") television set must be observed to be
similar quality as the same images when the image source is directly connected
to the television set. The video image source for quality tests shall be a full
action, color movie on a new; unused S-VHS tape provided by a major recording
studio played back on a brand new s-vhs tape player connected directly to the
television with A/V connectors.
When compared to the same movie provided as part of the Content across the
System, MATV, and television set, there shall be no material degradation in
resolution, discoloration, focus, or brightness, nor multiple be images
(ghosting), artifacting, or other negative differences in image quality.
6.2.2 ADDED SYSTEM FEATURES & FUNCTIONALITY
When a competing hotel offers features and functionality that it is determined
by the Advisory Board provide the competing hotel. with a competitive advantages
then Maginet and GDG shall implement equivalent or alternative technology to owe
that the System delivers those additional features and functionality enjoyed by
the competing hotel; where those features and functionalities improve revenue
from the system or are perceived as an incentive for guests to stay at the
competing hotel.
Page 23 of 25
<PAGE>
EXHIBIT "A" TECHNICAL REQUIREMENTS
6.2.3 COMPETITIVE RATES
If a competing hotel is able to offer lower rates for movies and services of an
equivalent quality, Maginet and GDG shall use reasonable best efforts, including
employing new or alternative technologies to lower operating costs such that
rates can be lowered without effecting Hyatt profitability.
6.2.4 GREATER CONTENT VARIETY.
If a competing hotel generates higher revenues by offering a greater variety of
interactive or video on demand content, of equivalent quality, maginet shall
increase programming and system capacity to match the usage rates enjoyed by the
competing hotel.
6.2.5 GREATER SIMULTANEOUS SYSTEM ACCESS
If a competing hotel generates higher revenues by offering a greater number of
simultaneous outputs to deliver the content, Maginet shall increase programming
and system capacity to match the usage rates enjoyed by the competing hotel.
6.2.6 VENDOR PREFERENCE
If a competing hotel offers better revenues and/or improved features such that
the revenue generating potential of the system is greater, Maginet and GDG shall
employ similar or alternative technology, to ensure that the System remains
competitive in this sector of its revenue generating capability.
6.3 ALTERNATIVE TECHNOLOGY SYSTEM OBSOLESCENCE
If a competing hotel offers alternative technology that substantially improves
revenue and/or offers, features and benefits that are determined to be an
incentive for guests to stay at the competing hotel, then Maginet and GDG shall
provide similar or alternative technology so that System delivers features and
functions that would not be perceived as inferior or outdated by guests and
vendors using the system when compared with the competition.
6.4 DIGITAL HARDWARE PERFORMANCE CRITERIA
In cases where such technology involves digital video delivery, the following
criteria is intended to set a minimum standard, in cases where it is not
possible to define the system used by the competition:
a. Movies will be delivered to the viewer at 400 lines of resolution or
better, with color clarity and definition. superior to the current
vendor's VHS product.
b. Transmission of movie signals will be sufficient to provide "flicker
free" video images.
c. The units shall be capable of providing simultaneous access to any or
all of the available number of ports on the system.
d. It must be possible to pause and rewind for a total of 15 minutes of
the movie showing time, using the remote control (subject to studio
consent).
Page 24 of 25
<PAGE>
EXHIBIT "A" TECHNICAL REQUIREMENTS
e. Additionally it shall meet or exceed other performance criteria
indicated below as applicable to video tape based systems, where not
specified under this section and as required to comply with the
requirements of the master agreement.
6.5 DELIVERY CRITERIA FOR SYSTEM UPDATE
To comply with the terms within the master agreement, maginet shall deliver the
system upgrade within nine months of written notice from Hyatt Parties that the
competitor's advantage was determined to exist.
Page 25 of 25
<PAGE>
November 15, 1995
EXHIBIT B
FORM OF INDIVIDUAL AGREEMENT
----------------------------
-34-
<PAGE>
HOTEL GUEST SERVICES AGREEMENT
This Hotel Guest Services Agreement, ("Agreement") between ____________________,
a Company duly incorporated in ____________________, having its principal place
of business at _____________________________________, and a [wholly-owned
subsidiary/licensed distributor] of MagiNet International Corporation
(hereinafter referred to as "Provider"), and the Hyatt _________________ Hotel,
having its principal place of business at ___________________________ ("Hotel"),
sets forth the terms for installation, operation and maintenance by Provider of
an ondemand guest video system and related services in the Hotel.
WHEREAS:
(A) The Hotel operates a hotel for the lodging of guests in separate,
private rooms and suites which are customarily available for overnight sleeping
accommodations;
(B) The Hotel wishes to enhance the guests' stay by giving them the
opportunity to view pre-recorded entertainment programs and movies and standard
off-air broadcast or cable television channels available to the Hotel without
special equipment, and other programming and interactive service offerings,
conveniently in the privacy of their own rooms using an on-demand video system
provided by MagiNet;
(C) Hyatt International (Europe Africa Middle East), Limited ("Hyatt
International"), Hyatt Chain Services Limited ("Hyatt Chain"), Guestserve
Development Group ("GDG"), and MagiNet International Corporation ("MagiNet")
have entered into an exclusive Master Guest Video Services Agreement dated
August __, 1995, (the "Master Agreement") whereby MagiNet, using on demand video
and interactive services technology of GDG ("GDG Technology"), has agreed to
provide on-demand video services and interactive services pursuant to the terms
therein and herein;
Now, therefore, the parties do hereby agree as follows:
1. ON-DEMAND VIDEO SERVICES SYSTEM
(a) Provider shall, with the support of magiNet and GDG, provide to
the hotel through the System (defined below) and the Hotel's video and audio
transmission and receiving and antenna and wiring systems ("MATV") on-demand
video and interactive services pursuant to the terms and conditions set forth in
the Master Agreement and herein. All terms and provisions in the Master
Agreement applicable to the parties hereto, including obligations of MagiNet and
GDG to the Hotel thereunder, are hereby incorporated
-1- (02/15/95)
<PAGE>
into this Agreement by reference and made a part hereof. In the event of any
conflicts between this Agreement and the Master Agreement, the Master Agreement
shall control.
(b) The Hotel is hereby fully licensed by Provider, GDG and MagiNet
for as long as this Agreement is in effect to have the use of the GDG
Technology, and any improvements thereon made by GDG, MagiNet and/or any third
party acting under a license or contract from either on the terms provided
herein.
(c) The Hotel is hereby fully licensed by Provider, GDG and MagiNet
to have and use a graphics generator (the "Graphics Generator") that enables the
Hotel to update its own Hotel Content for display on the System through the GDG
Technology as provided in subsection (p) below. "Content" shall mean off-air
activities, services and programming as provided hereunder and as may be agreed
upon pursuant to the Master Agreement. This license covers all uses in the Hotel
by any entities affiliated with Hyatt International (the "Hyatt Affiliates")
throughout the duration of the Master Agreement and for such time thereafter as
permitted by this Agreement.
(d) "System" as referred to herein, shall include at least: A) a
module for each television set that can remotely control on demand requests made
by guests from Hotel rooms ("Rooms") to central storage devices within the
Hotel; (ii) a remote control and appropriate spares for each television in the
Hotel; (iii) Content storage sufficient for the Content initially installed and
a reasonable amount of expansion capability for additional Content that may be
installed in the future; (iv) a front-desk personal computer, monitor and
printer; and (v) all necessary software, electronic, computer and switching
equipment, including GDG Technology to permit the receipt, transmission,
monitoring and on demand remotely controlled guest operated in-room display of
the Content.
(e) Subject to the right of Hotel and its guests to use other non-
competing video devices, cd players, computers, telefax machines, and similar
devices in the Rooms, the Hotel will ensure that the System will be the sole and
exclusive in-room pay per view guest video services system provided to their
guests during the term of this Agreement (except as otherwise provided for
herein, or in the Master Agreement). The Hotel will not either directly or
indirectly solicit the installation of any video system in the Hotel which might
directly compete with or cause transmission interference with the System.
(f) Subject to paragraph (j) following, Provider shall develop,
repair, purchase, build and install all hardware and software required to
operate the System at its sole cost, including any MATV upgrades required for
the System to perform according to specification, and shall install, operate and
maintain the System
-2- (02/15/95)
<PAGE>
and such MATV at the Hotel as provided herein. All required hardware and
software and other equipment and specifications for the System and the MATV are
specified and listed in Exhibit A hereto (the "Technical Requirements").
(g) Provider shall provide documentation to provide the reader With
sufficient information so that the System can be operated without further
consultation (the "System Manual"). Two (2) copies of each System Manual shall
be provided for the Hotel.
(h) One (1) copy of a manual that describes the Graphics Generator
sufficiently to permit its use shall be provided to the Hotel (the "Graphics
Generator Manual").
(i) System Manuals and Graphics Generator Manuals may be copied and
printed in whole or in part by Hotel on an as needed basis. All Manuals shall be
marked and treated by all parties as confidential. Notice of copying of each
Manual shall, with best efforts, be given to Provider.
(j) The System shall provide guests with the Content in as efficient
and effective a manner as is reasonably and technically possible at the time the
System is installed in each Hotel, and as further specified and described in the
Technical Requirements.
(k) The System shall accommodate, and Provider shall ensure the
delivery of across the System and the MATV, to the extent reasonably and
commercially possible, all Content that the Hotel determines in the future would
benefit Hotel guests or Hotel staffs and would be economically viable to add to
each Hotel's services.
(l) The System will be multilingual, and shall permit displays and
commands in at least three separate languages. The selected languages are
preliminarily designated in English, Japanese, and the primary local language
used in the country in which the Hotel is located. If Hotel desires a different
set of languages it shall designate its selections by written notice to MagiNet
on the date of execution of this Agreement and such notice shall become attached
hereto as an Exhibit. Subsequent changes or additions to such languages shall be
mutually agreed in accordance with Customer demand.
(m) Provider shall at all times in the future ensure that the System
and all other Hyatt International or Hyatt Chain contracted computer,
reservations and information systems operated or used by, the Hotel are
interoperable, and will ensure that it takes no action(s) that could jeopardize
such interoperability.
(n) Provider understands and agrees that the System must meet or
exceed all applicable Technical Requirements described in
-3- (02/15/95)
<PAGE>
Exhibit A. Provider shall provide sufficient spare equipment to minimize the
effect of component failure on guest services and to enable rapid repair and
replacement of defective components, including spare converters and remote
controls to enable Hotel staff to meet the short term needs of its guests if
repair and/or replacement of components are required.
(o) Each Hotel will ensure the safety and security of the System and
all related property of Provider at all times while the System is installed in
the Hotel, and will be liable for any loss or damage to the System resulting
from willful misconduct on the part of Hotel's guests, employees or third
parties (excepting third parties associated with MagiNet or GDG).
(p) The Hotel shall have the right to utilize the System in the Hotel
to display informercials, programs on other hotels and resorts, and similar
advertising and merchandising of hospitality industry products and services
offered by Hyatt International or any Hyatt Affiliates ("Hyatt Products"),
including Interactive Services (see below) and Hotel Services (see below)
(collectively, "Hotel Content").
(q) Hotel Content shall not be directly competitive with any then
currently available Content.
(r) Except as specifically otherwise provided herein, all Content
other than movies must first be approved by the Hotel prior to installation on
the System.
(s) "Hotel Services" shall mean those guest information and other
services available now and in the future from the Hotels or Hyatt International
and Hyatt Affiliates, including the development, storage and transmission of
information about: (1) guest billings status, (2) minibar consumption and other
charges, (3) hotel, transportation, and restaurant reservations, (4) guest
marketing information for or on behalf or third parties, and (5) guest messaging
systems and services.
(t) Provider shall ensure that Hotel Services are available through
the System, and can be accessed with no more delay than may be experienced in
order to obtain Interactive Services (defined below) from Provider, include such
assistance as may be needed for the Hotel so that all Technical Requirements are
met for the transmission of Hotel Services through the System,
(u) "Interactive Services" shall mean all interactive guest video
products and services, including games, made available to the Hotel by Provider
pursuant to the Master Agreement.
(v) If Hotel requires Provider to provide services requiring the
modification of hardware or software interfaces other than those on the System
in order to implement future Hotel
-4- (02/15/95)
<PAGE>
Services, then the Hotel shall be solely responsible for such costs. if Provider
satisfies such requirements, then any direct costs for the alteration of
existing interfaces solely for the purpose of providing future Hotel Services,
and approved by the Hotel, shall be paid by Hotel.
(w) After execution of this Agreement, Provider will perform at its
expense a site evaluation at Hotel to determine whether any upgrading of the
Hotel master television antenna system ("MATV") will be required. If such
upgrading is required, this shall be provided and funded by MagiNet, as provided
in Section 4(i).
2. TERM OF AGREEMENT
(a) The term of this Agreement will begin on the Term Commencement
Date as defined in Section 2(b) below and will continue until the expiration or
earlier termination of the Master Agreement (the "Term").
(b) Upon the installation of the System, Provider will test the
System to ensure functionality as provided in Section 4(f). Upon the successful
conclusion of such test, Provider and Hotel will sign a statement acknowledging
that the System is functional. Such statement will be attached hereto when
completed as provided in Section 4(f), and the "Term Commencement Date" will be
the date of such statement.
3. HOTEL FACILITIES.
During the Term, Hotel shall provide a designated room for installation of the
System; signal wiring and connections; electrical power and sockets; cooling
facilities; and a secure location for all equipment comprising the System
(collectively, the "Hotel Facilities"); all in accordance with the Technical
Requirements.
4. INSTALLATION
(a) Installation shall commence within ______( ) days following
execution of this Agreement.
(b) Provider shall apply for and obtain all licenses, permits and
other government approvals required to do work on Hotel's premises, and shall at
all times comply with the applicable legal and regulatory requirements for such
work. It shall be Provider's responsibility to handle all such requirements, and
also its responsibility to pay for any legal expenses and fines incurred due to
Provider's failure to comply with such requirements.
(c) An interface with Hotel's PMS shall be completed during
installation of the System. A front-desk personal computer
-5- (02/15/95)
<PAGE>
and printer will be included as a part of the System for printing charges for
each guest purchase or rental in case such interface fails at any time.
Provider will ensure that the System will fully interface and integrate with the
PMS. As a part of such integration, guest usage charges shall be automatically
posted to each individual guest's bill, counts of access shall be available to
the Hotel and other reporting will be permitted. Hotel will cooperate with
Provider for the purpose of successfully implementing the interface, and shall
undertake its best efforts to insure cooperation between Provider and each PMS
software vendor used by the Hotel. All interface protocol installation or
maintenance charges asserted by the PMS software vendor and agreed upon in
advance by the Hotel will be paid for by Hotel.
(d) Hotel will provide such access as may be reasonably requested by
authorized personnel to enable complete installation of the System in the Hotel,
including without limitation providing all Hotel Facilities, within a reasonable
time to permit complete installation. Hotel will make reasonable efforts to
provide sufficient access to guest rooms for the purpose of equipment
installation so that such installation is performed with a minimum of delay.
During the installation process, Hotel will exercise best efforts to provide
complimentary rooms for out of town members of the installation team.
(e) Appropriate fully qualified personnel shall perform Provider's
obligations hereunder in an efficient, courteous, effective and timely manner
and all such personnel shall be bonded, trained and supervised in accordance
with appropriate hospitality industry practices consistent with local practice
and custom. All actions of any person acting for or on behalf of Provider shall
be subject to the same rules and regulations, which will be made known to
Provider, as are applicable to Hotel staff. All such persons shall wear
identification badges, and shall be dressed in a proper fashion.
(f) Upon completion of the installation, Provider will test and
ensure that the System in each Hotel, and in all Rooms is fully functional
without material defects and meets all applicable Technical Requirements. Upon
the successful conclusion of such testing, Provider will deliver to the Hotel
and the Hyatt Parties a written Certification (the "Certification"), that the
System is fully functional and without material defects and meets all applicable
Technical Requirements. Such Certifications will be attached to this Agreement
as an exhibit.
(g) At the time of installation, Provider shall train all employees
deemed by Hotel to be appropriate in the use of the System.
(h) Hotel will begin the process of billing guests for and generating
revenue from the Content no later than the date of
-6- (02/15/95)
<PAGE>
the Certification.
(i) Hotel shall provide access to its MATV. Provider shall be
responsible for all work required to and all costs incurred in upgrading the
MATV as required for proper operation of the System, except that improvements
required for in-wall cable and its installation in excess of [***] shall be
paid by the Hotel. If these costs exceed [***] and Provider elects not to pay
for such excess, then the Movie commission rate payable to the Hotel for the
Movies shown at Hotels shall be increased by [***] for a period of three years.
Nothing herein shall be deemed to allow or require Hotel to submit any records
beyond those showing the actual costs of the purchase and installation.
(j) The installation of the System and MATV upgrade shall not degrade
the MATV, or impair the ordinary reception of broadcast programs or other
services on the MATV. Any MATV hardware and equipment owned by Hotel which has
been disconnected as a result of the installation will be taken to Hotel
designated storage locations by the installation personnel.
5. MAINTENANCE
(a) Provider will promptly provide all maintenance, repairs and
replacement of all software and hardware and other equipment necessary to ensure
proper operation of the System and the related MATV in the Hotel, including
satisfactory signal quality, and shall insure that a qualified person is
available on a twenty-four (24) hour basis to receive service requests. MagiNet
and GDG will provide backup support to Provider as necessary to ensure proper
maintenance, repair and replacement occurs. Such maintenance and technical
assistance will be provided free of charge, unless the maintenance is occasioned
by a breach by Hotel of any of its obligations as set forth in this Agreement,
or by unauthorized use, access, theft, negligence or damage caused by Hotel
staff or third parties not under contract to Provider, MagiNet or GDG. Hotel
staff shall be trained so that they can undertake routine maintenance as agreed
upon by the Hotel and Provider. Provider shall not be obligated to maintain
hardware already contracted by Hotel to a third party.
(b) Hotel will, at the Hotel's expense, notify a person designated by
Provider by telephone or by fax of any failure or degradation of any part of the
System anywhere within the Hotel, including in any Room.
(c) The Hotel will notify Provider as soon as is reasonably possible
and upon Hotel's actual notice of any unauthorized use, access, theft, damage or
malfunction of or to the System.
(d) Each Hotel will allow authorized personnel of
*** Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Commission.
-7- (02/15/95)
<PAGE>
Provider, MagiNet and GDG to have escorted access to the System at reasonable
times in order to conduct routine maintenance, to observe and to monitor the
System, to ensure suitable operating conditions, to implement improvements in
the System, to conduct repairs, and to otherwise carry out Provider's, MagiNet's
and GDG's obligations set out in this Agreement and the Master Agreement.
(e) In the event that any malfunction, nonconformity or other defect
in the System is believed to exist by Hotel and notice of such defect is given,
Provider shall promptly undertake best efforts to have the defect corrected and
in no event shall there be more than a four (4) hour delay in Provider's
response and all repairs shall be made as quickly as possible. If Hotel does not
provide prompt access to the System to correct System failures once Provider has
been notified by Hotel of such System defects, Provider will not be liable for
any delays so incurred.
(f) Any repairs or replacements to any equipment supplied by Provider
made necessary by any negligent or willful act by Hotel or any of its guests,
employees, contractors, servants, and agents, or force majeure events, will be
undertaken by Provider at Hotel's expense.
(g) Hotel shall not permit any person to tamper with or attempt to
make repairs to any equipment supplied by Provider. In emergencies, Hotel may
carry out repairs in accordance with instructions given by Provider.
(h) Each Hotel will be responsible for replacement of depleted
batteries and for paying for replacement infrared remote control units in the
event of theft, loss or damage in excess of twenty (20) units per year. Initial
replacement cost is as set forth on Exhibit B, plus shipping, duties and taxes,
and is subject to change upon written notice from Provider or MagiNet to Hotel,
with an effective date at least thirty (30) days in advance of a change, in
accordance with commercially reasonable and customary practices.
6. RENTAL FEE AND PAYMENT TERMS
(a) Hotel will charge hotel guests for access to movies and other pay
per view and pay for service Content (collectively the "Programs") for which
charges are assessed (the "Rental Fees"). The amount to be charged for Movies
shall be set by Provider in consultation with and approved by Hotel at the time
of the execution of the Agreement or, for other pay per view and pay for service
Content, at the time the Content is made available. Such charges shall not
commence until after a guest has been allowed to review the selection for an
initial period to be mutually agreed by Hotel and Provider. In addition to the
Rental Fee, Hotel will collect from guests any taxes applicable to such
receipts, and will pay those taxes to the appropriate government authorities.
-8- (02/15/95)
<PAGE>
(b) From time to time, Provider may revise the Rental Fees after
consultation with Hotel. Rental Fees shall be charged which are customary in
each locale, and may be increased annually in an amount at least equal to the
increase in the local cost of living. Provider will notify each Hotel in writing
of any new Rental Fee and the effective date at least thirty (30) days in
advance of a revision.
(c) In the event any Hotel guest disputes the amount of Rental Fees
in a situation in which Hotel personnel are otherwise unaware of any System
malfunction (herein referred to as a "Denial"), Hotel may in its sole discretion
credit the disputed amount to the guest's account provided it provides Provider
with a copy of the credit voucher showing room number, date, time of day, and
reason for the disputed charge. Hotel will use its best efforts to limit Denials
to not more than five percent (5%) of gross Rental Fees per month.
(d) The System will generate an accurate record (the "Access Record")
of the access to the System by any guests, including a record of the access
charges for each individual guest's bill or Room account, the types of access
made, and any other reasonably recordable information that may be requested. The
Access Record will not retain the names of guests. Provider will be responsible
at their own cost for programming the System to enable it to provide the
aforesaid data. The Access Record for Hotel will be held in confidence by the
personnel of Hotel. Provide and Hotel may review and use the Access Record for
such purposes as they may reasonably deem appropriate. Each party will indemnify
the other against any and all claims as a result of their improper use of such
Access Record.
(e) Hotel will submit a report (via telefax) to Provider on the first
day of each month which details the previous month's gross Rental Fees and
itemizes deductions for all Denials allowed. Provider shall invoice the Hotel
for gross Rental Fees less Denials allowed, Hotel commissions payable under
Exhibit B (which Exhibit shall be supplemented and amended from time to time as
new Programs are added to the System) and unreimbursed tax payments ("Net Rental
Fees"), all based upon guest usage as reported by the relevant PMS accounting
records during each calendar month which information shall be accessible and
reviewable during the month by Provider and Hotel. Hotel shall hand post any
invoices printed in hard form as a result of PMS downtime to accurately capture
those buys in PMS records. If Hotel's PMS report differs from the automatic
record kept by the System, both parties agree to mutually and amicably resolve
any variances between their respective records of Rental Fees and Denials.
(f) Hotel will pay to Provider or the designated subsidiary or
distributor or other designated party within ten (10) days, the Net Rental Fees
invoiced by- Provider as provided in
-9- (02/15/95)
<PAGE>
paragraph (e) preceding. The payment transmission will also specify the
occupancy rate for the month.
(g) Hotel will keep current, complete and accurate records (of
occupancy rates and all Net Rental Fees and other amounts due to Provider
pursuant to this Agreement. Throughout the duration of this Agreement, Hotel's
book and records pertinent to the Rental Fees, Denials and Net Rental Fees for
any month will be open to inspection and reproduction by Provider and, if
necessary, to an audit by a mutually agreed upon certified public accountant as
an authorized representative of Provider upon reasonable advance written notice
to Hotel. No such records need to be retained beyond one year, Provider's right
to inspect and audit the books and records of Hotel will not extend beyond one
year from the expiration of the Agreement. If any audit by Provider discloses
any non-payment or underpayment of any amount payable to Provider, the Hotel
will immediately pay to Provider any deficiency, plus interest charges at the
rate of 1.5% per month or the maximum interest allowed by local law, whichever
is less. If the deficiency is in excess of fifteen percent (15%) of the actual
amount payable to Provider for the period for which the deficiency occurred, the
Hotel will reimburse Provider for all costs incurred by Provider in conducting
the audit.
7. PROGRAM TITLE SELECTIONS.
(a) It is understood and agreed that, except as otherwise provided
below, Provider shall have absolute control and discretion in the selection of
the movies it contracts for with the movie studios or their distributors and
provides to Hotel (the "Movies").
(b) Provider shall provide a method whereby a guest will be able to
electronically restrict persons from viewing any adult selections being offered
in a Room.
(c) When available from producing studios, the Content offered by
Provider shall include first run Movies offered to Hotel that shall be no less
current and offer no less variety of first run and other titles than those
available at competing hotels in the country where the Hotel is located.
Provider shall consult with the Hotel on a regular basis to ensure the provision
of a selection of titles properly suited to each Hotel's guest profile. Hotels
may review the movies and other video materials being offered by Provider, and
may object to Movies it feels violate the sensitivities of the guests at a
particular Hotel, and any unresolved disputes will be adjudicated by the
Advisory Board established pursuant to the Master Agreement, pending which
resolution the objectionable Movies shall not be offered at the Hotel.
(d) Provider will be solely responsible for any royalty
-10- (02/15/95)
<PAGE>
payable to Movie suppliers and any license fees for Movies made available on the
System.
(e) Each Hotel trill be responsible for ensuring that access to the
room(s) in which the central storage and transmission equipment for the System
is located is restricted to persons accompanied by persons authorized by
Provider to be present there except in cases of emergency. Provider shall
authorize a sufficient number of persons employed by the Hotel for such purpose.
Hotels will not authorize copying of any Movies and will undertake their best
efforts to ensure that the Movies are exhibited in the Rooms only, and not in
the public rooms and public areas (including "lobbies, hallways, restaurants,
bars, meeting rooms, etc.) of the Hotel. The Movies will not be exhibited other
than in accordance with this Agreement. Hotel will use reasonable efforts to
insure that only registered guests of the Hotel and their invitees may view the
Movies.
(f) Cassettes and other media that contain the Movies ("Cassettes")
will be kept in a secure and locked area. Hotel will prevent unauthorized access
to and use, exhibition or viewing of any Cassette by any person other than as
set forth herein. Hotel will not permit any person to duplicate or make
alterations of any kind to Cassettes. Hotel will promptly report to Provider any
unauthorized use of the Cassettes as soon as a Hotel becomes aware of any such
use. If Hotel has videocassette recorders installed in the Rooms, the Hotel
shall agree that Provider may, where required to do so as a result of its
licensing agreements, as directed by the Hotel, either (i) disable the "record"
function in such a way that does not permanently damage the videocassette
equipment, but only to the extent required to comply with such restrictions, or
(ii) disable the Movie function for such Rooms.
(g) Provider shall be responsible to ensure that any of the
transmissions on the System controlled by it do not violate any applicable laws,
including those of the country in which Hotel is located, including specifically
any laws relating to copyright, pornography, and censorship of information or
materials.
(h) Provider Shall at all times offer to the Hotel the most advanced
guest video services and features (and associated technologies) it or its
competitors offers to any other hotel.
8. OWNERSHIP OF THE SYSTEM.
(a) The parties agree that the System and all equipment, materials
and engineering related thereto (excepting the MATV) and which are provided by
Provider are the sole and exclusive property of Provider.
(b) Hotel shall exercise best efforts to ensure the safety and
security of the System and all related property of
-11- (02/15/95)
<PAGE>
Provider at all times while the System is installed at the Hotel. Hotel will
use its reasonable efforts to prevent any vandalism, theft, or damage of (Dr to
any of the equipment supplied by Provider.
(c) Hotel shall not allow any lien, encumbrance, mortgage, claim or
security interest to be attached to or be made against the System. The Hotel
shall allow Provider to affix a notice or plaque to the System stating that the
System is the sole and exclusive property of Provider and/or MagiNet.
(d) Hotel shall allow authorized personnel of Provider, MagiNet or
GDG, or their independent contractors to have access to the System at all times
in order to conduct routine maintenance, observation and monitoring of the
System, to ensure suitable operating conditions and to implement improvements in
the system. Upon termination of this Agreement, Hotel will take all reasonable
actions necessary to allow Provider to remove the System promptly and Provider
shall remove the System no later than thirty (30) days after such termination
and shall return the premises to their original condition, normal wear and tear
excepted at no cost to Hotel.
(e) In the event the safety of the System is threatened due to
earthquake, flood, fire, strike, civil disruption or similar causes, Provider
shall be entitled to enter upon the Hotel premises and to remove the System from
danger upon reasonable notice to Hotel.
(f) "Hotel Systems" shall mean those hardware and software systems
other than the System used by Hyatt International and Hyatt Affiliates and the
Hotel to deliver Content to guests in their rooms, including any transmitting
devices and equipment, wiring, televisions, and cable or master antennae
transmission systems, as well as all software and hardware used for Hotel's PMS
and MATV.
(g) Hotel Content, Hotel Systems, all signal boosters, wiring and
faceplates, and any portions of the System that are permanently installed, or
installed in such a way that the removal of that part would cause more than
incidental wear and tear to the premises, and all other property at the Hotels
apart from the System, shall be considered by the parties to he the sole and
exclusive property of the Hotel (the "Hotel Property") . All Hotel Property
shall be considered to be the property of the Hotel, irrespective of whether
such information, materials, hardware and software systems are used on or
developed by anyone related to MagiNet and/or GDG and/or any third parties.
(h) The System and Content provided by Provider, MagiNet and/or GDG
that is not Hotel Property shall be either the property of Provider, MagiNet, or
GDG or properly licensed to Provider,
-12- (02/15/95)
<PAGE>
MagiNet or GDG by a third party.
(i) Equipment comprising part of the System and owned by Provider
will not be removed from Hotel for any purpose whatsoever during the term of the
Agreement except for purposes of repair, and when removal is necessary to ensure
safety of such equipment.
9. INSURANCE AND PROPERTY TAXES.
(a) Provider will maintain general business risk insurance on the
System at its expense.
(b) Provider shall carry and maintain for installation, and any later
work at the Hotel, worker's compensation insurance, or such other insurance as
is required and or needed to pay for any actions of Provider's personnel and all
such other personnel, in the amount of at least $1,000,000 combined single limit
comprehensive general contractual liability insurance, and at least $1,000,000
combined single limit vehicle liability insurance. Copies of all applicable
policies and certificates of insurance shall be provided to the Hotel prior to
commencement of any work on the premises of any Hotel.
(c) Hotel shall include the System in any assessment of the real
estate or personal property of the Hotel and pay such taxes as are assessed, to
the extent required by law.
(d) To the extent permitted under its existing insurance policies,
Hotel shall include the System as part of its insured property and equipment.
10. PUBLICITY REGARDING THE SYSTEM,
Hotel and the staff and the employees of the Hotel shall adequately publicize
the existence of the System and access to the Programs for use by guests as
determined by Hotel in its sole discretion. Hotel hereby acknowledges that the
success of the System installed by Provider depends on the response of the
Hotel's employees to guests' inquiries in a proper manner to encourage guests'
use and enjoyment of the System. If Provider shall develop and provide to Hotel
in-room or other advertising materials to encourage use of the System by guests
of the Hotel, Hotel shall place such material in the Rooms or elsewhere at the
Hotel, provided that Hotel Provider finds such materials to be suitable to the
decorum of the Rooms.
11. TRAINING AND CONSULTATION.
(a) To enable each Hotel to generate suitable promotional material
related to the use of the System and to enable personnel of each Hotel to advise
and encourage guests regarding
-13- (02/15/95)
<PAGE>
their use of the System, Provider will provide a one-time training course on the
use and operation of the System for as many employees as Hotel deems desirable
at no charge. Such training shall take place within sixty (60) days of the
installation done under this Agreement.
(b) Hotel will exercise best efforts to provide complimentary
accommodations for Provider training personnel. In addition, Provider, MagiNet
and GDG personnel will be reasonably available at no charge for telephone
consultation to personnel of Hotels to provide further assistance regarding use
and operation of the Systems, including an in-country telephone number staffed
on a twenty-four hour basis.
12. CONFIDENTIALITY
The parties agree that the functions and components of the System, facts
regarding the equipment and materials related thereto, the manner of operation
thereof and the terms of this Agreement, including without limitation Rental
Fees payable hereunder, all constitute proprietary information of Provider.
Hotel shall not permit any third party to have access to the System other than
such of the Hotel's maintenance personnel as may be reasonably necessary to
enable Hotel to provide the Hotel Facilities and otherwise as expressly
permitted by Provider in writing.
13. REPRESENTATIONS AND COVENANTS
The Parties represent, undertake and covenant with each other that throughout
the duration of this Agreement:
(a) Authority. The Parties warrant and represent that each has
---------
full legal power and authority to enter into this Agreement and to perform all
of its obligations hereunder and that this Agreement is within its authority and
that all necessary corporate action has been taken to authorize it to enter into
this Agreement and perform its obligations hereunder.
(b) Compliance. Each party will comply, and will ensure that
----------
performance of its obligations hereunder complies, with all applicable laws,
ordinances, rules, regulations, orders, licenses, permits or other requirements
now or hereafter in effect, of any governmental authority. Without limiting the
generality of the foregoing, to the extent any filing with, or any license,
approval or other agreement of, any applicable authority is required for
performance of any of the either party's obligations, such party will file the
appropriate documents and will maintain such documents on file, which Provider
may inspect upon demand.
14. DEFAULT
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<PAGE>
(a) Default. Either Hotel or Provider shall be in default under this
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Agreement if it (i) shall be adjudicated bankrupt or petition for relief under
any bankruptcy, reorganization receivership, liquidation, compromise arrangement
or moratorium statute, or (ii) shall petition for the appointment of a receiver,
liquidation, compromise arrangement or moratorium statute, or (iii) shall
petition for the appointment of a receiver, liquidator, trustee or custodian for
all or part of its assets,
(b) Notice of Non-performance. Hotel or Provider shall also be in
-------------------------
default under this Agreement if it (or any associated or affiliated entity so
required) should fail to perform or comply with any material obligation under
this Agreement or under the Master Agreement intended to benefit either party
and either (i) such failure is not remedied within sixty (60) days after receipt
of notice from the other party of such failure or (ii) if such default is of a
nature that it cannot, with due diligence and in good faith, be cured within
sixty (60) days, the non-performing party fails to proceed promptly and with due
diligence and in good faith to cure such failure of performance. In each
instance the non-performing party shall be informed in writing by the other
party of the circumstances of such non-performance.
(c) Remedies. If any of the events of default set out in Section
--------
14(a) or (b) above should occur, the party not in default may exercise any or
all of the following remedies: (i) cancel and terminate this Agreement (which
termination for purposes of Section 6(b) shall become effective sixty (60) days
after the original notice to the defaulting party of the failure to perform or
comply) , (ii) obtain injunctive and other equitable relief, and (iii) obtain
such damages and other rights and remedies as the party not in default may have
at law, and (iv) undertake either step(s) (i) and/or (ii) while retaining the
System in place (subject to continuance of all other material terms and
conditions herein and until a replacement vendor can be selected in an orderly
transition to that vendor's technology).
(d) Master Agreement. In the event the Master Agreement is
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terminated for any reason Hotel shall have the option, exercisable within thirty
(30) days, to terminate this Agreement, otherwise this Agreement shall continue
in full force and effect according to the terms herein. Default under or
termination of this Agreement shall not be considered a default for the purposes
of the Master Agreement except as specifically provided therein.
15. MARKETING AND PROMOTION,
(a) Any marketing and promotion that occurs with respect to the
System in connection with the Hotel shall be first approved by the Hotel.
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(b) No party is or shall act as the agent for any other party, and no
statement may be made that can be attributable to a party, or any of its
affiliated or related companies or entities, without first obtaining such
entity's permission for the statement.
(c) The parties agree to cooperate with each other to promote the use
of the System.
16. GENERAL TERMS
(a) Provider shall indemnify and hold the Hotel, and all related
entities and persons, including their affiliates, agents, officers, directors
and employees, harmless from any and all actions, costs, losses, expenses and/or
damages resulting from Provider's activities and the activities of any entity
for which they have assumed responsibility hereunder, pursuant to (or relating
or incidental to this Agreement. Such indemnification shall specifically include
any, and all actions alleged to involve intellectual property and any other
action of any kind.
(b) Provider agrees to be fully responsible for all subcontractors
who may be chosen for actions to be taken under this Agreement, including full
indemnity for the actions of any subcontractor or any of the subcontractor's
employees.
(c) Hotel shall be required insofar as is commercially reasonable to
notify Provider of any video recording and/or playback devices and related
content that are provided by the Hotel to its guests.
(d) Except as required by Provider, MagiNet or GDG licensing
agreements with others, nothing herein may be used by Provider or MagiNet or GDG
to limit the Hotel in their promotion of any Content whatsoever, which promotion
shall be entirely within the Hotels' reasonable discretion.
(e) This Hotel Agreement will be governed by the laws of
__________________.
(f) Except as otherwise set forth herein, the provisions hereof will
be binding upon, and will inure to the benefit of, the respective successors and
assigns of the parties hereto; provided that no assignment of this Agreement
will be made by Provider without the express prior written consent of Hotel,
such consent not to be unreasonably withheld. It is expressly understood that
Provider may assign this Agreement without consent, specifically including: (i)
an assignment by Provider to a creditor for debt financing purposes, provided
that such creditor has agreed in writing to abide by the terms of this
Agreement, and (ii) an assignment to a subsidiary or related entity of Provider,
so long as Provider remains primarily liable. Notwithstanding any
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assignment, none of the System or other Provider property may be removed from
the Hotel prior to the Hotel's uncured default or termination of this Agreement,
free of any claims on the System.
(g) This Agreement may be modified or amended only by a written
agreement signed by both parties. No waiver by either party of any breach or
default hereunder will be construed as a waiver of any precedent or subsequent
breach or default.
(h) This Agreement sets forth the entire agreement and understanding
of the parties relating to the subject matter hereof, and merges and supersedes
all prior discussions and understanding between the parties related thereto,
whether written or oral.
(i) Where at party is unable, wholly or in part, by reason of Force
Majeure, to carry out any obligations under this Agreement and that party; (i)
gives the affected party prompt notice of that Force Majeure with reasonably
full particulars and, insofar as known, the probable extent to which it will be
unable to perform or be delayed in performing that obligation; and (ii) uses all
reasonable efforts to remove that Force Majeure as quickly as possible; then
that obligation is suspended insofar as it is affected by the continuance of
that Force Majeure provided that this section will not operate to relieve any
party of any obligation to pay money. In the event any Force Majeure prevents
performance under this Agreement by either party which continues in existence
for more than thirty (30) days, the parties will meet in good faith to discuss
the situation and to make all reasonable efforts to achieve a mutually
satisfactory resolution of the problem so that Force Majeure no longer prevents
performance under this Agreement, provided that the Hotel shall have the option
to terminate the Agreement for any Force Majeure event that last longer than one
hundred and eighty (180) days.
(j) Any and all disputes arising under or in any way connected or
related to this Agreement, and any subject matters covered by this Agreement,
shall be finally adjudicated and resolved through final and binding arbitration
in ____________, in accordance with the Rules of Arbitration of the United
Nations Commission on International Trade Law (UNCITRAL). Interim court relief
may be sought at any time by any party, and any request for interim relief shall
not be considered a bar to arbitration, nor limit the power of the arbitrator to
change any interim relief awarded during the course of the arbitration.
(k) In the event that materially better terms than those stated
herein are offered by Provider to any similar hotel located in the same city as
the Hotel, the Hotel will be offered all the same terms and conditions, and any
less favorable payments made or receipts obtained subsequent to their being
contracted with another customer but prior to the effective date of the change
in the terms in this Agreement shall be reimbursed to or for the Hotel.
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(1) Subject to the provisions of this Agreement, all Intellectual
Property owned by Hyatt Parties, the Hotels and any related entities shall be
and remain the property of those entities. MagiNet and GDG and any related
entities shall be provided the limited right to use and practice such
Intellectual Property solely for the purpose of ensuring that they can perform
the Activities.
(m) Subject to the provisions of this Agreement, all Intellectual
Property of MagiNet and GDG and any related entities shall be and remain the
property of those entities. Hyatt International, Hyatt Services, the Hotels and
any related entities shall be provided the limited right to use and practice
such Intellectual Property solely for the purposes described in this Agreement
and the Individual Agreements.
IN WITNESS WHEREOF, this Hotel Agreement is entered into by the parties
hereto this ___ day of________________________, 19___.
[PROVIDER] [HOTEL]
By: By:
Title: Title:
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EXHIBIT A
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TECHNICAL REQUIREMENTS
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 21, 1996, in Amendment No. 1 to the
Registration Statement (Form S-1) and related Prospectus of MagiNet
Corporation for the registration of 5,750,000 shares of its common stock.
Ernst & Young LLP
Palo Alto, California
October 4, 1996